Stock-Based Compensation
During the three and nine months ended September 27, 2008, we granted 14,410 and
1.4 million restricted stock units with a weighted average grant date fair value
of $11.04 and $9.88, respectively.
The total stock-based compensation expense included in our consolidated
statements of operations was as follows:

                                                            Three Months Ended                             Nine Months Ended
                                                   September 27,           September 29,          September 27,          September 29,
(In thousands)                                         2008                    2007                   2008                   2007
Cost of sales                                     $            36         $           152        $           198        $           396
Selling, general and administrative expenses                 (195 )                  (322 )                1,044                  2,603
Research and development expense                               61                    (100 )                  264                    223

                                                  $           (98 )       $          (270 )      $         1,506        $         3,222

Certain of our stock-based awards vest conditioned upon our achievement of annual financial performance goals. In the three months ended September 27, 2008 and September 29, 2007, we determined that the performance goals applicable to certain of our outstanding stock-based awards would not be achieved. Accordingly, in the three months ended September 27, 2008 and September 29, 2007, we cumulatively adjusted the stock-based compensation expense previously recognized for such awards based on the expectation that such awards would not vest.
Stock-based compensation expense associated with personnel engaged in manufacturing is capitalized and reflected in inventories, when applicable. At September 27, 2008 and December 29, 2007, such amounts were not material. Results of Operations for the Three and Nine Months Ended September 27, 2008 and September 29, 2007
The following table presents our results of operations for the periods indicated as a percentage of net sales:

                                                                           Percentage of Net Sales
                                                        Three Months Ended                          Nine Months Ended
                                                September 27,        September 29,         September 27,        September 29,
                                                    2008                  2007                 2008                  2007
Net sales                                             100.0 %               100.0 %              100.0 %               100.0 %
Cost of sales                                          62.3                  60.0                 60.6                  57.4

Gross profit                                           37.7                  40.0                 39.4                  42.6

Selling, general and administrative
expenses                                               26.9                  26.4                 26.1                  26.8
Research and development expense                       10.8                   8.9                 10.4                   9.5

Operating income                                        0.0                   4.7                  2.9                   6.3

Recovery (write-down) of note receivable
and other amounts related to previously
discontinued operations, net                            0.7                     -                 (1.9 )                   -
Interest and other income (expense), net               (0.8 )                 0.1                 (0.5 )                 0.1

Income (loss) before income taxes                      (0.1 )                 4.8                  0.5                   6.4

Income tax provision (benefit)                          1.0                  (0.3 )                0.6                   0.6

Net income (loss)                                      (1.1 )%                5.1 %               (0.1 )%                5.8 %

In the following discussion regarding our results of operations, certain prior period amounts have been reclassified to conform to the current period presentation.
Net Sales
Net sales for the three months ended September 27, 2008 decreased $4.0 million, or 3.6%, compared with the corresponding period in 2007. Net sales by our Lasers Division decreased $0.2 million, or 0.5%, and net sales by our PPT Division decreased $3.8 million, or 5.9%, compared with the prior year period. The decrease in total net sales during the three months ended September 27, 2008 compared with the prior year period was due primarily to lower sales to customers in our scientific research, aerospace and defense/security end market, offset in part by increased sales to our microelectronics end market. Net sales for the nine months ended September 27, 2008 increased $10.8 million, or 3.3%, compared with the corresponding period in 2007. Net sales by our Lasers Division increased $8.4 million, or 6.3%, and net sales by our PPT Division increased $2.4 million, or 1.2%, compared with the prior year period. The increase in total net sales during the nine months ended September 27, 2008 compared with the prior year period was due primarily to higher sales to customers in our microelectronics and industrial manufacturing and other end markets, offset in part by lower sales to our scientific research, aerospace and defense/security end market.
Net sales to the scientific research, aerospace and defense/security markets for the three months ended September 27, 2008 decreased $4.1 million, or 10.7%, compared with the same period in 2007. Net sales to these markets for the nine months ended September 27, 2008 decreased $1.2 million, or 1.1%, compared with the same period in 2007. The decrease in sales to these markets in the third quarter of 2008 compared with the prior year period was due in large part to shipments of large systems by our PPT Division for a major aerospace program in the 2007 period that did not recur in the 2008 period. The decrease in sales to this market in the nine month period of 2008 was due primarily to lower sales by our PPT Division for the reasons noted above, as well as generally weaker market conditions. Generally, our net sales to these markets by each of our divisions may fluctuate from period to period due to changes in overall research and defense spending levels and the timing of large sales relating to major research and aerospace/defense programs and, in some cases, these fluctuations may be offsetting between our divisions or between such periods. Net sales to the microelectronics market for the three months ended September 27, 2008 increased $1.4 million, or 5.0%, compared with the same period in 2007. Net sales to this market for the nine months ended September 27, 2008 increased $8.0 million, or 8.5%, compared with the same period in 2007. The increases in sales to this market during the three and nine months ended September 27, 2008 compared with the same periods in 2007 were due primarily to increased sales of products and systems for photovoltaic applications and laser-based disk texturing systems, offset in part by a significant decrease in sales to our semiconductor manufacturing equipment customers as a result of the continued cyclical downturn in that market.
Net sales to the life and health sciences market for the three months ended September 27, 2008 decreased $0.5 million, or 2.5%, compared with the same period in 2007, due to lower sales by our PPT Division. Net sales to this market during the nine months ended September 27, 2008 were approximately equal to the same period in 2007, due to increased sales by our Lasers Division, offset by lower sales by our PPT Division.
Net sales to our industrial manufacturing and other end markets for the three months ended September 27, 2008 decreased $0.8 million, or 3.7%, compared with the same period in 2007, due to lower sales by our Lasers Division, offset in part by higher sales by our PPT Division. Net sales to these markets for the nine months ended September 27, 2008 increased $3.9 million, or 6.3%, compared with the same period in 2007, due to increased sales by our PPT Division, offset in part by lower sales by our Lasers Division.

Geographically, net sales were as follows:

                            Three Months Ended                                Percentage
                     September 27,       September 29,        Increase         Increase
   (In thousands)        2008                2007            (Decrease)       (Decrease)
   United States    $        50,869     $        53,332     $     (2,463 )           (4.6 )%
   Europe                    27,165              29,865           (2,700 )           (9.0 )
   Pacific Rim               21,872              19,260            2,612             13.6
   Other                      5,120               6,544           (1,424 )          (21.8 )

                    $       105,026     $       109,001     $     (3,975 )           (3.6 )%




                             Nine Months Ended                                Percentage
                     September 27,       September 29,        Increase         Increase
   (In thousands)        2008                2007            (Decrease)       (Decrease)
   United States    $       157,249     $       167,884     $    (10,635 )           (6.3 )%
   Europe                    86,982              83,245            3,737              4.5
   Pacific Rim               78,207              56,436           21,771             38.6
   Other                     15,495              19,604           (4,109 )          (21.0 )

                    $       337,933     $       327,169     $     10,764              3.3 %

The decrease in sales to customers in the United States for the three and nine months ended September 27, 2009 was due primarily to decreased sales to our semiconductor manufacturing equipment customers. Our decreased sales to customers in Europe in the third quarter of 2008 compared with the prior year period was due primarily to shipments of large systems by our PPT Division for a major aerospace program in the 2007 period that did not recur in the 2008 period. Our increased sales to the Pacific Rim in both periods of 2008 were due in large part to increased sales of laser-based disk texturing systems compared with the prior year period. Our sales of these systems are typically made in batches rather than a steady stream and do not occur every quarter. Our decreased sales to customers in other areas of the world in both periods of 2008 were due primarily to decreased sales to our semiconductor manufacturing equipment customers.
Gross Margin
Gross margin was 37.7% and 40.0% for the three months ended September 27, 2008 and September 29, 2007, respectively, and was 39.4% and 42.6% for the nine months ended September 27, 2008 and September 29, 2007, respectively. The decrease in gross margin in both periods in 2008 was due primarily to lower gross margins in our Lasers Division, which experienced reduced absorption of overhead costs due to lower manufacturing volume, particularly in the third quarter, a higher proportion of sales of products with lower gross margins, and generally greater market pricing pressure. In addition, our PPT Division experienced lower gross margins in the third quarter of 2008 due to its lower sales volume.
Selling, General and Administrative (SG&A) Expenses SG&A expenses totaled $28.2 million, or 26.9% of net sales, and $28.7 million, or 26.4% of net sales, for the three months ended September 27, 2008 and September 29, 2007, respectively. The decrease in SG&A expenses in absolute dollars for the current year period was due primarily to decreased personnel costs, particularly equity and incentive compensation, offset in part by costs associated with actions initiated in the third quarter of 2008 to reduce operating costs and improve our profitability.
SG&A expenses totaled $88.1 million, or 26.1% of net sales, and $87.5 million, or 26.8% of net sales, for the nine months ended September 27, 2008 and September 29, 2007, respectively. The increase in SG&A expenses in absolute dollars for the current year period was due primarily to a $1.8 million increase in rent and utilities expense, offset in part by a $1.3 million reduction in personnel costs, even after considering the additional charges associated with our cost reduction actions.

Research and Development (R&D) Expense
R&D expense totaled $11.3 million, or 10.8% of net sales, and $9.7 million, or 8.9% of net sales, for the three months ended September 27, 2008 and September 29, 2007, respectively, and $35.1 million, or 10.4% of net sales, and $31.2 million, or 9.5% of net sales, for the nine months ended September 27, 2008 and September 29, 2007, respectively. The increase in R&D expense in the current year periods was due primarily to increased spending on new product development for photovoltaic applications.
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.
Recovery (Write-Down) of Note Receivable and Other Amounts In 2005, we sold our robotic systems operations to Kensington Laboratories LLC (Kensington) for $0.5 million in cash and a note receivable of $5.7 million, after adjustments provided for in the purchase agreement, and subleased the facility relating to such operations to Kensington. We had previously classified such business as a discontinued operation. Kensington has failed to make certain principal, interest and rent payments due under our agreements. The note is secured by a first-priority security interest in certain Kensington assets, and we have begun legal proceedings to collect amounts owed. Due to uncertainty regarding collectibility, in the second quarter of 2008, we recognized a charge of $7.1 million to fully write off the note receivable and other amounts owed. In accordance with the Securities and Exchange Commission Staff Accounting Bulletin Topic 5.Z.5, we have recorded this write-down through continuing operations in our consolidated statements of operations. During the third quarter of 2008, we recovered $0.7 million of the rent payments due, which has been included in our consolidated statements of operations. Any additional amounts recovered in the future will be included in our consolidated statements of operations for the periods in which the cash is collected. Interest and Other Income (Expense), Net Interest and other expense, net totaled $0.8 million for the three months ended September 27, 2008 compared with interest and other income, net of $0.1 million for the three months ended September 29, 2007. Interest and other expense, net totaled $1.5 million for the nine months ended September 27, 2008 compared with interest and other income, net of $0.3 million for the nine months ended September 29, 2007. In the current year periods, interest income was negatively impacted by lower cash balances compared with the same periods in 2007, when we had higher cash balances due primarily to proceeds received from our convertible debt offering in February 2007, a significant portion of which was subsequently used for stock repurchases and capital expenditures. In addition, during both periods of 2008, interest income was negatively impacted by lower interest rates.
We expect that interest and other expense, net in the fourth quarter of 2008 will be slightly higher than the third quarter. In general, we expect interest and other income (expense), net to fluctuate slightly in future periods, depending on our levels of cash and marketable securities and interest earned thereon in a given period. Upon adoption of FSP APB 14-1 in fiscal year 2009, we expect that the interest expense associated with our convertible subordinated notes will increase significantly, which increase will be non-cash in nature. Income Taxes
Our effective tax rate for the three and nine months ended September 27, 2008 was (2,216.3%) and 110.4%, respectively, compared with a tax benefit of 5.4% and tax expense of 10.2%, respectively, in the corresponding prior year periods. The effective tax rate for the three and nine month periods ended September 27, 2008 were impacted by the fact that we recorded lower income, or losses, in various low tax jurisdictions and greater profits in relatively high tax international jurisdictions, compared with the corresponding prior year periods. In addition, our effective tax rate for the three month period varied significantly compared with the effective tax rate for the nine month

period due to the fact that we reported a pre-tax loss for the three month period, but recorded pre-tax profits for the nine month period. Under Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, we are required to adjust our effective tax rate each quarter to be consistent with the estimated annual effective tax rate. We are also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings compared with annual projections.
We have maintained a valuation allowance against a portion of our gross deferred tax assets pursuant to Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes, due to the uncertainty as to the timing and ultimate realization of those assets. As a result, until such valuation allowance is reversed, the U.S. tax provision relating to future earnings will be offset substantially by a reduction in the valuation allowance. Accordingly, current and future tax expense will consist of certain required state income taxes, taxes in certain foreign jurisdictions, the federal alternative minimum tax and the impact of discrete items.
As of September 27, 2008, our remaining valuation allowance was $25.7 million. We will continue to monitor actual results, refine forecasted data and assess the need for retaining a valuation allowance against a portion of our gross deferred tax assets. In the event it is determined that a valuation allowance is no longer required, the reversal will be recorded as a discrete item in the appropriate period. Based upon our past projections of future profitability, we had anticipated recording a reversal of a substantial portion of the valuation allowance as a discrete item during the fourth quarter of 2008. However, we continue to evaluate our business outlook and 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 may require material adjustments to these deferred tax asset balances. Therefore, we will continue to monitor actual results and refine forecasted data as appropriate to facilitate future determinations made with respect to the realization of deferred tax assets. Liquidity and Capital Resources
Our cash and cash equivalents and marketable securities balances increased to $148.9 million as of September 27, 2008 from $143.9 million as of December 29, 2007. The increase was attributable primarily to cash generated by operations, offset in part by repurchases of our common stock and capital expenditures made during the year.
Net cash provided by our operating activities of $31.6 million for the nine months ended September 27, 2008 consisted of net non-cash charges of $31.0 million and an increase in working capital of $0.8 million, offset in part by our net loss of $0.2 million. Such non-cash charges consisted of $16.2 million for depreciation and amortization, $7.1 million for the write-down of the note receivable and other amounts related to previously discontinued operations, $4.4 million for the provision for losses on inventories, $1.5 million for stock-based compensation and $1.2 million related to deferred income taxes. The increase in working capital consisted of a decrease in accounts receivable of $5.6 million due to the timing of collections, a decrease in inventories of $3.8 million due to a concerted effort to reduce inventory levels and an increase in accrued expenses and other liabilities of $3.3 million due to an increase in accrued taxes and an increase in deferred revenue, offset in part by a decrease in accounts payable of $9.6 million and a decrease in accrued payroll and related expenses of $1.2 million, both due to timing of payments, coupled with an increase in prepaid expenses and other assets of $1.1 million due to an increase in income taxes receivable.
Net cash used in investing activities of $33.4 million for the nine months ended September 27, 2008 consisted of purchases of property and equipment of $16.1 million, which included $5.3 million in purchases related to our SAP implementation, and net purchases of marketable securities of $17.3 million. Net cash used in financing activities for the nine months ended September 27, 2008 of $10.1 million consisted primarily of the repurchase of 1.2 million shares of our common stock for approximately $12.8 million, including

the cancellation of common stock in connection with the payment of taxes owed by employees related to our stock incentive plans and the repayment of short-term borrowings of $1.6 million, offset in part by long-term borrowings of $2.8 million and by $1.6 million received as consideration for the issuance of common stock in connection with exercises of stock options and purchases of common stock under our employee stock purchase plan.
At September 27, 2008, we had cash and cash equivalents of $77.0 million and marketable securities of $72.0 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 . . .