**U.S.SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

**FORM10-Q**

** **
| ** ** | ** ** | **(Mark One)** |
|------------|------------|----------------|
| ** ** | ** ** | **x**          | **QUARTERLY REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** ** | ** ** | ** **     | ** ** |
| ** ** | ** ** | ** **     | ** ** | **FOR  THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007** |
| ** ** | ** ** | ** **     | ** ** | ** ** |
| ** ** | ** ** | **o**          | **TRANSITION REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** ** | ** ** | ** **     | ** ** |
| ** ** | ** ** | ** **     | ** ** | **FOR THE TRANSITION PERIOD FROM                        TO** |

 

**CommissionFile Number  000-30833**

 

**Bruker BioSciences Corporation**

(Exact name of registrantas specified in its charter)

 

| **DELAWARE**                    | ** ** | **04-3110160**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer       |
| incorporation or  organization) |       | Identification Number) |

 

**40Manning Park**

**Billerica,MA  01821**

(Address of principalexecutive offices)

 

**(978)663-3660**

(Registrant’s telephone number,including area code)

 

Indicate by checkmark whether the registrant:  (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  x  No  o

 

Indicate by checkmark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer (as defined inRule 12b-2 of the Exchange Act).  Large accelerated filer        o  Acceleratedfiler        x  Non-acceleratedfiler o

 

Indicate by checkmark whether the registrant is a shell company (asdefined in Exchange Act Rule 12b-2).  Yes  o  No x

 

As of November 5, 2007, there were 105,490,604 shares of the Registrant’scommon stock outstanding.

 

 

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Bruker BioSciencesCorporation

Form 10-Q

For the Quarter EndedSeptember 30, 2007

Index

 
| ** **  | ** ** | ** **                                                                                                                  | ** ** | ** ** |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|
|        |       |                                                                                                                        |       |       |
| **PART I**  | ** ** | **FINANCIAL INFORMATION**                                                                                                   |       | 3          |
| ITEM 1:     |       | Financial Statements:                                                                                                       |       | 3          |
|        |       | Unaudited Condensed  Consolidated Balance Sheets as of September 30, 2007 and December 31,  2006                       |       | 3          |
|        |       | Unaudited Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2007 and 2006 |       | 4          |
|        |       | Unaudited Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2007 and 2006           |       | 5          |
|        |       | Notes to Unaudited Condensed  Consolidated Financial Statements                                                             |       | 6          |
| ITEM 2:     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                 |       | 14         |
| ITEM 3:     |       | Quantitative  and Qualitative Disclosures about Market Risk                                                                 |       | 26         |
| ITEM 4:     |       | Controls and  Procedures                                                                                                    |       | 27         |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                                       |       | 28         |
| ITEM 1:     |       | Legal Proceedings                                                                                                           |       | 28         |
| ITEM  1A:   |       | Risk Factors                                                                                                                |       | 28         |
| ITEM 2:     |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                |       | 28         |
| ITEM 3:     |       | Defaults  Upon Senior Securities                                                                                            |       | 28         |
| ITEM 4:     |       | Submission  of Matters to a Vote of Security Holders                                                                        |       | 28         |
| ITEM 5:     |       | Other Information                                                                                                           |       | 28         |
| ITEM  6:    |       | Exhibits                                                                                                                    |       | 28         |
|        |       | SIGNATURES                                                                                                                  |       | 29         |

 

2

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**PARTI   FINANCIAL INFORMATION**

**ITEM1:  Financial Statements**

** **

Bruker BioSciencesCorporation

UnauditedCondensed Consolidated Balance Sheets

(in thousands, exceptshare and per share data)

 
| ** **                                                                                                                                                                                                             | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                             |       |                         |       |                        |       |
| Current assets:                                                                                                                                                                                                        |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                             |       | $                            | 38,904     |                        | $          | 52,147 |   |
| Accounts  receivable, net                                                                                                                                                                                              |       | 85,840                       |       | 79,604                      |       |
| Due from  affiliated companies                                                                                                                                                                                         |       | 6,366                        |       | 9,028                       |       |
| Inventories                                                                                                                                                                                                            |       | 184,248                      |       | 134,504                     |       |
| Other current  assets                                                                                                                                                                                                  |       | 28,082                       |       | 19,461                      |       |
| Total current  assets                                                                                                                                                                                                  |       | 343,440                      |       | 294,744                     |       |
| Property, plant  and equipment, net                                                                                                                                                                                    |       | 101,015                      |       | 90,349                      |       |
| Goodwill,  intangible and other assets                                                                                                                                                                                 |       | 53,909                       |       | 48,094                      |       |
| Total assets                                                                                                                                                                                                           |       | $                            | 498,364    |                        | $          | 433,187 |   |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                         |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                                                                  |       |                         |       |                        |       |
| Short-term  borrowings                                                                                                                                                                                                 |       | $                            | 21,014     |                        | $          | 21,857 |   |
| Accounts payable                                                                                                                                                                                                       |       | 31,102                       |       | 23,102                      |       |
| Due to  affiliated companies                                                                                                                                                                                           |       | 7,526                        |       | 5,901                       |       |
| Customer  advances                                                                                                                                                                                                     |       | 44,345                       |       | 49,461                      |       |
| Deferred revenue                                                                                                                                                                                                       |       | 21,790                       |       | 16,661                      |       |
| Other current  liabilities                                                                                                                                                                                             |       | 84,672                       |       | 78,146                      |       |
| Total current  liabilities                                                                                                                                                                                             |       | 210,449                      |       | 195,128                     |       |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Long-term debt                                                                                                                                                                                                         |       | 18,078                       |       | 22,863                      |       |
| Other long-term  liabilities                                                                                                                                                                                           |       | 31,321                       |       | 23,730                      |       |
| Commitments and  contingencies (Note 14)                                                                                                                                                                               |       |                         |       |                        |       |
| Preferred stock,  $0.01 par value, 5,000,000 shares authorized, none issued or outstanding at  September 30, 2007 or December 31, 2006                                                                                 |       | —                       |       | —                      |       |
| Common stock,  $0.01 par value, 200,000,000 shares authorized, 105,485,207 shares issued and  105,474,931 shares outstanding at September 30, 2007 and 102,561,129 shares  issued and outstanding at December 31, 2006 |       | 1,047                        |       | 1,020                       |       |
| Treasury stock,  at cost, 10,276 shares and 0 shares at September 30, 2007 and December 31,  2006, respectively                                                                                                        |       | (92                          | )          | —                      |       |
| Other  stockholders’ equity                                                                                                                                                                                       |       | 237,561                      |       | 190,446                     |       |
| Total  shareholders’ equity                                                                                                                                                                                       |       | 238,516                      |       | 191,466                     |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                                       |       | $                            | 498,364    |                        | $          | 433,187 |   |

 

*See the accompanying notes to financialstatements.*

 

3

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Bruker BioSciencesCorporation

UnauditedCondensed Consolidated Statements of Operations

(in thousands, except pershare data)

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                             | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Product revenue                                                                        |       | $                                | 115,235    |                            | $          | 91,928 |   | $ | 317,243 |   | $ | 264,104 |   |
| Service revenue                                                                        |       | 16,217                           |       | 12,684                          |       | 46,169 |   | 34,970 |   |
| Other revenue                                                                          |       | 191                              |       | 258                             |       | 421 |   | 1,135 |   |
| Total revenue                                                                          |       | 131,643                          |       | 104,870                         |       | 363,833 |   | 300,209 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Cost of product  revenue                                                               |       | 59,924                           |       | 50,659                          |       | 166,525 |   | 143,414 |   |
| Cost of service  revenue                                                               |       | 9,886                            |       | 8,028                           |       | 29,816 |   | 20,633 |   |
| Total cost of  revenue                                                                 |       | 69,810                           |       | 58,687                          |       | 196,341 |   | 164,047 |   |
| Gross profit                                                                           |       | 61,833                           |       | 46,183                          |       | 167,492 |   | 136,162 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Operating  expenses:                                                                   |       |                             |       |                            |       |   |   |   |   |
| Sales and  marketing                                                                   |       | 27,057                           |       | 19,063                          |       | 74,909 |   | 58,795 |   |
| General and  administrative                                                            |       | 8,556                            |       | 7,239                           |       | 24,036 |   | 20,319 |   |
| Research and  development                                                              |       | 14,763                           |       | 11,936                          |       | 42,302 |   | 36,495 |   |
| Acquisition  related charges                                                           |       | —                           |       | 961                             |       | — |   | 5,829 |   |
| Total operating  expenses                                                              |       | 50,376                           |       | 39,199                          |       | 141,247 |   | 121,438 |   |
| Operating income                                                                       |       | 11,457                           |       | 6,984                           |       | 26,245 |   | 14,724 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Interest and  other income (expense), net                                              |       | (619                             | )          | (491                            | )          | (825 | ) | 3,522 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Income before  income tax provision and minority interest in consolidated subsidiaries |       | 10,838                           |       | 6,493                           |       | 25,420 |   | 18,246 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Income tax  provision                                                                  |       | 2,065                            |       | 3,535                           |       | 7,655 |   | 9,398 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Income before  minority interest in consolidated subsidiaries                          |       | 8,773                            |       | 2,958                           |       | 17,765 |   | 8,848 |   |
| Minority  interest in consolidated subsidiaries                                        |       | 109                              |       | (18                             | )          | 255 |   | 75 |   |
| Net income                                                                             |       | $                                | 8,664      |                            | $          | 2,976 |   | $ | 17,510 |   | $ | 8,773 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Net income per  common share - basic                                                   |       | $                                | 0.08       |                            | $          | 0.03 |   | $ | 0.17 |   | $ | 0.09 |   |
| Net income per  common share - diluted                                                 |       | $                                | 0.08       |                            | $          | 0.03 |   | $ | 0.16 |   | $ | 0.09 |   |
| Weighted average  common shares outstanding:                                           |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                                  |       | 104,377                          |       | 102,038                         |       | 103,806 |   | 101,635 |   |
| Diluted                                                                                |       | 106,679                          |       | 102,704                         |       | 106,484 |   | 102,090 |   |

 

*See the accompanying notes tofinancial statements.*

 

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Bruker BioSciencesCorporation

UnauditedCondensed Consolidated Statements of Cash Flows

(in thousands)

 
| ** **                                                | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **September 30,**          | ** ** |
| ** **                                                | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| **Operating  activities:**                                |       |                            |       |   |   |
| Net cash (used  in) provided by operating activities      |       | $                               | (10,153    | ) | $ | 17,835 |   |
|                                                      |       |                            |       |   |   |
| **Investing  activities:**                                |       |                            |       |   |   |
| Purchases of  property and equipment                      |       | (13,352                         | )          | (5,037 | ) |
| Redemption of  short-term investments                     |       | —                          |       | 46,460 |   |
| Acquisitions,  net of cash acquired                       |       | (2,855                          | )          | (27,642 | ) |
| Changes in  restricted cash                               |       | (283                            | )          | (76 | ) |
| Net cash (used  in) provided by investing activities      |       | (16,490                         | )          | 13,705 |   |
|                                                      |       |                            |       |   |   |
| **Financing  activities:**                                |       |                            |       |   |   |
| (Repayments of)  proceeds from short-term borrowings, net |       | (6,416                          | )          | 19,521 |   |
| (Repayments of)  proceeds from long-term debt, net        |       | (1,470                          | )          | 899 |   |
| Proceeds from  issuance of common stock                   |       | 18,864                          |       | 418 |   |
| Repurchase of  common stock                               |       | (92                             | )          | — |   |
| Cash payments to  shareholders                            |       | —                          |       | (74,021 | ) |
| Net cash  provided by (used in) financing activities      |       | 10,886                          |       | (53,183 | ) |
| Effect of  exchange rate changes on cash                  |       | 2,514                           |       | 3,162 |   |
| Net change in  cash and cash equivalents                  |       | (13,243                         | )          | (18,481 | ) |
| Cash and cash  equivalents at beginning of period         |       | 52,147                          |       | 62,632 |   |
| Cash and cash  equivalents at end of period               |       | $                               | 38,904     |   | $ | 44,151 |   |
|                                                      |       |                            |       |   |   |
| **Non-Cash  Financing Activities**                        |       |                            |       |   |   |
| Issuance of  common stock related to acquisitions         |       | $                               | 269        |   | $ | 58,463 |   |

 

*See the accompanying notes tofinancial statements.*

 

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Bruker BioSciencesCorporation

Notes toUnaudited Condensed Consolidated Financial Statements

 

**1.  Description of Business andBasis of Presentation**

** **

Bruker BioSciencesCorporation and its wholly-owned subsidiaries (the “Company”, “we,” “us,” or “our”)design, manufacture, service and market proprietary life science and materialsresearch systems based on mass spectrometry core technology platforms, X-raytechnologies, optical emission spectroscopy (OES) technology, and infrared andRaman molecular spectroscopy technology. The Company also sells a broad rangeof field analytical systems for chemical, biological, radiological and nuclear(CBRN) detection. The Company maintains major technical and manufacturingcenters in Europe, North America and Japan and sales offices throughout theworld. The Company’s diverse customer base includes pharmaceutical,biotechnology and proteomics companies, academic institutions, advancedmaterials and semiconductor industries and government agencies.

 

The financial statementsrepresent the consolidated accounts of the Company and its wholly-ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated in consolidation. The condensed consolidated financial statements asof and for the three and nine months ended September 30, 2007 and 2006 havebeen prepared in accordance with accounting principles generally accepted inthe United States of America for interim financial information and withArticle 10 of Regulation S-X. Accordingly, the financial informationpresented herein does not include all of the information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements. In the opinion of management, all adjustments(consisting only of normal recurring adjustments) considered necessary for afair presentation have been included. The results for interim periods are notnecessarily indicative of the results to be expected for the full year.

 

On July 1, 2006, theCompany completed its acquisition of Bruker Optics Inc. (“Bruker Optics”). Boththe Company and Bruker Optics were majority owned by five affiliatedstockholders prior to the acquisition. As a result, the acquisition of BrukerOptics by the Company was considered a business combination of companies undercommon control. The consolidated balance sheets, statements of operations,statements of cash flows and notes to the financial statements presented inthis Quarterly Report on Form 10-Q have been restated by combining thehistorical consolidated financial statements of the Company with those ofBruker Optics for periods prior to the acquisition.

 

The Company reportsfinancial results on the basis of the following three business segments:

 

1.                     *Bruker AXS* is a leading developer andprovider of life science and advanced materials research tools based on X-raytechnology tools for advanced X-ray and spark-OES instrumentation used innon-destructive molecular materials and elemental analysis in academic,research and industrial applications.

 

2.                     *Bruker Daltonics* is a leading developerand provider of life science tools based on mass spectrometry and also developsand provides a broad range of field analytical systems for CBRN detection.

 

3.                     *Bruker Optics* is a leading developer andprovider of research, analytical and process analysis instruments and solutionsbased on infrared and Raman molecular spectroscopy technologies.

 

**2.  Public Offering of CommonStock**

** **

On February 12, 2007, theCompany and a group of selling stockholders completed a public offering of11,960,000 shares of its common stock, of which 2,530,000 were sold by theCompany and 9,430,000 were sold by four selling shareholders, at $7.10 pershare, generating net proceeds of approximately $16.9 million to the Companyand approximately $63.2 million to the selling stockholders, in the aggregate.

 

**3. Acquisitions**

** **

On July 1, 2006, theCompany completed the acquisition of all of the outstanding stock of BrukerOptics in accordance with the terms of the stock purchase agreement dated as ofApril 17, 2006. The acquisition of Bruker Optics represented a businesscombination of companies under common control due to the majority ownership ofboth companies by five related individuals as an affiliated shareholder group.As a result, the acquisition, as it related to the shares owned by theseaffiliated shareholders (approximately 96%), was accounted for at historicalcarrying value. The acquisition of the shares of the non-affiliatedshareholders (approximately 4%) was accounted for at fair value, in a mannersimilar to the acquisition of a minority interest. The excess purchase price ofthe interest not under common control over the fair value of the related netassets was recorded as intangible assets and goodwill.

 

Upon completion of theacquisition, the Company paid an aggregate of $135 million of consideration tothe Bruker Optics stockholders and holders of Bruker Optics stock options, ofwhich approximately $79 million was paid in cash and approximately $56million was paid in restricted unregistered shares of Company common stock. Thefair value of the consideration paid for the acquisition of the minorityinterest was approximately $5.2 million, including cash of $4.8 millionand common stock valued at

 

6

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 $0.4 million. The value ofthe shares of common stock issued to the non-affiliated shareholder inconnection with the merger was determined using a trailing average of theclosing market prices of the Company’s stock for a period of ten consecutivetrading days ending three days prior to the closing of the acquisition, whichoccurred on July 1, 2006.

 

The Company engaged RSMMcGladrey, Inc., a third party valuation firm, to assist management inappraising the fair value of certain assets acquired.  The appraisal was completed in the secondquarter of 2007. The following table summarizes the fair values of assetsacquired and liabilities assumed at the date of acquisition of the minorityinterest (in thousands):

 
| Current assets                 |   | $       | 42,387 |   |
|--------------------------------|--------|---------|--------|--------|
| Property, plant  and equipment |   | 13,174  |   |
| Intangible  assets             |   | 53,846  |   |
| Other assets                   |   | 72      |   |
| Total assets                   |   | 109,479 |   |
| Current  liabilities           |   | 34,488  |   |
| Long-term debt                 |   | 3,463   |   |
| Other  liabilities             |   | 2,074   |   |
| Total  liabilities assumed     |   | 40,025  |   |
| Net assets                     |   | 69,454  |   |
| Minority  interest percentage  |   | 4.1     | %      |
| Net assets  acquired           |   | 2,848   |   |
| Goodwill                       |   | 2,294   |   |
| Total purchase  price          |   | $       | 5,142  |   |

 

The purchase price forthe 4.1% minority interest acquired was allocated to the net assets acquired ona pro rata basis in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 141,*Business Combinations*.Accordingly, acquisition related intangibles total $2.2 million and are beingamortized over four years. In addition, approximately $2.7 million of acquiredintangible assets were assigned to in-process research and development projectsof which the 4.1% minority interest, or approximately $0.1 million, was writtenoff at the date of acquisition in accordance with FASB InterpretationNo. 4,*Applicability of FASB StatementNo. 2 to Business Combinations Accounted for by the Purchase Method*.The projects that were estimated to qualify as acquired in-process research anddevelopment projects were those that had not yet reached technology feasibilityand for which no future alternative uses existed.

 

The $2.3 million ofgoodwill acquired from Bruker Optics in connection with the acquisition wasassigned to the Company’s Bruker Optics subsidiary, currently a reportableoperating segment, and will not be deductible for tax purposes since theacquisition was a tax-free acquisition.

 

On January 1, 2007, theCompany acquired all of the assets of KecaMetal Products, Ltd. (“Keca”), a Texas partnership located in Spring,Texas.  The aggregate purchase price forKeca was $0.6 million and was funded with cash on hand.  Keca provides specialized machining services,primarily to Bruker Optics.  The results of Keca have been included in theBruker Optics segment from the date of acquisition.

 

 On June 30, 2007, the Company acquiredAnalys-Konsult AB (“AKAB”), a distributor and service provider of scientificinstrumentation based in Sweden.  Theaggregate purchase price of AKAB was approximately $0.8 million, of whichapproximately $0.5 million was paid in cash and approximately $0.3 million wasfunded by the issuance of an aggregate of 29,740 restricted unregistered sharesof the Company’s common stock, par value $0.01 per share, to AKAB’sshareholders.  The results of AKAB havebeen included in the Bruker AXS segment from the date of acquisition.

 

Pro forma financialinformation reflecting the Keca or AKAB acquisitions has not been presented asthe impact on revenues and net income and net income per common share would nothave been material.

 

**4. Provision for Income Taxes**

** **

Theincome tax provision for the three months ended September 30, 2007 was $2.1million compared to an income tax provision of $3.5 million for the threemonths ended September 30, 2006, representing effective tax rates of 19.1% and54.4%, respectively. The income tax provision for the nine months endedSeptember 30, 2007 was $7.7 million compared to an income tax provision of $9.4million for the nine months ended September 30, 2006, representing effectivetax rates of 30.1% and 51.5%, respectively. Our effective tax rate reflects ourtax provision for non-U.S. entities only, since no benefit was recognized forcumulative losses incurred in the U.S. We will maintain a full valuationallowance for our U.S. net operating losses until evidence exists that it ismore likely than not that the loss carryforward amounts will be utilized tooffset U.S. taxable income. Our tax rate may change over time as the amount ormix of income and taxes outside the U.S. changes. Our effective tax rate iscalculated using our projected annual pre-tax income or loss and is affected byresearch and development tax credits, the expected level of other tax benefits,and the impact of changes to the valuation allowance, as well as changes in themix of our pre-tax income and losses among jurisdictions with varying statutorytax rates and credits.

 

7

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OnAugust 14, 2007, the German Business Tax Reform 2008 was signed by the FederalPresident and the legislative process was finalized on August 17, 2007 with theofficial publication of the law.  Thisnew legislation changes the German Federal Corporate Tax Rate from 25% to15%.  In addition, German Trade Tax is nolonger deductible from the Corporate Income Tax. The Company has analyzed theimpact of these changes on its deferred tax assets and liabilities as of thedate of enactment. The temporary differences that will reverse after December31, 2007 have been adjusted to reflect the new tax rate which will becomeeffective on January 1, 2008. As a result, the Company has recorded a netreduction to income tax expense of $2.4 million in the quarter ending September30, 2007.

 

InJuly 2006, the Financial Accounting Standards Board issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes –an interpretation of FASB Statement 109* (“FIN 48”). Among otherthings, FIN 48 provides guidance to address uncertainty in tax positions andclarifies the accounting for income taxes by prescribing a minimum recognitionthreshold which income tax positions must achieve before being recognized inthe financial statements. In addition, FIN 48 requires expanded annualdisclosures, including a rollforward of the beginning and ending aggregateunrecognized tax benefits as well as specific detail related to taxuncertainties for which it is reasonably possible the amount of unrecognizedtax benefit will significantly increase or decrease within twelve months*.* The Company adopted FIN 48 onJanuary 1, 2007, and recorded a reduction to retained earnings of $751,000effective January 1, 2007. The Company has unrecognized tax benefits ofapproximately $2.0 million as of January 1, 2007, of which $2.0 million,if recognized, would result in a reduction of the Company’s effective taxrate.  As of September 30, 2007, theCompany does not expect any material changes to unrecognized tax positionswithin the next twelve months.

 

The Company recognizespenalties and interest related to unrecognized tax benefits in the provisionfor income taxes. As of September 30, 2007, approximately $518,000 of accruedinterest related to uncertain tax positions was included in other currentliabilities on our consolidated balance sheet, of which $51,000 and $153,000was recorded during the three and nine months ended September 30, 2007,respectively.

 

Thetax years 2003 to 2006 are open tax years in our major taxing jurisdictions.The Company files returns in many foreign and state jurisdictions with varyingstatutes of limitations.

 

**5.  Equity-Based Compensation**

** **

In 2000, the Board ofDirectors adopted and the stockholders approved the 2000 Stock Option Plan. The2000 Stock Option Plan provided for the issuance of up to 2,200,000 shares ofcommon stock in connection with awards under the Plan. The 2000 Stock OptionPlan allows a committee of the Board of Directors to grant incentive stockoptions, non-qualified stock options, stock appreciation rights and stockawards (including restricted stock and phantom shares). The committee has theauthority to determine which employees will receive the awards, the amount ofthe awards and other terms and conditions of the awards. Awards granted by thecommittee typically vest over a period of three-to-five years.

 

On July 1, 2003, theCompany’s stockholders approved an amendment and restatement of the 2000 StockOption Plan to change the plan name and increase the number of shares availablefor issuance. The name of the amended plan is the Bruker BioSciencesCorporation Amended and Restated 2000 Stock Option Plan. The amendment authorized4,132,000 additional shares of common stock of the Company issuable pursuant tothe plan. On June 29, 2006, the Company’s stockholders approved an increase inthe number of shares available for issuance under the plan from 6,320,000shares to 8,000,000 shares, an increase of 1,680,000 shares.

 

The total number ofshares issuable under the plan is 8,000,000, all of which have been registeredon Form S-8 (Reg. No. 333-47836, 333-107294 and 333-137090).

 

As of September 30, 2007,the Company’s primary types of share-based compensation related to issuances ofstock options and restricted stock. The Company recorded stock-basedcompensation expense for the three and nine months ended September 30, 2007 and2006 as follows (in thousands):

 
| ** **                                  | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                  | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock options                               |       | $                                | 557        |                            | $          | 277 |   | $ | 1,031 |   | $ | 813 |   |
| Restricted stock                            |       | 143                              |       | 155                             |       | 466 |   | 229 |   |
| Total  stock-based compensation, pre-tax    |       | 700                              |       | 432                             |       | 1,497 |   | 1,042 |   |
| Tax benefit                                 |       | (196                             | )          | (121                            | )          | (419 | ) | (266 | ) |
| Total  stock-based compensation, net of tax |       | $                                | 504        |                            | $          | 311 |   | $ | 1,078 |   | $ | 776 |   |

 

Restricted shares of theCompany’s common stock are periodically awarded to executive officers,directors and certain key employees of the Company subject to a servicerestriction which expires ratably over a period of three-to-five years. Therestricted shares of common stock may not be sold or transferred during therestriction period. Stock compensation for restricted stock is

 

8

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recorded based on the stock price on the grant date and charged toexpense ratably through the restriction period. The following table summarizesinformation about restricted stock activity during the nine months endedSeptember 30, 2007:

 
| ** **                         | ** ** | ** **          | ** ** | **Weighted**        | ** ** |
|------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                         | ** ** | **Shares**          | ** ** | **Average**         | ** ** |
| ** **                         | ** ** | **Subject to** | ** ** | **Grant Date** | ** ** |
| ** **                         | ** ** | **Restriction**     | ** ** | **Fair Value** | ** ** |
| Outstanding at  December 31, 2006  |       | 628,200             |       | $                   | 5.29       |   |
| Granted                            |       | 35,400              |       | 8.07                |       |
| Vested                             |       | (129,090            | )          | 5.34                |       |
| Forfeited                          |       | (5,630              | )          | 5.83                |       |
| Outstanding at  September 30, 2007 |       | 528,880             |       | $                   | 5.45       |   |

 

Unrecognized pretaxexpense of $2.1 million related to restricted stock awards is expected to berecognized over the weighted average remaining service period of 3.6 years forawards outstanding at September 30, 2007.

 

The fair value of eachstock option award is estimated on the date of grant using the Black-Scholesoption-pricing model. Assumptions regarding volatility, expected term, dividendyield and risk-free interest rate are required for the Black-Scholes model.Volatility and expected term assumptions are based on the Company’s historicalexperience. The risk-free interest rate is based on a U.S. treasury note with amaturity similar to the stock option award’s expected life. The assumptions forvolatility, expected life, dividend yield and risk-free interest rate arepresented in the table below:

 
| ** **               | ** ** | **2007**     | ** ** | **2006** | ** ** |
|--------------------------|------------|--------------|------------|----------|------------|
| Risk-free  interest rate |       | 4.52% - 4.81 | %          | 3.80     | %          |
| Expected life            |       | 6.5 years    |       | 5 years  |       |
| Volatility               |       | 82.0         | %          | 105.0    | %          |
| Expected  dividend yield |       | 0            | %          | 0        | %          |

 

All stock options grantedhad an exercise price equal to the market value of the underlying common stockon the date of grant. Stock option activity for the nine months ended September30, 2007 was as follows:

 
| ** **                         | ** ** | ** **          | ** ** | ** **   | ** ** | **Weighted**        | ** ** | ** **                             | ** ** |
|------------------------------------|------------|---------------------|------------|--------------|------------|---------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | ** **          | ** ** | **Weighted** | ** ** | **Average**         | ** ** | **Aggregate**                          | ** ** |
| ** **                         | ** ** | **Shares**          | ** ** | **Average**  | ** ** | **Remaining**       | ** ** | **Intrinsic**                          | ** ** |
| ** **                         | ** ** | **Subject to** | ** ** | **Option**   | ** ** | **Contractual**     | ** ** | **Value**                              | ** ** |
| ** **                         | ** ** | **Options**         | ** ** | **Price**    | ** ** | **Term (Yrs)** | ** ** | **($’s in 000’s)** | ** ** |
| Outstanding at  December 31, 2006  |       | 3,671,425           |       | $            | 6.25       |                |       |                                   |       |   |
| Granted                            |       | 1,247,174           |       | 7.93         |       |                |       |                                   |       |
| Exercised                          |       | (322,623            | )          | 5.12         |       |                |       |                                   |       |
| Forfeited                          |       | (45,091             | )          | 9.84         |       |                |       |                                   |       |
| Outstanding at  September 30, 2007 |       | 4,550,885           |       | $            | 6.75       |                | 4.8        |                                   | $          | 11,985 |   |
| Exercisable at  September 30, 2007 |       | 2,653,753           |       | $            | 6.70       |                | 4.3        |                                   | $          | 8,236 |   |

 

The following tablesummarizes information about stock options outstanding and exercisable atSeptember 30, 2007:

 
| ** **               | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | **Aggregate** | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Aggregate** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | **Intrinsic** | ** ** | ** ** | ** ** | **Average** | ** ** | **Intrinsic** | ** ** |
| **Range of**        | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Value** | ** ** | **Number** | ** ** | **Exercise** | ** ** | **Value** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding**              | ** ** | **Term (Yrs)**          | ** ** | **Price** | ** ** | **($’s in 000’s)** | ** ** | **Exercisable** | ** ** | **Price** | ** ** | **($’s in 000’s)** | ** ** |
| $2.12 to $4.00           |       | 732,448                      |       | 4.0                          |       | $ | 3.21 |   | $ | 4,097 |   | 595,454 |   | $ | 3.18 |   | $ | 3,344 |   |
| $4.01 to $6.00           |       | 1,664,504                    |       | 4.6                          |       | 5.17 |   | 6,041 |   | 1,118,321 |   | 5.14 |   | 4,089 |   |
| $6.01 to $10.00          |       | 1,625,584                    |       | 7.2                          |       | 7.67 |   | 1,847 |   | 411,629 |   | 6.85 |   | 803 |   |
| $10.01 to $13.00         |       | 203,349                      |       | 4.4                          |       | 11.02 |   | — |   | 203,349 |   | 11.02 |   | — |   |
| $13.01 and above         |       | 325,000                      |       | 3.6                          |       | 15.64 |   | — |   | 325,000 |   | 15.64 |   | — |   |
|                     |       | 4,550,885                    |       | 4.8                          |       | $ | 6.75 |   | $ | 11,985 |   | 2,653,753 |   | $ | 6.70 |   | $ | 8,236 |   |

 

9

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The intrinsic valuesabove are based on the Company’s closing stock price of $8.80 on September 30,2007. The weighted-average grant-date fair value of options granted during thenine months ended September 30, 2007 was $5.88. Unrecognized pretax expense of$8.9 million related to stock options is expected to be recognized over theweighted average remaining service period of 3.0 years for awards outstandingat September 30, 2007.

 

**6.  Inventories**

** **

Inventories consisted ofthe following as of September 30, 2007 and December 31, 2006 (in thousands):

 
| ** **           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| Raw materials        |       | $                      | 55,008     |                  | $          | 45,361 |   |
| Work in process      |       | 57,234                 |       | 42,269                |       |
| Demonstration  units |       | 19,294                 |       | 14,678                |       |
| Finished goods       |       | 52,712                 |       | 32,196                |       |
| Total  inventories   |       | $                      | 184,248    |                  | $          | 134,504 |   |

 

**7.  Goodwill and OtherIntangible Assets**

 

The following is a summaryof other intangible assets subject to amortization as of  September 30, 2007 and December 31, 2006 (inthousands):

 
| ** **                               | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **Useful**                       | ** ** | **Gross**                       | ** ** | ** ** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                               | ** ** | **Lives**                        | ** ** | **Carrying**                    | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                               | ** ** | **in Years**                | ** ** | **Amount**                      | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Existing  technology and related patents |       | 4 to 5                           |       | $                               | 6,335      |   | $ | (2,861 | ) | $ | 3,474 |   | $ | 6,172 |   | $ | (1,916 | ) | $ | 4,256 |   |
| Customer  relationships                  |       | 5                                |       | 1,115                           |       | (455 | ) | 660 |   | 1,108 |   | (288 | ) | 820 |   |
| Trade names                              |       | 5 to 10                          |       | 439                             |       | (161 | ) | 278 |   | 718 |   | (215 | ) | 503 |   |
| Total amortizable  intangible assets     |       |                             |       | $                               | 7,889      |   | $ | (3,477 | ) | $ | 4,412 |   | $ | 7,998 |   | $ | (2,419 | ) | $ | 5,579 |   |

 

For the three monthsended September 30, 2007 and 2006, the Company recorded amortization expense ofapproximately $0.3 million and $0.3 million, respectively, related to otheramortizable intangible assets.  For thenine months ended September 30, 2007 and 2006, the Company recorded amortizationexpense of approximately $1.1 million and $0.6 million, respectively, relatedto other amortizable intangible assets.

 

The estimated futureamortization expense related to other amortizable intangible assets is asfollows (in thousands):

 
| **For the year ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|
| 2007 (a)                                                      |       | $          | 316        |   |
| 2008                                                          |       | 1,239      |       |
| 2009                                                          |       | 1,210      |       |
| 2010                                                          |       | 1,088      |       |
| 2011                                                          |       | 510        |       |
| Thereafter                                                    |       | 49         |       |
| Total                                                         |       | $          | 4,412      |   |

 

----

(a)  Amountrepresents estimated amortization expense for the remaining three months endingDecember 31, 2007.

 

The carrying amount ofgoodwill was $39.8 million as of September 30, 2007 and December 31, 2006,and is primarily included in the Bruker AXS segment. The Company performs itsannual test for indications of impairment as of December 31st eachyear. The Company completed its annual test for impairment as ofDecember 31, 2006 and determined that goodwill was not impaired at thattime.

 

**8.  Warranty Costs**

** **

The Company typicallyprovides a one-year parts and labor warranty with the purchase of equipment.The anticipated cost for

 

10

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this one-year warranty is accrued upon recognition of the sale and isincluded as a current liability on the balance sheet. The Company also offersto its customers warranty and service agreements extending beyond the initialyear of warranty for a fee. These fees are recorded as deferred revenue andamortized into income over the life of the extended warranty contract.

 

Changes in the Company’saccrued warranty liability during the nine months ended September 30, 2007 wereas follows (in thousands):

 
| Warranty accrual  at December 31, 2006            |   | $      | 13,274 |   |
|---------------------------------------------------|--------|--------|--------|--------|
| Accruals for  warranties issued during the period |   | 8,593  |   |
| Settlements of  warranty claims                   |   | (8,475 | )      |
| Foreign currency  impact                          |   | 789    |   |
| Warranty accrual  at September 30, 2007           |   | $      | 14,181 |   |

 

**9.  Line of Credit**

** **

On July 5, 2006, theCompany issued a demand promissory note for a $40 million line of credit in theUnited States. On September 28, 2007, the demand promissory note was increasedto $75 million. As of September 30, 2007, the line of credit was fullyavailable. The note bears interest at the bank’s prime rate, LIBOR plus 1%, ora LIBOR advantage rate plus 1% at the request of the Company.  All of theCompany’s obligations under the line of credit are secured by a pledge to thebank of 100% of the capital stock of each of the Company’s wholly-owneddomestic subsidiaries, each of which also pledged a portion of the stock ofcertain of their foreign subsidiaries.

 

**10.  Employee Benefit Plans**

** **

The Company has a definedbenefit retirement plan that covers substantially all employees of the BrukerAXS German subsidiary who were employed as of September 30, 1997. The planprovides pension benefits based upon final average salary and years of service.

 

The net periodic pensionbenefit cost includes the following components during the three and nine monthsended September 30, 2007 and 2006 (in thousands):

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                           | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Components  of net periodic pension benefit cost** |       |                             |       |                            |       |   |   |   |   |
| Service cost                                         |       | $                                | 278        |                            | $          | 177 |   | $ | 837 |   | $ | 522 |   |
| Interest cost                                        |       | 127                              |       | 98                              |       | 380 |   | 290 |   |
| Amortization                                         |       | (4                               | )          | (4                              | )          | (12 | ) | (12 | ) |
| Net periodic  benefit cost                           |       | $                                | 401        |                            | $          | 271 |   | $ | 1,205 |   | $ | 800 |   |

 

To date, the Company hasnot funded the defined benefit plan and is not required to make contributionsduring the remainder of 2007.

 

**11.  Earnings Per Share**

** **

Basic earnings per shareis calculated by dividing net earnings by the weighted-average number of commonshares outstanding during the period. Restricted stock is not included in the calculation of basic EPS untilthe time-based restriction has lapsed. Except where the result would beantidilutive, the diluted earnings per share computation includes the effect ofpotential shares, shares which would be issuable upon the exercise ofoutstanding stock options or outstanding restricted stock issuable when therestrictions lapse, reduced by the number of shares which are assumed to bepurchased by the Company from the resulting proceeds at the average marketprice during the period.

 

The following table setsforth the computation of basic and diluted average shares outstanding for thethree and nine months ended September 30, 2007 and 2006 (in thousands):

 

11

----

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                     | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income, as  reported                       |       | $                                | 8,664      |                            | $          | 2,976 |   | $ | 17,510 |   | $ | 8,773 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| **Weighted  average shares outstanding:**      |       |                             |       |                            |       |   |   |   |   |
| Weighted average  shares outstanding - basic   |       | 104,377                          |       | 102,038                         |       | 103,806 |   | 101,635 |   |
| Effect of  dilutive securities:                |       |                             |       |                            |       |   |   |   |   |
| Stock options  and restricted stock            |       | 2,302                            |       | 666                             |       | 2,678 |   | 455 |   |
| Weighted average  shares outstanding - diluted |       | 106,679                          |       | 102,704                         |       | 106,484 |   | 102,090 |   |
| Net income per  share - basic                  |       | $                                | 0.08       |                            | $          | 0.03 |   | $ | 0.17 |   | $ | 0.09 |   |
| Net income per  share - diluted                |       | $                                | 0.08       |                            | $          | 0.03 |   | $ | 0.16 |   | $ | 0.09 |   |

 

The total anti-dilutedshares outstanding for the nine months ended September 30, 2007 and 2006 were640,000 and 1,027,000, respectively.

 

**12. Interest and Other Income(Expense), Net**

 

The components ofinterest and other income (expense), net, were as follows for the three andnine months ended September 30, 2007 and 2006 (in thousands):

 
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                          | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income                                                     |       | $                                | 235        |                            | $          | 294 |   | $ | 909 |   | $ | 1,939 |   |
| Interest expense                                                    |       | (386                             | )          | (762                            | )          | (1,294 | ) | (1,556 | ) |
| Exchange losses  on foreign currency transactions                   |       | (1,078                           | )          | (68                             | )          | (1,680 | ) | (1,165 | ) |
| Appreciation of  the fair value of derivative financial instruments |       | 179                              |       | 118                             |       | 759 |   | 3,893 |   |
| Other                                                               |       | 431                              |       | (73                             | )          | 481 |   | 411 |   |
| Interest and  other income (expense), net                           |       | $                                | (619       | )                               | $          | (491 | ) | $ | (825 | ) | $ | 3,522 |   |

 

**13.  Comprehensive Income**

 

Comprehensive incomerefers to revenues, expenses, gains and losses that under accounting principlesgenerally accepted in the United States of America are included in othercomprehensive income, but excluded from net income as these amounts arerecorded directly as an adjustment to stockholders’ equity, net of tax. The following is a summary of comprehensive income for the three and ninemonths ended September 30, 2007 and 2006 (in thousands):

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                |       | $                                | 8,664      |                            | $          | 2,976 |   | $ | 17,510 |   | $ | 8,773 |   |
| Foreign currency  translation adjustments |       | 7,252                            |       | (249                            | )          | 9,950 |   | 8,265 |   |
| Total  comprehensive income               |       | $                                | 15,916     |                            | $          | 2,727 |   | $ | 27,460 |   | $ | 17,038 |   |
|                                           |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |

 

**14.  Commitments and Contingencies**

 

Lawsuits, claims andproceedings of a nature considered normal to its businesses may be pending fromtime to time against the Company. The Company believes the outcome of theseproceedings, if any, will not have a material impact on the Company’s financialposition or results of operations.

 

**15.  Letters of Credit andGuarantees**

 

As of September 30, 2007and December 31, 2006, the Company had bank guarantees of $11.6 millionand $9.1 million,

 

12

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respectively, for its customer advances. These bank guarantees affectthe availability of the Company’s lines of credit.

 

**16.  Business SegmentInformation**

 

SFAS No. 131,*Disclosures about Segments of an Enterprise andRelated Information* (“SFAS 131”), establishes standards forreporting information about reportable segments in financial statements ofpublic business enterprises. SFAS 131 also establishes standards for relateddisclosures about products and services, geographic areas and major customers.The Company reports financial results on the basis of three reportablesegments: Bruker AXS, Bruker Daltonics and Bruker Optics. Bruker AXSmanufactures and distributes advanced X-ray instrumentation and spark-OESinstrumentation used in non-destructive molecular and elemental analysis inacademic, research and industrial applications.  Bruker Daltonicsmanufactures and distributes mass spectrometry instruments that can beintegrated and used with other analytical instruments. Bruker Opticsmanufactures and distributes infrared and Raman molecular spectroscopyinstruments and solutions that can be used in analytical and researchapplications. Bruker BioSciences Corporation, the parent company of Bruker AXS,Bruker Daltonics and Bruker Optics, is the corporate entity that principallyincurs certain public company costs.

 

Selected reportablesegment financial information for the three and nine months ended September 30,2007 and 2006 is presented below (in thousands):

 
| ** **                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                    | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenue:**                  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bruker AXS                    |       | $                                | 59,969     |                            | $          | 47,015 |   | $ | 165,212 |   | $ | 123,985 |   |
| Bruker Daltonics              |       | 46,486                           |       | 36,301                          |       | 126,176 |   | 113,660 |   |
| Bruker Optics                 |       | 28,682                           |       | 24,517                          |       | 80,705 |   | 69,373 |   |
| Eliminations (a)              |       | (3,494                           | )          | (2,963                          | )          | (8,260 | ) | (6,809 | ) |
| Total                         |       | $                                | 131,643    |                            | $          | 104,870 |   | $ | 363,833 |   | $ | 300,209 |   |
|                          |       |                             |       |                            |       |   |   |   |   |
| **Operating  income (loss):** |       |                             |       |                            |       |   |   |   |   |
| Bruker AXS                    |       | $                                | 6,164      |                            | $          | 2,836 |   | $ | 14,444 |   | $ | 5,496 |   |
| Bruker Daltonics              |       | 2,885                            |       | 1,242                           |       | 4,167 |   | 5,707 |   |
| Bruker Optics                 |       | 4,311                            |       | 5,083                           |       | 11,816 |   | 9,526 |   |
| Eliminations (a)              |       | (185                             | )          | 459                             |       | (203 | ) | 100 |   |
| Corporate                     |       | (1,718                           | )          | (2,636                          | )          | (3,979 | ) | (6,105 | ) |
| Total                         |       | $                                | 11,457     |                            | $          | 6,984 |   | $ | 26,245 |   | $ | 14,724 |   |

 

----

(a) represents transactions betweensegments which are eliminated in consolidation.

 

**17.  Recent AccountingPronouncements**

 

In February 2007,the FASB issued SFAS No. 159,*The FairValue Option for Financial Assets and Liabilities, Including an amendment ofFASB Statement No. 115* (“SFAS 159”). This Statement permitsentities to choose to measure many financial instruments and certain otheritems at fair value that are not currently required to be measured at fairvalue. SFAS 159 is effective as of the beginning of fiscal 2008. The Companyhas not yet assessed the effect, if any, that adoption of SFAS 159 will have onits results of operations and financial position.

 

In September 2006,the FASB issued SFAS No. 157,*FairValue Measurements* (“SFAS 157”). This Statement is effective forfinancial statements issued for fiscal years beginning after November 15,2007. SFAS 157 provides a common fair value hierarchy for companies to followin determining fair value measurements in the preparation of financialstatements and expands disclosure requirements relating to how such fair valuemeasurements were developed. SFAS 157 clarifies the principle that fair valueshould be based on the assumptions that the marketplace would use when pricingan asset or liability, rather than company specific data. The Company iscurrently assessing the impact that SFAS 157 will have on its results ofoperations and financial position.

 

13

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**ITEM2:  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

The following discussionof our financial condition and results of operations should be read inconjunction with our interim condensed consolidated financial statements andthe notes to those statements included in Part 1, Item 1 of this QuarterlyReport on Form 10-Q, and in conjunction with the consolidated financialstatements contained in our Annual Report on Form 10-K for the yearended December 31, 2006.

 

Statements contained inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations which express that we “believe”, “anticipate”, “expect” or “plan to”,as well as other statements which are not historical fact, are forward-lookingstatements within the meaning of the Private Securities Litigation Act of 1995.Actual events or results may differ materially from those set forth inforward-looking statements. Certain factors that might cause such a differenceare discussed in “Factors Affecting Our Business, Operating Results andFinancial Condition” set forth in our Annual Report on Form 10-K for theyear ended December 31, 2006.

 

**OVERVIEW**

 

The following management’sdiscussion and analysis of financial condition and results of operations(MD&A) describes the principal factors affecting the results of ouroperations, financial condition, and changes in financial condition, as well asour critical accounting policies and estimates. MD&A is organized asfollows:

 

•                     *Executive overview.* This section providesa general description and history of our business, a brief discussion of ourreportable segments and significant recent developments in our business.

 

•                     *Critical accounting policies and estimates.*This section discusses the accounting estimates that are considered importantto our financial condition and results of operations and require us to exercisesubjective or complex judgments in their application.

 

•                     *Results of operations.* This sectionprovides our analysis of the significant line items in our consolidatedstatement of operations for the three and nine months ended September 30, 2007compared to the three and nine months ended September 30, 2006.

 

•                     *Liquidity and capital resources.* Thissection provides an analysis of our liquidity and cash flow and a discussion ofour outstanding debt and commitments.

 

**EXECUTIVEOVERVIEW**

 

Bruker BioSciences andits wholly-owned subsidiaries design, manufacture, market and serviceproprietary life science and materials research systems based on massspectrometry core technology platforms, X-ray technologies, optical emissionspectroscopy (OES) technologies, and molecular spectroscopy technologies. Wealso manufacture and distribute a broad range of field analytical systems forchemical, biological, radiological and nuclear, or CBRN, detection. We reportfinancial results on the basis of three reportable segments: Bruker AXS, BrukerDaltonics and Bruker Optics.

 

Bruker AXS primarilyengages in the business of manufacturing and distributing advancedinstrumentation and automated solutions based on X-ray and spark-OEStechnologies with the purpose of addressing the needs of our customers in thediscovery of new drugs, drug targets and advanced materials, as well asindustrial QA/QC applications. Typical customers of Bruker AXS’ products andsolutions include biotechnology and pharmaceutical companies, semiconductorindustries, chemical, cement, metals and petroleum companies, raw materialmanufacturers, and academic and government research institutions. BrukerDaltonics is a leading manufacturer of innovative mass spectrometry-basedinstruments and accessories used by pharmaceutical, biotechnology, proteomicsand molecular diagnostics companies, academic institutions, and governmentagencies in their research that can also be integrated and used along withother analytical instruments. Bruker Daltonics also manufactures anddistributes a broad range of field analytical systems for CBRN detection.Bruker Optics is a leading developer, manufacturer and provider of research,analytical and process analysis instruments and solutions based on infrared andRaman molecular spectroscopy technology. Typical customers of Bruker Optics’products and solutions include pharmaceutical and biotechnology companies,cement and petroleum companies, food, beverage and agricultural industries, andacademic and government research institutions.

 

We maintain majortechnical and manufacturing centers in Europe, North America and Japan. We havesales offices located throughout the world and our corporate headquarters islocated in Billerica, Massachusetts. Our business strategy is to capitalize onour proven ability to innovate and generate rapid revenue growth, bothorganically and through acquisitions. Our revenue growth strategy, combinedwith improvements to our gross profit margins over time and increased leverageon our operating expenses, are expected to enhance our operating margins andimprove our earnings in the future.

 

For the nine months endedSeptember 30, 2007, our revenues grew by 21% to $363.8 million, withacquisitions contributing approximately 3% and foreign exchange rate changescontributing approximately 5% of this growth. We continue to focus on improvingour profitability and our gross profit margins improved from 45.1% during thenine months ended

 

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September 30, 2006 to46.0% for the nine months ended September 30, 2007, reflecting volume leverage,contributions from our recently integrated acquisitions and improvementsrealized from ongoing gross profit margin improvement programs.  We continue to invest in incremental sales andmarketing initiatives, primarily headcount increases, which has resulted in oursales and marketing expenses as a percentage of product and service revenueincreasing year-over-year.  We expect these investments to result inincreased revenues in future periods.  Our increased revenues did enable us toleverage both general and administrative and research and development expensesas a percentage of revenue during the nine months ended September 30, 2007compared to the comparable period in 2006.

 

**CriticalAccounting Policies and Estimates**

 

The discussion andanalysis of our financial condition and results of operations is based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these financial statements requires that we make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and reported amounts of revenues and expenses during the reportingperiod. On an ongoing basis, management evaluates its estimates and judgments,including those related to revenue recognition, allowance for doubtfulaccounts, inventories, goodwill, long-lived assets, warranty costs and incometaxes. We base our estimates and judgments on historical experience, currentmarket and economic conditions, our observance of industry trends and otherassumptions that we believe are reasonable and form the basis for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. Actual results could differ from theseestimates.

 

We believe the followingcritical accounting policies to be both those most important to the portrayalof our financial condition and those that require the most subjective judgment.

 

•                     *Revenue recognition.* We recognize revenuefrom system sales when persuasive evidence of an arrangement exists, the priceis fixed or determinable, title and risk of loss has been transferred to thecustomer and collectibility of the resulting receivable is reasonably assured.Title and risk of loss is generally transferred to the customer upon receipt ofa signed customer acceptance form for a system that has been shipped,installed, and for which the customer has been trained. As a result, the timingof customer acceptance or readiness could cause our reported revenues to differmaterially from expectations. When products are sold through an independentdistributor, a strategic distribution partner or an unconsolidated affiliateddistributor, which assumes responsibility for installation, we recognize thesystem sale when the product has been shipped and title and risk of loss havebeen transferred. Our distributors do not have price protection rights orrights to return; however, our products are generally warranted to be free fromdefect for a period of one year. Revenue is deferred until cash is receivedwhen a significant portion of the fee is due over one year after delivery,installation and acceptance of a system. For arrangements with multipleelements, we recognize revenue for each element based on the fair value of theelement, provided all other criteria for revenue recognition have been met. Thefair value for each element provided in multiple element arrangements istypically determined by referencing historical pricing policies when theelement is sold separately. Changes in our ability to establish the fair valuefor each element in multiple element arrangements could affect the timing ofrevenue recognition. Revenue from accessories and parts is recognized uponshipment and service revenue is recognized as the services are performed. Werecord grant revenue from government contracts by deferring any up-frontpayments received and recording the revenue for research and developmentactivities systematically over the life of the contract as the services areprovided.

 

•                     *Warranty costs.* We normally provide a one-yearparts and labor warranty with the purchase of equipment. The anticipated costfor this one-year warranty is accrued upon recognition of the sale and isincluded as a current liability on the balance sheet. Although our facilitiesundergo quality assurance and testing procedures throughout the productionprocess, our warranty obligation is affected by product failure rates, materialusage and service delivery costs incurred in correcting a product failure.Although our actual warranty costs have historically been consistent withexpectations, to the extent warranty claim activity or costs associated withservicing those claims differ from our estimates, revisions to the warrantyaccrual may be required.

 

•                     *Inventories.* Inventories are stated at thelower of cost or market, with cost determined by the first-in, first-outmethod. We maintain an allowance for excess and obsolete inventory to reflectthe expected un-saleable or un-refundable inventory based on an evaluation ofslow moving products. If ultimate usage or demand varies significantly fromexpected usage or demand, additional write-downs may be required, resulting ina charge to operations.

 

•                    *Goodwill, other intangible assets, and otherlong-lived assets.* We perform an evaluation of whether goodwill isimpaired annually or when events occur or circumstances change that would morelikely than not reduce the fair value of a reporting unit below its carryingamount. Fair value is determined using market comparables for similarbusinesses or forecasts of discounted future cash flows. We also review otherintangible assets and other long-lived assets when indication of potentialimpairment exists, such as a significant reduction in cash flows associatedwith the assets. Should the fair value of our long-lived assets decline becauseof reduced operating performance, market declines, or other indicators ofimpairment, a charge to operations for impairment may be necessary.

 

•                     *Allowance for doubtful accounts.* Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe

 

15

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inability of ourcustomers to pay amounts due. If the financial condition of our customers wereto deteriorate, reducing their ability to make payments, additional allowanceswould be required and would result in a charge to operations.

 

•                     *Income taxes.* We estimate the degree towhich tax assets and loss carryforwards will result in a benefit based onexpected profitability by tax jurisdiction, and provide a valuation allowancefor tax assets and loss carryforwards that we believe will more likely than notgo unused. If it becomes more likely than not that a tax asset or losscarryforward will be used for which a reserve has been provided, we reverse therelated valuation allowance. If our actual future taxable income by taxjurisdiction differs from estimates, additional allowances or reversals ofreserves may be necessary.

 

**Resultsof Operations**

 

***Three months ended September 30, 2007 compared to the threemonths ended September 30, 2006***

 

***Revenue***

 

The following tablepresents revenue, change in revenue and revenue growth by reportable segmentfor the three months ended September 30, 2007 and 2006 (dollars in thousands):

 
| ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | **Percentage** | ** ** |
|------------------|------------|------------|------------|------------|------------|-------------------|------------|----------------|------------|
| ** **       | ** ** | **2007**   | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **Change**     | ** ** |
| Bruker AXS       |       | $          | 59,969     |       | $          | 47,015            |       | $              | 12,954     |   | 27.6 | % |
| Bruker Daltonics |       | 46,486     |       | 36,301     |       | 10,185            |       | 28.1           | %          |
| Bruker Optics    |       | 28,682     |       | 24,517     |       | 4,165             |       | 17.0           | %          |
| Eliminations (a) |       | (3,494     | )          | (2,963     | )          | (531              | )          |           |       |
| Total Revenue    |       | $          | 131,643    |       | $          | 104,870           |       | $              | 26,773     |   | 25.5 | % |

 

----

(a) represents revenue recorded ontransactions between segments which is eliminated in consolidation.

 

Bruker AXS’ revenueincreased by $13.0 million, or 27.6%, to $60.0 million for the three monthsended September 30, 2007 compared to $47.0 million for the comparable period in2006. Included in this change in revenue is approximately $2.2 million from theimpact of foreign exchange. Excluding the effect of foreign exchange, revenueincreased by 22.9%. The increase in revenue is attributable to an increase inx-ray diffraction and x-ray fluorescence system sales, to higher other systemrevenue and aftermarket revenue, and to the businesses acquired in the secondhalf of 2006, which represented approximately 5% of the revenue growth. Othersystem revenue relates primarily to the distribution of products notmanufactured by Bruker AXS. X-ray systems, other system and aftermarket revenueas a percentage of Bruker AXS’ product and service revenue were as followsduring the three months ended September 30, 2007 and 2006 (dollars inthousands):

 
| ** **                         | ** ** | **2007**    | ** ** | **2006**                          | ** ** |
|------------------------------------|------------|-------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | ** **  | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                         | ** ** | ** **  | ** ** | **Segment Product**          | ** ** | ** ** | ** ** | **Segment Product** | ** ** |
| ** **                         | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** |
| X-Ray Systems                      |       | $           | 41,065     |                              | 68.5       | % | $ | 32,129 |   | 68.4 | % |
| Other System  Revenue              |       | 4,540       |       | 7.6                               | %          | 3,534 |   | 7.5 | % |
| Bruker AXS  Aftermarket            |       | 14,364      |       | 23.9                              | %          | 11,352 |   | 24.1 | % |
| Total Product  and Service Revenue |       | $           | 59,969     |                              | 100        | % | $ | 47,015 |   | 100 | % |

 

Bruker Daltonics’ revenueincreased by $10.2 million, or 28.1%, to $46.5 million for the three monthsended September 30, 2007 compared to $36.3 million for the comparable period in2006. Included in this change in revenue is approximately $2.2 million from theimpact of foreign exchange. Excluding the effect of the foreign exchange benefit,revenue increased by 21.9%. The increase in revenue excluding the effect offoreign exchange is a result of an increase in direct life science systemsales, CBRN detection systems and aftermarket revenue, partially offset byreduced OEM sales for certain life science systemsyear-over-year.  Aftermarket revenues include accessory sales,consumables, training and services. Included in other revenue during the threemonths ended September 30, 2007 and 2006 are grant revenues for early-stageresearch and development projects funded by the German government. Life sciencesystems, CBRN detection systems and aftermarket revenue as a percentage ofBruker Daltonics’ product and service revenue were as follows during the threemonths ended September 30, 2007 and 2006 (dollars in thousands):

 

16

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| ** **                    | ** ** | **2007**    | ** ** | **2006**                          | ** ** |
|-------------------------------|------------|-------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | ** **  | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                    | ** ** | ** **  | ** ** | **Segment Product**          | ** ** | ** ** | ** ** | **Segment Product** | ** ** |
| ** **                    | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** |
| Life Science Systems          |       | $           | 31,244     |                              | 67.5       | % | $ | 26,381 |   | 73.2 | % |
| CBRN Detection  Systems       |       | 5,328       |       | 11.5                              | %          | 2,175 |   | 6.0 | % |
| Bruker Daltonics  Aftermarket |       | 9,723       |       | 21.0                              | %          | 7,487 |   | 20.8 | % |
| Product and  Service Revenue  |       | 46,295      |       | 100                               | %          | 36,043 |   | 100 | % |
| Grant Revenue                 |       | 191         |       |                              |       | 258 |   |   |   |
| Total Revenue                 |       | $           | 46,486     |                              |       |   | $ | 36,301 |   |   |   |

 

Bruker Optics’ revenueincreased by $4.2 million, or 17.0%, to $28.7 million for the three monthsended September 30, 2007 compared to $24.5 million for the comparable period in2006. Included in this change in revenue is approximately $1.3 million from theimpact of foreign exchange. Excluding the effect of foreign exchange, revenueincreased by 11.9%. The increase in revenue excluding the effect of foreignexchange is primarily due to higher sales of molecular spectroscopy systemsyear-over-year, partially offset by reduced revenues associated with our orderwith the Chinese State Food and Drug Administration. For the three months endedSeptember 30, 2007, we recognized $0.8 million in revenue from our order with theChinese State Food and Drug Administration, compared to $2.4 million in revenuefrom this order in the same period in 2006. Aftermarket revenues includeaccessory sales, consumables, training and services. Other system revenuerelates primarily to the distribution of products not manufactured by BrukerOptics. Molecular spectroscopy systems, other system and aftermarket revenue asa percentage of Bruker Optics’ product and service revenue were as followsduring the three months ended September 30, 2007 and 2006 (dollars inthousands):

 
| ** **                         | ** ** | **2007**    | ** ** | **2006**                          | ** ** |
|------------------------------------|------------|-------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | ** **  | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                         | ** ** | ** **  | ** ** | **Segment Product**          | ** ** | ** ** | ** ** | **Segment Product** | ** ** |
| ** **                         | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** |
|                               |       |        |       |                              |       |   |   |   |   |
| Molecular  Spectroscopy Systems    |       | $           | 22,047     |                              | 76.9       | % | $ | 18,694 |   | 76.2 | % |
| Other System  Revenue              |       | 1,723       |       | 6.0                               | %          | 1,524 |   | 6.3 | % |
| Bruker Optics  Aftermarket         |       | 4,912       |       | 17.1                              | %          | 4,299 |   | 17.5 | % |
| Total Product  and Service Revenue |       | $           | 28,682     |                              | 100        | % | $ | 24,517 |   | 100 | % |

 

***Cost of Revenue***

 

The following tablepresents cost of product and service revenue and gross profit margins onproduct and service revenue by reportable segment for the three months endedSeptember 30, 2007 and 2006 (dollars in thousands):

 
| ** **             | ** ** | **2007**         | ** ** | **2006**              | ** ** |
|------------------------|------------|------------------|------------|-----------------------|------------|
| ** **             | ** ** | **Cost of** | ** ** | **Gross Profit** | ** ** | **Cost of** | ** ** | **Gross Profit** | ** ** |
| ** **             | ** ** | **Revenue**      | ** ** | **Margin**            | ** ** | **Revenue** | ** ** | **Margin** | ** ** |
| Bruker AXS             |       | $                | 32,294     |                  | 46.2       | % | $ | 28,944 |   | 38.5 | % |
| Bruker Daltonics       |       | 26,425           |       | 42.9                  | %          | 21,441 |   | 40.5 | % |
| Bruker Optics          |       | 14,295           |       | 50.1                  | %          | 11,244 |   | 54.0 | % |
| Eliminations (a)       |       | (3,204           | )          |                  |       | (2,942 | ) |   |   |
| Total Cost of  Revenue |       | $                | 69,810     |                  | 46.9       | % | $ | 58,687 |   | 43.9 | % |

 

----

(a)         represents the cost of revenues between segments which is eliminated inconsolidation.

 

Bruker AXS’ cost ofproduct and service revenue for the three months ended September 30, 2007 was$32.3 million, resulting in a gross profit margin of 46.2%, compared to cost ofproduct and service revenue of $28.9 million, or a gross profit margin of38.5%, for the comparable period in 2006. The increase in gross profit marginis primarily attributable to better capacity utilization as a result ofincreased revenues year-over-year and the realization of benefits from variousongoing gross profit margin improvement programs, partially offset by lowergross profit margins realized on other system revenues.

 

Bruker Daltonics’ cost ofproduct and service revenue for the three months ended September 30, 2007 was$26.4 million, resulting in a gross profit margin of 42.9%, compared to cost ofproduct and service revenue of $21.4 million, or a gross profit margin of40.5%, for the comparable period in 2006. The increase in gross profit marginis primarily attributable to increased sales of our CBRN detection systems, anda decrease in OEM life science system sales, which typically have lower marginsthan direct life science

 

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system sales.

 

Bruker Optics’ cost ofproduct and service revenue for the three months ended September 30, 2007 was$14.3 million, resulting in a gross profit margin of 50.1%, compared to cost ofproduct and service revenue of $11.2 million, or a gross profit margin of54.0%, for the comparable period in 2006. The decrease in gross profit marginis primarily attributable to reduced revenues from our order with the ChineseState Food and Drug Administration.

 

***Sales and Marketing***

 

The following tablepresents sales and marketing expense and sales and marketing expense as apercentage of product and service revenue by reportable segment for the threemonths ended September 30, 2007 and 2006 (dollars in thousands):

 
| ** **                 | ** ** | **2007**           | ** ** | **2006**                          | ** ** |
|----------------------------|------------|--------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | ** **         | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                 | ** ** | **Sales and** | ** ** | **Segment Product**          | ** ** | **Sales and** | ** ** | **Segment Product** | ** ** |
| ** **                 | ** ** | **Marketing**      | ** ** | **and Service Revenue** | ** ** | **Marketing** | ** ** | **and Service Revenue** | ** ** |
| Bruker AXS                 |       | $                  | 11,945     |                              | 19.9       | % | $ | 7,956 |   | 16.9 | % |
| Bruker Daltonics           |       | 8,270              |       | 17.9                              | %          | 5,795 |   | 16.1 | % |
| Bruker Optics              |       | 6,842              |       | 23.9                              | %          | 5,312 |   | 21.7 | % |
| Total Sales and  Marketing |       | $                  | 27,057     |                              | 20.6       | % | $ | 19,063 |   | 18.2 | % |

 

Bruker AXS’ sales andmarketing expense for the three months ended September 30, 2007 increased to$11.9 million, or 19.9% of product and service revenue, from $8.0 million, or16.9% of product and service revenue for the comparable period in 2006. Theincrease in sales and marketing expense is primarily attributable to increasedheadcount related to the acquisitions completed during the second half of 2006and higher commissions on increased revenues from our core businessyear-over-year.

 

Bruker Daltonics’ salesand marketing expense for the three months ended September 30, 2007 increasedto $8.3 million, or 17.9% of product and service revenue, from $5.8 million, or16.1% of product and service revenue for the comparable period in 2006. Theincrease in sales and marketing expense is attributable to incrementalinvestments in various sales and marketing initiatives, primarily related to anincrease in field sales personnel, product specialists and applicationsresources.

 

Bruker Optics’ sales andmarketing expense for the three months ended September 30, 2007 increased to$6.8 million, or 23.9% of product and service revenue, from $5.3 million, or 21.7%of product and service revenue for the comparable period in 2006. The increasein sales and marketing expense is primarily attributable to higher commissionson increased revenues and new order bookings year-over-year, particularly inour Asia-Pacific operations.

 

***General and Administrative***

 

The following tablepresents general and administrative expense and general and administrativeexpense as a percentage of product and service revenue by reportable segmentfor the three months ended September 30, 2007 and 2006 (dollars in thousands):

 
| ** **                        | ** ** | **2007**             | ** ** | **2006**                          | ** ** |
|-----------------------------------|------------|----------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | ** **           | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                        | ** ** | **General and** | ** ** | **Segment Product**          | ** ** | **General and** | ** ** | **Segment Product** | ** ** |
| ** **                        | ** ** | **Administrative**   | ** ** | **and Service Revenue** | ** ** | **Administrative** | ** ** | **and Service Revenue** | ** ** |
| Bruker AXS                        |       | $                    | 3,846      |                              | 6.4        | % | $ | 3,309 |   | 7.0 | % |
| Bruker Daltonics                  |       | 2,285                |       | 4.9                               | %          | 2,048 |   | 5.7 | % |
| Bruker Optics                     |       | 1,407                |       | 4.9                               | %          | 1,104 |   | 4.5 | % |
| Corporate                         |       | 1,018                |       |                              |       | 778 |   |   |   |
| Total General  and Administrative |       | $                    | 8,556      |                              | 6.5        | % | $ | 7,239 |   | 6.9 | % |

 

Bruker AXS’ general andadministrative expenses for the three months ended September 30, 2007 increasedto $3.8 million, or 6.4% of product and service revenue, from $3.3 million, or7.0% of product and service revenue for the comparable period in 2006. Theincrease in general and administrative expenses is primarily due to modestincreases in headcount to support increased business activities and tointangible asset amortization associated with the acquisitions completed duringthe second half of 2006.

 

Bruker Daltonics’ generaland administrative expense for the three months ended September 30, 2007increased to $2.3 million, or 4.9% of product and service revenue, from $2.0million, or 5.7% of product and service revenue for the comparable

 

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period of 2006. Theincrease in general and administrative expenses is primarily attributable tochanges in foreign currencies year-over-year.

 

Bruker Optics’ generaland administrative expenses for the three months ended September 30, 2007increased to $1.4 million, or 4.9% of product and service revenue, from $1.1million, or 4.5% of product and service revenue for the comparable period of2006. The increase in general and administrative expenses is primarilyattributable to modest headcount increases and to changes in foreign currenciesyear-over-year, primarily the Euro.

 

Corporate general andadministrative expense for the three months ended September 30, 2007 increasedto $1.0 million from $0.8 million for the comparable period of 2006. Theincrease is primarily attributable to increased business developmentactivities. Corporate general and administrative expense represents expensesassociated with being a public company not allocated to our reportablesegments, including legal fees, audit and consulting fees, salaries and filingfees.

 

***Research and Development***

 

The following tablepresents research and development expense and research and development expenseas a percentage of product and service revenue by reportable segment for thethree months ended September 30, 2007 and 2006 (dollars in thousands):

 
| ** **                      | ** ** | **2007**              | ** ** | **2006**                          | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | ** **            | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                      | ** ** | **Research and** | ** ** | **Segment Product**          | ** ** | **Research and** | ** ** | **Segment Product** | ** ** |
| ** **                      | ** ** | **Development**       | ** ** | **and Service Revenue** | ** ** | **Development** | ** ** | **and Service Revenue** | ** ** |
| Bruker AXS                      |       | $                     | 5,901      |                              | 9.8        | % | $ | 4,100 |   | 8.7 | % |
| Bruker Daltonics                |       | 6,824                 |       | 14.7                              | %          | 5,921 |   | 16.4 | % |
| Bruker Optics                   |       | 2,038                 |       | 7.1                               | %          | 1,915 |   | 7.8 | % |
| Total Research  and Development |       | $                     | 14,763     |                              | 11.2       | % | $ | 11,936 |   | 11.4 | % |

 

Bruker AXS’ research anddevelopment expense for the three months ended September 30, 2007 increased to$5.9 million, or 9.8% of product and service revenue, from $4.1 million, or8.7% of product and service revenue for the comparable period in 2006. Theincrease in research and development expense is primarily attributable to anincrease in materials purchases and an increase in headcount resulting from theacquisitions completed during the second half of 2006.

 

Bruker Daltonics’research and development expense for the three months ended September 30, 2007increased to $6.8 million, or 14.7% of product and service revenue, from $5.9million, or 16.4% of product and service revenue for the comparable period in2006. The increase in research and development expense is primarilyattributable to an increase in materials purchases and to changes in foreigncurrencies year-over-year, primarily the Euro, as a majority of research anddevelopment is performed in Germany.

 

Bruker Optics’ researchand development expense for the three months ended September 30, 2007 increasedto $2.0 million, or 7.1% of product and service revenue, from $1.9 million, or7.8% of product and service revenue for the comparable period in 2006. Theincrease in research and development expense is primarily attributable tochanges in foreign currencies year-over-year, primarily the Euro, as a majorityof research and development is performed in Germany, partially offset by adecrease in materials purchases.

 

***Acquisition Related Charges***

 

On April 18, 2006,we announced that we had entered into a definitive agreement to acquire all ofthe stock of molecular spectroscopy company Bruker Optics. The acquisitionof Bruker Optics was approved by our shareholders on June 29, 2006 and wassubsequently completed on July 1, 2006. This acquisition represented a businesscombination of companies under common control due to a majority ownership byindividuals of both Bruker BioSciences and Bruker Optics and, as a result,transaction costs have been expensed as incurred rather than being included inthe purchase price allocation. During the third quarter of 2006, we incurredacquisition related charges totaling $1.0 million, which consisted ofinvestment banking and legal fees.

 

***Interest and Other Income (Expense), Net***

 

Interest and other income(expense), net, during the three months ended September 30, 2007 was $(0.6)million, compared to $(0.5) million during the three months ended September 30,2006. During the three months ended September 30, 2007, the major componentswithin interest and other income (expense), net, were net interest expense of$(0.2) million, losses on foreign currency transactions of $(1.1) million andthe appreciation of the fair value of derivative financial instruments of $0.2million. During the three months ended September 30, 2006, the major componentswithin interest and other income (expense), net, were net interest expense of$(0.5) million, losses on foreign currency transactions of $(0.1) million andthe appreciation of the fair value of derivative financial instruments of $0.1million.

 

19

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***Provision for Income Taxes***

 

The income tax provisionfor the three months ended September 30, 2007 was $2.1 million compared to anincome tax provision of $3.5 million for the three months ended September 30,2006, representing effective tax rates of 19.1% and 54.4%, respectively. Thelower effective tax rate in the third quarter of 2007 compared to the thirdquarter of 2006 was primarily due to new tax legislation in Germany enacted inthe third quarter of 2007. The Company has analyzed the impact of these changeson its deferred tax assets and liabilities as of the date of enactment. Thetemporary differences that will reverse after December 31, 2007 have beenadjusted to reflect the new tax rate which will become effective on January 1,2008. As a result, the Company has recorded a net reduction to income taxexpense of $2.4 million in the quarter ending September 30, 2007. Our effectivetax rate is calculated using our projected annual pre-tax income or loss and isaffected by research and development tax credits, the expected level of othertax benefits, and the impact of changes to the valuation allowance, as well aschanges in the mix of our pre-tax income and losses among jurisdictions withvarying statutory tax rates and credits.

 

***Minority Interest in Consolidated Subsidiaries***

 

Minority interest inconsolidated subsidiaries for the three months ended September 30, 2007 was$0.1 million compared to $(18,000) in the comparable period of 2006. Theminority interest in subsidiaries represents the minority shareholders’proportionate share of net income of those subsidiaries for the three monthsended September 30, 2007 and 2006. For the three months ended September 30,2007 and 2006, the minority interest relates to our two majority-ownedsubsidiaries, Incoatec GmbH and Bruker Baltic Ltd.

 

***Nine months ended September 30, 2007 compared to the ninemonths ended September  30, 2006***

 

***Revenue***

 

The following tablepresents revenue, change in revenue and revenue growth by reportable segmentfor the nine months ended September 30, 2007 and 2006 (dollars in thousands):

 
| ** **       | ** ** | **2007** | ** ** | **2006** | ** ** | **$ Change** | ** ** | **Percentage  Change** | ** ** |
|------------------|------------|----------|------------|----------|------------|-------------------|------------|------------------------|------------|
| Bruker AXS       |       | $        | 165,212    |     | $          | 123,985           |       | $                      | 41,227     |   | 33.3 | % |
| Bruker Daltonics |       | 126,176  |       | 113,660  |       | 12,516            |       | 11.0                   | %          |
| Bruker Optics    |       | 80,705   |       | 69,373   |       | 11,332            |       | 16.3                   | %          |
| Eliminations (a) |       | (8,260   | )          | (6,809   | )          | (1,451            | )          |                   |       |
| Total Revenue    |       | $        | 363,833    |     | $          | 300,209           |       | $                      | 63,624     |   | 21.2 | % |

 

----

(a)   represents revenuerecorded on transactions between segments which is eliminated in consolidation.

 

Bruker AXS’ revenueincreased by $41.2 million, or 33.3%, to $165.2 million for the nine monthsended September 30, 2007 compared to $124.0 million for the comparable periodin 2006. Included in this change in revenue is approximately $6.0 million fromthe impact of foreign exchange. Excluding the effect of foreign exchange,revenue increased by 28.4%. The increase in revenue is attributable to anincrease in x-ray diffraction and x-ray fluorescence system sales, to higherother system revenue and higher aftermarket revenue, and to the businessesacquired in the second half of 2006, which represented approximately 8% of therevenue growth. Other system revenue relates primarily to the distribution ofproducts not manufactured by Bruker AXS. X-ray systems, other system andaftermarket revenue as a percentage of Bruker AXS’ product and service revenuewere as follows during the nine months ended September 30, 2007 and 2006(dollars in thousands):

 
| ** **                         | ** ** | **2007**    | ** ** | **2006**                          | ** ** |
|------------------------------------|------------|-------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | ** **  | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                         | ** ** | ** **  | ** ** | **Segment Product**          | ** ** | ** ** | ** ** | **Segment Product** | ** ** |
| ** **                         | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** |
| X-Ray Systems                      |       | $           | 111,518    |                              | 67.5       | % | $ | 83,405 |   | 67.3 | % |
| Other System  Revenue              |       | 13,965      |       | 8.5                               | %          | 6,221 |   | 5.0 | % |
| Bruker AXS  Aftermarket            |       | 39,729      |       | 24.0                              | %          | 34,359 |   | 27.7 | % |
| Total Product  and Service Revenue |       | $           | 165,212    |                              | 100        | % | $ | 123,985 |   | 100 | % |

 

Bruker Daltonics’ revenueincreased by $12.5 million, or 11.0%, to $126.2 million for the nine monthsended September 30, 2007 compared to $113.7 million for the comparable periodin 2006. Included in this change in revenue is approximately $6.1 millionfrom the impact of foreign exchange. Excluding the effect of the foreignexchange benefit, revenue increased by 5.7%. The increase in revenue excludingthe effect of foreign exchange is a result of increased direct sales of lifescience systems, CBRN detection systems, and aftermarket revenueyear-over-year, partially offset by reduced OEM sales for certain life

 

20

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science systems andsubstantially reduced grant revenue. Aftermarket revenues include accessorysales, consumables, training and services. Included in other revenue during thenine months ended September 30, 2007 and 2006 are grant revenues forearly-stage research and development projects funded by the German government.Life science systems, CBRN detection systems and aftermarket revenue as apercentage of Bruker Daltonics’ product and service revenue were as followsduring the nine months ended September 30, 2007 and 2006 (dollars inthousands):

 
| ** **                    | ** ** | **2007**    | ** ** | **2006**                          | ** ** |
|-------------------------------|------------|-------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | ** **  | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                    | ** ** | ** **  | ** ** | **Segment Product**          | ** ** | ** ** | ** ** | **Segment Product** | ** ** |
| ** **                    | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** |
| Life Science  Systems         |       | $           | 86,517     |                              | 68.8       | % | $ | 85,982 |   | 76.4 | % |
| CBRN Detection  Systems       |       | 12,986      |       | 10.3                              | %          | 5,591 |   | 5.0 | % |
| Bruker Daltonics  Aftermarket |       | 26,252      |       | 20.9                              | %          | 20,952 |   | 18.6 | % |
| Product and  Service Revenue  |       | 125,755     |       | 100                               | %          | 112,525 |   | 100 | % |
| Grant Revenue                 |       | 421         |       |                              |       | 1,135 |   |   |   |
| Total Revenue                 |       | $           | 126,176    |                              |       |   | $ | 113,660 |   |   |   |

 

Bruker Optics’ revenueincreased by $11.3 million, or 16.3%, to $80.7 million for the nine monthsended September 30, 2007 compared to $69.4 million for the comparable period in2006. Included in this change in revenue is approximately $3.3 million from theimpact of foreign exchange. Excluding the effect of foreign exchange, revenueincreased by 11.6%. The increase in revenue excluding the effect of foreignexchange is due to higher sales of molecular spectroscopy systemsyear-over-year and higher aftermarket sales, partially offset by reducedrevenues associated with our order with the Chinese State Food and DrugAdministration. For the nine months ended September 30, 2007, we recognized$4.9 million in revenue from our order with the Chinese State Food and DrugAdministration compared to $6.1 million in revenues from this order in the sameperiod in 2006. Aftermarket revenues include accessory sales, consumables,training and services. Other system revenue relates primarily to thedistribution of products not manufactured by Bruker Optics. Molecular spectroscopysystems, other system and aftermarket revenue as a percentage of Bruker Optics’product and service revenue were as follows during the nine months endedSeptember 30, 2007 and 2006 (dollars in thousands):

 
| ** **                         | ** ** | **2007**    | ** ** | **2006**                          | ** ** |
|------------------------------------|------------|-------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | ** **  | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                         | ** ** | ** **  | ** ** | **Segment Product**          | ** ** | ** ** | ** ** | **Segment Product** | ** ** |
| ** **                         | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** | **Revenue** | ** ** | **and Service Revenue** | ** ** |
| Molecular  Spectroscopy Systems    |       | $           | 61,386     |                              | 76.1       | % | $ | 52,396 |   | 75.5 | % |
| Other System  Revenue              |       | 5,447       |       | 6.7                               | %          | 5,467 |   | 7.9 | % |
| Bruker Optics  Aftermarket         |       | 13,872      |       | 17.2                              | %          | 11,510 |   | 16.6 | % |
| Total Product  and Service Revenue |       | $           | 80,705     |                              | 100        | % | $ | 69,373 |   | 100 | % |

 

***Cost of Revenue***

 

The following tablepresents cost of product and service revenue and gross profit margins onproduct and service revenue by reportable segment for the nine months endedSeptember 30, 2007 and 2006 (dollars in thousands):

 
| ** **             | ** ** | **2007**         | ** ** | **2006**              | ** ** |
|------------------------|------------|------------------|------------|-----------------------|------------|
| ** **             | ** ** | **Cost of** | ** ** | **Gross Profit** | ** ** | **Cost of** | ** ** | **Gross Profit** | ** ** |
| ** **             | ** ** | **Revenue**      | ** ** | **Margin**            | ** ** | **Revenue** | ** ** | **Margin** | ** ** |
| Bruker AXS             |       | $                | 90,818     |                  | 45.0       | % | $ | 72,100 |   | 41.8 | % |
| Bruker Daltonics       |       | 73,167           |       | 41.8                  | %          | 65,795 |   | 41.5 | % |
| Bruker Optics          |       | 40,086           |       | 50.2                  | %          | 33,325 |   | 51.9 | % |
| Eliminations (a)       |       | (7,730           | )          |                  |       | (7,173 | ) |   |   |
| Total Cost of  Revenue |       | $                | 196,341    |                  | 46.0       | % | $ | 164,047 |   | 45.1 | % |

 

----

(a)   represents the costof revenues between segments which is eliminated in consolidation.

 

Bruker AXS’ cost ofproduct and service revenue for the nine months ended September 30, 2007 was$90.8 million, resulting in a gross profit margin of 45.0%, compared to cost ofproduct and service revenue of $72.1 million, or a gross profit margin of41.8%, for the comparable period in 2006. The increase in gross profit marginis primarily attributable to better capacity utilization as a result ofincreased revenues year-over-year, the higher margin businesses acquired in thesecond half of 2006 and the realization of benefits from various ongoing grossprofit margin improvement programs, partially offset by lower gross profitmargins realized on other system revenues.

 

21

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Bruker Daltonics’ cost ofproduct and service revenue for the nine months ended September 30, 2007 was$73.2 million, resulting in a gross profit margin of 41.8%, compared to cost ofproduct and service revenue of $65.8 million, or a gross profit margin of 41.5%,for the comparable period in 2006. The increase in gross profit margin isprimarily attributable to increased sales of our CBRN detection systems, and adecrease in OEM life science system sales, which typically have lower marginsthan direct life science system sales.

 

Bruker Optics’ cost ofproduct and service revenue for the nine months ended September 30, 2007 was$40.1 million, resulting in a gross profit margin of 50.2%, compared to cost ofproduct and service revenue of $33.3 million, or a gross profit margin of51.9%, for the comparable period in 2006. The decrease in gross profit marginis primarily attributable to reduced revenues from our order with the ChineseState Food and Drug Administration and a change in product mix year-over-yearwithin the molecular spectroscopy systems, specifically lower sales of FT-NIRsystems year-over-year.

 

***Sales and Marketing***

 

The following tablepresents sales and marketing expense and sales and marketing expense as apercentage of product and service revenue by reportable segment for the ninemonths ended September 30, 2007 and 2006 (dollars in thousands):

 
| ** **                 | ** ** | **2007**           | ** ** | **2006**                          | ** ** |
|----------------------------|------------|--------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | ** **         | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                 | ** ** | **Sales and** | ** ** | **Segment Product**          | ** ** | **Sales and** | ** ** | **Segment Product** | ** ** |
| ** **                 | ** ** | **Marketing**      | ** ** | **and Service Revenue** | ** ** | **Marketing** | ** ** | **and Service Revenue** | ** ** |
| Bruker AXS                 |       | $                  | 33,173     |                              | 20.1       | % | $ | 24,448 |   | 19.7 | % |
| Bruker Daltonics           |       | 22,743             |       | 18.1                              | %          | 18,702 |   | 16.6 | % |
| Bruker Optics              |       | 18,993             |       | 23.5                              | %          | 15,645 |   | 22.6 | % |
| Total Sales and  Marketing |       | $                  | 74,909     |                              | 20.6       | % | $ | 58,795 |   | 19.7 | % |

 

Bruker AXS’ sales andmarketing expense for the nine months ended September 30, 2007 increased to$33.2 million, or 20.1% of product and service revenue, from $24.4 million, or19.7% of product and service revenue for the comparable period in 2006. Theincrease in sales and marketing expense is primarily attributable to increasedheadcount related to the acquisitions completed during the second half of 2006and higher commissions on increased revenues and new order bookingsyear-over-year.

 

Bruker Daltonics’ salesand marketing expense for the nine months ended September 30, 2007 increased to$22.7 million, or 18.1% of product and service revenue, from $18.7 million, or16.6% of product and service revenue for the comparable period in 2006. Theincrease in sales and marketing expense is attributable to incrementalinvestments in various sales and marketing initiatives, primarily related to anincrease in product specialists, direct sales, inside sales and applicationsresources.

 

Bruker Optics’ sales andmarketing expense for the nine months ended September 30, 2007 increased to$19.0 million, or 23.5% of product and service revenue, from $15.6 million, or22.6% of product and service revenue for the comparable period in 2006. Theincrease in sales and marketing expense is primarily attributable to highercommissions on increased revenues and new order bookings year-over-year,particularly in our Asia- Pacific operations.

 

***General and Administrative***

 

The following tablepresents general and administrative expense and general and administrativeexpense as a percentage of product and service revenue by reportable segmentfor the nine months ended September 30, 2007 and 2006 (dollars in thousands):

 
| ** **                        | ** ** | **2007**             | ** ** | **2006**                          | ** ** |
|-----------------------------------|------------|----------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | ** **           | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                        | ** ** | **General and** | ** ** | **Segment Product**          | ** ** | **General and** | ** ** | **Segment Product** | ** ** |
| ** **                        | ** ** | **Administrative**   | ** ** | **and Service Revenue** | ** ** | **Administrative** | ** ** | **and Service Revenue** | ** ** |
| Bruker AXS                        |       | $                    | 10,690     |                              | 6.5        | % | $ | 9,514 |   | 7.7 | % |
| Bruker Daltonics                  |       | 6,615                |       | 5.3                               | %          | 5,588 |   | 5.0 | % |
| Bruker Optics                     |       | 4,249                |       | 5.3                               | %          | 3,036 |   | 4.4 | % |
| Corporate                         |       | 2,482                |       |                              |       | 2,181 |   |   |   |
| Total General  and Administrative |       | $                    | 24,036     |                              | 6.6        | % | $ | 20,319 |   | 6.8 | % |

 

22

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Bruker AXS’ general andadministrative expenses for the nine months ended September 30, 2007 increasedto $10.7 million, or 6.5% of product and service revenue, from $9.5 million, or7.7% of product and service revenue for the comparable period in 2006. Theincrease in general and administrative expenses is primarily due to intangibleasset amortization associated with the acquisitions completed during the secondhalf of 2006, increased headcount and to external tax consulting fees incurredin the second quarter of 2007.

 

Bruker Daltonics’ generaland administrative expense for the nine months ended September 30, 2007 increasedto $6.6 million, or 5.3% of product and service revenue, from $5.6 million, or5.0% of product and service revenue for the comparable period of 2006. Theincrease in general and administrative expenses is primarily attributable toexternal tax consulting fees incurred in the second quarter of 2007 and lowergeneral and administrative expenses in 2006 which resulted from the collectionof accounts receivable balances which previously had been written-off.

 

Bruker Optics’ generaland administrative expenses for the nine months ended September 30, 2007increased to $4.2 million, or 5.3% of product and service revenue, from $3.0million, or 4.4% of product and service revenue for the comparable period of2006. The increase in general and administrative expenses is primarilyattributable to the allocated corporate general and administrative expensesassociated with being part of a public company and external tax consulting feesincurred in the second quarter of 2007.

 

Corporate general andadministrative expense for the nine months ended September 30, 2007 increasedto $2.5 million from $2.2 million for the comparable period of 2006. Theincrease is primarily attributable to increased business developmentactivities. Corporate general and administrative expense represents expensesassociated with being a public company not allocated to our reportablesegments, including legal fees, audit and consulting fees, salaries and filingfees.

 

***Research and Development***

 

The following tablepresents research and development expense and research and development expenseas a percentage of product and service revenue by reportable segment for thenine months ended September 30, 2007 and 2006 (dollars in thousands):

 
| ** **                      | ** ** | **2007**              | ** ** | **2006**                          | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | ** **            | ** ** | **Percentage of**            | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
| ** **                      | ** ** | **Research and** | ** ** | **Segment Product**          | ** ** | **Research and** | ** ** | **Segment Product** | ** ** |
| ** **                      | ** ** | **Development**       | ** ** | **and Service Revenue** | ** ** | **Development** | ** ** | **and Service Revenue** | ** ** |
| Bruker AXS                      |       | $                     | 16,371     |                              | 9.9        | % | $ | 12,727 |   | 10.3 | % |
| Bruker Daltonics                |       | 19,920                |       | 15.8                              | %          | 18,287 |   | 16.3 | % |
| Bruker Optics                   |       | 6,011                 |       | 7.4                               | %          | 5,481 |   | 7.9 | % |
| Total Research  and Development |       | $                     | 42,302     |                              | 11.6       | % | $ | 36,495 |   | 12.2 | % |

 

Bruker AXS’ research anddevelopment expense for the nine months ended June 30, 2007 increased to $16.4million, or 9.9% of product and service revenue, from $12.7 million, or 10.3%of product and service revenue for the comparable period in 2006. The increasein research and development expense is primarily attributable to an increase inheadcount resulting from the acquisitions completed during the second half of2006 and increased materials purchases.

 

Bruker Daltonics’research and development expense for the nine months ended September 30, 2007increased to $19.9 million, or 15.8% of product and service revenue, from $18.3million, or 16.3% of product and service revenue for the comparable period in2006. The increase in research and development expense is primarilyattributable to changes in foreign currencies year-over-year, primarily theEuro, as a majority of research and development is performed in Germany and increasedmaterials purchases.

 

Bruker Optics’ researchand development expense for the nine months ended September 30, 2007 increasedto $6.0 million, or 7.4% of product and service revenue, from $5.5 million, or7.9% of product and service revenue for the comparable period in 2006. Theincrease in research and development expense is primarily attributable tochanges in foreign currencies year-over-year, primarily the Euro, as a majorityof research and development is performed in Germany.

 

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***Acquisition Related Charges***

 

On April 18, 2006,we announced that we had entered into a definitive agreement to acquire all ofthe stock of molecular spectroscopy company Bruker Optics. The acquisitionof Bruker Optics was approved by our shareholders on June 29, 2006 and wassubsequently completed on July 1, 2006. This acquisition represented a businesscombination of companies under common control due to a majority ownership byindividuals of both Bruker BioSciences and Bruker Optics and, as a result,transaction costs have been expensed as incurred rather than being included ina purchase price allocation. During the nine months ended September 30, 2006,we incurred acquisition related charges totaling $5.8 million, which consistedof investment banking, legal and accounting fees, compensation earned by thespecial committee of our Board of Directors and antitrust regulation filingfees.

 

***Interest and Other Income (Expense), Net***

 

Interest and other income(expense), net, during the nine months ended September 30, 2007 was $(0.8)million, compared to $3.5 million during the nine months ended September 30,2006. During the nine months ended September 30, 2007, the major componentswithin interest and other income (expense), net, were net interest expense of$(0.4) million, losses on foreign currency transactions of $(1.7) million andthe appreciation of the fair value of derivative financial instruments of $0.8million. During the nine months ended September 30, 2006, the major componentswithin interest and other income (expense), net, were net interest income of$0.4 million, losses on foreign currency transactions of $(1.2) million and theappreciation of the fair value of derivative financial instruments of $3.9million.

 

***Provision for Income Taxes***

 

The income tax provisionfor the nine months ended September 30, 2007 was $7.7 million compared to anincome tax provision of $9.4 million for the nine months ended September 30,2006, representing effective tax rates of 30.1% and 51.5%, respectively. Thelower effective tax rate in the first nine months of 2007 compared to the firstnine months of 2006 was primarily due to new legislation in Germany. TheCompany has analyzed the impact of these changes on its deferred tax assets andliabilities as of the date of enactment. The temporary differences that willreverse after December 31, 2007 have been adjusted to reflect the new tax ratewhich will become effective on January 1, 2008. As a result, the Company hasrecorded a net reduction to income tax expense of $2.4 million in the quarterending September 30, 2007. Our effective tax rate is calculated using ourprojected annual pre-tax income or loss and is affected by research anddevelopment tax credits, the expected level of other tax benefits, and theimpact of changes to the valuation allowance, as well as changes in the mix ofour pre-tax income and losses among jurisdictions with varying statutory taxrates and credits.

 

***Minority Interest in Consolidated Subsidiaries***

 

Minority interest inconsolidated subsidiaries for the nine months ended September 30, 2007 was $0.3million compared to $0.1 million in the comparable period of 2006. The minorityinterest in subsidiaries represents the minority shareholders’ proportionateshare of net income of those subsidiaries for the nine months ended September30, 2007 and 2006. For the nine months ended September 30, 2007 and 2006, theminority interest relates to our two majority-owned subsidiaries, Incoatec GmbHand Bruker Baltic Ltd.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

We currently anticipatethat our existing cash will be sufficient to support our operating andinvesting needs for at least the next twelve months, but this depends on ourprofitability and our ability to manage working capital requirements. Futurecash requirements could also be affected by potential acquisitions that we mayconsider. Historically, we have financed our growth through a combination ofdebt financings and issuances of common stock. Most recently, on February 12,2007, we and a group of selling stockholders completed a public offering whichgenerated net proceeds of approximately $16.9 million to us. In thefuture, there can be no assurance that additional financing alternatives willbe available to us if required, or if available, will be obtained with termsfavorable to us.

 

During the nine monthsended September 30, 2007, net cash used by operating activities was $10.2million, compared to net cash provided by operating activities of$17.8 million during the nine months ended September 30, 2006. The changein cash from operating activities was primarily attributable to an increase ininventory balances and a decrease in customer deposits, partially offset by improvedoperating results year-over-year and increases in accounts payable, deferredrevenue and income taxes payable.

 

During the nine monthsended September 30, 2007, investing activities used $16.5 million in cashcompared to net cash provided by investing activities of $13.7 million duringthe nine months ended September 30, 2006. Cash used by investing activitiesduring the nine months ended September 30, 2007 was attributable primarily to$13.3 million in capital expenditures and $2.9 million used for acquisitions,net of cash acquired. Cash provided by investing activities during the ninemonths ended September 30, 2006 was attributable primarily to approximately$46.5 million from the redemption of short-term investments offset by $27.6million used for acquisitions, net of cash acquired, and $5.0 million incapital expenditures.

 

In connection with ouracquisition of Roentec AG, additional consideration, in the amount ofapproximately $2.0 million,

 

24

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may be paid to Roentec’sformer management, employee and consultant shareholders based on the 2006 and2007 revenue performance of Roentec. If these payments are required, they willbe comprised of either, at our option, 50% our restricted common stock and 50%cash, or 100% cash. For 2006, approximately $1.3 million in cash was paid inMarch 2007 to Roentec’s former shareholders.

 

In January 2006, weacquired Socabim SAS, a privately-held company focused on advanced X-rayanalysis software for materials research based in Paris, France. The initialaggregate purchase price of approximately $8.8 million was paid through theissuance of 267,302 restricted shares of our common stock to Socabim’s twolargest shareholders, which had an aggregate value of approximately $1.3million as of the date of issuance, and an aggregate of $7.5 million was paidto all of the Socabim selling shareholders from cash on hand. Additional cashconsideration, in the amount of approximately $1.5 million in total, may bepaid through 2009 based on the future performance of Socabim. For 2006,approximately $356,000 in cash was paid in 2007 to Socabim’s formershareholders.

 

In September 2006, weacquired all of the capital stock of Quantron GmbH, a spark-OES company basedin Kleve, Germany.  In accordance with the stock purchase agreement, atthe closing, we paid an aggregate of approximately $6.3 million ofconsideration to the sellers, of which approximately $5.0 million was paid incash and approximately $1.3 million was paid through the issuance of anaggregate of 202,223 restricted unregistered shares of our common stock, parvalue $0.01 per share, to Quantron’s two largest shareholders. Pursuant to theearn-out provisions of the stock purchase agreement, up to an aggregate of $4.7million of additional cash consideration may be paid through 2009 based on thefuture performance of Quantron. At September 30, 2007, no additional cashconsideration has been paid.

 

In January 2007, weacquired all of the assets of KecaMetal Products, Ltd. (“Keca”), a Texas partnership located in Spring,Texas. The aggregate purchase price for Keca was $0.6 million and was fundedwith cash on hand.

 

In June 2007, we acquiredall of the capital stock of Analys-Konsult AB (“AKAB”), a distributor andservice provider of scientific instrumentation based in Sweden. The aggregatepurchase price of AKAB was approximately $0.8 million, of which approximately$0.5 million was paid in cash and approximately $0.3 million was paid throughthe issuance of an aggregate of 29,740 restricted unregistered shares of ourcommon stock to AKAB’s shareholders.

 

During the nine monthsended September 30, 2007, financing activities provided $10.9 million of cashcompared to net cash used by financing activities of $53.2 million during thenine months ended September 30, 2006. The change in cash from financingactivities in the first nine months of 2007 was due to approximately $18.9million in net proceeds from the public offering of common stock along withsubsequent stock option exercises, partially offset by $6.5 million in net repaymentsof short-term borrowings. Cash used by financing activities during the ninemonths ended September 30, 2006 was attributable primarily to approximately$74.0 million paid to shareholders in connection with the Bruker Opticsacquisition, partially offset by $19.5 million in net proceeds from short-termborrowings.

 

At September 30, 2007, wehad a demand line of credit with Citizens Bank in the United States with amaximum available amount of $75.0 million. The line of credit is securedby a pledge to the bank of 100% of the capital stock of each of the Company’swholly-owned domestic subsidiaries, each of which also pledged a portion of thestock of certain of their foreign subsidiaries. As of September 30, 2007, ourU.S. line of credit was fully available. We also maintain revolving lines ofcredit totaling approximately $44.4 million with various German, Japanese andSwedish banks. The German, Japanese and Swedish lines of credits are unsecuredand as of September 30, 2007 approximately $13.8 million, in the aggregate, wasoutstanding on these lines of credit.

 

In addition to our linesof credit, we have both short-term and long-term notes payable with outstandingbalances aggregating $25.3 million as of September 30, 2007. The interest rateson these obligations range from 1.8% to 8.01%. We entered into an interest rateswap to hedge the variability of cash flows related to changes in interestrates on borrowings of variable debt obligations and pay a 4.6% fixed rate ofinterest and receive a variable rate of interest based on the SecuritiesIndustry and Financial Markets Association SWAP Index. The interest rate swaphas a notional value of $1.7 million which decreases in conjunction withthe State of Wisconsin industrial revenue bonds (IRB) payment schedule untilthe interest rate swap and IRB agreements terminate in December 2013.

 

The following tablesummarizes maturities for our significant financial obligations as of September30, 2007 (in thousands):

 
| ** **                       | ** ** | ** ** | ** ** | **Less than** | ** ** | **1-3**   | ** ** | **4-5**   | ** ** | **More than** | ** ** |
|----------------------------------|------------|------------|------------|--------------------|------------|-----------|------------|-----------|------------|--------------------|------------|
| **Contractual Obligations** | ** ** | **Total**  | ** ** | **1 year**    | ** ** | **years** | ** ** | **years** | ** ** | **5 years**   | ** ** |
| Short-term  borrowings           |       | $          | 21,014     |               | $          | 21,014    |       | $         | —     |               | $          | — |   | $ | — |   |
| Long-term  borrowings            |       | 18,078     |       | —             |       | 14,986    |       | 2,150     |       | 942                |       |
| Pension                          |       | 13,157     |       | 152                |       | 687       |       | 1,273     |       | 11,045             |       |
| Total  contractual obligations   |       | $          | 52,249     |               | $          | 21,166    |       | $         | 15,673     |               | $          | 3,423 |   | $ | 11,987 |   |

 

In connection with someof our outstanding debt, we are required to maintain certain financial ratiosand meet other

 

25

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financial criteria. Additionally,we are subject to a variety of restrictive covenants that require bank consentif not met. As of September 30, 2007, the latest measurement date, we were incompliance with all financial covenants.

 

As of September 30, 2007,we have approximately $12.3 million of net operating loss carryforwardsavailable to reduce future U.S. taxable income. These losses have variousexpiration dates through 2026. We also had foreign tax credits of approximately$5.0 million that expire in 2016 and research and development tax credits ofapproximately $3.1 million available to offset future U.S. tax liabilities thatexpire at various dates through 2025.

 

**RecentAccounting Pronouncements**

 

In February 2007,the FASB issued SFAS No. 159,*The FairValue Option for Financial Assets and Liabilities, Including an amendment ofFASB Statement No. 115* (“SFAS 159”). This Statement permitsentities to choose to measure many financial instruments and certain otheritems at fair value that are not currently required to be measured at fairvalue. SFAS 159 is effective as of the beginning of fiscal 2008. The Companyhas not yet assessed the effect, if any, that adoption of SFAS 159 will have onits results of operations and financial position.

 

In September 2006,the FASB issued SFAS No. 157,*FairValue Measurements* (“SFAS 157”). This Statement is effective forfinancial statements issued for fiscal years beginning after November 15,2007. SFAS 157 provides a common fair value hierarchy for companies to followin determining fair value measurements in the preparation of financialstatements and expands disclosure requirements relating to how such fair valuemeasurements were developed. SFAS 157 clarifies the principle that fair valueshould be based on the assumptions that the marketplace would use when pricingan asset or liability, rather than company specific data. The Company iscurrently assessing the impact that SFAS 157 will have on its results ofoperations and financial position.

 

**ITEM3:  Quantitative and Qualitative Disclosures About Market Risk**

 

We are potentiallyexposed to market risk associated with changes in foreign exchange and interestrates for which we selectively use financial instruments to reduce relatedmarket risks. An instrument is treated as a hedge if it is effective inoffsetting the impact of volatility in our underlying exposure. We have alsoentered into instruments which are not effective derivatives under therequirements of SFAS No. 133, and therefore such instruments are notdesignated as hedges. All transactions are authorized and executed pursuant toour policies and procedures. Analytical techniques used to manage and monitorforeign exchange and interest rate risk include market valuations andsensitivity analysis.

 

The Company regularlyinvests excess cash in overnight repurchase agreements and interest-bearinginvestment-grade securities that we hold for the duration of the term of therespective instrument and are subject to changes in short-term interest rates.The Company believes that the market risk arising from holding these financialinstruments is minimal.

 

The Company’s exposure tomarket risks associated with changes in interest rates relates primarily to theincrease or decrease in the amount of interest income earned on its investmentportfolio. The Company ensures the safety and preservation of invested funds bylimiting default risk, market risk and reinvestment risk. The Company mitigatesdefault risk by investing in investment grade securities. Declines in interestrates over time will, however, reduce the Company’s interest income.

 

**Impactof Foreign Currencies**

 

We sell products in manycountries, and a substantial portion of sales and expenses are denominated inforeign currencies, principally in the Euro and Japanese Yen. Fluctuations inthe rate of exchange between the U.S. dollar and foreign currencies couldadversely affect our financial results. Costs related to these sales arelargely denominated in the same respective currencies, thereby limiting ourtransaction risk exposure. However, for sales not denominated in U.S. dollars,if there is an increase in the rate at which a foreign currency is exchangedfor U.S. dollars, it will require more of the foreign currency to equal aspecified amount of U.S. dollars than before the rate increase. In such cases,if we price our products in the foreign currency, we will receive less in U.S.dollars than we did before the rate increase went into effect. If we price ourproducts in U.S. dollars and competitors price their products in local currency,an increase in the relative strength of the U.S. dollar could result in ourprices not being competitive in a market where business is transacted in thelocal currency.

 

We have entered intoforward currency exchange contracts having maturities of less than twelvemonths with notional amounts aggregating $2.3 million. These contracts involvethe purchase of Japanese Yen, Singapore Dollars, U.S. Dollars and EURO currencyat fixed U.S. dollar and EURO amounts. The notional amounts of the contracts areintended to hedge receivables in U.S. dollars and EURO. These transactionsdo not qualify for hedge accounting under SFAS No. 133. Accordingly, theinstruments are marked-to-market with the corresponding gains and lossesrecorded in other income (expense) in the current period.

 

At the end of eachreporting period, we obtain third-party verification as to the fair value ofthese instruments.  As of September 30, 2007 and 2006, the currencyexchange contracts had a favorable fair value of $0.0 million and a favorablefair value of $0.7 million, respectively. The instruments’ fair marketvalues are recorded net of each other on the balance sheet. In connection withthese instruments, we recorded a net gain of $0.2 million and $0.1 millionduring the three months ended

 

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September 30, 2007 and2006, respectively, and a net gain of $0.4 million and $3.9 million during thenine months ended September 30, 2007 and 2006, respectively.

 

Realized foreign exchangelosses were approximately $(1.1) million and $(0.1) million for thethree months ended September 30, 2007 and 2006, respectively, and approximately$(1.7) million and $(1.2) million for the nine months ended September30, 2007 and 2006, respectively. As we continue to expand internationally, weevaluate currency risks and may enter into foreign exchange contracts on a moreconsistent basis or from time to time as circumstances require to mitigateforeign currency exposure.

 

We have entered intoforeign-denominated debt obligations. The currency effects of the debtobligations are reflected in interest and other income (expense), net, on theconsolidated statement of operations. We also have foreign-denominatedintercompany borrowing arrangements with our Bruker Daltonik GmbH subsidiary inGermany that affected accumulated other comprehensive income (loss). A 10%increase or decrease of the respective foreign exchange rate with our BrukerDaltonik GmbH subsidiary in Germany would result in a change in accumulatedother comprehensive income (loss) of approximately $3.1 million or $(2.5)million, respectively.

 

**Impactof Interest Rates**

 

Our exposure related toadverse movements in interest rates is derived primarily from outstandingfloating rate debt instruments that are indexed to short-term market rates andcash equivalents. Our objective in managing our exposure to interest rates isto decrease the volatility that changes in interest rates might have on ourearnings and cash flows. To achieve this objective, we use a fixed rateagreement to adjust a portion of our debt that is subject to variable interestrates.

 

In the United States, wehave entered into an interest rate swap arrangement to limit the interest rateexposure on our $2.0 million industrial revenue bond to a fixed rate of 4.6%.We pay a 4.6% fixed rate of interest and receive a variable rate of interestbased on the Securities Industry and Financial Markets Association SWAP Indexon a $1.7 million notional amount. Net interest payments or receipts arerecorded as adjustments to interest expense. In addition, the instrument isrecorded at fair market value on our balance sheet, and changes in the fairmarket value are recorded in current earnings since the arrangement is notconsidered an effective hedge. As of September 30, 2007, the fair value of theinstrument was approximately $(0.1) million, net of tax, and is recordedas a liability on the balance sheet.

 

In 2002, we entered intotwo derivative financial instruments: a cross currency interest rate swap andan interest rate swap. The cross currency interest rate swap is for5.0 million Euro and we receive semiannual interest payments in Euro basedon a variable interest rate equal to the six-month EURIBOR rate in exchange forsemiannual payments in Swiss francs at a fixed rate of 4.97%. The interest rateswap of 3.0 million Euro reduced the 6-month EURIBOR rate by 1.80% perannum until January 4, 2007. We entered into the financial instruments tomanage our exposure to interest rates and foreign exchange risk. Until theinstruments become an effective hedge, the instruments are consideredspeculative and are marked-to-market through interest and other income(expense), net, on the consolidated statement of operations. As of September30, 2007 and 2006, the cross currency interest rate swap had an unfavorablefair value of $(0.6) million and $(0.0) million, respectively. As of September30, 2006, the interest rate swap had an unfavorable fair value of approximately$(29,000).

 

A 10% increase or decreasein the average cost of our variable rate debt would not result in a materialchange in pre-tax interest expense.

 

**Inflation**

 

We do not believeinflation had a material impact on our business or operating results during anyof the periods presented.

 

**ITEM4:  Controls and Procedures**

 

Our Company’s management,with the participation of the Chief Executive Officer and Chief FinancialOfficer, has conducted an evaluation of the effectiveness of our disclosurecontrols and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) as of September 30, 2007. Based onthis evaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls were effective at September 30, 2007.

 

We maintain internalcontrols and procedures designed to ensure that we are able to collect theinformation subject to required disclosure in reports we file with the UnitedStates Securities and Exchange Commission, and to process, summarize anddisclose this information within the time specified by the rules set forthby the Securities and Exchange Commission.

 

There were no changes inour internal control over financial reporting that occurred during the quarterended September 30, 2007 that materially affected, or are reasonably likely toaffect, our internal control over financial reporting.

 

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**PARTII  OTHER INFORMATION**

 

**ITEM1:  Legal Proceedings**

 

**General**

 

The Company may, fromtime to time, be involved in legal proceedings in the ordinary course ofbusiness. The Company is not currently involved in any pending legalproceedings that, either individually or taken as a whole, are reasonablylikely in management’s judgment to materially harm our business, prospects,results of operations or financial condition, nor have any such legalproceedings been threatened.

 

**ITEM1A:  Risk Factors**

 

*Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors”in our Annual Report on Form 10-K for the year ended December 31,2006, which could materially affect our business, financial condition or futureresults. The risks described in our Annual Report on Form 10-K are not theonly risks facing our Company. Additional risks and uncertainties not currentlyknown to us or that we currently deem to be immaterial also may materiallyadversely affect our business, financial condition and/or operating results.*

 

*Therehave been no material changes to the risk factors disclosed in Part I, “Item1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2006.*

 

**ITEM2:  Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

**ITEM3:  Defaults Upon Senior Securities**

 

None.

 

**ITEM4:  Submission of Matters to a Vote of Security Holders**

 

None.

 

**ITEM5:  Other Information**

 

None.

 

**ITEM6:  Exhibits**

** **
| 31.1 |   | Certification by Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (1).                                                                                       |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification by Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (1).                                                                                       |
| 32.1 |   | Certification by Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2). |

 

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|   | (1) | Filed herewith     |
|--------|-----|--------------------|
|   | (2) | Furnished herewith |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                         |   | BRUKER BIOSCIENCES CORPORATION |
|------------------------------|--------|--------------------------------|
|                         |   |                           |
|  Date: November 6, 2007 |   | By:                            | /s/ Frank H. Laukien,  Ph.D. |
|                         |   |                           | Frank H. Laukien, Ph.D.

*President,  Chairman, Chief Executive Officer, and Director*

*(Principal  Executive Officer)* |
|                         |   |                           | * * |
|                         |   |                           | * * |
|  Date: November 6, 2007 |   | By:                            | /s/ William J. Knight |
|                         |   |                           | William J. Knight

*Chief  Financial Officer*

*(Principal  Financial and Accounting Officer)* |

 

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