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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 December 29, 2007

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 large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated
filer     ̈             Accelerated filer    x            Non-accelerated filer     ̈

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

The number of shares outstanding of the
Registrants Common Stock at January 24, 2008 was 27,887,825 shares.









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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



|                               |  |                                                                                                                                                     |  |   
|------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|                               | 
|                               |  | Page                                                                                                                                               
|PART I - FINANCIAL INFORMATION |  |                                                                                                                                                    
|                               |  |                                                                                                                                                    
|Item 1.                        |  | Financial Statements                                                                                                                                |  |   
|                               |  |                                                                                                                                                    
|                               |  | Consolidated Condensed Balance Sheets  December 29, 2007 and June 2, 2007                                                                          |  | 2 
|                               |  |                                                                                                                                                    
|                               |  | Consolidated Condensed Statements of Operations  Three Months and Six Months Ended December 29, 2007 and December 2, 2006                          |  | 3 
|                               |  |                                                                                                                                                    
|                               |  | Consolidated Condensed Statements of Cash Flows  Six Months Ended December 29, 2007 and December 2, 2006, and Seven Months Ended December 29, 2007 |  | 4 
|                               |  |                                                                                                                                                    
|                               |  | Notes to Consolidated Condensed Financial Statements                                                                                                |  | 5 
|                               |  |                                                                                                                                                    
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                               |  | 21
|                               |  |                                                                                                                                                    
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                          |  | 30
|                               |  |                                                                                                                                                    
|Item 4.                        |  | Controls and Procedures                                                                                                                             |  | 31
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                                                                                    
|                               |  |                                                                                                                                                    
|Item 1.                        |  | Legal Proceedings                                                                                                                                   |  | 32
|                               |  |                                                                                                                                                    
|Item 1A.                       |  | Risk Factors                                                                                                                                        |  | 33
|                               |  |                                                                                                                                                    
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                         |  | 41
|                               |  |                                                                                                                                                    
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                                                                 |  | 42
|                               |  |                                                                                                                                                    
|Item 6.                        |  | Exhibits                                                                                                                                            |  | 43
|                               | 
|Signatures                     |  | 44                                                                                                                                                 



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##### Table of Contents

PART I - FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

ELECTRO SCIENTIFIC
INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                                                                           |  |                  |         |             |   |        
|---------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ----------- | - | -------
|                                                                                                           |  | December 29,2007 |         | June 2,2007
|Assets                                                                                                     |  |                  |         |             |   |        
|Current assets:                                                                                            |  |                  |         |             |   |        
|Cash and cash equivalents                                                                                  |  | $                | 152,997 |             | $ | 100,462
|Marketable securities                                                                                      |  |                  | 7,584   |             |   | 124,607
|                                                                                                           |  |                  |         |             |   |        
|Total cash and securities                                                                                  |  |                  | 160,581 |             |   | 225,069
|Trade receivables, net of allowances of $760 and $626                                                      |  |                  | 59,986  |             |   | 55,722 
|Inventories                                                                                                |  |                  | 88,934  |             |   | 80,981 
|Shipped systems pending acceptance                                                                         |  |                  | 10,368  |             |   | 1,817  
|Deferred income tax asset, net                                                                             |  |                  | 10,179  |             |   | 9,504  
|Prepaid and other current assets                                                                           |  |                  | 8,722   |             |   | 5,776  
|                                                                                                           |  |                  |         |             |   |        
|Total current assets                                                                                       |  |                  | 338,770 |             |   | 378,869
|Long-term marketable securities                                                                            |  |                  | 21,727  |             |   | 3,622  
|Property, plant and equipment, net of accumulated depreciation of $66,017 and $58,701                      |  |                  | 45,792  |             |   | 43,859 
|Deferred income tax asset, net                                                                             |  |                  | 8,373   |             |   | 11,246 
|Goodwill                                                                                                   |  |                  | 11,541  |             |   | 1,442  
|Acquired intangible assets, net of accumulated amortization of $1,310 and $0                               |  |                  | 11,001  |             |   |       
|Other assets                                                                                               |  |                  | 35,938  |             |   | 26,630 
|                                                                                                           |  |                  |         |             |   |        
|Total assets                                                                                               |  | $                | 473,142 |             | $ | 465,668
|                                                                                                           |  |                  |         |             |   |        
|Liabilities and Shareholders' Equity                                                                       |  |                  |         |             |   |        
|Current liabilities:                                                                                       |  |                  |         |             |   |        
|Accounts payable                                                                                           |  | $                | 12,215  |             | $ | 13,826 
|Accrued liabilities                                                                                        |  |                  | 26,307  |             |   | 25,465 
|Deferred revenue                                                                                           |  |                  | 24,751  |             |   | 12,290 
|                                                                                                           |  |                  |         |             |   |        
|Total current liabilities                                                                                  |  |                  | 63,273  |             |   | 51,581 
|Income tax liability                                                                                       |  |                  | 7,598   |             |   | 5,757  
|Commitments and contingencies                                                                              |  |                  |         |             |   |        
|Shareholders' equity:                                                                                      |  |                  |         |             |   |        
|Preferred stock, without par value; 1,000 sharesauthorized; no shares issued                               |  |                  |        |             |   |       
|Common stock, without par value; 100,000 shares authorized;27,837 and 28,766 shares issued and outstanding |  |                  | 142,612 |             |   | 162,719
|Retained earnings                                                                                          |  |                  | 259,156 |             |   | 245,546
|Accumulated other comprehensive income                                                                     |  |                  | 503     |             |   | 65     
|                                                                                                           |  |                  |         |             |   |        
|Total shareholders' equity                                                                                 |  |                  | 402,271 |             |   | 408,330
|                                                                                                           |  |                  |         |             |   |        
|Total liabilities and shareholders' equity                                                                 |  | $                | 473,142 |             | $ | 465,668
|                                                                                                           |  |                  |         |             |   |        

The accompanying notes are an integral part of these statements.



2



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                        |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  
|------------------------------------------------------- |  | -------------------------- | ------ | --------------- | ------------------------ | ------ | ---------------- |  | --------------- | ------- |  | - | ------- | -
|                                                        |  | For the three months ended |        |                 | For the six months ended |       
|                                                        |  | December 29,2007           |        | December 2,2006 |                          |        | December 29,2007 |  | December 2,2006 |        
|Net sales                                               |  | $                          | 77,286 |                 | $                        | 59,301 |                  |  | $               | 159,604 |  | $ | 119,669 |  
|Cost of sales                                           |  |                            | 41,602 |                 |                          | 35,027 |                  |  |                 | 87,111  |  |   | 69,130  |  
|                                                        |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  
|Gross profit                                            |  |                            | 35,684 |                 |                          | 24,274 |                  |  |                 | 72,493  |  |   | 50,539  |  
|Operating expenses:                                     |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  
|Selling, service and administration                     |  |                            | 15,978 |                 |                          | 12,023 |                  |  |                 | 31,358  |  |   | 24,074  |  
|Research, development and engineering                   |  |                            | 11,508 |                 |                          | 9,617  |                  |  |                 | 22,601  |  |   | 18,921  |  
|Write-off of acquired in-process research & development |  |                            |       |                 |                          |       |                  |  |                 | 2,800   |  |   |        |  
|Insurance recoveries                                    |  |                            |       |                 |                          | (1,000 | )                |  |                 |        |  |   | (2,287  | )
|                                                        |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  
|                                                        |  |                            | 27,486 |                 |                          | 20,640 |                  |  |                 | 56,759  |  |   | 40,708  |  
|                                                        |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  
|Operating income                                        |  |                            | 8,198  |                 |                          | 3,634  |                  |  |                 | 15,734  |  |   | 9,831   |  
|Interest and other income, net                          |  |                            | 1,856  |                 |                          | 2,278  |                  |  |                 | 3,916   |  |   | 5,090   |  
|                                                        |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  
|Income before income taxes                              |  |                            | 10,054 |                 |                          | 5,912  |                  |  |                 | 19,650  |  |   | 14,921  |  
|Provision for income taxes                              |  |                            | 3,392  |                 |                          | 2,123  |                  |  |                 | 7,458   |  |   | 4,930   |  
|                                                        |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  
|Net income                                              |  | $                          | 6,662  |                 | $                        | 3,789  |                  |  | $               | 12,192  |  | $ | 9,991   |  
|                                                        |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  
|Net income per share - basic                            |  | $                          | 0.24   |                 | $                        | 0.13   |                  |  | $               | 0.44    |  | $ | 0.34    |  
|                                                        |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  
|Net income per share - fully diluted                    |  | $                          | 0.24   |                 | $                        | 0.13   |                  |  | $               | 0.43    |  | $ | 0.34    |  
|                                                        |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  
|Weighted average number of shares - basic               |  |                            | 27,817 |                 |                          | 29,128 |                  |  |                 | 27,989  |  |   | 29,102  |  
|                                                        |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  
|Weighted average number of shares - fully diluted       |  |                            | 28,238 |                 |                          | 29,522 |                  |  |                 | 28,452  |  |   | 29,303  |  
|                                                        |  |                            |        |                 |                          |        |                  |  |                 |         |  |   |         |  

The accompanying notes are an integral part of these statements.



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW

(In thousands)

(Unaudited)



|                                                                              |  |                          |          |   |                           |   |          |                  |  |   |          |  
|----------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ------------------------- | - | -------- | ---------------- |  | - | -------- | -
|                                                                              |  | For the six months ended |          |   | For the sevenmonths ended |  
|                                                                              |  | December 29,2007         |          |   | December 2,2006           |   |          | December 29,2007 | 
|Cash flows from operating activities:                                         |  |                          |          |   |                           |   |          |                  |  |   |          |  
|Net income                                                                    |  | $                        | 12,192   |   |                           | $ | 9,991    |                  |  | $ | 13,610   |  
|Adjustments to reconcile net income to cash provided by operating activities: |  |                          |          |   |                           |   |          |                  |  |   |          |  
|Depreciation                                                                  |  |                          | 4,944    |   |                           |   | 4,093    |                  |  |   | 5,625    |  
|Amortization of intangible assets                                             |  |                          | 1,310    |   |                           |   | 15       |                  |  |   | 1,310    |  
|Write-off of in-process research & development                                |  |                          | 2,800    |   |                           |   |         |                  |  |   | 2,800    |  
|Insurance recovery on damaged equipment                                       |  |                          |         |   |                           |   | (1,287   | )                |  |   |         |  
|Stock-based compensation expense                                              |  |                          | 2,182    |   |                           |   | 1,488    |                  |  |   | 2,377    |  
|Provision for doubtful accounts                                               |  |                          |         |   |                           |   | 104      |                  |  |   |         |  
|Loss on disposal of property and equipment                                    |  |                          | 34       |   |                           |   |         |                  |  |   | 35       |  
|Deferred income taxes                                                         |  |                          | (54      | ) |                           |   | 2,947    |                  |  |   | (54      | )
|Changes in operating accounts, net of assets acquired:                        |  |                          |          |   |                           |   |          |                  |  |   |          |  
|(Increase) decrease in trade receivables, net                                 |  |                          | (2,673   | ) |                           |   | (5,350   | )                |  |   | 2,237    |  
|Decrease in inventories                                                       |  |                          | (52      | ) |                           |   | (11,740  | )                |  |   | (4,797   | )
|(Increase) decrease in shipped systems pending acceptance                     |  |                          | (8,242   | ) |                           |   | 749      |                  |  |   | (8,551   | )
|(Increase) decrease in prepaid and other current assets                       |  |                          | 1,178    |   |                           |   | (2,843   | )                |  |   | 857      |  
|Increase (decrease) in accounts payable and other liabilities                 |  |                          | (10,136  | ) |                           |   | 2,470    |                  |  |   | (8,105   | )
|Increase (decrease) in deferred revenue                                       |  |                          | 10,604   |   |                           |   | (77      | )                |  |   | 10,858   |  
|                                                                              |  |                          |          |   |                           |   |          |                  |  |   |          |  
|Net cash provided by operating activities                                     |  |                          | 14,087   |   |                           |   | 560      |                  |  |   | 18,202   |  
|Cash flows from investing activities:                                         |  |                          |          |   |                           |   |          |                  |  |   |          |  
|Purchase of property, plant and equipment                                     |  |                          | (3,284   | ) |                           |   | (5,718   | )                |  |   | (3,850   | )
|Purchase of securities                                                        |  |                          | (277,309 | ) |                           |   | (281,840 | )                |  |   | (310,750 | )
|Proceeds from sales of securities and maturing securities                     |  |                          | 353,526  |   |                           |   | 303,512  |                  |  |   | 409,580  |  
|Cash paid for acquisition of NWR, net of cash acquired                        |  |                          | (36,159  | ) |                           |   |         |                  |  |   | (36,159  | )
|Minority equity investment                                                    |  |                          |         |   |                           |   | (11,000  | )                |  |   |         |  
|Insurance recovery on damaged equipment                                       |  |                          |         |   |                           |   | 1,287    |                  |  |   |         |  
|(Increase) decrease in other assets                                           |  |                          | 1,022    |   |                           |   | 1,099    |                  |  |   | (1,178   | )
|                                                                              |  |                          |          |   |                           |   |          |                  |  |   |          |  
|Net cash provided by investing activities                                     |  |                          | 37,796   |   |                           |   | 7,340    |                  |  |   | 57,643   |  
|Cash flows from financing activities:                                         |  |                          |          |   |                           |   |          |                  |  |   |          |  
|Proceeds from exercise of stock options and stock plans                       |  |                          | 3,373    |   |                           |   | 1,370    |                  |  |   | 3,520    |  
|Share repurchases                                                             |  |                          | (21,552  | ) |                           |   |         |                  |  |   | (27,540  | )
|Excess tax benefits realized from stock options exercised                     |  |                          | 710      |   |                           |   | 40       |                  |  |   | 710      |  
|                                                                              |  |                          |          |   |                           |   |          |                  |  |   |          |  
|Net cash provided by (used in) financing activities                           |  |                          | (17,469  | ) |                           |   | 1,410    |                  |  |   | (23,310  | )
|                                                                              |  |                          |          |   |                           |   |          |                  |  |   |          |  
|Net increase in cash and cash equivalents                                     |  |                          | 34,414   |   |                           |   | 9,310    |                  |  |   | 52,535   |  
|Cash and cash equivalents:                                                    |  |                          |          |   |                           |   |          |                  |  |   |          |  
|Beginning of period                                                           |  |                          | 118,583  |   |                           |   | 79,961   |                  |  |   | 100,462  |  
|                                                                              |  |                          |          |   |                           |   |          |                  |  |   |          |  
|End of period                                                                 |  | $                        | 152,997  |   |                           | $ | 89,271   |                  |  | $ | 152,997  |  
|                                                                              |  |                          |          |   |                           |   |          |                  |  |   |          |  
|Supplemental cash flow information:                                           |  |                          |          |   |                           |   |          |                  |  |   |          |  
|Income tax refunds received                                                   |  | $                        | 133      |   |                           | $ | 331      |                  |  | $ | 133      |  
|Cash paid for income taxes                                                    |  |                          | (7,940   | ) |                           |   | (939     | )                |  |   | (7,940   | )

The accompanying notes are an integral part of these statements.



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of
Presentation

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

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

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

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



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The consolidated condensed statement of operations in this report for the six months ended December 29, 2007 does
not present amounts included in fiscal 2008 year-to-date results of operations for the four weeks ending June 30, 2007, which are detailed as follows (in thousands):



|                                         |  |   |       
|---------------------------------------- |  | - | ------
|Net sales                                |  | $ | 16,961
|Cost of sales                            |  |   | 8,886 
|                                         |  |   |       
|Gross profit                             |  |   | 8,075 
|Selling, service and administration      |  |   | 3,745 
|Research, development and engineering    |  |   | 2,886 
|                                         |  |   |       
|Operating income                         |  |   | 1,444 
|Interest and other income, net           |  |   | 816   
|                                         |  |   |       
|Income before income taxes               |  |   | 2,260 
|Provision for income taxes               |  |   | 842   
|                                         |  |   |       
|Net income                               |  | $ | 1,418 
|                                         |  |   |       
|Net income per share - basic and diluted |  | $ | 0.05  
|                                         |  |   |       

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

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



|                                                |  |                                  |         |   |            |   |        |            |  |   |         |  
|----------------------------------------------- |  | -------------------------------- | ------- | - | ---------- | - | ------ | ---------- |  | - | ------- | -
|                                                |  | Six months endedDecember 2, 2006 |        
|(in thousands, except per share amounts)        |  | As Reported                      |         |   | Adjustment |   |        | As Revised | 
|Consolidated Condensed Statement of Operations: |  |                                  |         |   |            |   |        |            | 
|Net sales                                       |  | $                                | 119,465 |   |            | $ | 204    |            |  | $ | 119,669 |  
|Cost of sales                                   |  |                                  | 67,910  |   |            |   | 1,220  |            |  |   | 69,130  |  
|                                                |  |                                  |         |   |            |   |        |            |  |   |         |  
|Gross profit                                    |  |                                  | 51,555  |   |            |   | (1,016 | )          |  |   | 50,539  |  
|Selling, service and administration             |  |                                  | 24,181  |   |            |   | (107   | )          |  |   | 24,074  |  
|Research, development and engineering           |  |                                  | 18,921  |   |            |   |       |            |  |   | 18,921  |  
|Insurance recovery                              |  |                                  | (2,287  | ) |            |   |       |            |  |   | (2,287  | )
|                                                |  |                                  |         |   |            |   |        |            |  |   |         |  
|Operating income                                |  |                                  | 10,740  |   |            |   | (909   | )          |  |   | 9,831   |  
|Interest and other income, net                  |  |                                  | 5,188   |   |            |   | (98    | )          |  |   | 5,090   |  
|                                                |  |                                  |         |   |            |   |        |            |  |   |         |  
|Income before income taxes                      |  |                                  | 15,928  |   |            |   | (1,007 | )          |  |   | 14,921  |  
|Provision for income taxes                      |  |                                  | 5,367   |   |            |   | (437   | )          |  |   | 4,930   |  
|                                                |  |                                  |         |   |            |   |        |            |  |   |         |  
|Net income                                      |  | $                                | 10,561  |   |            | $ | (570   | )          |  | $ | 9,991   |  
|                                                |  |                                  |         |   |            |   |        |            |  |   |         |  
|Net income per share - basic and diluted        |  | $                                | 0.36    |   |            | $ | (0.02  | )          |  | $ | 0.34    |  
|                                                |  |                                  |         |   |            |   |        |            |  |   |         |  

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



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



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



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



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



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



6



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##### Table of Contents

Based on the above adjustments, the net cash used in operating activities presented in the consolidated condensed
statement of cash flows for the six months ended December 2, 2006 decreased by $0.7 million and net cash provided by investing activities increased by $0.7 million.

Note 2  Acquisition of New Wave Research, Incorporated

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

The Company acquired 100% of
NWRs outstanding common stock for approximately $36.2 million, comprised of $34.9 million in cash and merger-related transaction costs of $1.3 million. The contractual purchase price of $36.0 million was reduced by $1.1 million related to
certain net working capital adjustments and indemnity payments agreed to prior to closing. The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their fair values. Analysis supporting the purchase price
allocation includes a valuation of assets and liabilities as of the closing date, a valuation specialists report on 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. In the third quarter of fiscal 2008, the Company reduced its acquired value-added tax
liability and its deferred tax valuation allowance required for net operating losses, resulting in the reduction in goodwill of approximately $1.3 million.

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



|                                           |  |   |         |  
|------------------------------------------ |  | - | ------- | -
|Accounts receivable                        |  | $ | 5,437   |  
|Inventory                                  |  |   | 6,110   |  
|Prepaid expense and other current assets   |  |   | 3,457   |  
|Property, plant and equipment              |  |   | 2,579   |  
|Intangible assets                          |  |   | 12,311  |  
|In-process research & development          |  |   | 2,800   |  
|Goodwill                                   |  |   | 10,099  |  
|Other long-term assets                     |  |   | 1,129   |  
|Accounts payable and accrued liabilities   |  |   | (11,100 | )
|Deferred revenue (1)                       |  |   | (1,603  | )
|                                           |  |   |         |  
|Net assets acquired                        |  |   | 31,219  |  
|Escrow deposits pending disbursement (2)   |  |   | 4,940   |  
|                                           |  |   |         |  
|Total purchase price, net of cash acquired |  | $ | 36,159  |  
|                                           |  |   |         |  



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



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



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##### Table of Contents

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 December 29, 2007 (in thousands):



|                                                      |  |             |  |                                   |        |                         |   |        |                                   |  |   |       
|----------------------------------------------------- |  | ----------- |  | --------------------------------- | ------ | ----------------------- | - | ------ | --------------------------------- |  | - | ------
|                                                      |  | Useful life |  | EstimatedFair Value atAcquisition |        | AccumulatedAmortization |   |        | Recorded valueat December 29,2007
|Developed technology                                  |  | 7 years     |  | $                                 | 8,100  |                         | $ | (511   | )                                 |  | $ | 7,589 
|Customer relationships                                |  | 6 years     |  |                                   | 2,700  |                         |   | (341   | )                                 |  |   | 2,359 
|Customer backlog                                      |  | 1 year      |  |                                   | 700    |                         |   | (309   | )                                 |  |   | 391   
|Trade name and trademarks                             |  | 3 years     |  |                                   | 400    |                         |   | (59    | )                                 |  |   | 341   
|Change of control agreements                          |  | 1 year      |  |                                   | 100    |                         |   | (44    | )                                 |  |   | 56    
|Fair value of below-market lease(non-current portion) |  | 3.8 years   |  |                                   | 311    |                         |   | (46    | )                                 |  |   | 265   
|                                                      |  |             |  |                                   |        |                         |   |        |                                   |  |   |       
|Subtotal  long term                                  |  |             |  |                                   | 12,311 |                         |   | (1,310 | )                                 |  |   | 11,001
|Fair value of below-market lease(current portion)     |  |             |  |                                   | 110    |                         |   |       |                                   |  |   | 110   
|                                                      |  |             |  |                                   |        |                         |   |        |                                   |  |   |       
|Total acquired intangible assets                      |  |             |  | $                                 | 12,421 |                         | $ | (1,310 | )                                 |  | $ | 11,111
|                                                      |  |             |  |                                   |        |                         |   |        |                                   |  |   |       

Amortization expense for intangible assets purchased in the NWR acquisition was approximately $0.7 and $1.3
million for the three-month and six-month periods ended December 29, 2007, respectively, and has been recorded in the consolidated condensed statement of operations as follows (in thousands):



|                                    |  |                                     |     |                                   |   |      
|----------------------------------- |  | ----------------------------------- | --- | --------------------------------- | - | -----
|                                    |  | Three months endedDecember 29, 2007 |     | Six months endedDecember 29, 2007
|Cost of sales                       |  | $                                   | 289 |                                   | $ | 511  
|Selling, service and administration |  |                                     | 454 |                                   |   | 799  
|                                    |  |                                     |     |                                   |   |      
|                                    |  | $                                   | 743 |                                   | $ | 1,310
|                                    |  |                                     |     |                                   |   |      

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



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

At the acquisition date, NWR had in-process research and development valued at $2.8 million and the immediate
write-off of this amount has been included in operating expenses for the six-month period ended December 29, 2007. The in-process research and development related to three programs consisting of development on a diode-pumped solid-state LED
wafer-scribing system, a next-generation Advanced Beam Delivery System and a next-generation laser product. The value of the in-process research and development was based on the excess earnings method of the income approach, which measures the value
of an asset by calculating the present value of related future economic benefits, such as cash earnings. In determining the value of in-process research and development, the assumed commercialization date for these products was April 2008. The
current estimated commercialization dates for these products ranges from May 2008 to November 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.



8



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##### Table of Contents

Purchase accounting adjustments were made to record inventory at fair value on the date of acquisition. These adjustments
resulted in $0.2 million in additional purchase accounting charges to cost of sales in the third quarter of fiscal 2008 and $1.1 in the six months ended December 29, 2007.

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

Note 3  Marketable Securities

As of December 29, 2007, the Company had a total of $19.6 million invested in auction rate
securities. These securities historically provided short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every 28 to 35 days. This mechanism allows existing
investors to either retain or liquidate their holdings by selling such securities at par. The recent uncertainties in the credit markets have reduced the liquidity of these securities as recent auctions have not been completed. In the second quarter
of fiscal 2008, the Company determined that these securities should be reclassified to long-term marketable securities on the consolidated condensed balance sheet. The Company has the intent and ability to hold these securities until they reach
maturity or are redeemed by the issuers and accrued interest income continues to be received when due. As such, the Company has determined that there has been no permanent impairment of the value of these securities and that their par value
approximates fair value. Thus, no unrealized gain or loss has been recorded in other comprehensive income or in the condensed consolidated statement of operations.

Note 4  Inventories

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



|                                  |  |                  |        |             |   |       
|--------------------------------- |  | ---------------- | ------ | ----------- | - | ------
|                                  |  | December 29,2007 |        | June 2,2007
|Raw materials and purchased parts |  | $                | 54,152 |             | $ | 50,021
|Work-in-process                   |  |                  | 19,816 |             |   | 19,170
|Finished goods                    |  |                  | 14,966 |             |   | 11,790
|                                  |  |                  |        |             |   |       
|                                  |  | $                | 88,934 |             | $ | 80,981
|                                  |  |                  |        |             |   |       



9



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##### Table of Contents

Note 5  Other Assets

Other assets consisted of the following (in thousands):



|                                    |  |                  |        |             |   |       
|----------------------------------- |  | ---------------- | ------ | ----------- | - | ------
|                                    |  | December 29,2007 |        | June 2,2007
|Patents, net                        |  | $                | 153    |             | $ | 188   
|Consignment and demo equipment, net |  |                  | 9,866  |             |   | 7,516 
|Minority equity investment          |  |                  | 11,000 |             |   | 11,000
|All-Ring patent suit court bond     |  |                  | 9,084  |             |   | 6,901 
|Acquisition escrow deposit          |  |                  | 4,940  |             |   |      
|Other                               |  |                  | 895    |             |   | 1,025 
|                                    |  |                  |        |             |   |       
|                                    |  | $                | 35,938 |             | $ | 26,630
|                                    |  |                  |        |             |   |       

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

As discussed in Note 2, escrow deposits totaling $4.9 million related to the NWR acquisition are included in other assets pending final disbursement.

Note 6  Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):



|                          |  |                  |        |             |   |       
|------------------------- |  | ---------------- | ------ | ----------- | - | ------
|                          |  | December 29,2007 |        | June 2,2007
|Payroll-related           |  | $                | 9,947  |             | $ | 11,391
|Product warranty          |  |                  | 3,876  |             |   | 3,893 
|Income taxes payable      |  |                  | 2,268  |             |   | 2,961 
|Value-added taxes payable |  |                  | 2,243  |             |   | 648   
|Other                     |  |                  | 7,973  |             |   | 6,572 
|                          |  |                  |        |             |   |       
|                          |  | $                | 26,307 |             | $ | 25,465
|                          |  |                  |        |             |   |       

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



10



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##### Table of Contents

Note 7  Product Warranty

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

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



|                                    |  |                    |        |   |                 |   |        |  
|----------------------------------- |  | ------------------ | ------ | - | --------------- | - | ------ | -
|                                    |  | Three months ended |       
|                                    |  | December 29,2007   |        |   | December 2,2006 |  
|Product warranty accrual, beginning |  | $                  | 4,424  |   |                 | $ | 3,766  |  
|Warranty charges incurred, net      |  |                    | (2.448 | ) |                 |   | (1,196 | )
|Provision for warranty charges      |  |                    | 1,900  |   |                 |   | 1,125  |  
|                                    |  |                    |        |   |                 |   |        |  
|Product warranty accrual, ending    |  | $                  | 3,876  |   |                 | $ | 3,695  |  
|                                    |  |                    |        |   |                 |   |        |  

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



|                                    |  |                  |        |   |                                   |   |        |   |  |   |        |  
|----------------------------------- |  | ---------------- | ------ | - | --------------------------------- | - | ------ | - |  | - | ------ | -
|                                    |  | Six months ended |        |   | Seven monthsendedDecember 29,2007 |  
|                                    |  | December 29,2007 |        |   | December 2,2006                   |   |       
|Product warranty accrual, beginning |  | $                | 3,630  |   |                                   | $ | 3,716  |   |  | $ | 3,893  |  
|NWR warranty reserve acquired       |  |                  | 774    |   |                                   |   |       |   |  |   | 774    |  
|Warranty charges incurred           |  |                  | (2,895 | ) |                                   |   | (2,573 | ) |  |   | (3,746 | )
|Provision for warranty charges      |  |                  | 2,367  |   |                                   |   | 2,552  |   |  |   | 2,955  |  
|                                    |  |                  |        |   |                                   |   |        |   |  |   |        |  
|Product warranty accrual, ending    |  | $                | 3,876  |   |                                   | $ | 3,695  |   |  | $ | 3,876  |  
|                                    |  |                  |        |   |                                   |   |        |   |  |   |        |  



11



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##### Table of Contents

Note 8  Deferred Revenue

Revenue is deferred pending title transfer and fulfillment of acceptance criteria, which frequently occur at the time of delivery to a common carrier. Shipments for which title transfer has not occurred and/or
acceptance criteria cannot be demonstrated at the Companys factory include sales to Japanese end-user customers and shipments of substantially new products. In sales involving multiple element arrangements, the fair value of any undelivered
elements, including installation services, is deferred until the elements are delivered and acceptance criteria are met. Revenue related to maintenance and service contracts is deferred and recognized ratably over the duration of the contracts.

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



|                            |  |                    |         |   |                 |   |        |  
|--------------------------- |  | ------------------ | ------- | - | --------------- | - | ------ | -
|                            |  | Three months ended |        
|                            |  | December 29,2007   |         |   | December 2,2006 |  
|Deferred revenue, beginning |  | $                  | 19,365  |   |                 | $ | 12,159 |  
|Revenue deferred            |  |                    | 16,574  |   |                 |   | 7,952  |  
|Revenue recognized          |  |                    | (11,188 | ) |                 |   | (6,867 | )
|                            |  |                    |         |   |                 |   |        |  
|Deferred revenue, ending    |  | $                  | 24,751  |   |                 | $ | 13,244 |  
|                            |  |                    |         |   |                 |   |        |  

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



|                              |  |                  |         |   |                                   |   |         |   |  |   |         |  
|----------------------------- |  | ---------------- | ------- | - | --------------------------------- | - | ------- | - |  | - | ------- | -
|                              |  | Six months ended |         |   | Seven monthsendedDecember 29,2007 |  
|                              |  | December 29,2007 |         |   | December 2,2006                   |   |        
|Deferred revenue, beginning   |  | $                | 12,544  |   |                                   | $ | 13,321  |   |  | $ | 12,290  |  
|NWR deferred revenue acquired |  |                  | 1,603   |   |                                   |   |        |   |  |   | 1,603   |  
|Revenue deferred              |  |                  | 30,579  |   |                                   |   | 13,484  |   |  |   | 32,577  |  
|Revenue recognized            |  |                  | (19,975 | ) |                                   |   | (13,561 | ) |  |   | (21,719 | )
|                              |  |                  |         |   |                                   |   |         |   |  |   |         |  
|Deferred revenue, ending      |  | $                | 24,751  |   |                                   | $ | 13,244  |   |  | $ | 24,751  |  
|                              |  |                  |         |   |                                   |   |         |   |  |   |         |  



12



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##### Table of Contents

Note 9  Earnings Per Share

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



|                                                      |  |                                     |       |                                    |        |            |   |        |  |       
|----------------------------------------------------- |  | ----------------------------------- | ----- | ---------------------------------- | ------ | ---------- | - | ------ |  | ------
|                                                      |  | Three months endedDecember 29, 2007 |       | Three months endedDecember 2, 2006
|                                                      |  | Net Income                          |       | Shares                             |        | Net Income |   | Shares
|Net income available to common shareholders  basic   |  | $                                   | 6,662 |                                    | 27,817 |            | $ | 3,789  |  | 29,128
|Effect of dilutive shares                             |  |                                     |      |                                    | 421    |            |   |       |  | 394   
|                                                      |  |                                     |       |                                    |        |            |   |        |  |       
|Net income available to common shareholders  diluted |  | $                                   | 6,662 |                                    | 28,238 |            | $ | 3,789  |  | 29,522
|                                                      |  |                                     |       |                                    |        |            |   |        |  |       

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



|                                                      |  |                                   |        |                                  |        |            |   |        |  |       
|----------------------------------------------------- |  | --------------------------------- | ------ | -------------------------------- | ------ | ---------- | - | ------ |  | ------
|                                                      |  | Six months endedDecember 29, 2007 |        | Six months endedDecember 2, 2006
|                                                      |  | Net Income                        |        | Shares                           |        | Net Income |   | Shares
|Net income available to common shareholders  basic   |  | $                                 | 12,192 |                                  | 27,989 |            | $ | 9,991  |  | 29,102
|Effect of dilutive shares                             |  |                                   |       |                                  | 463    |            |   |       |  | 201   
|                                                      |  |                                   |        |                                  |        |            |   |        |  |       
|Net income available to common shareholders  diluted |  | $                                 | 12,192 |                                  | 28,452 |            | $ | 9,991  |  | 29,303
|                                                      |  |                                   |        |                                  |        |            |   |        |  |       

In the diluted EPS calculations for the three months ended December 29, 2007 and December 2, 2006,
employee stock options representing approximately 2,561,000 and 2,748,000 common stock equivalent shares, respectively, were excluded because inclusion would have had an antidilutive effect. In the diluted EPS calculation, approximately 2,538,000
and 2,720,000 antidilutive shares, respectively, were excluded for the six months ended December 29, 2007 and December 2, 2006.



13



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##### Table of Contents

Note 10  Comprehensive Income

The components of comprehensive income, net of tax, for the three months and six months ended December 29, 2007 and December 2, 2006 are as follows (in thousands):



|                                                                   |  |                    |       |                 |   |       |  
|------------------------------------------------------------------ |  | ------------------ | ----- | --------------- | - | ----- | -
|                                                                   |  | Three months ended |      
|                                                                   |  | December 29,2007   |       | December 2,2006 |  
|Net income                                                         |  | $                  | 6,662 |                 | $ | 3,789 |  
|Other comprehensive income                                         |  |                    | 4     |                 |   | (6    | )
|Foreign currency translation adjustment                            |  |                    | 49    |                 |   | 406   |  
|Net unrealized gain on securities classified as available for sale |  |                    | 1     |                 |   | 231   |  
|                                                                   |  |                    |       |                 |   |       |  
|                                                                   |  | $                  | 6,716 |                 | $ | 4,420 |  
|                                                                   |  |                    |       |                 |   |       |  

The components of comprehensive income, net of tax, for the six months ended December 29, 2007 and
December 2, 2006 are as follows (in thousands):



|                                                                          |  |                  |        |   |                 |   |        |  
|------------------------------------------------------------------------- |  | ---------------- | ------ | - | --------------- | - | ------ | -
|                                                                          |  | Six months ended |       
|                                                                          |  | December 29,2007 |        |   | December 2,2006 |  
|Net income                                                                |  | $                | 12,192 |   |                 | $ | 9,991  |  
|Other comprehensive income                                                |  |                  | 9      |   |                 |   | (11    | )
|Foreign currency translation adjustment                                   |  |                  | 382    |   |                 |   | 222    |  
|Net unrealized gain (loss) on securities classified as available for sale |  |                  | (134   | ) |                 |   | 494    |  
|                                                                          |  |                  |        |   |                 |   |        |  
|                                                                          |  | $                | 12,449 |   |                 | $ | 10,696 |  
|                                                                          |  |                  |        |   |                 |   |        |  

Note 11 - Share Repurchase Program

On March 9, 2007, the Companys Board of Directors authorized the repurchase of up to $50 million in shares of the Companys outstanding common stock beginning April 17, 2007 through transactions
in the open market or in negotiated transactions with brokers or shareholders. During the three months ended December 29, 2007, approximately 72,000 shares were repurchased at a total purchase price of $1.8 million. Approximately 897,000 shares
were purchased in the six months ended December 29, 2007 at a total purchase price of $20.6 million. Cash used to settle the repurchase transactions in the six months ended December 29, 2007 totaled $21.6 million, including $1.0 million
for amounts owed on the unsettled repurchase transactions at June 30, 2007. On October 9, 2007, the Company suspended purchase transactions under its share repurchase program. In total, the Company repurchased approximately
1.7 million shares for $37.3 million under this share repurchase program at an average price per share of $21.96.

On January 22, 2008, the
Companys Board of Directors voted to resume the previous $50 million share repurchase program. Accordingly, the Board of Directors has authorized the repurchase of up to $12.7 million in shares of the Companys outstanding common stock
over a six-month period beginning January 29, 2008 through transactions in the open market or in negotiated transactions with brokers or shareholders.



14



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##### Table of Contents

Note 12  Stock Based Compensation Plans

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

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



|                                                          |  |                    |       |   |                 |   |     |  
|--------------------------------------------------------- |  | ------------------ | ----- | - | --------------- | - | --- | -
|                                                          |  | Three months ended |      
|                                                          |  | December 29,2007   |       |   | December 2,2006 |  
|Cost of sales                                             |  | $                  | 169   |   |                 | $ | 172 |  
|Selling, service, and administration                      |  |                    | 685   |   |                 |   | 506 |  
|Research, development, and engineering                    |  |                    | 284   |   |                 |   | 233 |  
|Stock-based compensation expense before income taxes      |  |                    | 1,138 |   |                 |   | 911 |  
|Income tax benefit                                        |  |                    | (360  | ) |                 |   | (74 | )
|                                                          |  |                    |       |   |                 |   |     |  
|Total stock-based compensation expense after income taxes |  | $                  | 778   |   |                 | $ | 837 |  
|                                                          |  |                    |       |   |                 |   |     |  



|                                                          |  |                  |       |   |                 |   |       |  
|--------------------------------------------------------- |  | ---------------- | ----- | - | --------------- | - | ----- | -
|                                                          |  | Six months ended |      
|                                                          |  | December 29,2007 |       |   | December 2,2006 |  
|Cost of sales                                             |  | $                | 299   |   |                 | $ | 280   |  
|Selling, service, and administration                      |  |                  | 1,387 |   |                 |   | 850   |  
|Research, development, and engineering                    |  |                  | 496   |   |                 |   | 358   |  
|                                                          |  |                  |       |   |                 |   |       |  
|Stock-based compensation expense before income taxes      |  |                  | 2,182 |   |                 |   | 1,488 |  
|Income tax benefit                                        |  |                  | (643  | ) |                 |   | (174  | )
|                                                          |  |                  |       |   |                 |   |       |  
|Total stock-based compensation expense after income taxes |  | $                | 1,539 |   |                 | $ | 1,314 |  
|                                                          |  |                  |       |   |                 |   |       |  

The total amount of cash received from the exercise of stock options and stock plans for the three and six months
ended December 29, 2007 was $1.3 million and $3.4 million, respectively. For the six months ended December 29, 2007, there was $0.7 million in excess tax benefit realized from the exercise of stock options and ESPP purchases. There was no
material excess tax benefit realized in the three months ended December 29, 2007. Upon exercise of stock options, the Company issues new shares of common stock from its authorized shares.

As of December 29, 2007, no stock-based compensation costs were capitalized and the Company had $12.3 million of total unamortized stock-based compensation costs,
net of estimated forfeitures, to be recognized over a weighted-average period of 2.9 years.

At December 29, 2007, the Company had 9,668,442 shares of
its common stock reserved for issuance under all of its plans combined. Of those shares, 4,527,155 are subject to issuance under currently outstanding stock options and stock awards and 5,141,287 shares are available for future grants. The
weighted-average fair-value of stock-based compensation awards, including stock option awards granted and vested during the period, unvested stock awards granted during the period and the intrinsic value of stock options exercised during the period
were (in thousands, except per share data):



15



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##### Table of Contents

|                                           |  |                    |       |                 |   |      
|------------------------------------------ |  | ------------------ | ----- | --------------- | - | -----
|                                           |  | Three months ended
|                                           |  | December 29,2007   |       | December 2,2006
|Stock Option Awards:                       |  |                    |       |                 |   |      
|Grant date fair value per share            |  | $                  |      |                 | $ | 9.40 
|Total fair value of options granted        |  |                    |      |                 |   | 940  
|Total fair value of options vested         |  |                    | 66    |                 |   | 530  
|Total intrinsic value of options exercised |  |                    | 65    |                 |   | 80   
|Unvested Stock Awards:                     |  |                    |       |                 |   |      
|Grant date fair value per share            |  | $                  | 22.73 |                 | $ | 20.49
|Total fair value of awards granted         |  |                    | 1,023 |                 |   | 201  
|Employee Stock Purchase Plan:              |  |                    |       |                 |   |      
|Grant date fair value per share            |  | $                  | 6.80  |                 | $ | 6.63 
|Total grant date fair value                |  |                    | 415   |                 |   | 1,455



|                                           |  |                  |       |                 |   |      
|------------------------------------------ |  | ---------------- | ----- | --------------- | - | -----
|                                           |  | Six months ended
|                                           |  | December 29,2007 |       | December 2,2006
|Stock Option Awards:                       |  |                  |       |                 |   |      
|Grant date fair value per share            |  | $                | 10.82 |                 | $ | 9.40 
|Total fair value of options granted        |  |                  | 1,780 |                 |   | 940  
|Total fair value of options vested         |  |                  | 765   |                 |   | 980  
|Total intrinsic value of options exercised |  |                  | 580   |                 |   | 103  
|Unvested Stock Awards:                     |  |                  |       |                 |   |      
|Grant date fair value per share            |  | $                | 22.73 |                 | $ | 18.81
|Total fair value of awards granted         |  |                  | 9,442 |                 |   | 1,947
|Employee Stock Purchase Plan:              |  |                  |       |                 |   |      
|Grant date fair value per share            |  | $                | 6.76  |                 | $ | 6.36 
|Total grant date fair value                |  |                  | 479   |                 |   | 1,842

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



|                                                    |  |           |   |  |                               |       |                                         |            |                                        |   |      
|--------------------------------------------------- |  | --------- | - |  | ----------------------------- | ----- | --------------------------------------- | ---------- | -------------------------------------- | - | -----
|                                                    |  | Shares    |   |  | WeightedAverageExercise Price |       | WeightedAverageRemainingContractualTerm |            | AggregateIntrinsic Value(in
thousands)
|Outstanding as of June 2, 2007                      |  | 4,292,422 |   |  | $                             | 25.03 |                                         |            |                                        |   |      
|Granted                                             |  | 164,499   |   |  | $                             | 20.06 |                                         |            |                                        |   |      
|Exercised                                           |  | (151,431  | ) |  | $                             | 19.12 |                                         |            |                                        |   |      
|Expired or forfeited                                |  | (340,982  | ) |  | $                             | 22.34 |                                         |            |                                        |   |      
|                                                    |  |           |   |  |                               |       |                                         |            |                                        |   |      
|Outstanding as of December 29, 2007                 |  | 3,964,508 |   |  | $                             | 25.28 |                                         | 5.96 years |                                        | $ | 2,392
|                                                    |  |           |   |  |                               |       |                                         |            |                                        |   |      
|Vested and expected to vest as of December 29, 2007 |  | 3,933,310 |   |  | $                             | 25.31 |                                         | 5.93 years |                                        | $ | 2,372
|                                                    |  |           |   |  |                               |       |                                         |            |                                        |   |      
|Exercisable as of December 29, 2007                 |  | 3,699,567 |   |  | $                             | 25.61 |                                         | 5.74 years |                                        | $ | 2,177
|                                                    |  |           |   |  |                               |       |                                         |            |                                        |   |      



16



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##### Table of Contents

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



|                                    |  |         |   |  |                              |       |                                         |            |                                                    |   |       
|----------------------------------- |  | ------- | - |  | ---------------------------- | ----- | --------------------------------------- | ---------- | -------------------------------------------------- | - | ------
|                                    |  | Shares  |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |            | WeightedAverage GrantDate Fair Value(in
thousands)
|Outstanding as of June 2, 2007      |  | 223,194 |   |  | $                            | 20.01 |                                         |            |                                                    |   |       
|Granted                             |  | 416,841 |   |  | $                            | 22.73 |                                         |            |                                                    |   |       
|Vested                              |  | (57,938 | ) |  | $                            | 24.32 |                                         |            |                                                    |   |       
|Expired or forfeited                |  | (19,450 | ) |  | $                            | 22.78 |                                         |            |                                                    |   |       
|                                    |  |         |   |  |                              |       |                                         |            |                                                    |   |       
|Outstanding as of December 29, 2007 |  | 562,647 |   |  | $                            | 21.81 |                                         | 2.56 years |                                                    | $ | 11,253
|                                    |  |         |   |  |                              |       |                                         |            |                                                    |   |       

Note 13  Geographic and Product Information

Net sales by product type for the three months ended December 29, 2007 and December 2, 2006 were as follows (in thousands):



|                                   |  |                    |        |                 |   |       
|---------------------------------- |  | ------------------ | ------ | --------------- | - | ------
|                                   |  | Three months ended
|                                   |  | December 29,2007   |        | December 2,2006
|Semiconductor Group                |  | $                  | 39,691 |                 | $ | 29,440
|Passive Component Group            |  |                    | 18,767 |                 |   | 15,892
|Interconnect Micro-Machining Group |  |                    | 18,828 |                 |   | 13,969
|                                   |  |                    |        |                 |   |       
|                                   |  | $                  | 77,286 |                 | $ | 59,301
|                                   |  |                    |        |                 |   |       

Net sales by product type for the six months ended December 29, 2007 and December 2, 2006 were as
follows (in thousands):



|                                   |  |                  |         |                 |   |        
|---------------------------------- |  | ---------------- | ------- | --------------- | - | -------
|                                   |  | Six months ended
|                                   |  | December 29,2007 |         | December 2,2006
|Semiconductor Group                |  | $                | 77,867  |                 | $ | 61,324 
|Passive Component Group            |  |                  | 42,558  |                 |   | 34,553 
|Interconnect Micro-Machining Group |  |                  | 39,179  |                 |   | 23,792 
|                                   |  |                  |         |                 |   |        
|                                   |  | $                | 159,604 |                 | $ | 119,669
|                                   |  |                  |         |                 |   |        

Net sales by geographic area, based on the location of the end user, for the three months ended December 29,
2007 and December 2, 2006 were as follows (in thousands):



|         |  |                    |        |                 |   |       
|-------- |  | ------------------ | ------ | --------------- | - | ------
|         |  | Three months ended
|         |  | December 29,2007   |        | December 2,2006
|Asia     |  | $                  | 54,614 |                 | $ | 43,165
|Americas |  |                    | 14,937 |                 |   | 11,727
|Europe   |  |                    | 7,735  |                 |   | 4,409 
|         |  |                    |        |                 |   |       
|         |  | $                  | 77,286 |                 | $ | 59,301
|         |  |                    |        |                 |   |       



17



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##### Table of Contents

Net sales by geographic area, based on the location of the end user, for the six months ended December 29, 2007 and
December 2, 2006 were as follows (in thousands):



|         |  |                  |         |                 |   |        
|-------- |  | ---------------- | ------- | --------------- | - | -------
|         |  | Six months ended
|         |  | December 29,2007 |         | December 2,2006
|Asia     |  | $                | 118,201 |                 | $ | 86,818 
|Americas |  |                  | 27,866  |                 |   | 24,732 
|Europe   |  |                  | 13,537  |                 |   | 8,119  
|         |  |                  |         |                 |   |        
|         |  | $                | 159,604 |                 | $ | 119,669
|         |  |                  |         |                 |   |        

Note 14  Insurance Recoveries

In November 2006, the Company settled litigation related to insurance coverage for the shareholder and derivative lawsuits related to the restatement of financial results announced in 2003 and recorded a gain of $1.0
million in the second quarter of fiscal 2007. All related costs were expensed as incurred in prior periods.

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

Note 15  Legal Proceeding

All Ring Patent Infringement Prosecution

In August 2005, the Company
commenced a proceeding in the Kaohsiung District Court of Taiwan (the Court) directed against All Ring Tech Co., Ltd. (All Ring) of Taiwan. The Company alleged that All Rings Capacitor Tester Model RK-T6600 (the Capacitor Tester) infringes
ESIs Taiwan Patent No. 207469, entitled Circuit Component Handler (the 207469 patent). This patent corresponds to ESIs U.S. Patent No. 5,842,579. The patented technology is used in the Model 3340 Multifunction MLCC
Tester. The Court issued a Provisional Attachment Order (PAO) in August 2005 and All Ring filed a bond with the Court to obtain relief from the attachment of its assets. In July 2007, pursuant to the Companys application, the Court issued a
second PAO and approximately US$6.0 million was restricted in All Rings accounts. All Ring appealed the second PAO to the High Court in August 2007 and the High Court revoked the second PAO in September 2007. The Company appealed the High
Courts decision to the Supreme Court. The Supreme Court granted the Companys appeal in January 2008 and revoked the High Courts decision. The second PAO remains in effect and cannot be revoked.

In October 2005, the Court executed a Preliminary Injunction Order that prohibits All Ring from manufacturing, selling, offering for sale or using the Capacitor Tester
until final judgment is entered in the formal patent infringement action. In October 2007, All Ring filed an application to revoke the Preliminary Injunction Order. The Court dismissed All Rings application on January 18, 2008.

Pursuant to the Courts orders, in October 2005 the Company was required to post a Taiwan dollar security bond with the Court. An additional bond
amount of US$2.1 million was posted in June 2007 related to the second Provisional Attachment Order. The total security bond is valued at approximately US$9.1 million and is included in other assets on the Companys consolidated condensed
balance sheets at December 29, 2007.

In November 2007, All Ring filed with the Hsinchu District Court an application for a reverse Preliminary
Injunction Order to allow All Ring to continue to manufacture, produce, sell, display, import, or export the Capacitor Tester, and the Company submitted a defense brief in December 2007. All Rings application has not yet been ruled upon.



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##### Table of Contents

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

In November 2005, All Ring filed a cancellation action against ESIs 207469 patent in the Taiwan Intellectual Property Office (the IPO). On July 5, 2007, the
IPO issued a notice requiring the Company to cancel two of the claims in the 207469 patent. No other claims of the patent have been rejected. The Company filed a response canceling the two claims and amending the remaining claims accordingly in
August 2007. An interview with the Examiner is set for January 28, 2008. The Company intends to vigorously pursue its patent infringement claims against All Ring and defend against the cancellation action.

Note 16  Adoption of FIN 48

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

As of June 3, 2007,
the total gross amount of reserves for income taxes, which is reported as non-current income tax liabilities, was $5.8 million. Any future adjustments to reserves for income taxes will be recorded as an increase or decrease to provision for income
taxes and would impact the effective tax rate. In addition, interest is accrued related to reserves for income taxes and penalties in the provision for income taxes. The gross amount of interest accrued as of the beginning of our 2008 fiscal year
was $0.3 million.

As of December 29, 2007, the total gross amount of reserves for income taxes was $8.6 million with $7.6 million reported as
non-current income tax liability and $1.0 million as income tax payable. The reserve for income taxes includes $0.4 million of accrued interest and $0.6 million in penalties. The increase in income tax reserves from June 2, 2007 is primarily
due to the inclusion of the NWR tax reserves. Any future adjustments to the reserves related to the NWR acquisition would be reflected as an adjustment to goodwill and would not impact the effective tax rate. The Company anticipates no significant
changes in unrecognized tax benefits in the next 12 months as the result of examinations or lapse of statutes of limitation.



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##### Table of Contents

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



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

Note 17 - New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair
value measurements. SFAS 157 does not impose fair value measurements on items not already accounted for at fair value; rather it applies, with certain exceptions, to other accounting pronouncements that either require or permit fair value
measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, of adopting SFAS 157 on its financial position and
results of operations.

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

In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 requires all entities to report non-controlling (minority) interests in subsidiaries as equity in the consolidated financial statements. SFAS 160
requires that transactions between an entity and non-controlling interests are treated as equity transactions. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company currently owns 100% of each of its subsidiaries
and as such, adoption of SFAS 160 is not expected to have a significant impact on its financial position and results of operations.



20



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##### Table of Contents

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

Forward Looking Statements

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

Overview

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

Acquisition of New Wave Research, Incorporated

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

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



21



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##### Table of Contents

Purchase accounting charges for the three-month and six-month periods ended December 29, 2007 were as follows (in
thousands):



|                                               |  |                                     |       |   |                                   |   |       |  
|---------------------------------------------- |  | ----------------------------------- | ----- | - | --------------------------------- | - | ----- | -
|                                               |  | Three months endedDecember 29, 2007 |       |   | Six months endedDecember 29, 2007 |  
|Cost of sales                                  |  | $                                   | 515   |   |                                   | $ | 1,625 |  
|Selling, service and administration            |  |                                     | 542   |   |                                   |   | 919   |  
|Research, development and engineering          |  |                                     | (24   | ) |                                   |   | (24   | )
|Write-off of in-process research & development |  |                                     |      |   |                                   |   | 2,800 |  
|                                               |  |                                     |       |   |                                   |   |       |  
|                                               |  | $                                   | 1,033 |   |                                   | $ | 5,320 |  
|                                               |  |                                     |       |   |                                   |   |       |  

Purchase accounting charges recorded in cost of sales related to the fair value adjustments to acquired inventory
and amortization of acquired intangibles. Purchase accounting charges included in operating expenses for the three-month and six-month periods ended December 29, 2007 were $0.5 million and $3.7 million, respectively, for the amortization of
acquired intangibles, adjustments to the depreciable value of property, plant & equipment and the write-off of $2.8 million of in-process research & development. See further discussion of in-process research & development
below in the discussion of expenses to compared to the prior year.

Change in Fiscal Reporting Periods

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

Summary of Sequential Quarterly
Results

The semiconductor industry has recently experienced falling prices that have limited the profitability of memory producers. This has resulted
in a decrease in capital expenditures by the semiconductor industry. Despite this slowing within our semiconductor market, the third quarter of fiscal 2008 reflected strong demand driven by successful introduction of new products. Orders increased
slightly to $74.6 million compared to $74.4 million in the prior quarter. A significant sequential increase in orders for our semiconductor group was substantially offset by decreases in our interconnect/micro-machining and passive component groups.

Orders for our semiconductor group products increased by 61% compared to the second quarter of fiscal 2008. A portion of the increase was due to the
timing of orders, which were lower in the second quarter due to specific large orders received in the four weeks preceding that quarter. In addition, we experienced continued strength in demand for our semiconductor group products, driven by
adoption of our ultra-violet (UV) memory repair systems and continued strength in demand for our dual-beam infra-red (IR) memory repair systems.



22



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##### Table of Contents

Passive component group orders decreased by 5% compared to the second quarter of fiscal 2008. Despite the sequential
decrease, we received multiple orders for our new Model 3550 high capacitance testing system and for our 3300 series and 6650 test systems. We believe this activity reflects continued strength in the MLCC manufacturing market and our continued
penetration into the Japanese MLCC market.

Due to increasing focus on tools designed for micro-machining applications, we have designated our electronic
interconnect products as the interconnect/micro-machining group (IMG). Orders for our IMG products decreased by 60% due primarily to timing of orders for micro-machining applications.

Gross margins were 46.2% on net sales of $77.3 million in the third quarter of fiscal 2008, compared to 44.7% on net sales of $82.3 million in the second quarter of fiscal 2008. Included in cost of sales in the
current quarter were $0.5 million in purchase accounting charges, compared to $1.1 million in the prior quarter, which resulted in a 0.8 percentage point increase in gross margin in the current quarter. The remaining sequential increase in gross
margin was driven primarily by favorable product mix.

Operating expenses decreased by $1.8 million to $27.5 million in the third quarter of fiscal 2008,
compared to $29.3 million in the second quarter of fiscal 2008. The current quarter included $0.5 million in purchase accounting charges. The second quarter of fiscal 2008 included $3.2 million in purchase accounting charges, primarily comprised of
a $2.8 million write-off of in-process research & development. The $0.9 million increase, exclusive of the decrease in purchase accounting charges, is primarily due to increases in NWR operating expenses and integration expenses in the
third quarter of fiscal 2008 compared to the prior quarter. A full 13 weeks of operating results for NWR are included in the current quarter, compared to approximately 10 weeks in the second quarter of fiscal 2008.

Operating income increased to $8.2 million in the third quarter of fiscal 2008, compared to $7.5 million in the second quarter of fiscal 2008. Non-operating income
decreased to $1.9 million from $2.1 million, primarily due to lower interest income resulting from lower average invested assets resulting from funds used for the acquisition of NWR and share repurchases.

The income tax provision recorded for the third quarter of fiscal 2008 was $3.4 million with an associated effective rate of 34%. Comparatively, the income tax provision
in the second quarter of fiscal 2008 was $4.1 million with an associated effective tax rate of 42%. The prior quarter effective tax rate was higher due to a $1.0 million tax provision adjustment related to the $2.8 million purchase accounting
write-off of in-process research and development.

Net income for the current quarter was $6.7 million or $0.24 per basic and diluted share, compared to
net income of $5.5 million or $0.20 per basic and $0.19 per diluted share in the second quarter of fiscal 2007.

We expect to see continued weakening in
the overall semiconductor capital equipment market. As a result, in the fourth quarter of fiscal 2008 we expect shipments and net sales to be in the range of $65 million to $75 million. The gross margin percentage in the fourth quarter is expected
to be approximately 44, reflecting less favorable product mix. We anticipate operating expenses for the fourth quarter of fiscal 2008 to be approximately flat compared to the third quarter. We expect the tax rate in the fourth quarter to be
approximately 36% and diluted earnings per share to be in the range of $0.08 to $0.15.



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##### Table of Contents

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

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

Results of Operations

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



|                                      |  |                    |   |  |                  |   |  |                  |   |  |                 |  
|------------------------------------- |  | ------------------ | - |  | ---------------- | - |  | ---------------- | - |  | --------------- | -
|                                      |  | Three months ended |   |  | Six months ended |  
|                                      |  | December 29,2007   |   |  | December 2,2006  |   |  | December 29,2007 |   |  | December 2,2006 |  
|Net sales                             |  | 100.0              | % |  | 100.0            | % |  | 100.0            | % |  | 100.0           | %
|Cost of sales                         |  | 53.8               |   |  | 59.1             |   |  | 54.6             |   |  | 57.8            |  
|                                      |  |                    |   |  |                  |   |  |                  |   |  |                 |  
|Gross margin                          |  | 46.2               |   |  | 40.9             |   |  | 45.4             |   |  | 42.2            |  
|Selling, service and administrative   |  | 20.7               |   |  | 20.3             |   |  | 19.6             |   |  | 20.1            |  
|Research, development and engineering |  | 14.9               |   |  | 16.2             |   |  | 14.2             |   |  | 15.8            |  
|Write-off acquired in-process R&D     |  |                   |   |  |                 |   |  | 1.8              |   |  |                |  
|Insurance recovery                    |  |                   |   |  | (1.7             | ) |  |                 |   |  | (1.9            | )
|                                      |  |                    |   |  |                  |   |  |                  |   |  |                 |  
|Operating income                      |  | 10.6               |   |  | 6.1              |   |  | 9.9              |   |  | 8.2             |  
|Total other income, net               |  | 2.4                |   |  | 3.8              |   |  | 2.5              |   |  | 4.3             |  
|                                      |  |                    |   |  |                  |   |  |                  |   |  |                 |  
|Income before taxes                   |  | 13.0               |   |  | 10.0             |   |  | 12.3             |   |  | 12.5            |  
|Income tax provision                  |  | 4.4                |   |  | 3.6              |   |  | 4.7              |   |  | 4.1             |  
|                                      |  |                    |   |  |                  |   |  |                  |   |  |                 |  
|Net income                            |  | 8.6                | % |  | 6.4              | % |  | 7.6              | % |  | 8.3             | %
|                                      |  |                    |   |  |                  |   |  |                  |   |  |                 |  

Net Sales

Net sales were $77.3 million for the quarter ended December 29, 2007, an increase of $18.0 million or 30.3% compared to net sales of $59.3 million for the quarter ended December 2, 2006. The overall increase was driven by
increases in all three of our product groups, as well as the impact of NWR net sales totaling $7.4 million in the third quarter of fiscal 2008.

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



|                                   |  |                    |         |                |                  |   |           |   |                |  |     |  
|---------------------------------- |  | ------------------ | ------- | -------------- | ---------------- | - | --------- | - | -------------- |  | --- | -
|                                   |  | Three months ended |        
|                                   |  | December 29, 2007  |         |                | December 2, 2006 |  
|                                   |  | Net Sales          |         | % of Net Sales |                  |   | Net Sales |   | % of Net Sales | 
|Semiconductor (SG)                 |  | $                  | 39,691  |                | 52               | % |           | $ | 29,440         |  | 50  | %
|Passive Components (PCG)           |  |                    | 18,767  |                | 24               |   |           |   | 15,892         |  | 27  |  
|Interconnect/micro-machining (IMG) |  |                    | 18,828  |                | 24               |   |           |   | 13,969         |  | 23  |  
|                                   |  |                    |         |                |                  |   |           |   |                |  |     |  
|                                   |  | $                  | 77,286  |                | 100              | % |           | $ | 59,301         |  | 100 | %
|                                   |  |                    |         |                |                  |   |           |   |                |  |     |  
|                                   | 
|                                   |  | Six months ended   |        
|                                   |  | December 29, 2007  |         |                | December 2, 2006 |  
|                                   |  | Net Sales          |         | % of Net Sales |                  |   | Net Sales |   | % of Net Sales | 
|Semiconductor (SG)                 |  | $                  | 77,867  |                | 49               | % |           | $ | 61,324         |  | 51  | %
|Passive Components (PCG)           |  |                    | 42,558  |                | 27               |   |           |   | 34,553         |  | 29  |  
|Interconnect/micro-machining (IMG) |  |                    | 39,179  |                | 24               |   |           |   | 23,792         |  | 20  |  
|                                   |  |                    |         |                |                  |   |           |   |                |  |     |  
|                                   |  | $                  | 159,604 |                | 100              | % |           | $ | 119,669        |  | 100 | %
|                                   |  |                    |         |                |                  |   |           |   |                |  |     |  



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SG sales in the third quarter of fiscal 2008 increased $10.3 million or 35% compared to the second quarter of fiscal
2007, including an increase of $3.6 million resulting from the acquisition of NWR. The remaining net sales increase was primarily due to increased volume sales of our dual-beam UV-based Model 9850.

Third quarter PCG sales increased $2.9 million or 18% compared to sales in the second quarter of fiscal 2007. The rise in PCG net sales was driven by strong demand for
our Model 3300 series electrical test and Model 6650A visual inspection systems, and increased penetration in the Asian market, as manufacturers seek to build production capacity for MLCC products. We believe end-market demand for MLCC products has
increased for wireless handsets, dual core microprocessors, flat-panel displays and automotive electronics.

IMG sales were $18.8 million in the third
quarter of fiscal 2008, an increase of $4.9 million or 35% compared to IMG sales of $14.0 million in the second quarter of fiscal 2007, including an increase of $3.8 million resulting from the acquisition of NWR. The remaining increase was led by
sales volumes of our Model 5300 series UV laser micro-via drilling systems.

Net sales were $159.6 million for the six months ended December 29, 2007,
an increase of $39.9 million or 33% compared to $119.7 million for the six months ended December 2, 2006. The increase in net sales for the six months ended December 29, 2007 compared to the first six months of fiscal 2007 are attributable
to the inclusion of NWR net sales of $12.6 million, volume sales increases for our dual-beam UV-based Model 9850, strong demand for our Model 3300 series electrical test and Model 6650A visual inspection systems, increased penetration in the Asian
market for our PCG products, and a volume sales increase for our Model 5300 series UV laser micro-via drilling systems.

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



|              |  |                    |         |               |                  |   |           |   |               |  |     |  
|------------- |  | ------------------ | ------- | ------------- | ---------------- | - | --------- | - | ------------- |  | --- | -
|              |  | Three months ended |        
|              |  | December 29, 2007  |         |               | December 2, 2006 |  
|              |  | Net Sales          |         | % ofNet Sales |                  |   | Net Sales |   | % ofNet Sales | 
|Asia          |  | $                  | 54,614  |               | 71               | % |           | $ | 43,165        |  | 73  | %
|United States |  |                    | 14,937  |               | 19               |   |           |   | 11,727        |  | 20  |  
|Europe        |  |                    | 7,735   |               | 10               |   |           |   | 4,409         |  | 7   |  
|              |  |                    |         |               |                  |   |           |   |               |  |     |  
|              |  | $                  | 77,286  |               | 100              | % |           | $ | 59,301        |  | 100 | %
|              | 
|              |  | Six months ended   |        
|              |  | December 29, 2007  |         |               | December 2, 2006 |  
|              |  | Net Sales          |         | % ofNet Sales |                  |   | Net Sales |   | % ofNet Sales | 
|Asia          |  | $                  | 118,200 |               | 74               | % |           | $ | 86,818        |  | 72  | %
|United States |  |                    | 27,867  |               | 18               |   |           |   | 24,732        |  | 21  |  
|Europe        |  |                    | 13,537  |               | 8                |   |           |   | 8,119         |  | 7   |  
|              |  |                    |         |               |                  |   |           |   |               |  |     |  
|              |  | $                  | 159,604 |               | 100              | % |           | $ | 119,669       |  | 100 | %

Compared to the second quarter of fiscal 2007, the percentage of net sales to Asia in the current quarter of
fiscal 2008 decreased by two percentage points. The net $11.5 million increase in net sales to Asia was driven primarily by volume increases in net sales of SG products and IMG products in China and in volume increases in net sales of IMG and ECS
products in Japan. Those increases were offset by lower volume sales of SG products in Korea. Partially offsetting these increases, the impact of NWR net sales by region reduced our percentage of total net sales to Asia by approximately two
percentage points, as NWR net sales were not as concentrated in Asia. Net sales to Europe in the third quarter of fiscal 2008 increased by three percentage points compared to the second quarter of fiscal 2008, driven by higher sales volumes for SG
products and NWR sales, which increased our European net sales as a percentage of total net sales by approximately two percentage points.



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For the six months ended December 29, 2007, sales by region were weighted more strongly to Asia as the second
quarter of fiscal 2008 included volume increases in net sales of SG products to China and Korea and increases in Japan due to higher net sales of PCG products, as compared to the prior year. Additionally, the impact of the NWR regional net sales
distribution on the consolidated net sales distribution was reduced as they are included in our financial results only from the acquisition date beginning July 20, 2007.

Gross Profit

Gross profit was $35.7 million (46.2% of net sales) for the third quarter of fiscal 2008
compared to $24.3 million (40.9% of net sales) for the second quarter of fiscal 2007. Cost of sales in the current quarter included $0.5 million in purchase accounting charges, which reduced the gross margin by 0.6 percentage points. Gross profit
was $72.5 million (45.4% of net sales) for the six months ended December 29, 2007 compared to $50.5 million (42.2% of net sales) for the first two quarters of fiscal 2007. Cost of sales in the six months ended December 29, 2007 included
$1.6 million in purchase accounting charges, which reduced the gross margin by 1.0 percentage point. Despite the impact of purchase accounting, the increases in gross profit for the three and six months ended December 29, 2007 compared to the
three and six months ended December 2, 2006 are due to favorable sales mix within our product groups and volume-based manufacturing efficiencies on increased shipments. Shipments increased by $21.3 million or 35% and $49.1 million or 41%,
respectively, for the three months and six months ended December 29, 2007 compared to the three months and six months ended December 2, 2006. Included in that increase is $6.9 million and $13.0 million, respectively, in NWR shipments for
the three and six months ended December 29, 2007. Additionally, gross margin was negatively impacted in the prior year comparative quarters by various incremental manufacturing expenses related to the timing of freight, duty and warranty
charges.

Operating Expenses

Selling,
Service and Administrative Expenses

The primary items included in selling, service and administrative expenses are labor and other employee-related
expenses, travel expenses, professional fees and facilities costs. Selling, service and administrative expenses were $16.0 million (20.7% of net sales) in the third quarter of fiscal 2008, an increase of $4.0 million compared to $12.0 million (20.3%
of net sales) in the second quarter of fiscal 2007. The increase was impacted by the inclusion of $3.1 million in NWR selling, service and administrative expenses. The remaining $0.9 million increase was primarily due to expenses to support higher
volume sales and service activity as well as incremental costs related to the integration of NWR.

Selling, service and administrative expenses were $31.4
million (19.7% of net sales) in the six months ended December 29, 2007 compared to $24.1 million (20.2% of net sales) in the first six months of fiscal 2007. The increase of $7.3 million includes the impact of $5.7 million in NWR expenses, of
which $0.9 primarily consisted of amortization of purchase accounting intangibles. The remaining $1.6 million increase in selling, service and administration expenses for the six months ended December 29, 2007 compared to the six months ended
December 2, 2006 was primarily due to expenses to support higher volume sales and service activity as well as incremental costs related to the integration of NWR.



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##### Table of Contents

Research, Development and Engineering Expenses

Research, development and engineering expenses are primarily comprised of labor and other employee-related expenses, professional fees, project materials, equipment and facilities costs. Expenses associated with
research, development and engineering totaled $11.5 million (14.9% of net sales) for the third quarter of fiscal 2008, representing a $1.9 million increase from $9.6 million (16.2% of net sales) for the second quarter of fiscal 2007, including an
increase of $1.5 million related to the inclusion of NWR expenses. The remaining $0.4 million increase is primarily related to increased project materials and consulting costs to support the development of new products in existing and emerging
markets.

Research, development and engineering expenses were $22.6 million (14.2% of net sales) in the six months ended December 29, 2007 compared to
$18.9 million (15.9% of net sales) in the first six months of fiscal 2007. Excluding the impact of NWR expenses of $2.6 million, the remaining increase of $1.1 million is due primarily to increased project materials and consulting costs to support
the development of new products.

Write-off of In-process Research & Development

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

Insurance Recoveries

In November 2006, we settled
litigation related to insurance coverage for the shareholder and derivative lawsuits related to the restatement of financial results announced in 2003. As a result, we recorded a gain of $1.0 million in the second quarter of fiscal 2007 as an offset
to operating expenses in the consolidated condensed statement of operations. All related costs had been expensed as incurred in prior periods.

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

Interest and Other Income, Net

Interest and other income was $1.9 million in the third quarter of fiscal 2008, a decrease of $0.4 million compared to $2.3 million in the second
quarter of fiscal 2007. This decrease is primarily due to a lower volume of average invested assets as we used $36.2 million in cash to fund the purchase of NWR in July



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2007 and $37.3 million for our share repurchase program conducted from late April 2007 to early October 2007. Cash and securities totaled $217.5 million at
December 2, 2006 and decreased to $182.3 million at December 29, 2007. Yields on our invested assets have remained fairly stable over the past year.

Lower invested asset volumes also drove the $1.2 million reduction in interest and other income to $3.9 million for the six months ended December 29, 2007 compared to $5.1 million in the first six months of fiscal 2007.

Income Taxes

The income tax provision recorded for the third
quarter of fiscal 2008 was $3.4 million on pretax income of $10.1 million, an effective rate of 34%. Comparatively, the income tax provision was $2.1 million on pretax income of $5.9 million in the second quarter of fiscal 2007, an effective tax
rate of 36%. The prior year effective tax rate was higher due to certain discrete adjustments related to the adoption of SFAS 123R, and to the expiration of a research and experimentation tax credit as of December 31, 2005 which was ultimately
retroactively reinstated in the third quarter of fiscal 2007.

The provision for income taxes in the six months ended December 29, 2007 was $7.5
million on pretax income of $19.7 million, an effective tax rate of 38%, compared to an income tax provision of $4.9 million on pretax income of $14.9 million in the six months ended December 2, 2006, an effective tax rate of 33%. The increase
in the effective tax rate in the six months ended December 29, 2007 compared to the first six months of fiscal 2007 is primarily due to discrete purchase accounting charges of $2.8 million associated with the write-off of in-process research
and development, which is non-deductible for tax purposes.

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 further 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 lapsed of statutes of limitation.

Net Income

Net income for the three and six months ended December 29, 2007 was $6.7 million (8.6% of net sales) or $0.24 per share on a basic and diluted
basis and $12.2 million (7.6% of net sales) or $0.44 per basic and $0.43 per diluted share, respectively. For the three and six months ended December 2, 2006, we recorded net income of $3.8 million (6.4% of net sales) or $0.13 per basic and
diluted share and $10.0 million (8.3% of net sales) or $0.34 per basic and fully diluted share, respectively.

Financial Condition and Liquidity

At December 29, 2007, our principal sources of liquidity consisted of cash, cash equivalents and short-term marketable securities of $160.6 million
and accounts receivable of $60.0 million. At December 29, 2007, we had a current ratio of 5.4:1 and no long-term debt. Working capital decreased to $275.5 million at December 29, 2007 from $327.3 million at June 2, 2007, primarily due
to the use of cash for the acquisition of NWR and the funding of our share repurchase program.

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



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On March 9, 2007, the Board of Directors authorized the repurchase of up to $50 million in shares of our outstanding
common stock over a nine month period beginning April 17, 2007 through transactions in the open market or in negotiated transactions with brokers or shareholders. We suspended purchase transactions under that share repurchase program effective
October 9, 2007. In total, we repurchased a total of approximately 1.7 million shares for $37.3 million, with $27.5 million in cash used to settle purchases in the current fiscal year. On January 22, 2008, our Board of Directors voted
to resume the previous $50 million share repurchase program. Accordingly, the Board of Directors has authorized the repurchase of up to $12.7 million in shares of our outstanding common stock over a six-month period beginning January 29, 2008
through transactions in the open market or in negotiated transactions with brokers or shareholders.

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

As of
December 29, 2007, we had a total of $19.6 million invested in auction rate securities. Historically, these securities provided liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar
intervals, generally every 28 to 35 days. This mechanism allowed existing investors to either retain or liquidate their holdings by selling such securities at par. The recent uncertainties in the credit markets have reduced the liquidity of these
securities as recent auctions have not been completed. We currently believe that these securities will ultimately be liquidated in orderly transactions in the future and we do not expect to need to sell these securities to fund our operations in the
next twelve months. We have the intent and ability to hold these securities until they reach maturity or are redeemed by the issuers and accrued interest income continues to be received when due. As such, we have determined that there has been no
permanent impairment of the value of these securities and that their par value approximates fair value. Thus, no unrealized gain or loss has been recorded in other comprehensive income or in the condensed consolidated statement of operations.

Cash flows provided by operating activities totaled $18.2 million in the period from June 3, 2007 through December 29, 2007. Cash totaling $25.7
million was provided by net income adjusted for non-cash items. Other significant factors impacting cash flows from operations included collections on trade receivables, purchases of inventories, decreases in current liabilities and increases in
deferred revenue, net of the related deferred cost of sales.

Net trade receivables were $60.0 million at December 29, 2007, compared to $55.7 million
at June 2, 2007. Receivables increased $4.3 million primarily due to the acquisition of NWR receivables of $5.4 million in July 2007. Days sales outstanding has remained stable at 71 days at both December 29, 2007 and June 2, 2007.

Net inventories increased $8.0 million from June 2, 2007 to $88.9 million at December 29, 2007. In July 2007, we acquired NWR inventories of
$6.1 million. The remaining $1.9 million increase in inventories resulted from a production ramp relating to a specific customer shipment.

Operating cash
flows from changes in deferred revenue, net of related changes in shipped systems pending acceptance, totaled $2.3 million.

Payables and other liabilities
were $46.1 million at December 29, 2007 compared to $45.0 million at June 2, 2007, an increase of $1.1 million. In July 2007, we acquired $9.1 million in NWR current liabilities. Net cash used to settle other liabilities totaled $8.1
million, primarily used to fund the annual profit sharing payment for fiscal 2007 paid in August, settle income taxes payable and reduce outstanding accounts payable.



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##### Table of Contents

Cash flows provided by investing activities totaled $57.6 million for the seven months ended December 29, 2007. We
generated $98.8 million, net, in cash and cash equivalents through the maturity and sale of investments in our portfolio of marketable securities. We invested approximately $36.2 million of those proceeds in the acquisition of NWR. Additionally, we
invested $3.9 million in property, plant and equipment, primarily test equipment and computer hardware and software, and $1.2 million in loaned and demonstration system assets.

Net cash flows used in financing activities of $23.3 million were comprised of $27.5 million in cash used to settle repurchase transactions for approximately 1.2 million shares of our common stock pursuant to the
share repurchase program discussed above, partially offset by $4.2 million in proceeds and tax benefits from the exercise of stock options and ESPP purchases for the seven months ended December 29, 2007.

Critical Accounting Policies and Estimates

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

Goodwill and Intangible Assets

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



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

Except for the continued deterioration in the liquidity of auction rate securities as discussed, under the heading Financial Condition and Liquidity in Item 2 of Part I of this report, there have been no material changes in
the market risk disclosure contained in our 2007 Annual Report on Form 10-K for our fiscal year ended on June 2, 2007.



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

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

Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There has been no change in our internal controls over financial reporting during our fiscal quarter ended December 29, 2007 that has materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.



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##### Table of Contents

PART II  OTHER INFORMATION



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

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). This patent corresponds to our U.S. Patent No. 5,842,579. The patented technology is used in the Model 3340 Multifunction MLCC Tester. The Court issued a Provisional Attachment
Order (PAO) in August 2005 and All Ring filed a bond with the Court to obtain relief from the attachment of its assets. In July 2007, pursuant to our application, the Court issued a second PAO and approximately US$6.0 million was restricted in All
Rings accounts. All Ring appealed the second PAO to the High Court in August 2007 and the High Court revoked the second PAO in September 2007. We appealed the High Courts decision to the Supreme Court. The Supreme Court granted our
appeal in January 2008 and revoked the High Courts decision. The second PAO remains in effect and cannot be revoked.

In October 2005, the Court
executed a Preliminary Injunction Order that prohibits All Ring from manufacturing, selling, offering for sale or using the Capacitor Tester until final judgment is entered in the formal patent infringement action. In October 2007, All Ring filed an
application to revoke the Preliminary Injunction Order. The Court dismissed All Rings application on January 18, 2008.

Pursuant to the
Courts orders, in October 2005 we were required to post a Taiwan dollar security bond with the Court. An additional bond amount of US$2.1 million was posted in June 2007 related to the second Provisional Attachment Order. The total security
bond is valued at approximately US$9.1 million and is included in other assets on our consolidated condensed balance sheets at December 29, 2007.

In
November 2007, All Ring filed with the Hsinchu District Court an application for a reverse Preliminary Injunction Order to allow All Ring to continue to manufacture, produce, sell, display, import, or export the Capacitor Tester, and we submitted a
defense brief in December 2007. All Rings application has not yet been ruled upon.

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

In November 2005, All Ring filed a cancellation action against our 207469 patent in the Taiwan Intellectual Property Office (the IPO).
On July 5, 2007, the IPO issued a notice requiring us to cancel two of the claims in the 207469 patent. No other claims of the patent have been rejected. We filed a response canceling the two claims and amending the remaining claims accordingly
in August 2007. An interview with the Examiner is set for January 28, 2008. We intend to vigorously pursue our patent infringement claims against All Ring and defend against the cancellation action.



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

Factors That May Affect Future Results

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

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

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

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

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



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

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

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

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

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

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

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

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



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

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

Product development delays may result from numerous factors, including:



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



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



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



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



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



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

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

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

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



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

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

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

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

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

We may be subject to claims of intellectual property infringement.

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

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



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

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

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



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



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



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

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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

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

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



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

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

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

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

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



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



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



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



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



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



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



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

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



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

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



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



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



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



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



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



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



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



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



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

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



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



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



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

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

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



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

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

As of December 29, 2007, the Company had a total of $19.6 million invested in
auction rate securities. These securities historically provided short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every 28 to 35 days. This mechanism allows
existing investors to either retain their holdings or liquidate their holdings by selling such securities at par. The recent uncertainties in the credit markets have reduced the liquidity of these securities as recent auctions have not been
completed. In the second quarter of fiscal 2008, we reclassified these securities, which were previously included in current assets, as long-term marketable securities on our consolidated condensed balance sheet. We believe that these securities
will ultimately be liquidated in orderly transactions at an amount equal to the cost of the assets. However, if we need to liquidate the securities in the near future or if no orderly liquidation occurs, we may not be able liquidate these securities
at par or at all, which could impair our liquidity. In addition, while these investments continue to be of high credit quality and the respective credit ratings of the securities issuers also remain high, if their credit quality decreases or such
credit ratings decline we may have to recognize an impairment to the value of the securities, which could harm our financial results. It is possible that continued uncertainty in the credit markets could also impact the liquidity of our other
investments and cash equivalents, which could impair our liquidity or require us to recognize an impairment to the value of those investments, which could harm our business.

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

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

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



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

On April 10, 2007, we announced that on March 9, 2007, the Board of Directors authorized the repurchase of up to $50 million in shares of our outstanding common stock over a nine-month period beginning April 17, 2007 through
transactions in the open market or in negotiated transactions with brokers or shareholders. The following table sets forth information about the share repurchase transactions in accordance with SEC Regulation S-K, Item 703:



|                    |  |                                               |  |                                           |  |                                                                                             |  |                                                                                                                        
|------------------- |  | --------------------------------------------- |  | ----------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------
|Period              |  | (a) TotalNumber of Shares(or Units)
Purchased |  | (b) Average PricePaid per Share (or Unit) |  | (c) Total Numberof Shares (or Units)Purchased as Part
ofPublicly Announced Plansor Programs |  | (d) Maximum Number (or Approximate Dollar Value)of Shares (or Units) thatMay Yet Be PurchasedUnder the Plans
orPrograms
|9/30/07 to 10/09/07 |  | 72,000                                        |  | $24.87                                    |  | 72,000                                                                                      |  | $12,656,167                                                                                                            

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

On
January 22, 2008, our Board of Directors voted to resume the previous $50 million share repurchase program. Accordingly, the Board of Directors has authorized the repurchase of up to $12.7 million in shares of our outstanding common stock over
a six-month period beginning January 29, 2008 through transactions in the open market or in negotiated transactions with brokers or shareholders.



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##### Table of Contents

|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

The
2007 Annual Meeting of Shareholders of the Company was held pursuant to notice at 2:00 p.m. Pacific time on October 25, 2007 at the Companys offices in Portland, Oregon to consider and vote upon the following proposals.



|           |  |                                                                                                                                                                                                        
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Proposal 1 |  | To elect three directors for a term of three years.                                                                                                                                                    
|           | 
|Proposal 2 |  | To approve an amendment to our 2004 Stock Incentive Plan to permit grants to non-employee service providers, implement a claw-back provision and make other changes described in
the proxy statement.
|           | 
|Proposal 3 |  | To ratify the appointment of KPMG LLP as the Companys independent registered public accounting firm for the ten-month period ending March 29, 2008                                                    

The results of the voting on these proposals were as follows:

Proposal 1



|                                                     |  |                                  |  |                        
|---------------------------------------------------- |  | -------------------------------- |  | -----------------------
|Election of Directors                                |  | For                              |  | Withheld               
|Frederick A. Ball Nicholas Konidaris Jon D. Tompkins |  | 25,374,679 25,050,031 25,395,857 |  | 255,204 579,852 234,026



|           |  |            |  |           |  |             |  |                 
|---------- |  | ---------- |  | --------- |  | ----------- |  | ----------------
|           |  | For        |  | Against   |  | Abstentions |  | Broker Non-Votes
|Proposal 2 |  | 13,653,409 |  | 8,505,468 |  | 447,376     |  | 3,023,630       



|           |  |            |  |         |  |            
|---------- |  | ---------- |  | ------- |  | -----------
|           |  | For        |  | Against |  | Abstentions
|Proposal 3 |  | 25,112,731 |  | 438,878 |  | 78,274     



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##### Table of Contents

|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.
|     | 
|10.1 |  | Employment offer letter, dated November 26, 2007, between the Company and Paul Oldham. Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on
December 3, 2007.                                                                                                           
|     | 
|10.2 |  | 2004 Stock Incentive Plan, as amended. Incorporated by reference to Exhibit 10.2 of the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended September 29,
2007.                                                                                                                                  
|     | 
|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: January 25, 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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