UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 29, 2007

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

For the transition period from                      to                     

NEWPORT CORPORATION

Nevada		94-0849175
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1791 Deere Avenue, Irvine, California 92606
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (949) 863-3144

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, Par Value $0.1167 per share		The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ

Non-accelerated filer   o   (Do not check if a smaller reporting company)		Smaller reporting company o

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

As of June 30, 2007, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $585.3 million, calculated based upon the closing price of the registrant’s common stock as reported by the NASDAQ Global Market on such date.

As of March 5, 2008, 35,937,226 shares of the registrant’s sole class of common stock were outstanding.

Portions of the registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held on May 20, 2008 are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

TABLE OF CONTENTS

PART I
Item 1. Business			1
Item 1A. Risk Factors			17
Item 1B. Unresolved Staff Comments			27
Item 2. Properties			27
Item 3. Legal Proceedings			27
Item 4. Submission of Matters to a Vote of Security Holders			28
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			28
Item 6. Selected Financial Data			32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			49
Item 8. Financial Statements and Supplementary Data			50
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			50
Item 9A. Controls and Procedures			50
Item 9B. Other Information			52
PART III
Item 10. Directors, Executive Officers and Corporate Governance			53
Item 11. Executive Compensation			53
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			53
Item 13. Certain Relationships and Related Transactions, and Director Independence			53
Item 14. Principal Accounting Fees and Services			53
PART IV
Item 15. Exhibits, Financial Statement Schedules			53
SIGNATURES			57
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE			F-1
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Annual Report on Form 10-K except for historical information may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 1 (Business) and Item 1A (Risk Factors) of Part I and Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II of this Annual Report on Form 10-K. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. We undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART I

Item 1. Business

General Description of Business

     We are a global supplier of advanced technology products and systems to a wide range of industries, including scientific research, microelectronics, aerospace and defense/security, life and health sciences, and industrial manufacturing. We provide a broad portfolio of products to customers in these end markets, allowing us to offer them an end-to-end resource for products that make, manage and measure light.

     As the demands of research and commercial applications for higher precision and miniaturization continue to increase, photonics, the science and technology of making, managing and measuring light, has become a key enabling technology, permitting researchers and commercial users to perform tasks that cannot be accomplished by existing electrical, mechanical or chemical processes. In addition, in markets such as microelectronics and life and health sciences, photonics technology is replacing these current processes in a number of applications it can accomplish faster, better or more economically.

     We provide a wide range of products designed to enhance the capabilities and productivity of our customers’ photonics and other precision applications, including:

	•		lasers and laser technology, including solid-state, gas and dye lasers, high-power diode lasers, fiber lasers and amplifiers, and ultrafast laser systems;
	•		optical components and subassemblies, including precision optics and opto-mechanical subassemblies, thin-film optical filters, ruled and holographic diffraction gratings and crystals;
	•		photonics instruments and components, including optical meters, light sources, monochromators and spectroscopy instrumentation;

	•		high-precision positioning and vibration isolation products and systems; and
	•		advanced automated manufacturing systems used in the manufacture of communications and electronics devices.

     In addition to our individual product offerings, we have significant expertise in integrating our products into systems and subsystems that are engineered to meet our customers’ specific application requirements. We believe that our ability to develop and manufacture these integrated solutions, together with our broader portfolio of products and technologies, gives us a significant competitive advantage over our competitors.

     For over four decades, we have serviced the needs of research laboratories for precision equipment. We have acquired a number of companies, which has led to the expansion of our product offerings, technology base and geographic presence and has allowed us to evolve from a provider of discrete components and instruments primarily for research applications to a company that manufactures both components and integrated systems for both research and commercial applications.

     In February 2002, we acquired Micro Robotics Systems, Inc. (MRSI), a manufacturer of high-precision, fully-automated assembly and dispensing systems for back-end packaging applications in the semiconductor, microwave communications and fiber optic communications industries. MRSI has significant expertise in the design and manufacture of automated high-precision manufacturing systems. During the past two years, MRSI has focused its development efforts on automated laser-based manufacturing systems, particularly for disk drive and photovoltaic module manufacturing applications. MRSI is now part of our Photonics and Precision Technologies (PPT) Division.

     In July 2004, we acquired Spectra-Physics, Inc. and certain related entities (collectively, Spectra-Physics). This acquisition significantly increased the scope of our expertise and product offerings in our target customer end markets, adding to our product portfolio solid-state, gas and dye lasers, high-power diode lasers, and ultrafast laser systems, as well as photonics instruments and components, including light sources, monochromators, spectroscopy instrumentation, optical filters, ruled and holographic diffraction gratings and crystals. This acquisition approximately doubled our size with respect to revenue, number of employees and facilities. At the time of the acquisition, we established Spectra-Physics’ laser and laser-related technology business as our Lasers Division, and we combined Spectra-Physics’ photonics businesses with the existing businesses that comprised our former Industrial and Scientific Technologies Division to create our PPT Division.

     Following the acquisition of Spectra-Physics, we conducted a strategic review of all of our businesses and concluded that our robotic systems operations in Richmond, California, which served the front-end semiconductor equipment industry with product lines including wafer-handling robots, load ports and equipment front-end modules, were no longer core to our overall strategy. Consequently, in the first quarter of 2005, our Board of Directors approved a plan to sell these operations. At that time, we classified our robotic systems operations as discontinued operations. We completed the sale of these operations in December 2005. The robotic systems operations represented a substantial portion of our former Advanced Packaging and Automation Systems (APAS) Division. As a result of our decision to divest these operations, we realigned our business segments to include all remaining operations of our former APAS Division within our PPT Division. Accordingly, our operations are now conducted through two divisions, our Lasers Division and our PPT Division.

     We will continue to pursue acquisitions of companies, technologies and complementary product lines that we believe will further our strategic objectives. Conversely, from time to time, we review our different businesses, including our acquired companies, to ensure that they are key to our strategic plans, and close or divest businesses that we determine are no longer of strategic importance. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview,” beginning on page 35, and Notes 2 and 3 of the Notes to Consolidated Financial Statements beginning on page F-13 of this Annual Report on Form 10-K.

Our Markets

     We sell our products, subsystems and systems to original equipment manufacturer (OEM) and end-user customers across a wide range of markets and applications, including:

	•		Scientific Research. We are one of the world’s leading suppliers of lasers and photonics products to scientific researchers. For more than forty-five years, we have worked closely with the research community to pioneer new applications and technologies. Today, we continue to help researchers break new ground in a variety of scientific research areas, including spectroscopy, ultrafast phenomena, multiphoton microscopy, terahertz imaging, optical coherence tomography, laser induced fluorescence, light detection and ranging (LIDAR) and nonlinear optics.
	•		Microelectronics. Photonics technology addresses a number of vital applications in the microelectronics market, and is a key enabler of the industry roadmap driving smaller feature sizes with the increased functionalities needed for next-generation consumer technology products, including cellular phones, personal digital assistants and digital cameras. Our products are used in several key applications in this market, including semiconductor wafer inspection and metrology, memory yield enhancement, lithography, wafer dicing and scribing, wafer and component marking and resistor trimming, as well as in disk drive, printed circuit board, flat panel display and photovoltaic module manufacturing applications.
	•		Life and Health Sciences. Photonics is increasingly becoming a key enabling technology in the life and health sciences market. We provide products for use in diagnostic and analytical instrumentation and cosmetic and therapeutic applications. Our products are used in applications such as optical coherence tomography, multiphoton and confocal microscopy, flow cytometry, matrix-assisted laser desorption/ionization time-of-flight (MALDI-TOF) mass spectrometry, laser microdissection, DNA microarrays and blood analysis to enable advancements in the fields of molecular biology, proteomics and drug discovery. In addition, we supply high-power diode lasers to OEM customers for incorporation into laser systems for hair removal and a variety of dermatological and dental procedures.
	•		Aerospace and Defense/Security. The drive for more technologically advanced weapons and sensors is producing increased investment in light-based technologies that can remotely, rapidly and non-invasively detect threats, improve intelligence gathering, provide secure communications systems and improve the performance of weapons and countermeasures. In addition, innovative optical sensors are augmenting human vision on the battlefield, providing remote sensing, ranging and observation capabilities that offer high-resolution imaging and night vision. Our high-precision products are used by aerospace and defense engineers to develop, assemble, test and calibrate equipment for a wide range of applications, including target recognition and acquisition, LIDAR, range finding, missile guidance and advanced weapons development.
	•		Industrial Manufacturing, Marking and Engraving. Our lasers and photonics products are used in a wide range of precision industrial manufacturing applications, including rapid prototyping, micromachining, heat-treating, welding and soldering, cutting, illumination, drilling and high-precision marking and engraving. We also offer laser solutions for image recording and graphics applications including pre-press (computer-to-plate), on-press, ultra-high speed printing, photo finishing and holography.

Our Operating Divisions

     We operate our business in two divisions, our Lasers Division and our PPT Division, which are organized around our primary product categories.

Lasers Division

     Our Lasers Division, which was formed in July 2004 in connection with our acquisition of Spectra-Physics, offers a broad portfolio of laser technology products and services to OEM and end-user customers across a wide range of markets and applications. Our lasers and laser-based systems include ultrafast lasers and amplifiers, diode-pumped solid-state lasers, diode lasers, high-energy pulsed lasers, tunable lasers, gas lasers, and fiber lasers and amplifiers. We have established close relationships with OEM customers involved in microelectronics, life and health sciences and industrial manufacturing. In addition to supplying our existing lasers and laser systems to these customers, we also work closely with our OEM and industrial customers to develop laser and laser system designs optimized for their product and technology roadmaps. We offer our end-user customers a full range of laser technology solutions and accessories.

Products

     The following table summarizes our primary laser and laser-based system product offerings by product category, and includes representative applications for each category:

Category		Products				Representative Applications
Ultrafast Lasers and Systems		•		Mai Tai® one box femtosecond		•		Femtosecond spectroscopy
				Ti:sapphire lasers		•		Materials processing
		•		Tsunami® ultrafast Ti:sapphire		•		Multiphoton microscopy
				lasers		•		Optical coherence tomography
		•		Opal® femtosecond optical		•		Semiconductor metrology
				parametric oscillator (OPO)		•		Terahertz imaging
		•		Spitfire® Pro ultrafast		•		Time-resolved photoluminescence
				Ti:sapphire amplifier
		•		TOPAS automated ultrafast optical
				parametric amplifier (OPA)
		•		Solstice™ One Box Ultrafast Amplifier

Category		Products				Representative Applications
Diode-Pumped Solid State		•		BL series low power lasers		•		Diamond processing
Q-Switched Lasers		•		V-series high-repetition lasers		•		Disk texturing
		•		Tristar™ high repetition rate UV laser		•		Laser microdissection
		•		Navigator™ lasers		•		Matrix-assisted laser
		•		HIPPO high-power lasers				desorption/ionization
		•		Pulseo™ high peak power UV laser		•		Memory yield enhancement systems
		•		Explorer™ low-power UV lasers		•		Microelectronics material
		•		Empower™ green/UV lasers				processing
						•		Pump source for Ti:sapphire lasers
						•		Rapid prototyping
						•		Resistor trimming
						•		Sapphire scribing
						•		Silicon micromachining
						•		Solar cell manufacturing
						•		Wafer marking
Diode-Pumped Solid State		•		Millennia® Pro i/s CW lasers		•		Flow cytometry
Continuous Wave (CW) and		•		MG series CW solid state green lasers		•		Forensic investigations
Quasi-CW Lasers		•		Reveal™ CW forensic lasers		•		Image recording
		•		Centennia® CW thin-disk lasers		•		Laser cooling
		•		Excelsior™ low power CW lasers		•		Materials processing
		•		Vanguard™ quasi-CW solid state UV lasers		•		Optical trapping
		•		3900S and Matisse® CW tunable		•		Raman imaging
				Ti:sapphire lasers		•		Semiconductor wafer inspection
		•		Cyan™ compact low power CW lasers				and metrology
						•		Solar cell manufacturing
						•		Spectroscopy
						•		Ti:Sapphire pumping

Category		Products				Representative Applications
Diode Lasers		•		Open heatsink diode laser bars		•		Graphics and printing
		•		Multi-bar modules		•		Hair removal
		•		Fiber-coupled diode laser bars		•		Material heat treatment and
		•		Fiber-coupled single emitter diodes				processing
		•		Open heatsink single emitter diodes		•		Medical, therapeutic and
		•		Integra™ industrial diode laser systems				cosmetic procedures
						•		Pump source for solid state and fiber lasers
						•		Soldering and welding
High Energy Pulsed Nd:YAG		•		Quanta-Ray® PRO, LAB and PIV		•		Flat-panel display manufacturing
and Tunable Lasers				series pulsed Nd:YAG lasers		•		Laser ablation
		•		Quanta-Ray® INDI series compact		•		Laser cleaning
				Nd:YAG lasers		•		LIDAR
		•		MOPO® series High Energy		•		Mass spectrometry
				optical parametric oscillator (OPO)		•		Particle imaging velocimetry
		•		Tunable dye lasers				combustion diagnostics
						•		Plastic and ceramic component
								marking
						•		Remote sensing
						•		Spectroscopy
Gas Lasers		•		Air-cooled argon ion lasers		•		Confocal microscopy
		•		Water-cooled ion laser systems		•		DNA sequencing
		•		Nitrogen lasers		•		Flow cytometry
						• •		Laser doppler anemometry Raman spectroscopy
						•		Semiconductor wafer inspection
						•		Spectroscopy
						•		Holography
						•		Laser-doppler velocimetry
						•		Lithography
						•		Fluorescence immunoassay
						•		Matrix-assisted laser desorption/ionization

Fiber Laser Business Group

     During 2006, we established a Fiber Laser business group within our Lasers Division, which is engaged in the development of fiber laser and fiber amplifier technology. We introduced the first product from this group, the Pantera™ quasi-continuous wave mode-locked high-power ultraviolet laser, in the fourth quarter of 2007. The fiber laser and fiber amplifier products from this group incorporate our leading-edge capabilities in diode lasers, fiber coupling, frequency conversion, optics and photonics packaging.

Photonics and Precision Technologies Division

     Our PPT Division’s products and systems are used in applications across all of our target end markets. In addition, we sell subsystems to OEM customers that integrate our products into their systems, particularly for microelectronics and life and health sciences applications. The products sold by this division include photonics instruments and systems, precision micro-positioning systems and subsystems, vibration isolation systems and subsystems, optics, optical hardware, opto-mechanical subassemblies and crystals. The PPT Division also offers automated systems and subsystems for advanced applications in the manufacturing of communications and electronic devices, including disk drives, photovoltaic cells and microwave, optical, radio frequency (RF) and multi-chip modules.

Products

     The following table summarizes our PPT Division’s primary product offerings by product category, and includes representative applications for each category:

Category		Products				Representative Applications
Photonics Instruments and Systems		•		Optical meters		•		Characterization of light
		•		Laser diode instruments				emitted by lasers, light emitting diodes
		•		Light sources				and broadband light sources
		•		Solar simulators		•		Chemical composition analysis
		•		Solar cell test instruments		•		Colorimetry
		•		Photonics test systems		•		Optical power and energy
		•		Optical detectors				measurement for free space and
		•		Dispersive and Fourier transform (FT)				fiber-directed laser light
				spectrometers		•		Solar cell characterization
		•		Monochromators and spectrographs				and measurements
		•		Ultrafast laser pulse measurement		•		Testing and characterization
				systems				of optical fibers and passive fiber optic
								components
						•		Spectroscopy

Category		Products				Representative Applications
Precision Micro-Positioning Devices,		•		Precision air-bearing motion systems		•		High-precision positioning and
Systems and Subsystems		•		Motorized linear and rotation stages				motion control apparatus for
		•		Motorized actuators and optics mounts				manufacturing, in-process inspection and
		•		Custom multi-axis positioning systems				final test applications
		•		Motion controllers and drivers		•		High-precision positioning
		•		Manual linear and rotation stages				systems for thin-film solar panel
		•		Fiber alignment stages and accessories				manufacturing
		•		Micrometers and adjustment screws		•		Laser system alignment and
								beam steering for inspection, laser
								processing and communications
						•		Precision positioning of
								semiconductor wafers for metrology and
								fabrication
						•		Precision alignment in fiber
								optic, telecommunication and laser device
								assembly
						•		Sample or sensor manipulation
								for imaging and microscopy
						•		Sample sorting and sequencing for DNA research
						•		Tracking and targeting test
								systems for aerospace and defense/security
								applications
Vibration Isolation Systems and Subsystems		•		Optical tables and support systems		•		Foundation platforms for laser
		•		Workstations				systems
		•		Active and passive isolation systems		•		Isolated platform for
		•		Active vibration damping systems				semiconductor lithography equipment
		•		Honeycomb, granite and rigid		•		Reduction of impact of
				structures				external vibration sources on
		•		Elastomeric mounts				high-precision research, manufacturing
								test and assembly systems
						•		Scanning electron microscope,
								atomic force microscope, and optical
								microscope base isolation
						•		Workstation platforms for
								fiber optic device fabrication
						•		Workstation platforms for
								microscopy and other advanced imaging
								applications

Category		Products				Representative Applications
Optics and Optical Hardware		•		Lenses		•		Analytical instrumentation for
		•		Mirrors				life and health sciences
		•		Prisms and windows		•		Components for research and
		•		Thin-film filters and coatings				product development activities
		•		Filters and attenuators		•		Deep ultraviolet optics for
		•		Collimators				semiconductor lithography, wafer
		•		Ultrafast laser optics				inspection and wafer processing
		•		Beamsplitters and polarization optics		•		Development and manufacture of
		•		Ruled and holographic diffraction				laser systems
				gratings		•		Electro-optic sensors and
		•		Optical mounts				imaging systems for defense/security
		•		Bases and brackets				applications
		•		Posts and rod systems		•		High-precision alignment of
		•		Beam routing and enclosing systems				optical instruments
		•		Laser-to-fiber couplers		•		Optical measurement and
		•		Educational kits				communications systems
						•		Spectroscopy
						•		Ultrafast laser, terahertz
								imaging and laser fusion research
Opto-Mechanical Subassemblies		•		Laser beam delivery and imaging		•		Analytical instrumentation for
and Subsystems				assemblies				life and health sciences
		•		Integrated electro-optic-mechanical		•		High-speed cell sorting for
				subsystems				genomic research
		•		Objective lens systems		•		Laser beam delivery systems
		•		Refractive beam shaper assemblies				for solar cell manufacturing
		•		Fast steering mirrors		•		Laser beam stabilization for
		•		Laser beam attenuators				industrial metrology
						•		Light detection and ranging
						•		Optical coherence tomography
								for non-invasive diagnostics
						•		Optical data storage
						•		Semiconductor mask patterning
						•		Semiconductor wafer defect
								inspection
						•		Thin-film measurement of
								semiconductor wafers

Category		Products				Representative Applications
Crystals		•		Optical crystals		•		Infrared spectroscopy (FT-IR)
		•		Scintillation crystals				for quality assurance
		•		Crystal imaging arrays		•		Optical and acoustic
		•		Electro optics				applications including frequency doubling,
								optical modulators and Q switches
						•		X-ray detection such as steel
								thickness gauging
						•		X-ray imaging for security,
								industrial and medical applications
Advanced Manufacturing Systems		•		Automated manufacturing/ assembly		•		Automated manufacturing and
				systems				assembly of microelectronic and
		•		Automated dispensing systems				optoelectronic devices
						•		High-speed, high-accuracy
								automated dispensing applications for
								microwave modules, optical modules, hybrid
								circuits, multi-chip modules and
								semiconductor packaging
						•		High-speed, high-accuracy
								laser texturing of disk drive media

Integrated Solutions

     Our PPT Division also designs, develops and manufactures integrated systems and subsystems that integrate our broad portfolio of products and technologies into solutions that meet the specific application requirements of our OEM and select end-user customers. With our expertise in the design, development and manufacture of these integrated solutions, we help our customers accelerate the time to market and enhance the performance of their equipment or instrumentation products. We have established a business team comprised of technical and operations specialists, which collaborates across our divisions to develop and provide these integrated solutions to our customers. We have used our capabilities in this area for customers in a number of industries and applications, most notably in microelectronics applications such as semiconductor manufacturing, disk drive manufacturing, photovoltaic cell manufacturing, and in life and health sciences applications such as flow cytometry and optical coherence tomography.

     Financial information regarding our business segments and our operations by geographic area is included in Note 17 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K beginning on page F-33. A discussion of our net sales by end market and geographic area is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 35.

Sales and Marketing

     We market and sell our products and services through our direct domestic and international sales organizations, an international network of independent distributors and sales representatives, our product catalogs and our web site. Our domestic and international sales organizations are comprised of teams of field sales persons, which work closely with key account managers, product and applications specialists and other internal sales support personnel based primarily in Irvine, California; Mountain View, California; Stratford, Connecticut; Germany; France and Japan. We have aligned our domestic and international sales organizations along our two key categories of customers: end-users and OEM customers. These two categories of customers require very different selling approaches and support requirements. Our OEM subsystem and capital equipment customers often have unique technical specifications and manufacturing processes, and may require specific system, subsystem or component designs. This requires close cooperation between our sales personnel and distributors and our operations and engineering staff, and can result in long sales cycles for our subsystem and capital equipment products. Within our two key categories of customers, our sales personnel are organized into groups based on their special knowledge and expertise relating to specific product lines and markets. While these sales groups focus their attention and selling efforts in their areas of expertise, our entire sales organization collaborates closely to combine all of our areas of knowledge and expertise to offer integrated solutions to our customers.

     We also actively market and sell our products in certain markets outside of North America through independent sales representatives and distributors. We have written agreements with most of our representatives and distributors. In some cases we have granted representatives and distributors exclusive authorization to sell certain of our products in a specific geographic area. These agreements generally have terms of one year which automatically renew on an annual basis, and are generally terminable by either party for convenience following a specified notice period. Most distributor agreements are structured to provide distributors with sales discounts below the list price. Representatives are generally paid commissions for sales of products. No single independent representative or distributor accounted for more than 5% of our net sales in 2007.

     We also market our standard products through our product catalogs and our web site. Our principal marketing tool for the scientific research market is our comprehensive product catalog, The Newport Resource^®. This catalog provides detailed product information as well as extensive technical and applications data. We mail this catalog to approximately 40,000 existing and potential customers. The Newport Resource is published in English, French and German. New product supplements for each catalog are also distributed between publications. We also publish and distribute a variety of sales literature and product brochures which focus on specific products and end markets. Our web site features an online catalog, providing customers with access to the latest information regarding our products, technical/tutorial and application related materials, sales information, a literature and information request form, and the ability to purchase a majority of our standard products. Our web site is widely used by our customers to review information about our technologies, products and services.

     We operate a Technology and Applications Center (TAC) at our Irvine, California headquarters. The TAC is staffed with experienced photonics researchers who develop innovative ways to utilize our lasers and other photonics products together in leading-edge research applications such as multiphoton microscopy, Coherent Anti-Stokes Raman Scattering (CARS) microscopy and ultrafast spectroscopy. The TAC produces application notes and kits for these applications, publishes technical papers in scientific and technical journals, and also provides our research and development teams with ideas for new products and product enhancements. We believe that the TAC reinforces our position as a technology leader in the photonics industry, and that it serves as an important sales tool by performing actual experiments to demonstrate how our products will perform in our customers’ applications.

     We also operate an Applications Laboratory at the Mountain View, California facility of our Lasers Division, which provides support to our global sales and marketing team by conducting feasibility studies with prospective customers’ material processing applications using our laser and photonics products. This laboratory is staffed with experienced laser material processing engineers, and has demonstrated the performance of our products and integrated solutions in a wide range of advanced laser processing applications.

Research and Product Development

     We continually seek to improve our technological leadership position through internal research, product development and licensing, and acquisitions of complementary technologies. As of February 29, 2008, we had approximately 240 employees engaged in research and development. We continually work to enhance our existing products and to develop and introduce innovative new products to satisfy the needs of our customers. In addition, we regularly investigate new ways to combine components manufactured by our various operations to produce innovative technological solutions for the markets we serve. Total research and development expenses were $42.6 million, or 9.6% of net sales, in 2007, $42.0 million, or 9.2% of net sales, in 2006, and $35.9 million, or 8.9% of net sales, in 2005. Research and development expenses attributable to our Lasers Division were $23.3 million, or 12.6% of net sales to that segment, in 2007, $22.4 million, or 11.8% of net sales to that segment, in 2006, and $18.3 million, or 10.4% of net sales to that segment, in 2005. Research and development expenses attributable to our PPT Division were $19.3 million, or 7.4% of net sales to that segment, in 2007, $19.6 million, or 7.5% of net sales to that segment, in 2006, and $17.6 million, or 7.8% of net sales to that segment, in 2005.

     We are committed to product development and expect to continue our investment in this area in the future. We believe that the continual development or acquisition of innovative new products will be critical to our future success. Failure to develop, or introduce on a timely basis, new products or product enhancements that achieve market acceptance could have a material adverse effect on our business, operating results or financial condition.

Customers

     We sell our products to thousands of customers worldwide, in a wide range of diverse end markets, including scientific research, microelectronics (which is comprised primarily of semiconductor capital equipment, computer peripherals and photovoltaic customers), aerospace and defense/security, life and health sciences and industrial manufacturing. We believe that our customer diversification minimizes our dependence on any single industry or group of customers. In 2007, no single customer represented 10% or more of our consolidated net sales, or 10% or more of our net sales by either our Lasers Division or our PPT Division. In certain of our end markets, including the microelectronics market, a limited number of customers account for a significant portion of our sales to those markets. We believe that our relationships with these key customers are good. However, if our key customers discontinue or reduce their relationships with us, or suffer downturns in their businesses, it could have a significant negative impact on our financial results on a short-term basis, and our business and results of operations could be harmed going forward if we are unable to sufficiently expand our customer base to replace the lost business.

Competition

     The primary end markets that we serve include: scientific research, aerospace and defense/security; microelectronics (which is comprised primarily of semiconductor capital equipment, computer peripherals and photovoltaic customers); life and health sciences; and industrial manufacturing. These markets are intensely competitive and characterized by rapidly changing technology. A small number of competitors are dominant in certain of these markets. The products and systems developed and manufactured by both our PPT Division and our Lasers Division serve all of our targeted end markets. The following table summarizes our primary competitors for our principal product categories:

Product Category		Primary Competitors
Lasers		Bookham, Inc. Coherent, Inc. CVI Melles Griot Excel Technology, Inc. IPG Photonics, Inc.		JDS Uniphase Corporation Jenoptik Laser Optik Systeme GmbH Rofin-Sinar Technologies, Inc. Trumpf Group
Photonics Instruments		Agilent Technologies, Inc. Coherent, Inc. CVI Melles Griot ILX Lightwave Corporation		Ocean Optics, Inc. Ophir Optronics Ltd. Thorlabs, Inc.
Light Sources and Spectroscopy     Instrumentation		Andor Technology Acton Research Corporation Ocean Optics, Inc.		Photon Technology International Spectral Products Thorlabs, Inc.
Precision Micro-Positioning     Devices, Systems and     Subsystems		Aerotech Inc. Bookham, Inc. Danaher Corporation Parker Hannifin Corporation		Physik Instrumente Rockwell Automation, Inc. (Anorad) Sigma Koki Co., Ltd. Thorlabs, Inc.
Vibration Isolation    Systems and Subsystems		Kinetic Systems, Inc. Technical Manufacturing Corp.		Thorlabs, Inc.
Optics, Optical Hardware     and Opto-Mechanical     Subassemblies and     Subsystems		Bookham, Inc. CVI Melles Griot Corning Tropel Corporation Jenoptik Laser Optik Systeme GmbH		LINOS Photonics OptoSigma Corporation Thorlabs, Inc. Zygo Corporation
Optical Filters		Bookham, Inc. Barr Associates, Inc. Chroma Technology Corp. Ferroperm EMC Filters ApS		JDS Uniphase Corporation Omega Optical, Inc. Semrock, Inc.
Diffraction Gratings		Headwall Photonics, Inc. Horiba Jobin Yvon Ltd.		Optometrics LLC Spectrogon

     In certain of our product lines, particularly our precision motion systems product lines, we also face competition from certain of our existing and potential customers who have developed or may develop their own systems, subsystems and components.

     We believe that the primary competitive factors in our markets are:

	•		product features and performance;
	•		quality and reliability of products;

	•		pricing;
	•		customer service and support;
	•		breadth of product portfolio;
	•		customer relationships;
	•		ability to manufacture and deliver products on a timely basis;
	•		ability to customize products to customer specifications; and
	•		ability to offer complete integrated solutions to OEM customers.

     We believe that we currently compete favorably with respect to each of these factors. However, we may not be able to compete successfully in the future against existing or new competitors.

     We compete in various markets against a number of companies, some of which have longer operating histories, greater name recognition and significantly greater technical, financial, manufacturing and marketing resources than we do. In addition, some of these companies have long established relationships with our customers and potential customers in our markets. In addition to current competitors, we believe that new competitors, some of whom may have substantially greater financial, technical and marketing resources than us, will seek to provide products to one or more of our markets in the future. Such future competition could harm our business.

Intellectual Property and Proprietary Rights

     Our success and competitiveness depends to an extent on our ability to protect our proprietary technology. We protect our technology by controlling access to our proprietary information and by maintaining confidentiality agreements with our employees, consultants, customers and suppliers, and, in some cases, through the use of patents, trademark registrations and licenses. We maintain approximately 220 patents in the U.S. and foreign jurisdictions, and we have approximately 85 additional patent applications pending. These issued patents cover various aspects of products in many of our key product categories, particularly our laser products. We also have trademarks registered in the U.S. and foreign jurisdictions. We will continue to actively pursue applications for new patents and trademarks as we deem appropriate.

     It is possible that, despite our efforts, other parties may use, obtain or try to copy our products and technology. Policing unauthorized use of our products and technology is difficult and time consuming. We cannot guarantee that the steps we take to protect our rights will prevent any misappropriation of our products or technology. This is particularly the case in foreign jurisdictions, where the intellectual property laws may not afford our intellectual property rights the same protection as the laws of the United States. We have in the past and may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors, which claims could result in costly litigation and the diversion of our technical and management personnel.

     In addition, infringement, invalidity, right to use or ownership claims by third parties have been asserted against us in the past and may be asserted against us in the future. We expect that the number and significance of these matters will increase as our business expands. In particular, the laser industry is characterized by a very large number of patents, many of which are of questionable validity and some of which appear to overlap with other issued patents. As a result, there is a significant amount of uncertainty in the industry regarding patent protection and infringement. Any claims of infringement brought by third parties could result in protracted and costly litigation, and we could become subject to damages for infringement, or to an injunction preventing us from selling one or more of our products or using one or more of our trademarks. Such claims could also result in the necessity of obtaining a license relating to one or more of our products or current or future technologies, which may not be available on commercially reasonable terms or at all. Any intellectual property litigation and the failure to obtain necessary licenses or other rights or develop substitute technology could have a material adverse effect on our business, financial condition and results of operations.

Manufacturing

     We manufacture lasers and laser systems at our domestic facility located in Mountain View, California, and at our international facilities in Ottawa, Ontario and Stahnsdorf, Germany. We manufacture diode lasers in Tucson, Arizona. We manufacture instruments, components, subassemblies and systems at domestic facilities located in Irvine, California; Stratford, Connecticut; Franklin, Massachusetts; North Billerica, Massachusetts; and Rochester, New York, and at international facilities in Beaune-la Rolande, France; Brigueuil, France; Margate, United Kingdom; and Wuxi, China. In addition, we subcontract the manufacture of various products and components to a number of third-party subcontractors.

     Our manufacturing processes are diverse and consist of: purchasing raw materials, principally stainless steel, aluminum and glass; processing the raw materials into components, subassemblies and finished products; purchasing components, assembling and testing components and subassemblies; and, for our larger products, assembling the subassemblies and components into integrated systems. We primarily design and manufacture our products internally, although on a limited basis, we purchase completed products from certain third-party suppliers and resell those products through our distribution channels. Most of these completed products are produced to our specifications and carry our name and logo.

     We currently procure various components and materials, such as the sheet steel used in some of our vibration isolation tables, and the laser crystals used in certain of our laser products, from single or limited sources, due to unique component designs or materials characteristics as well as certain quality and performance requirements needed to manufacture our products. In some such cases, the number of available suppliers is limited by the existence of patents covering the components or materials. In addition, we manufacture certain components internally, and there are no readily available third-party suppliers of these components. If single-sourced components were to become unavailable in adequate amounts at acceptable quality levels or were to become unavailable on terms satisfactory to us, we would be required to purchase comparable components from other sources. While we believe that we would be able to obtain comparable replacement components from other sources in a timely manner, if we were unable to do so, our business, results of operations or financial condition could be adversely affected.

Backlog

     Our consolidated backlog of orders totaled $153.8 million at December 29, 2007 and $130.2 million at December 30, 2006. As of December 29, 2007, $126.4 million of our consolidated backlog was scheduled to be shipped on or before January 3, 2009. Orders for many of the products we sell to semiconductor equipment customers, which comprise a significant portion of our sales, are often subject to rescheduling without penalty or cancellation without penalty other than reimbursement of certain material costs. In addition, because we manufacture a significant portion of our standard catalog products for inventory, we often make shipments of these products upon or within a short time period following receipt of an order. As a result, our backlog of orders at any particular date may not be an accurate indicator of our sales for succeeding periods.

Investments

     From time to time, we make investments in companies having operations or technologies in areas which are within or adjacent to our strategic focus when acquired. We currently hold minority ownership interests in a number of small, privately-held companies. These investments are designed to further our strategic objectives and to support our key business initiatives. We want to support growth in new technologies, particularly those related to our strategic markets, in order to create and expand markets for our products. At December 29, 2007, the total carrying value of all of our minority interest investments was $2.9 million.

     Investments in technology companies involve significant risks, including the risks that such companies may be unable to raise additional required operating capital on acceptable terms or at all, or may not achieve or maintain market acceptance of their technology or products. In the event that any of such risks occurs, the value of our investment could decline significantly. In addition, because there is no public market for the securities we have

acquired, our ability to liquidate our investments is limited, and such markets may not develop in the future. In the event that we are required to write down the carrying value of one or more of our investments in the future, our earnings could be materially and adversely affected.

Employees

     As of February 29, 2008, we had approximately 2,000 employees worldwide. We believe that our relationships with our employees are good.

Government Regulation

Regulatory Compliance

     Our lasers and laser-based systems are subject to the laser radiation safety regulations of the Radiation Control for Health and Safety Act administered by the Center for Devices and Radiological Health of the United States Food and Drug Administration. Among other things, these regulations require a laser manufacturer to file new product and annual reports, to maintain quality control and sales records, to perform product testing, to distribute appropriate operating manuals, to incorporate certain design and operating features in lasers sold to end-users and to certify and label each laser sold to end-users as one of four classes (based on the level of radiation from the laser that is accessible to users). Various warning labels must be affixed and certain protective devices installed depending on the class of product. The Center for Devices and Radiological Health is empowered to seek fines and other remedies for violations of the regulatory requirements. We are also subject to comparable laser safety regulations with regard to laser products sold in Europe. We believe that we are currently in compliance with these regulations.

Environmental Regulation

     Our operations are subject to various federal, state and local regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. In the United States, we are subject to the federal regulation and control of the Environmental Protection Agency (EPA). Comparable authorities exist in other countries. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our business, results of operations or financial condition.

     Although we believe that our safety procedures for using, handling, storing and disposing of such materials comply with the standards required by state and federal laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident involving such materials, we could be liable for damages and such liability could exceed the amount of our liability insurance coverage (if any) and the resources of our business.

     Our Mountain View, California facility is an EPA-designated Superfund site and is subject to a cleanup and abatement order from the California Regional Water Quality Control Board. Spectra-Physics, along with several other entities with facilities located near the Mountain View, California facility, have been identified as Responsible Parties with respect to this Superfund site, due to releases of hazardous substances during the 1960s and 1970s. The site is mature, and investigations and remediation efforts have been ongoing for approximately 25 years. Spectra-Physics and the other Responsible Parties have entered into a cost-sharing agreement covering the costs of remediating the off-site groundwater impact. We have established reserves relating to the estimated cost of these remediation efforts, however our ultimate costs of remediation are difficult to predict. In addition, while we are not aware of any unresolved property damage or personal injury claims relating to this site, such claims could be made against us in the future. While Thermo Fisher Scientific, Inc., formerly known as Thermo Electron Corporation (Thermo) has agreed, in connection with our purchase of Spectra-Physics, to indemnify us, subject to certain conditions, for certain environmental liabilities relating to this site, this indemnity may not cover all liabilities

relating to this site. In such event, our business, financial condition and results of operations could be adversely affected.

     In addition, the European Union has enacted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE) for implementation in each European Union member country. RoHS regulates the use of certain hazardous substances in certain products, and WEEE requires the collection, reuse and recycling of waste from certain products. The European Union member states continue to define the scope of the implementation of RoHS and WEEE. Based on information we have received to date, certain of our products sold in these countries are or will likely be subject to RoHS and WEEE requirements. We will continue to monitor RoHS and WEEE guidance as it is announced by individual jurisdictions to determine our responsibilities. The guidance available to us to date suggests that in some instances we are not directly responsible for compliance with RoHS and WEEE because some of our products may be outside the scope of the directives. However, because the scope of the directives continues to expand in the course of implementation by the European Union member states, and because such products are sold under our brand name, we will likely be directly or contractually subject to such regulations in the case of many of our products. Also, final legislation from individual jurisdictions that have not yet implemented the directives may impose different or additional responsibilities upon us. We are also aware of similar legislation that is currently in force or being considered in the United States, as well as other countries, such as Japan and China. Our failure to comply with any of such regulatory requirements or contractual obligations could result in our being directly or indirectly liable for costs, fines or penalties and third-party claims, and could jeopardize our ability to conduct business in countries in these regions.

Availability of Reports

     We make available free of charge on our web site at www.newport.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. We will also provide electronic or paper copies of such reports free of charge, upon request made to our Corporate Secretary.

Item 1A. Risk Factors

     The following is a summary of certain risks we face in our business. They are not the only risks we face. Additional risks that we do not yet know of or that we currently believe are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in our other filings with the Securities and Exchange Commission.

Our financial results are difficult to predict, and if we fail to meet our financial guidance or the expectations of investors and/or securities analysts, the market price of our common stock will likely decline significantly.

     Our financial results in any given quarter have fluctuated and will likely continue to fluctuate. These fluctuations are typically unpredictable and can result from numerous factors including:

	•		fluctuations in our customers’ capital spending, industry cyclicality (particularly in the semiconductor equipment industry), market seasonality (particularly in the scientific research market), levels of government funding available to our customers and other economic conditions within the markets we serve;
	•		demand for our products and the products sold by our customers;
	•		the level of orders within a given quarter and preceding quarters;
	•		the timing and level of cancellations and delays of orders for our products;
	•		the timing of product shipments within a given quarter;

	•		our timing in introducing new products;
	•		market acceptance of any new or enhanced versions of our products;
	•		timing of new product introductions by our competitors;
	•		variations in the mix of products we sell;
	•		timing and level of scrap and warranty expenses;
	•		changes in our pricing policies or in the pricing policies of our competitors or suppliers;
	•		the availability and cost of key components and raw materials we use to manufacture our products;
	•		our ability to manufacture a sufficient quantity of our products to meet customer demand;
	•		our ability to retain and attract key employees;
	•		changes in our effective tax rates;
	•		changes in interest rates;
	•		fluctuations in foreign currency exchange rates; and
	•		our levels of expenses.

     We may in the future choose to change prices, increase spending, or add or eliminate products in response to actions by competitors or in an effort to pursue new market opportunities. These actions may also adversely affect our business and operating results and may cause our quarterly results to be lower than the results of previous quarters.

     In addition, we often recognize a substantial portion of our sales in the last month of the quarter. Thus, variations in timing of sales, particularly for our higher-priced, higher-margin products can cause significant fluctuations in our quarterly sales, gross margin and profitability. Orders expected to ship in one quarter could shift to another period due to changes in the anticipated timing of customers’ purchase decisions or rescheduled delivery dates requested by our customers. Our operating results for a particular quarter or year may be adversely affected if our customers, particularly our largest customers, cancel or reschedule orders, or if we cannot fill orders in time due to unexpected delays in manufacturing, testing, shipping and product acceptance. Also, we base our manufacturing on our forecasted product mix for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which would result in delays in the shipment of our products and could shift sales to a subsequent period. In addition, our expenses for any given quarter are typically based on expected sales, and if sales are below expectations in any given quarter, the adverse impact of the shortfall on our operating results may be magnified by our inability to adjust spending quickly to compensate for the shortfall.

     Due to these and other factors, we believe that quarter-to-quarter comparisons of results from operations, or any other similar period-to-period comparisons, are not reliable indicators of our future performance. In any period, our results may be below the expectations of market analysts and investors, which would likely cause the trading price of our common stock to drop.

We are dependent in part on the semiconductor capital equipment market, which is volatile and unpredictable.

     A significant portion of our current and expected future business comes from sales of components, subsystems and laser products to manufacturers of semiconductor fabrication, wafer inspection and metrology equipment and sales of capital equipment to integrated semiconductor device manufacturers. The semiconductor capital equipment market has historically been characterized by sudden and severe cyclical variations in product supply and demand. The timing, severity and duration of these market cycles are difficult to predict, and we may not be able to respond effectively to these cycles. The continuing uncertainty in this market severely limits our ability to predict our business prospects or financial results in this market.

     During industry downturns, our revenues from this market may decline suddenly and significantly. Our ability to rapidly and effectively reduce our cost structure in response to such downturns is limited by the fixed nature of many of our expenses in the near term and by our need to continue our investment in next-generation product technology and to support and service our products. In addition, due to the relatively long manufacturing lead times for some of the systems and subsystems we sell to this market, we may incur expenditures or purchase raw materials or components for products we cannot sell. Accordingly, downturns in the semiconductor capital equipment market may materially harm our operating results. Conversely, when upturns in this market occur, we may have difficulty rapidly and effectively increasing our manufacturing capacity to meet sudden increases in customer demand. If we fail to do so we may lose business to our competitors and our relationships with our customers may be harmed.

A limited number of customers account for a significant portion of our sales to the microelectronics market, and if we lose any of these customers or they significantly curtail their purchases of our products, our results of operations would be harmed.

     Our sales to the microelectronics market (which is comprised primarily of semiconductor capital equipment, computer peripherals and photovoltaics customers) constituted 27.8%, 32.4% and 28.8% of our consolidated net sales for the years 2007, 2006, and 2005, respectively. We rely on a limited number of customers for a significant portion of our sales to this market. Our top five customers in this market comprised approximately 56.3%, 58.2% and 53.7% of our sales to this market for the years 2007, 2006, and 2005, respectively, with one customer making up a substantial portion of such percentage in each of such years. No single customer in this market comprised 10% or more of our consolidated net sales in 2007, 2006 or 2005. If any of our principal customers discontinues its relationship with us, replaces us as a vendor for certain products or suffers downturns in its business, our business and results of operations could be harmed significantly. In addition, because a relatively small number of companies dominate the front-end equipment portion of this market, and because those companies rarely change vendors in the middle of a product’s life cycle, it may be particularly difficult for us to replace these customers if we lose their business.

     The microelectronics market is characterized by rapid technological change, frequent product introductions, changing customer requirements and evolving industry standards. Because our customers face uncertainties with regard to the growth and requirements of these markets, their products and components may not achieve, or continue to achieve, anticipated levels of market acceptance. If our customers are unable to deliver products that gain market acceptance, it is likely that these customers will not purchase our products or will purchase smaller quantities of our products. We often invest substantial resources in developing our products, systems and subsystems in advance of significant sales of these products, systems and/or subsystems to such customers. A failure on the part of our customers’ products to gain market acceptance, or a failure of the semiconductor capital equipment market to grow would have a significant negative effect on our business and results of operations.

Difficulties in executing our acquisitions could adversely impact our business.

     We have and will continue to acquire businesses, and the efficient and effective integration of our acquired businesses into our organization is critical to our growth. The process of integrating acquired companies into our operations requires significant resources and is time consuming, expensive and disruptive to our business. Further, we may not realize the benefits we anticipate from these acquisitions because of the following significant challenges:

	•		potentially incompatible cultural differences between the two companies;
	•		incorporating the acquired company’s technology and products into our current and future product lines, and successfully generating market demand for these expanded product lines;
	•		potential additional geographic dispersion of operations;
	•		the diversion of our management’s attention from other business concerns;
	•		the difficulty in achieving anticipated synergies and efficiencies;
	•		the difficulty in integrating disparate operational and information systems;

	•		the difficulty in leveraging the acquired company’s and our combined technologies and capabilities across all product lines and customer bases; and
	•		our ability to retain key customers, suppliers and employees of an acquired company.

     Our failure to achieve the anticipated benefits of any past or future acquisition or to successfully integrate and/or manage the operations of the companies we acquire could harm our business, results of operations and cash flows. Additionally, we may incur material charges in future quarters to reflect additional costs associated with past acquisitions, including asset impairment charges and other costs related to divestiture of acquired assets or businesses. Such charges could also include impairment of goodwill associated with past acquisitions should the operating results of one of our divisions differ negatively from the assumptions used in evaluating goodwill for impairment. While we believe our assumptions are reasonable, the operating income of our Lasers Division has been less than anticipated. If our Lasers Division does not achieve our expected level of profitability in the future, we may be required to recognize a goodwill impairment charge.

Many of the markets and industries that we serve are subject to rapid technological change, and if we do not introduce new and innovative products or improve our existing products, our business and results of operations will be negatively affected.

     Many of our markets are characterized by rapid technological advances, evolving industry standards, shifting customer needs and new product introductions and enhancements. Many of the products in our markets can become outdated quickly and without warning. We depend, to a significant extent, upon our ability to enhance our existing products, to anticipate and address the demands of the marketplace for new and improved technologies, either through internal development or by acquisitions, and to be price competitive. If we or our competitors introduce new or enhanced products, it may cause our customers to defer or cancel orders for our existing products. In addition, because certain of our markets experience severe cyclicality in capital spending, if we fail to introduce new products in a timely manner we may miss market upturns, or may fail to have our products or subsystems designed into our customers’ products. We may not be successful in acquiring, developing, manufacturing or marketing new products on a timely or cost-effective basis. If we fail to adequately introduce new, competitive products on a timely basis, our business and results of operations would be harmed.

We offer products for multiple industries and must face the challenges of supporting the distinct needs of each of the markets we serve.

     We offer products for a number of markets, including microelectronics, scientific research, aerospace and defense/security, life and health sciences, and industrial manufacturing. Because we operate in multiple markets, we must work constantly to understand the needs, standards and technical requirements of many different applications within these industries, and must devote significant resources to developing different products for these industries. Product development is costly and time consuming. We must anticipate trends in our customers’ industries and develop products before our customers’ products are commercialized. If we do not accurately predict our customers’ needs and future activities, we may invest substantial resources in developing products that do not achieve broad market acceptance. Our decision to continue to offer products to a given market or to penetrate new markets is based in part on our judgment of the size, growth rate and other factors that contribute to the attractiveness of a particular market. If our product offerings in any particular market are not competitive or our analyses of a market are incorrect, our business and results of operations would be harmed.

Because the sales cycle for some of our products is long and difficult to predict, and certain of our orders are subject to rescheduling or cancellation, we may experience fluctuations in our operating results.

     Many of our capital equipment, system and subsystem products are complex, and customers for these products require substantial time to make purchase decisions. These customers often perform, or require us to perform extensive configuration, testing and evaluation of our products before committing to purchasing them. The sales cycle for our capital equipment, system and subsystem products from initial contact through shipment typically varies, is difficult to predict and can last more than one year. The orders comprising our backlog are generally subject to rescheduling without penalty or cancellation without penalty other than reimbursement for certain material

costs. We have from time to time experienced order rescheduling and cancellations that have caused our revenues in a given period to be materially less than would have been expected based on our backlog at the beginning of the period. If we experience such rescheduling and/or cancellations in the future, our operating results will fluctuate from period to period. These fluctuations could harm our results of operations.

If we are delayed in introducing our new products into the marketplace, our operating results will suffer.

     Because certain of our products, particularly lasers, are sophisticated and complex, we may experience delays in introducing new products or enhancements to our existing products. If we do not introduce our new products or enhancements into the marketplace in a timely fashion, our customers may choose to use competitors’ products. In addition, because certain of our markets, such as the semiconductor equipment market, are highly cyclical in nature, if we fail to timely introduce new products in advance of an upturn in the market’s cycle, we may be foreclosed from selling products to many customers until the next cycle. As such, our inability to introduce new or enhanced products in a timely manner could cause our business and results of operations to suffer.

We face significant risks from doing business in foreign countries.

     Our business is subject to risks inherent in conducting business internationally. For the years ended December 29, 2007, December 30, 2006, and December 31, 2005, our international revenues accounted for approximately 49.7%, 47.6% and 46.6%, respectively, of total net sales, with a substantial portion of international sales originating in Europe and Japan. We expect that international revenues will continue to account for a significant percentage of total net sales for the foreseeable future, and that in particular, the proportion of our sales to Asian customers will continue to increase. Our international operations expose us to various risks, which include:

	•		adverse changes or instability in the political or economic conditions in countries or regions where we manufacture or sell our products;
	•		challenges of administering our business globally;
	•		the actions of U.S. and foreign regulatory authorities, including embargoes, export restrictions, tariffs, trade restrictions and trade barriers, license requirements, currency controls and other rules and regulations applicable to the importing and exporting of our products, which are complicated and potentially conflicting and may impose strict and severe penalties for noncompliance;
	•		longer accounts receivable collection periods;
	•		overlapping, differing or more burdensome tax structures;
	•		adverse currency fluctuations;
	•		differing protection of intellectual property;
	•		difficulties in staffing and managing each of our individual foreign operations; and
	•		increased risk of exposure to terrorist activities.

     In addition, fluctuations in foreign exchange rates could affect the sales price in local currencies of our products in foreign markets, potentially making our products less price competitive. Such exchange rate fluctuations could also increase the costs and expenses of our foreign operations or require us to modify our current business practices. If we experience any of the risks associated with international business, our business and results of operations could be significantly harmed.

We face substantial competition, and if we fail to compete effectively, our operating results will suffer.

     The markets for our products are intensely competitive, and we believe that competition from both new and existing competitors will increase in the future. We compete in several specialized markets, against a limited number of companies in each market. We also face competition in some of our markets from our existing and potential

customers who have developed or may develop products that are competitive to ours, or who engage subcontract manufacturers to manufacture subassembly products on their behalf. Some of our existing and potential competitors are more established, enjoy greater name recognition and possess greater financial, technological and marketing resources than we do. Other competitors are small and highly specialized firms that are able to focus on only one aspect of a market. We compete on the basis of product performance, features, quality, reliability, the breadth of our product portfolio and price and on our ability to manufacture and deliver our products on a timely basis. We may not be able to compete successfully in the future against existing or new competitors. In addition, competitive pressures may force us to reduce our prices, which could negatively affect our operating results. If we do not respond adequately to competitive challenges, our business and results of operations would be harmed.

If we fail to protect our intellectual property and proprietary technology, we may lose our competitive advantage.

     Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trademark and trade secret protection and nondisclosure agreements to protect our proprietary rights. The steps we have taken may not be sufficient to prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The patent and trademark law and trade secret protection may not be adequate to deter third party infringement or misappropriation of our patents, trademarks and similar proprietary rights. In addition, patents issued to us may be challenged, invalidated or circumvented. Our rights granted under those patents may not provide competitive advantages to us, and the claims under our patent applications may not be allowed. We have in the past and may in the future be subject to or may initiate interference proceedings in the United States Patent and Trademark Office, which can demand significant financial and management resources. The process of seeking patent protection can be time consuming and expensive and patents may not be issued from currently pending or future applications. Moreover, our existing patents or any new patents that may be issued may not be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us. We have in the past and may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors, which claims could result in costly litigation, the diversion of our technical and management personnel and the assertion of counterclaims by the defendants, including counterclaims asserting invalidity of our patents. We will take such actions where we believe that they are of sufficient strategic or economic importance to us to justify the cost.

We have experienced, and may in the future experience, intellectual property infringement claims, which could be costly and time consuming to defend.

     We have from time to time received communications from third parties alleging that we are infringing certain trademarks, patents or other intellectual property rights held by them. Whenever such claims arise, we evaluate their merits. Any claims of infringement brought by third parties could result in protracted and costly litigation, and we could become subject to damages for infringement, or to an injunction preventing us from selling one or more of our products or using one or more of our trademarks. Such claims could also result in the necessity of obtaining a license relating to one or more of our products or current or future technologies, which may not be available on commercially reasonable terms or at all. Any intellectual property litigation and the failure to obtain necessary licenses or other rights or develop substitute technology may divert management’s attention from other matters and could have a material adverse effect on our business, financial condition and results of operations. In addition, the terms of our customer contracts typically require us to indemnify the customer in the event of any claim of infringement brought by a third party based on our products. Any such claims of this kind may have a material adverse effect on our business, financial condition or results of operations.

     If we are unable to attract new employees and retain and motivate existing employees, our business and results of operations will suffer.

     Our ability to maintain and grow our business is directly related to the service of our employees in each area of our operations. Our future performance will be directly tied to our ability to hire, train, motivate and retain qualified personnel. Competition for personnel in the technology marketplace is intense, and we have experienced attrition in certain management, engineering, manufacturing and product marketing positions. If we are unable to hire sufficient

numbers of employees with the experience and skills we need or to retain our employees, our business and results of operations would be harmed.

Our reliance on sole source and limited source suppliers could result in delays in production and distribution of our products.

     We obtain some of the materials used to build our products, systems and subsystems, such as the sheet steel used in some of our vibration isolation tables, and the laser crystals used in certain of our laser products, from single or limited sources due to unique component designs as well as specialized quality and performance requirements needed to manufacture our products. If our components or raw materials are unavailable in adequate amounts at acceptable quality levels or are unavailable on satisfactory terms, we may be required to purchase them from alternative sources, if available, which could increase our costs and cause delays in the production and distribution of our products. If we do not obtain comparable replacement components from other sources in a timely manner, our business and results of operations will be harmed. Many of our suppliers require long lead times to deliver the quantities of components that we need. If we fail to accurately forecast our needs, or if we fail to obtain sufficient quantities of components that we use to manufacture our products, then delays or reductions in production and shipment could occur, which would harm our business and results of operations.

Our products could contain defects, which would increase our costs and harm our business.

     Certain of our products, especially our laser and automation products, are inherently complex in design and require ongoing regular maintenance. Further, the manufacture of these products often involves a highly complex and precise process. As a result of the technical complexity of these products, design defects, changes in our or our suppliers’ manufacturing processes or the inadvertent use of defective materials by us or our suppliers could adversely affect our manufacturing yields and product reliability. This could in turn harm our business, operating results, financial condition and customer relationships.

     We provide warranties for our products, and we accrue allowances for estimated warranty costs at the time we recognize revenue for the sale of the products. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair or replace the products under warranty. We establish warranty reserves based on historical warranty costs for our products. If actual return rates or repair and replacement costs differ significantly from our estimates, adjustments to recognize additional cost of sales may be required in future periods.

     Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our products are combined with products from other suppliers, which may contain defects. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to identify and fix defects or other problems, we could experience, among other things:

	•		loss of customers;
	•		increased costs of product returns and warranty expenses;
	•		damage to our brand reputation;
	•		failure to attract new customers or achieve market acceptance;
	•		diversion of development and engineering resources; or
	•		legal action by our customers.

     The occurrence of any one or more of the foregoing factors could seriously harm our business, financial condition and results of operations.

Our convertible debt imposes significant financial obligations upon us, and certain provisions of our convertible notes could discourage a change in control.

     In February 2007, we issued $175 million of convertible subordinated notes. The notes are subordinated to all of our existing and future senior indebtedness. The notes mature on February 15, 2012 and bear interest at a rate of 2.5% per year, payable in cash semiannually in arrears on February 15 and August 15 of each year. These notes are included in long-term debt in our consolidated balance sheet. Holders of the notes may convert their notes under certain specified circumstances which may occur prior to maturity, and upon conversion, a holder will receive cash in lieu of shares of our common stock for the value of the notes, as determined in the manner set forth in the indenture governing the notes. We may also be required to deliver additional cash or common stock or a combination of cash and common stock upon conversion.

     Our ability to meet our semiannual interest payment obligations under the notes and our cash payment obligations upon maturity or conversion of the notes will depend upon our future performance and ability to generate substantial cash flow from operations, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to meet our obligations or otherwise are obligated to repay the notes prior to maturity, our available cash would be depleted, perhaps seriously, and our ability to fund operations may be harmed.

     In addition, certain provisions of our convertible notes could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, which include a change in control, holders of the notes will have the right, at their option, to require us to repurchase all of their notes or any portion of the principal amount of such notes. The magnitude of the amount of any repurchase could discourage a third party from acquiring us.

Proposed accounting changes for convertible debt securities, such as our convertible subordinated notes, may adversely affect our financial results.

     The Financial Accounting Standards Board (FASB) has issued a proposed FASB Staff Position (FSP) No. APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). If adopted by the FASB, the FSP would change the required method of accounting for net share settled convertible securities, by requiring that issuers of such securities account for a net share settled convertible security as if it were a separate debt and equity security. The effect of this change would be to require issuers to record additional non-cash interest expense equal to the difference between the interest rate at which the issuer could issue non-convertible subordinated debt and the interest rate applicable to the net share settled convertible security, thereby significantly increasing the total interest expense relating to the net share settled convertible security. As currently proposed, the FSP would require the new accounting method to be applied retrospectively to all periods presented. The FASB is not expected to issue final guidance with respect to the proposed FSP until at least the end of the first quarter of 2008. If the proposed FSP is adopted by the FASB, we would be required to record significant additional before-tax, non-cash interest expense in each period from the issuance of the convertible subordinated notes until the earlier of their conversion or redemption or their maturity in 2012. This would adversely affect our results of operations, and could adversely impact the trading price of our common stock.

Our products are subject to potential product liability claims which, if successful, could adversely affect our results of operations.

     We are exposed to significant risks for product liability claims if personal injury or death results from the use of our products. We may experience material product liability losses in the future. We currently maintain insurance against product liability claims. However, our insurance coverage may not continue to be available on terms that we accept, if at all. This insurance coverage also may not adequately cover liabilities that we incur. Further, if our products are defective, we may be required to recall or redesign these products. A successful claim against us that exceeds our insurance coverage level, or any claim or product recall, could have a material adverse effect on our business, financial condition and results of operations.

While we believe we currently have adequate internal control over financial reporting, we are required to evaluate our internal control over financial reporting each year, and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

     Pursuant to rules and regulations promulgated by the Securities and Exchange Commission under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management each year on our internal control over financial reporting. This report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. This report must also contain a statement that our auditors have issued an attestation report on such internal controls.

     The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework for companies to assess and improve their internal control systems. Auditing Standard No. 5 provides the professional standards and related performance guidance for auditors to attest to and report on the effectiveness of internal control over financial reporting under Section 404. Management’s assessment of internal controls over financial reporting requires management to make subjective judgments, some of which will be in areas that may be open to interpretation. As such, the report may be uniquely difficult to prepare, and our auditors may not agree with our assessments.

     If we are unable to assert each year that our internal control over financial reporting is effective (or if our auditors are unable to attest that our internal control over financial reporting is effective), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price. In addition, if any unidentified material weaknesses were to result in fraudulent activity and/or a material misstatement or omission in our financial statements, we could suffer losses and be subject to civil and criminal penalties, all of which could have a material adverse effect on our business, financial condition and results of operations.

Difficulties in implementing a new global information technology system could harm our business.

     We are in the process of implementing a new global information technology system. Our worldwide operations had been managed and monitored with a number of different and in some cases incompatible legacy software systems, many of which were implemented long before we acquired these operations. We anticipate that our new system will enable the more centralized, streamlined and efficient operation and monitoring of our business. The implementation is proceeding in stages across our various facilities. We commenced the initial phase of the implementation in 2006 and currently expect to complete it in 2008. Following completion of this initial phase, we expect to continue to implement enhancements and improvements to the new system. We have incurred and expect to continue to incur significant financial and resource costs in connection with the implementation of the new system, and our business has been and will continue to be subject to many difficulties as we replace the various legacy software systems that we currently use to manage and monitor our operations. These difficulties include disruption of our operations, loss of data, and the diversion of our management and key employees’ attention away from other business matters. The difficulties associated with the implementation, and our failure to realize the anticipated benefits from the implementation, could harm our business, results of operations and cash flows.

Compliance with environmental regulations and potential environmental liabilities could adversely affect our financial results.

     Our operations are subject to various federal, state and local regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. In the United States, we are subject to the federal regulation and control of the Environmental Protection Agency (EPA). Comparable authorities are involved in other countries. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. Future

developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our business, results of operations or financial condition.

     Although we believe that our safety procedures for using, handling, storing and disposing of such materials comply with the standards required by state and federal laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident involving such materials, we could be liable for damages and such liability could exceed the amount of our liability insurance coverage (if any) and the resources of our business.

     Our Mountain View, California facility is an EPA-designated Superfund site and is subject to a cleanup and abatement order from the California Regional Water Quality Control Board. Spectra-Physics, along with several other entities with facilities located near the Mountain View, California facility, have been identified as Responsible Parties with respect to this Superfund site, due to releases of hazardous substances during the 1960s and 1970s. The site is mature, and investigations and remediation efforts have been ongoing for approximately 25 years. Spectra-Physics and the other Responsible Parties have entered into a cost-sharing agreement covering the costs of remediating the off-site groundwater impact. We have established reserves relating to the estimated cost of these remediation efforts, however our ultimate costs of remediation are difficult to predict. In addition, while we are not aware of any unresolved property damage or personal injury claims relating to this site, such claims could be made against us in the future. While Thermo has agreed in connection with our purchase of Spectra-Physics to indemnify us, subject to certain conditions, for certain environmental liabilities relating to this site, this indemnity may not cover all liabilities relating to this site. In such event, our business, financial condition and results of operations could be adversely affected.

     The environmental regulations to which we are subject, include a variety of federal, state, local and international environmental regulations restricting the use and disposal of materials used in the manufacture of our products, or requiring design changes or recycling of our products. If we fail to comply with any present and future regulations, we could be subject to future liabilities, the suspension of manufacturing or a prohibition on the sale of products we manufacture. In addition, such regulations could restrict our ability to equip our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations, including expenses associated with the recall of any non-compliant product and the management of historical waste.

     From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced. We continue to evaluate the necessary steps for compliance with regulations as they are enacted. For example, the European Union has enacted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE) for implementation in each European Union member country. RoHS regulates the use of certain hazardous substances in certain products, and WEEE requires the collection, reuse and recycling of waste from certain products. The European Union member states continue to define the scope of the implementation of RoHS and WEEE. Based on information we have received to date, certain of our products sold in these countries are or will likely be subject to RoHS and WEEE requirements. We will continue to monitor RoHS and WEEE guidance as it is announced by individual jurisdictions to determine our responsibilities. The guidance available to us to date suggests that in some instances we are not directly responsible for compliance with RoHS and WEEE because some of our products may be outside the scope of the directives. However, because the scope of the directives continues to expand in the course of implementation by the European Union member states, and because such products are sold under our brand name, we will likely be directly or contractually subject to such regulations in the case of many of our products. Also, final legislation from individual jurisdictions that have not yet implemented the directives may impose different or additional responsibilities upon us. We are also aware of similar legislation that is currently in force or being considered in the United States, as well as other countries, such as Japan and China. Our failure to comply with any of such regulatory requirements or contractual obligations could result in our being directly or indirectly liable for costs, fines or penalties and third-party claims, and could jeopardize our ability to conduct business in countries in these regions.

Natural disasters or power outages could disrupt or shut down our operations, which would negatively impact our operations.

     We are headquartered, and have significant operations, in the State of California and other areas where our operations are susceptible to damages from earthquakes, floods, fire, loss of power or water supplies, or other similar contingencies. We currently have comprehensive business continuation plans for our global information technology systems and for most of our operations and facilities, and we are in the process of formulating such plans for our remaining operations and facilities. Despite these contingency plans, if any of our facilities were to experience a catastrophic loss or significant power outages, it could disrupt our operations, delay production, shipments and revenue, and result in large expenses to repair or replace the facility, any of which would harm our business. We are predominantly uninsured for losses and interruptions caused by earthquakes.

Item 1B. Unresolved Staff Comments

     None.

Item 2. Properties

     Our corporate headquarters is located in Irvine, California. We lease this facility under a lease expiring in February 2012. Our primary manufacturing operations for each of our divisions are located in the following facilities:

Division		Primary Facility Locations		Approximate Facility Size
Lasers		Mountain View, California Tucson, Arizona Ottawa, Ontario Stahnsdorf, Germany		159,000 square feet 81,000 square feet 19,000 square feet 12,000 square feet
Photonics and Precision Technologies		Irvine, California Franklin, Massachusetts Rochester, New York North Billerica, Massachusetts Stratford, Connecticut Beaune-la Rolande, France Brigueuil, France Wuxi, China Margate, United Kingdom		273,000 square feet 56,000 square feet 55,000 square feet 38,000 square feet 32,000 square feet 86,000 square feet 44,000 square feet 30,000 square feet 16,500 square feet

     We own portions of our Mountain View, California, Rochester, New York and Beaune-la Rolande, France facilities, and we own our Brigueuil, France and Margate, United Kingdom facilities. We lease all other facilities under leases with expiration dates ranging from 2008 to 2018. In addition to these primary facilities, we lease a number of other facilities worldwide for administration, sales and/or service. We believe that our facilities are adequate for our current needs and that, if required, we will be able to extend or renew our leases, or locate suitable substitute space, on commercially reasonable terms as our leases expire. We also believe that suitable additional space will be available on commercially reasonable terms in the future to accommodate expansion of our operations.

Item 3. Legal Proceedings

     From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows.

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

     No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 29, 2007.

PART II

Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

     Our common stock is traded on the NASDAQ Global Select Market under the symbol NEWP. As of February 29, 2008, we had approximately 930 common stockholders of record based upon the records of our transfer agent which do not include beneficial owners of common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. The following table reflects the high and low sales prices of our common stock for each quarterly period during the last two fiscal years:

Quarter Ended		High				Low
December 29, 2007		$	15.68				12.42
September 29, 2007			16.28				11.85
June 30, 2007			16.84				14.40
March 31, 2007			21.34				15.96
December 30, 2006			22.83				15.84
September 30, 2006			18.59				13.94
July 1, 2006			19.83				15.44
April 1, 2006			20.18				13.50

Dividends

     We declared no dividends on our common stock during 2007 or 2006. We do not intend to pay cash dividends in the foreseeable future, however, we will periodically review this issue in the future based on changes in our financial position and investment opportunities, as well as any changes in the tax treatment of dividends.

Purchases of Equity Securities

     The following table reflects purchases made by us during the quarter ended December 29, 2007, of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:

Maximum

Number (or

Approximate

Total Number of

Dollar Value of

Average

Shares (or Units)

Shares (or Units)

Price Paid

Purchased as Part

that May Yet Be

Total Number of

per Share

of Publicly

Purchased Under

Shares (or Units)

(or

Announced Plans

the Plans or

Period(1)

Purchased

Unit)

or Programs

Programs

September 30, 2007 - October 27, 2007

—

—

—

October 28, 2007 - November 24, 2007

386,092

(2)

$12.93

386,092

1,056,717

November 25, 2007 - December 29, 2007

—

—

—

Totals

386,092

$12.93

386,092

Information Regarding Equity Compensation Plans

     The following table sets forth information with respect to securities authorized for issuance under our equity compensation plans as of December 29, 2007:

Equity Compensation Plan Information

Number of Securities

Number of Securities

Remaining Available

to be Issued upon

Weighted-Average

for Future Issuance

Exercise of

Exercise Price of

under Equity

Outstanding

Outstanding

Compensation Plans

Options, Warrants

Options, Warrants

(excluding securities

and Rights

and Rights

reflected in column (a))

Plan Category

(a)

(b)

(c)

Equity Compensation Plans Approved by Security Holders (1)

4,108,854

$

18.09

4,553,800

Equity Compensation Plans Not Approved by Security Holders (2)

288,340

$

47.70

—

Total

4,397,194

4,553,800

Equity Compensation Plans Not Approved by Security Holders

     In November 1999, our Board adopted our 1999 Stock Incentive Plan (1999 Plan), pursuant to which nonqualified options to purchase shares of our common stock were granted to employees (excluding officers and members of our Board) from November 1999 until May 2001. In May 2001, upon the approval by our stockholders of our 2001 Stock Incentive Plan, the 1999 Plan was terminated for the purposes of future grants. As of December 29, 2007, options to purchase a total of 288,340 shares of our common stock were outstanding under the 1999 Plan. All options granted under the 1999 Plan were granted at an exercise price equal to the fair market value of the common stock on the grant date, and generally vest in 25% increments on each of the first four anniversaries of the grant date. No option is exercisable more than ten years following the grant date. The right to exercise an option will terminate earlier in the event of termination of the continuous service (as defined in the option agreement) of the employee.

Stock Performance Graph

     The following graph compares the cumulative total stockholder return on $100 invested in our common stock for the five years ended December 29, 2007, with the cumulative total return on $100 invested in each of (i) the Nasdaq Market Index and (ii) our peer group. The graph assumes all investments were made at market value on December 31, 2002 and the reinvestment of all dividends.

     The peer group reflected in the graph represents a combination of all companies comprising the Semiconductor Equipment & Materials Industry Group (834) Index and the Scientific & Technical Instruments Industry Group (837) Index, published by Hemscott, Inc., with these indices weighted one-third (1/3) and two-thirds (2/3), respectively. A listing of the companies comprising each index is available from us by written request to our Corporate Secretary.

COMPARES 5-YEAR CUMULATIVE RETURN AMONG
NEWPORT CORPORATION, NASDAQ MARKET INDEX AND PEER GROUP

The material in this performance graph is not “soliciting material” and is not deemed filed with the SEC and is not to be incorporated by reference in any filing of Newport under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

Item 6. Selected Financial Data

     The table below presents selected consolidated financial data of Newport and our subsidiaries as of and for the years ended December 29, 2007, December 30, 2006, December 31, 2005, January 1, 2005 and December 31, 2003. The consolidated balance sheet data as of December 29, 2007 and December 30, 2006, and the consolidated statement of operations data for the years ended December 29, 2007, December 30, 2006 and December 31, 2005 have been derived from our audited consolidated financial statements included in this Annual Report on Form 10-K. The consolidated balance sheet data as of December 31, 2005, January 1, 2005 and December 31, 2003 and the consolidated statement of operations data for the years ended January 1, 2005 and December 31, 2003 have been derived from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K.

     The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

		As of or for the Year Ended(1)(8)
		December 29,				December 30,				December 31,				January 1,				December 31,
(In thousands, except percentages)		2007				2006				2005				2005				2003
														(2)
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net sales		$	445,197			$	454,724			$	403,733			$	267,335			$	118,373
Cost of sales (3)			259,636				256,756				234,480				178,335				78,225
Gross profit			185,561				197,968				169,253				89,000				40,148
Selling, general and administrative expense			116,476				114,533				102,002				71,354				35,328
Research and development expense			42,570				41,981				35,949				22,161				11,793
Restructuring, impairment and other charges (3)			—				—				—				14,877				687
Operating income (loss)			26,515				41,454				31,302				(19,392	)			(7,660	)
Interest and other income (expense), net (4)			137				(759	)			(1,842	)			(2,000	)			7,985
Income (loss) from continuing operations before income taxes			26,652				40,695				29,460				(21,392	)			325
Income tax provision (benefit) (5)			(17,229	)			2,193				3,746				(979	)			(812	)
Income (loss) from continuing operations before extraordinary gain			43,881				38,502				25,714				(20,413	)			1,137
Loss from discontinued operations, net of income tax benefits (3)(6)			—				(1,075	)			(16,973	)			(61,023	)			(14,297	)
Extraordinary gain on settlement of litigation (7)			—				—				2,891				—				—
Net income (loss)		$	43,881			$	37,427			$	11,632			$	(81,436	)		$	(13,160	)
Percentage of net sales:
Gross profit			41.7	%			43.5	%			41.9	%			33.3	%			33.9	%
Selling, general and administrative expense			26.2	%			25.2	%			25.3	%			26.7	%			29.8	%
Research and development expense			9.6	%			9.2	%			8.9	%			8.3	%			10.0	%
Restructuring, impairment and other charges			—				—				—				5.6	%			0.6	%
Operating income (loss)			5.9	%			9.1	%			7.7	%			(7.3	)%			(6.5	)%
Income (loss) from continuing operations before extraordinary gain			9.9	%			8.5	%			6.4	%			(7.6	)%			1.0	%
Net income (loss)			9.9	%			8.2	%			2.9	%			(30.5	)%			(11.1	)%

		As of or for the Year Ended
(In thousands, except per share and worldwide		December 29,				December 30,				December 31,				January 1,				December 31,
employment figures)		2007				2006				2005				2005				2003
PER SHARE INFORMATION:
Basic net income (loss) per share:
Income (loss) from continuing operations before extraordinary gain		$	1.14			$	0.95			$	0.62			$	(0.50	)		$	0.03
Loss from discontinued operations, net of income taxes			—				(0.03	)			(0.41	)			(1.49	)			(0.37	)
Extraordinary gain on settlement of litigation			—				—				0.07				—				—
Net income (loss)		$	1.14			$	0.92			$	0.28			$	(1.99	)		$	(0.34	)
Diluted net income (loss) per share:
Income (loss) from continuing operations before extraordinary gain		$	1.12			$	0.91			$	0.60			$	(0.50	)		$	0.03
Loss from discontinued operations, net of income taxes			—				(0.02	)			(0.40	)			(1.49	)			(0.36	)
Extraordinary gain on settlement of litigation			—				—				0.07				—				—
Net income (loss)		$	1.12			$	0.89			$	0.27			$	(1.99	)		$	(0.33	)
Shares used in computation of income (loss) per share:
Basic			38,479				40,698				41,281				40,838				38,685
Diluted			39,058				42,167				42,716				40,838				39,939
Total stockholders’ equity per diluted share		$	10.35			$	10.32			$	8.82			$	10.17			$	10.98
BALANCE SHEET INFORMATION:
Cash and marketable securities		$	143,864			$	85,413			$	71,022			$	108,182			$	267,302
Working capital		$	275,696			$	200,808			$	150,318			$	181,999			$	374,315
Total assets		$	689,947			$	593,015			$	529,406			$	578,468			$	468,219
Short-term obligations		$	12,402			$	9,481			$	12,559			$	17,186			$	—
Long-term obligations (includes obligations under capital leases)		$	176,487			$	52,125			$	51,372			$	48,453			$	1,884
Stockholders’ equity		$	404,445			$	434,953			$	376,583			$	415,509			$	438,409
MISCELLANEOUS STATISTICS:
Common shares outstanding at year end			36,918				41,458				40,036				43,023				39,033
Average worldwide employment			1,943				1,940				1,978				1,352				834
Sales per employee		$	229			$	234			$	204			$	198			$	142

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. These statements are based on assumptions that we consider reasonable. When used in this report, the words “anticipates,” “believes,” “can,” “continue,” “could,” “would,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will” and similar expressions or the negative of such expressions are intended to identify these forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in Item 1A (Risk Factors) of Part I of this Annual Report on Form 10-K.

Overview

     We are a global supplier of advanced technology lasers, components, instruments, subsystems and systems to markets where high-precision, efficient manufacturing, test, measurement and assembly are critical. Our wide range of products are used worldwide in industries including scientific research, microelectronics, aerospace and defense/security, life and health sciences and industrial manufacturing. We operate within two distinct business segments, our Lasers Division and our PPT Division. Both of our divisions offer a broad array of advanced technology products and services to original equipment manufacturer and end-user customers across a wide range of applications and markets.

     The following is a discussion and analysis of certain factors that have affected our results of operations and financial condition during the periods included in the accompanying consolidated financial statements.

Acquisitions

     In November 2006, we acquired from Picarro, Inc. and Picarro Canada, Inc. (collectively, Picarro) certain assets and liabilities of Picarro’s Laser Products business, which designs and manufactures solid-state lasers primarily for the life and health sciences market. This acquired business has become a part of our Lasers Division. The transaction was accounted for using the purchase method. Our results of operations for 2006 included the results of operations of this acquired business from November 3, 2006, the closing date of the acquisition. See further discussion regarding this transaction in Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Divestitures

     Following our acquisition of Spectra-Physics in July 2004, we conducted a strategic review of all of our businesses and concluded that our robotic systems operations in Richmond, California, which served the front-end semiconductor equipment industry with product lines including wafer-handling robots, load ports and equipment front-end modules, were no longer core to our overall strategy. Consequently, in the first quarter of 2005, our Board of Directors approved a plan to sell these operations, and the sale was completed in the fourth quarter of 2005 for $0.5 million in cash and a note receivable of $6.6 million. These operations have been reflected as discontinued operations for all periods presented. In 2006, we increased the loss on the sale of these operations and recorded an adjustment of $1.1 million, net of income taxes.

     The net sales and loss before income taxes from discontinued operations were as follows:

		Year Ended
		December 30,				December 31,
(In thousands)		2006				2005
Net sales		$	—			$	8,835
Loss before income taxes		$	(1,106	)		$	(17,823	)

     The realized losses recognized on the disposal of these operations were $1.0 million and $8.5 million for 2006 and 2005, respectively.

     Unless otherwise indicated, Management’s Discussion and Analysis of Financial Condition and Results of Operations excludes discontinued operations and relates only to continuing operations.

Extraordinary Gain

     In March 2005, we settled a dispute arising out of our acquisition of MRSI. As a result of this settlement, we recorded an extraordinary gain of $2.9 million in the first quarter of 2005. Pursuant to the terms of the settlement agreement, 114,691 shares of our common stock, which were being held in escrow, were returned to us and cancelled. Such shares had been issued to the former MRSI stockholders at the time of the acquisition of MRSI, or had been issued upon the exercise of options to purchase our common stock which had been granted at the time of the acquisition in connection with the assumption and conversion of options to purchase MRSI common stock. In addition, outstanding options to purchase 21,606 shares of our common stock were cancelled and the exercise prices of all remaining outstanding options which had been granted in connection with the MRSI acquisition were increased to reflect an adjustment to the total consideration paid for the acquisition.

Fiscal Year End

     We use a conventional 52/53-week accounting fiscal year. Our fiscal year ends on the Saturday closest to December 31, and our fiscal quarters end on the Saturday closest to the end of each corresponding calendar quarter. Fiscal year 2007 (referred to herein as 2007) ended on December 29, 2007, fiscal year 2006 (referred to herein as 2006) ended on December 30, 2006 and fiscal year 2005 (referred to herein as 2005) ended on December 31, 2005. Fiscal years 2007, 2006 and 2005 each consisted of 52 weeks and fiscal year 2008 will consist of 53 weeks.

Critical Accounting Policies and Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate these estimates and assumptions, including those related to revenue recognition, allowances for doubtful accounts, inventory reserves, warranty obligations, asset impairment, pension liabilities, income taxes and stock-based compensation expense. We base these estimates on our historical experience and on various other factors which we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of certain expenses that are not readily apparent from other sources. Our significant accounting policies are discussed in Note 1, Organization and Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements, included in Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K. Below is a summary of those accounting policies that involve the most significant judgments, assumptions and estimates used in the preparation of our financial statements. These judgments, assumptions and estimates by their nature involve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or assumptions are inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Revenue Recognition

     We recognize revenue after title to and risk of loss of products have passed to the customer (which typically occurs upon shipment from our facilities), or delivery of the service has been completed, provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable and collectibility is reasonably assured. We recognize revenue and related costs for arrangements with multiple deliverables, such as equipment and installation, as each element is delivered or completed based upon its relative fair value, determined based upon the price that

would be charged on a standalone basis. If a portion of the total contract price is not payable until installation is complete, we do not recognize such portion as revenue until completion of installation; however, we record the full cost of the product at the time of shipment. Revenue for training is deferred until the service is completed. Revenue for extended service contracts is recognized over the related contract periods.

     Our customers generally have 30 days from the original invoice date (generally 60 days for international customers) to return a standard catalog product purchase for exchange or credit. Catalog products must be returned in the original condition and meet certain other criteria. Product returns of catalog items have historically been insignificant and are charged against revenue in the period returned. Custom, option-configured and certain other products as defined in the terms and conditions of sale cannot be returned without our consent. For certain of these products, we establish a sales return reserve based on the historical product returns.

Accounts and Notes Receivable

     We record reserves for specific receivables deemed to be at risk for collection, as well as a reserve based on our historical collections experience. We estimate the collectibility of customer receivables on an ongoing basis by reviewing past due invoices and assessing the current creditworthiness of each customer. A considerable amount of judgment is required in assessing the ultimate realization of these receivables.

     Certain of our Japanese customers provide us with promissory notes on the due date of the receivable. The payment dates of the promissory notes range between 60 and 150 days from the original receivable due date. For balance sheet presentation purposes, amounts due to us under such promissory notes are reclassified from accounts receivable to current notes receivable. At December 29, 2007 and December 30, 2006, notes receivable, net totaled $3.8 million and $4.9 million, respectively. Subsequently, certain of these promissory notes are sold with recourse to banks in Japan with which we regularly do business. The sales of these receivables have been accounted for as secured borrowings, as we have not met the criteria for sale treatment in accordance with Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (a replacement of FASB Statement No. 125). The principal amount of the promissory notes sold with recourse is included in both notes receivable, net and short-term obligations until the underlying note obligations are ultimately satisfied through payment by the customers to the banks. At December 29, 2007 and December 30, 2006, the principal amount of such promissory notes included in notes receivable, net and short-term obligations in the accompanying consolidated balance sheets totaled $1.9 million and $2.4 million, respectively.

Pension Plans

     Several of our non-U.S. subsidiaries have defined benefit pension plans covering substantially all full-time employees at those subsidiaries. Some of the plans are unfunded, as permitted under the plans and applicable laws. For financial reporting purposes, the calculation of net periodic pension costs is based upon a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions are based upon our judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and the cash funding requirements of our pension plans.

Inventories

     We state our inventories at the lower of cost (determined on either a first-in, first-out (FIFO) or average cost basis) or fair market value and include materials, labor and manufacturing overhead. We write down excess and obsolete inventory to net realizable value. Once we write down the carrying value of inventory, a new cost basis is established, and we do not increase the newly established cost basis based on subsequent changes in facts and circumstances. In assessing the ultimate realization of inventories, we make judgments as to future demand requirements and compare those requirements with the current and committed inventory levels. We record any amounts required to reduce the carrying value of inventory to net realizable value as a charge to cost of sales. Should actual demand requirements differ from our estimates, we may be required to reduce the carrying value of

inventory to net realizable value, resulting in a charge to cost of sales which could adversely affect our operating results.

Warranty

     Unless otherwise stated in our product literature or in our agreements with our customers, products sold by our PPT Division generally carry a one-year warranty from the original invoice date on all product materials and workmanship. Products of this division sold to original equipment manufacturer (OEM) customers generally carry longer warranties, typically 15 to 24 months. Products sold by our Lasers Division typically carry warranties that vary by product and product component, but that generally range from 90 days to two years. In certain cases, such warranties for Lasers Division products are limited by either a set calendar period or a maximum amount of usage of the product, whichever occurs first. Defective products will either be repaired or replaced, generally at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for warranties relating to a product (based on historical experience) as a component of cost of sales at the time revenue for that product is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage and/or service delivery costs negatively differ from our estimates, revisions to the estimated warranty obligation would be required which could adversely affect our operating results.

Impairment of Assets

     We assess the impairment of long-lived assets at least annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. Changes in our strategic plan and/or market conditions could significantly impact these judgments and could require adjustments to recorded asset balances. We hold minority interests in companies having operations or technologies in areas which are within or adjacent to our strategic focus when acquired, all of which are privately held and whose values are difficult to determine. We record an investment impairment charge if we believe an investment has experienced a decline in value that is other than temporary. Future changes in our strategic direction, adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

     We perform annual impairment tests of our goodwill and other intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill is not amortized but is subject to impairment tests based upon a comparison of the fair value of each of our reporting units, as defined, and the carrying value of the reporting units’ net assets, including goodwill. SFAS No. 142 requires a review of goodwill and other intangible assets for impairment at least annually or when circumstances exist that would indicate an impairment of such goodwill or other intangible assets. We perform the annual impairment review as of the beginning of the fourth quarter of each year. We determine our reporting units by identifying those operating segments or components for which discrete financial information is available which is regularly reviewed by the management of that unit. However, we aggregate components if they have similar economic characteristics. For any acquisition, we allocate goodwill to the applicable reporting unit at the completion of the purchase price allocation through specific identification, and reallocate goodwill if the reporting units change. We test each of our reporting units to determine whether the goodwill and other intangible assets are impaired by comparing the respective fair values of goodwill and/or other intangible assets to their respective carrying values. Fair value is determined using a combination of a comparative company analysis, a comparative transaction analysis and a discounted cash flow analysis. We have not made any material changes in our impairment loss assessment methodology and the estimates and assumptions used represent management’s best estimate. However, if actual results are less than the projected income or other estimates and assumptions, particularly in our Lasers Division, we may be required to record impairment charges in the future.

Income Taxes

     We utilize the asset and liability method of accounting for income taxes as set forth in SFAS No. 109, Accounting for Income Taxes. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional liabilities or to reverse previously recorded tax liabilities. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known.

     Deferred income taxes are recognized for the future tax consequences of temporary differences using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Temporary differences include the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In accordance with the provisions of SFAS No. 109, a valuation allowance for deferred tax assets is recorded to the extent we cannot determine that the ultimate realization of the net deferred tax assets is more likely than not. Realization of deferred tax assets is principally dependent upon the achievement of future taxable income, the estimation of which requires significant management judgment. We achieved cumulative profitability for the three years ended December 29, 2007. Moreover, our management has forecasted that we will recognize income from continuing operations in the United States and permanent differences between such income from continuing operations and our taxable income for U.S. federal income tax purposes for at least the next two successive fiscal years. Accordingly, we released $19.8 million of our valuation allowance against our U.S. deferred tax assets. Our judgments regarding future profitability may change due to many factors, including future market conditions and our ability to successfully execute our business plans and/or tax planning strategies. These changes, if any, may require material adjustments to these deferred tax asset balances. Due to uncertainties surrounding the realization of our cumulative federal and state net operating losses, we have retained a valuation allowance against a portion of our gross deferred tax assets.

     Acquired tax liabilities related to prior tax returns of acquired entities at the date of purchase are recognized based on our estimate of the ultimate settlement that may be accepted by the tax authorities. We continually evaluate these tax-related matters. At the date of any material change in our estimate of items relating to an acquired entity’s prior tax returns, and at the date that the items are settled with the tax authorities, any liabilities previously recognized are adjusted to increase or decrease the remaining balance of goodwill attributable to that acquisition.

     In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under FIN 48, tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. As a result of these adjustments, our effective tax rate in a given financial statement period could be materially affected.

Stock-Based Compensation

     We account for stock-based compensation in accordance with SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R). Under the fair value recognition provision of SFAS No. 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the award. We estimate the fair value of stock options granted using the Black-Scholes-Merton option pricing model and a single option award approach. The fair value of restricted stock and restricted stock unit awards is based on the closing market price of our common stock on the date of grant. A substantial portion of our awards vest based upon the achievement of certain annual financial performance goals established by the Compensation Committee of our Board of Directors. We record an expense relating to such awards over the vesting period based on the likelihood of achieving the performance goals. We estimate the achievement of such goals in each reporting period to determine the amount of such compensation expense. Estimating the likelihood of achievement of performance goals requires significant judgment. As such performance goals are primarily based on annual operating results, we must estimate the likelihood of achievement of such goals based on forecasted results of operations. If our actual results of operations differ from our estimates, we may need to increase or decrease stock-based compensation related to performance-based awards.

     The fair value of time-based awards, adjusted for estimated forfeitures, is amortized on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The fair value of performance-based awards, adjusted for estimated forfeitures and estimated achievement of performance goals, is amortized using the graded vesting method over the requisite service period of the award, which is generally the vesting period.

Stock-Based Compensation Costs

     Prior to January 1, 2006, we applied the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations in accounting for our stock-based compensation and complied with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended. Accordingly, no compensation expense was recognized for employee stock options with exercise prices greater than or equal to our stock price at the date of grant, and no compensation expense was recognized for purchases under our Employee Stock Purchase Plan (Purchase Plan). Costs related to restricted stock awards, determined based on the fair market value of the shares at the date of grant, net of estimated forfeitures, were recognized as compensation expense ratably over the vesting period.

     Effective January 1, 2006, we adopted SFAS No. 123R, which requires that we recognize compensation expense related to the fair value of our stock-based compensation awards. We recognize compensation expense for stock-based awards, net of estimated forfeitures, using the straight-line method for time-based awards and the graded vesting method for performance-based awards, over the requisite service period of the awards. Under SFAS No. 123R, the Purchase Plan, as amended effective January 1, 2006, is considered a non-compensatory plan, and we are not required to recognize compensation expense for the purchases made under the Purchase Plan.

     The total stock-based compensation expense included in our consolidated statements of operations was as follows:

		Year Ended
		December 29,				December 30,				December 31,
(In thousands)		2007				2006				2005
Cost of sales		$	425			$	516			$	—
Selling, general and administrative expense			3,005				5,935				463
Research and development expense			238				464				—
		$	3,668			$	6,915			$	463

     Stock-based compensation expense for the year ended December 31, 2005 included amortization of restricted stock awards which were granted prior to the adoption of SFAS No. 123R and accounted for under APB Opinion No. 25.

     In March 2006, our Board of Directors adopted our 2006 Performance-Based Stock Incentive Plan (2006 Plan), which was approved by our stockholders in May 2006. The 2006 Plan authorizes us to grant up to 6,000,000 shares of our common stock, which includes the number of shares that had been available for future grant under our 2001 Stock Incentive Plan (2001 Plan) at the time the 2006 Plan was approved. This number of shares is subject to adjustments as to the number and kind of shares in the event of stock splits, stock dividends or certain other similar changes in our capital structure. Upon the approval of the 2006 Plan by our stockholders, the 2001 Plan was terminated for purposes of future grants. The 2006 Plan permits the grant of stock appreciation rights, restricted stock, restricted stock units, incentive stock options and non-qualified stock options. We expect to utilize restricted stock and restricted stock units to a greater extent than stock options and stock appreciation rights in granting stock-based awards in the future. Any stock options or stock appreciation rights granted under the 2006 Plan will have exercise prices or base values not less than the fair market value of the Company’s common stock on the date of grant and terms of not more than seven years.

     The vesting of substantially all awards granted to directors under the 2006 Plan occurs over a period of one year. The vesting of substantially all awards granted to officers and employees under the 2006 Plan occurs over a period of three years, conditioned on the achievement of annual performance goals established by the Compensation Committee of our Board of Directors at the time of grant. Generally, our performance-based awards provide that if the performance goals are not achieved in full for the initial applicable annual performance period, then fifty percent of the awards tied to such performance goals that do not vest will carry over and be eligible for vesting, subject to the achievement of certain performance goals for the next annual performance period. All awards are subject to forfeiture if employment or other service terminates prior to the vesting of the awards.

     At December 29, 2007, the total compensation cost related to unvested stock-based awards granted to employees, officers and directors under our stock-based benefit plans that had not yet been recognized was $1.5 million (net of estimated forfeitures of $0.1 million). Such amount excludes compensation expense associated with awards that are subject to performance conditions, which we do not expect will vest. This future compensation expense will be amortized, using the straight-line method for time-based awards and the graded vesting method for performance-based awards, over a weighted-average period of 1.1 years. The actual compensation expense that we will recognize in the future related to stock-based awards will be adjusted for subsequent forfeitures and will be adjusted based on our determination as to the extent to which performance conditions applicable to any stock-based awards will be achieved. At December 29, 2007, there were 1.0 million performance-based restricted stock units outstanding with a weighted average grant date fair value of $15.44 per share, which were not expected to vest. If our estimates regarding the achievement of performance conditions applicable to such performance-based awards are inaccurate, the amount of our stock-based compensation expense could increase significantly in future periods, which could materially affect our results of operations.

Results of Operations for the Years Ended December 29, 2007, December 30, 2006 and December 31, 2005

     The following table represents our results of operations for the periods indicated as a percentage of net sales:

		Percentage of Net Sales
		For the Year Ended
		December 29,				December 30,				December 31,
		2007				2006				2005
Net sales			100.0	%			100.0	%			100.0	%
Cost of sales			58.3				56.5				58.1
Gross profit			41.7				43.5				41.9
Selling, general and administrative expense			26.2				25.2				25.3
Research and development expense			9.6				9.2				8.9
Operating income			5.9				9.1				7.7
Interest and other income (expense), net			0.1				(0.2	)			(0.4	)
Income from continuing operations before income taxes			6.0				8.9				7.3
Income tax provision (benefit)			(3.9	)			0.4				0.9
Income from continuing operations before extraordinary gain			9.9				8.5				6.4
Loss from discontinued operations, net of income tax benefits			—				(0.3	)			(4.2	)
Extraordinary gain on settlement of litigation			—				—				0.7
Net income			9.9	%			8.2	%			2.9	%

     In the following discussion regarding our results of operations, due to changes in our market classifications for certain of our customers and product applications, certain prior period amounts have been reclassified among our end markets to conform to the current period presentation.

Net Sales

     For 2007, 2006 and 2005, our net sales totaled $445.2 million, $454.7 million and $403.7 million, respectively. Net sales decreased $9.5 million, or 2.1%, in 2007 compared with 2006. Net sales by our PPT Division decreased $2.1 million, or 0.8%, and net sales by our Lasers Division decreased $5.6 million, or 3.0%, during this period. The remainder of the decrease was due to $1.8 million of revenue which we received in 2006 in connection with the licensing of certain intellectual property, which did not recur during 2007. The decrease in net sales in 2007 compared with 2006 was due primarily to a decrease in sales to the microelectronics market, offset in part by increases in sales to all of our other end markets, particularly the life and health sciences market. Net sales increased $51.0 million, or 12.6%, in 2006 compared with 2005. Net sales by our PPT Division increased $34.2 million, or 15.0%, and net sales by our Lasers Division increased $15.0 million, or 8.5%, during this period. The remainder of the increase in net sales in 2006 was due to the $1.8 million of licensing revenue discussed above. The increase in sales in 2006 compared with 2005 resulted from stronger sales to customers in all of our end markets, particularly in the microelectronics and life and health sciences markets.

     Net sales to the scientific research, aerospace and defense/security markets were $160.0 million, $155.6 million and $152.0 million for 2007, 2006 and 2005, respectively. The increase of $4.4 million, or 2.8%, in 2007 compared with 2006 was due primarily to increased sales by our PPT Division of standard products and to a higher level of sales for major research programs, offset in part by lower sales by our Lasers Division. The increase of $3.6 million, or 2.4%, in 2006 compared with 2005 was due primarily to increased sales by our PPT Division, offset significantly by lower sales of certain of our laser products in the first half of 2006. Generally, our net sales to these markets by each of our divisions may fluctuate from period to period due to the timing of large sales relating to major research programs and, in some cases, these fluctuations may be offsetting between our divisions or between such periods.

     Net sales to the microelectronics market were $123.8 million, $147.3 million and $116.2 million for 2007, 2006 and 2005, respectively. The decrease of $23.5 million, or 15.9%, in 2007 compared with 2006 was due primarily to

sales of laser-based disk texturing systems in 2006 that did not recur in 2007, and to the cyclical downturn in the semiconductor equipment industry, which accounts for the majority of our sales in this market, which resulted in lower sales to customers in this market by both our PPT and Lasers Divisions. The increase of $31.1 million, or 26.7%, in 2006 compared with 2005 was due primarily to strong overall market conditions in 2006, particularly in the front-end semiconductor equipment market, which led to higher demand for the products sold by both our Lasers and PPT Divisions to this market. This increase was also attributable to $1.8 million in revenue that we received in 2006 in connection with the licensing of certain intellectual property relating to products for this market.

     Net sales to the life and health sciences market were $81.8 million, $75.2 million and $64.6 million for 2007, 2006 and 2005, respectively, representing an increase of $6.6 million, or 8.8%, in 2007 compared with 2006 and an increase of $10.6 million, or 16.4%, in 2006 compared with 2005. The increases in sales in both periods were due primarily to increased demand for products sold by both our Lasers and PPT Divisions to customers in this market due to the growing adoption by this market of photonics technology, as well as increased adoption by customers of our laser and optical component and subassembly products for analytic, imaging, therapeutic and cosmetic applications.

     Net sales to our industrial and other end markets were $79.6 million, $76.6 million and $70.9 million for 2007, 2006 and 2005, respectively. The increase of $3.0 million, or 3.8%, in 2007 compared with 2006 was due primarily to increased sales by our Lasers Division of products for materials processing applications and increased sales by our PPT Division of products for telecommunications applications. The increase of $5.7 million, or 8.1%, in 2006 compared with 2005 was due primarily to increased sales in our PPT Division to customers in these markets.

     Geographically, net sales were as follows:

		Year Ended												Percentage
		December 29,				December 30,				Increase /				Increase /
(In thousands, except percentages)		2007				2006				(Decrease)				(Decrease)
United States		$	223,891			$	238,433			$	(14,542	)			(6.1	)%
Europe			112,695				99,968				12,727				12.7
Pacific Rim			80,946				91,277				(10,331	)			(11.3	)
Other			27,665				25,046				2,619				10.5
Total sales		$	445,197			$	454,724			$	(9,527	)			(2.1	)%

		Year Ended
		December 30,				December 31,								Percentage
(In thousands, except percentages)		2006				2005				Increase				Increase
United States		$	238,433			$	215,600			$	22,833				10.6	%
Europe			99,968				86,054				13,914				16.2
Pacific Rim			91,277				81,635				9,642				11.8
Other			25,046				20,444				4,602				22.5
Total sales		$	454,724			$	403,733			$	50,991				12.6	%

     Overall, sales in 2007 to international customers, primarily in Europe, benefited from the weaker U.S. Dollar. Our sales to customers in the Pacific Rim decreased in 2007 compared with 2006, due primarily to lower sales to customers in the microelectronics market resulting from sales of laser-based disk texturing systems to a customer in this region in 2006 that did not recur in 2007, as well as from the cyclical downturn in the semiconductor equipment industry. The increase in international sales in 2006 compared with 2005 resulted from stronger sales to customers in all of our end markets, particularly in the microelectronics and life and health sciences markets.

     The results of our international operations are subject to currency fluctuations. As the value of the U.S. dollar weakens relative to other currencies, sales in those currencies convert to more U.S. dollars; conversely, when the value of the U.S. dollar strengthens relative to other currencies, sales in those countries convert to fewer U.S. dollars. As noted above, our net sales to international customers in 2007 were positively impacted by the weaker U.S. Dollar.

     We expect net sales to be lower in the first quarter of 2008 compared with the fourth quarter of 2007 due to the historical seasonality in the scientific research market and the continued weakness in the semiconductor equipment industry. Our business is subject to risks arising from market conditions in our primary end markets, as well as from general economic conditions.

     We expect that our sales to the scientific research, aerospace and defense/security markets will be down in the first quarter of 2008 compared with the fourth quarter of 2007 due to the traditional seasonal pattern in the scientific research market. Overall, we expect that our sales to these markets will fluctuate from period to period in line with changes in overall research and defense spending levels and the timing of sales of our products for major research programs, but will increase over time as we increase our penetration of these markets.

     We expect our sales to the microelectronics market in the first quarter of 2008 to be similar to the fourth quarter of 2007 due to the continued weakness in the semiconductor equipment industry, offset in part by stronger demand for our products by customers in other parts of this market, including solar cell manufacturing. We experienced the slowdown in the semiconductor equipment market during 2007 and anticipate that this will continue for the near term based on forecasts from our customers and the general U.S. economy; however, the duration and extent of this market downturn is difficult to predict and represents an uncertainty with respect to our future operating results.

     We expect our sales to the life and health sciences market in the first quarter of 2008 to be similar to or slightly higher than the fourth quarter of 2007. In general, we expect our sales to this market to fluctuate on a quarter to quarter basis in the near term due to our concentration of significant OEM customers in this market and the timing of their orders, but to increase over time as we increase our penetration of this market and as consumers drive higher demand for our customers’ products.

Gross Margin

     Gross margin was 41.7%, 43.5% and 41.9% for 2007, 2006 and 2005, respectively. The decrease in gross margin in 2007 compared with 2006 was due primarily to operating inefficiencies in our Lasers Division and to our lower total sales volume. In addition, we received $1.8 million of revenue and gross profit from licensing of certain intellectual property in 2006, which did not recur in 2007.

     Gross margin for 2006 was positively impacted compared with 2005 by the operating leverage provided by the higher sales volume, due primarily to higher absorption of fixed overhead, by the addition of the $1.8 million of revenue and gross profit received in 2006 from the licensing of certain intellectual property, and by cost savings resulting from our global sourcing activities.

     In the first quarter of 2008, we expect gross margin to improve slightly compared with the fourth quarter of 2007, due primarily to improved operating efficiencies.

Selling, General and Administrative (SG&A) Expense

     SG&A expense totaled $116.5 million, or 26.2% of net sales, $114.5 million, or 25.2% of net sales, and $102.0 million, or 25.3% of net sales, during 2007, 2006 and 2005, respectively. The increase in SG&A expense in 2007 compared with 2006 was due primarily to an increase in salary costs of $4.5 million resulting from annual merit increases and payments of severance, an increase in benefit expenses of $2.6 million and $2.4 million of incremental consulting and depreciation expenses related to our SAP implementation. Such increases were offset in part by a decrease of $7.3 million in expenses relating to our performance-based incentive and equity compensation programs due to certain performance criteria not being met.

     The increase in absolute dollars in 2006 compared with 2005 was due in part to the impact in 2006 of $5.9 million of incremental non-cash expense related to our equity incentive programs, which we began expensing in 2006 in accordance with SFAS No. 123R. The increase was also attributable to higher salary costs due to annual merit salary increases and the addition of new employees, higher variable selling expenses and incentive compensation due to higher sales and profitability levels, and payments of severance. These increases were offset in

part by the realization of a gain of $1.4 million resulting from the sale of certain non-core patents, which reduced SG&A expense in 2006.

     We expect that SG&A expense will be similar to or slightly higher in the first quarter of 2008 compared with the fourth quarter of 2007. We expect that our SG&A expense will be higher during the remainder of the year as a result of stock compensation expense relating to new equity awards that we expect to grant late in the first quarter of 2008. In general, we expect that SG&A expense will vary as a percentage of sales in the future based on our sales level in any given period. Because the majority of our SG&A expense is fixed in the short term, these changes in SG&A expense will likely not be in proportion to the changes in net sales.

Research and Development (R&D) Expense

     R&D expense totaled $42.6 million, or 9.6% of net sales, $42.0 million, or 9.2% of net sales, and $35.9 million, or 8.9% of net sales during 2007, 2006 and 2005, respectively. The R&D expense increases in both 2007 compared with 2006 and in 2006 compared with 2005 were due to increased investment in new product development programs, particularly in advanced laser development.

     We expect that R&D expense in the first quarter of 2008 will be similar to the fourth quarter of 2007. We believe that the continued development and advancement of our key products and technologies is critical to our future success, and we intend to continue to invest in key R&D initiatives, while working to ensure that the efforts are focused and the funds are deployed efficiently. In general, we expect that R&D expense as a percentage of net sales will vary in the future based on our sales level in any given period. Because of our commitment to continued product development, and because the majority of our R&D expense is fixed in the short term, changes in R&D expense will likely not be in proportion to the changes in net sales.

Interest and Other Income (Expense), Net

     Interest and other income, net, was $0.1 million in 2007, and interest and other expense, net was $0.8 million and $1.8 million in 2006 and 2005, respectively. The improvement in 2007 compared with 2006 was due primarily to our sale of $175 million of convertible subordinated notes in February 2007. This financing increased our cash balances significantly, which together with higher average interest income rates earned on these balances, resulted in an increase in interest income of $3.5 million in 2007. This increase in interest income was offset in part by an increase in interest expense of $1.7 million related to the convertible notes. In addition, in the second quarter of 2006, in connection with the closure of our sales office in Canada and the resulting liquidation of our investment in the associated entity, we recognized a gain of $0.9 million related to previously accumulated translation adjustments, which did not recur in 2007.

     The reduction in interest and other expense, net in 2006 compared with 2005 was due primarily to higher interest income, a loss due to the write-down of an investment in 2005 of $0.5 million, which did not recur in 2006, and the gain of $0.9 million recognized in 2006 related to the closure of our Canadian office as discussed above, offset in part by other net foreign exchange losses which we incurred in 2006.

Income Taxes

     Our effective tax rates from continuing operations were a tax benefit of 64.6% for 2007 and tax expense of 5.4% and 12.7% for 2006 and 2005, respectively. The tax benefit for 2007 was due primarily to the release of $19.8 million of the valuation allowance recorded against our deferred tax assets. In addition, in 2007, our subsidiary in France concluded an income tax audit for the years 2003 to 2005 and, based on the favorable conclusion of this audit, we recognized an income tax benefit of $0.7 million. Such benefits were offset in part by certain required state income taxes and taxes in certain foreign jurisdictions. Until such time that the valuation allowance recorded against our deferred tax assets is fully released, the Federal tax provision related to future earnings, should they occur, will be offset substantially by a reduction in the valuation allowance related to our net operating loss carryforwards.

     During 2006, we reduced our tax contingency reserve by $2.2 million due to the expiration of the statutory audit period related to certain income tax contingencies, as well as a determination that certain income tax contingency reserves were no longer necessary.

     In June 2006, the FASB issued FIN 48, which provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. We adopted the provisions of FIN 48 effective as of December 31, 2006, the first day of the first quarter of 2007. As a result of applying the provisions of FIN 48, our reserve for uncertain tax positions increased by $2.9 million, deferred income tax assets increased by $1.1 million, and shareholders’ equity decreased by $1.8 million as of December 31, 2006. As of December 29, 2007, we had $6.9 million of gross unrecognized tax benefits and the total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $4.8 million. We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. Such amounts were not significant as of December 29, 2007.

Liquidity and Capital Resources

     Our cash and cash equivalents and marketable securities balances increased to $143.8 million as of December 29, 2007 from $85.4 million as of December 30, 2006. The increase was primarily attributable to the proceeds raised through our convertible debt offering and cash generated from operations, offset in part by repayment of long-term debt and repurchases of our common stock.

     Net cash provided by our operating activities of $35.4 million for 2007 consisted of our income of $43.9 million and net non-cash charges of $10.1 million, offset in part by a decrease in working capital of $18.6 million. Such non-cash charges consisted of $21.3 million for depreciation and amortization, $4.5 million for the provision for losses on inventories and $3.7 million for stock-based compensation, offset in part by $19.7 million for deferred income taxes attributable primarily to the partial release of our valuation allowance. The decrease in working capital consisted of an increase of $22.7 million in inventory, a decrease of $5.0 million in payroll and related expenses due primarily to a reduction in annual performance bonus payments and an increase of $2.2 million in prepaid expenses and other assets, offset in part by a decrease of $9.9 million in accounts receivable due to improved collection efforts, an increase of $1.1 million in accounts payable due primarily to timing of payments and an increase of $1.0 million in accrued expenses and other liabilities.

     Net cash used in investing activities in 2007 of $22.8 million consisted of purchases of property and equipment of $18.7 million and net purchases of marketable securities of $4.1 million.

     Net cash provided by financing activities in 2007 of $39.1 million consisted primarily of proceeds from the issuance of $175.0 million of convertible subordinated notes, and $5.1 million received as consideration for the issuance of common stock in connection with the exercise of stock options and participation in our employee stock purchase plan. Cash received was offset in part by cash used for payment of expenses associated with our convertible notes offering totaling $5.6 million, for repayment of $48.4 million in long-term debt, and for the repurchase of 5.4 million shares of our common stock for approximately $87.0 million, including the cancellation of 0.1 million shares of our common stock in connection with the payment of $1.9 million for taxes owed by employees upon the exercise of stock options and the vesting of restricted stock units issued to such employees under our stock incentive plans.

     At December 29, 2007, we had cash and cash equivalents of $88.7 million and marketable securities of $55.1 million. The majority of the marketable securities are invested in one portfolio managed by a professional investment management firm, under the oversight of our senior financial management team. This portfolio manager invests the funds allocated in accordance with our Investment Policy, which is reviewed regularly by our senior financial management and the Audit Committee of our Board of Directors. We expect that our cash balances will fluctuate in the future based on factors such as cash used in or provided by ongoing operations, acquisitions or divestitures, investments in other companies, share repurchases, capital expenditures and contractual obligations, and changes in interest rates.

     At December 29, 2007, we had a total of three lines of credit, including one domestic revolving line of credit and two revolving lines of credit with Japanese banks. In addition, we had two other agreements with Japanese banks under which we sell trade notes receivable with recourse.

     Our domestic revolving line of credit has a total credit limit of $5.0 million and expires on December 1, 2008. Certain cash equivalents held at this lending institution collateralize this line of credit, which bears interest at either the prevailing prime rate (7.25% at December 29, 2007), or the prevailing London Interbank Offered Rate (4.65% at December 29, 2007) plus 1.25%, at our option, and carries an unused line fee of 0.25% per year. At December 29, 2007, there were no balances outstanding under this line of credit, with $4.0 million available, after considering outstanding letters of credit totaling $1.0 million.

     Our two revolving lines of credit with Japanese banks totaled 1.7 billion yen ($14.9 million at December 29, 2007) and expire as follows: $5.3 million on March 31, 2008, $7.0 million on May 3, 2008 and $2.6 million on June 30, 2008. These lines are not secured and bear interest at the prevailing bank rate. At December 29, 2007, we had $10.5 million outstanding and $4.4 million available for borrowing under these lines of credit. Amounts outstanding under these revolving lines of credit are included in short-term obligations in the accompanying consolidated balance sheets. Our two other agreements with Japanese banks, under which we sell trade notes receivable with recourse, totaled 550 million yen ($4.8 million at December 29, 2007), have no expiration dates and bear interest at the bank’s prevailing rate. At December 29, 2007, we had $1.9 million outstanding and $2.9 million available for the sale of notes receivable under these agreements. Amounts outstanding under these agreements are included in short-term obligations in the accompanying consolidated balance sheets. The weighted average interest rate on all of our Japanese borrowings as of December 29, 2007 was 1.8%.

     In 2006, our Board of Directors approved a share repurchase program, authorizing the purchase of up to 4.2 million shares of our common stock. During 2007, we purchased an aggregate of 3.1 million shares of our common stock under this program in the open market at an average price of $14.35 per share for a total of $45.1 million. During the first quarter of 2008, we repurchased an additional 1.1 million shares of common stock under this program in the open market at an average price of $10.78 per share for a total of $11.4 million, which completed our purchases under this program.

     In February 2007, we issued $175 million of convertible subordinated notes due 2012, which notes bear interest at a rate of 2.5% per year, payable in cash semiannually in arrears on February 15 and August 15 of each year. The notes were offered to qualified institutional buyers, as defined in, and in reliance on, Rule 144A of the Securities Act of 1933, as amended. The sale of the notes generated net proceeds of $169.4 million after deducting offering fees and expenses. We used $40.0 million of the net proceeds from the offering to repurchase 2.1 million shares of our common stock at a purchase price of $18.86 per share. Such repurchase was not made under our existing share repurchase program. We used $48.2 million of the net proceeds from the offering to prepay all of our long-term debt owed to Thermo pursuant to the note originally issued as part of the purchase price for Spectra-Physics in 2004. We intend to use the remaining proceeds from the offering for working capital and other general corporate purposes, which may include potential acquisitions or additional share repurchases.

     During 2008, we expect to use $15 million to $18 million of cash for capital expenditures.

     We believe our current working capital position, together with our expected future cash flows from operations will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for the foreseeable future. However, this belief is based upon many assumptions and is subject to numerous risks (see “Risk Factors” on pages 17-27), and there can be no assurance that we will not require additional funding in the future.

     Except for the aforementioned capital expenditures, we have no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, there can be no assurance that we will not need to obtain

additional sources of capital in the future to finance any such acquisitions and/or investments. There can be no assurance that any such financing would be available, or that, if available, such financing would be obtainable on terms favorable to us and would not be dilutive.

Contractual Obligations

     We lease certain of our manufacturing and office facilities and equipment under non-cancelable leases, certain of which contain renewal options. In addition to the base rent, we are generally required to pay insurance, real estate taxes and other operating expenses relating to such facilities.

     As of December 29, 2007, we had no material purchase obligations. Our long-term debt, and capital and operating lease obligations at December 29, 2007 were as follows:

		Capital				Long-Term				Operating				Total
(In thousands)		Leases				Debt				Leases				Obligations
Payments Due By Period:
2008		$	199			$	4,375			$	9,158			$	13,732
2009			198				4,375				6,638				11,211
2010			197				4,375				4,961				9,533
2011			196				4,375				4,211				8,782
2012			195				177,188				1,869				179,252
Thereafter			1,039				—				3,276				4,315
Total minimum payments			2,024				194,688			$	30,113			$	226,825
Less amount representing interest			(537	)			(19,688	)
Present value of obligation		$	1,487			$	175,000

     We have subleased certain of our facilities. Future minimum rentals to be received by us under non-cancelable subleases at December 29, 2007 were as follows:

		Operating
(In thousands)		Leases
Payments Due By Period:
2008		$	1,157
2009			202
2010			194
2011			138
2012			12
Total minimum sublease payments		$	1,703