COHERENT INC (Form: 10-Q, Received: 05/10/2006 14:40:23)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended April 1, 2006

or

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

For the transition period from to

Commission File Number: 0-5255

COHERENT, INC.

Delaware		94-1622541
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

5100 Patrick Henry Drive, Santa Clara, California 95054

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 764-4000

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 ý No o

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

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o

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

The number of shares outstanding of registrant’s common stock, par value $.01 per share, on May 4, 2006 was 30,978,617 shares.

COHERENT, INC.

INDEX

		Page
Part I.	Financial Information

Item I.	Financial Statements

	Condensed Consolidated Statements of Operations (unaudited) Three and six months ended April 1, 2006 and April 2, 2005	3

	Condensed Consolidated Balance Sheets (unaudited) April 1, 2006 and October 1, 2005	4

	Condensed Consolidated Statements of Cash Flows (unaudited) Three months and six months ended April 1, 2006 and April 2, 2005	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	44

Part II.	Other Information

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 4.	Submission of Matters to a Vote of Security Holders	45

Item 6.	Exhibits	46

Signatures		47

FORWARD-LOOKING STATEMENTS

This report 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. All statements included in or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These statements are generally accompanied by words such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “rely,” “believe,” “estimate,” “predict,” “intend,” “potential,” “continue,” “forecast” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Actual results of Coherent, Inc. (referred to herein as the Company, we, our or Coherent) may differ significantly from those projected in the forward-looking statements in this report. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the sections captioned “Future Trends,” “Key Performance Indicators,” “Risks Related to Our Business,” “Risks Related to Our Industry” as well as any other cautionary language in this quarterly report. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made.

PART I. FINANCIAL INFORMATION

Item I. FINANCIAL STATEMENTS

COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

( Unaudited; in thousands, except per share data)

	Three Months Ended						Six Months Ended
	April 1, 2006			April 2, 2005			April 1, 2006			April 2, 2005

Net sales	$	145,988		$	131,175		$	276,982		$	257,197
Cost of sales	82,124			72,688			156,967			147,173
Gross profit	63,864			58,487			120,015			110,024
Operating expenses:
Research and development	19,263			14,175			33,881			28,476
In-process research and development	—			—			690			—
Selling, general and administrative	32,131			28,765			61,542			57,137
Restructuring, impairment and other charges (recoveries)	(90		)	(40		)	(90		)	260
Amortization of intangible assets	2,335			1,528			4,641			3,021
Total operating expenses	53,639			44,428			100,664			88,894
Income from operations	10,225			14,059			19,351			21,130
Other income (expense):
Interest and dividend income	2,745			1,081			4,626			2,048
Interest expense	(590		)	(483		)	(821		)	(1,370		)
Foreign exchange gain (loss)	(1,022		)	311			(1,770		)	242
Other—net	1,110			(119		)	1,762			777
Total other income, net	2,243			790			3,797			1,697
Income before income taxes and minority interest	12,468			14,849			23,148			22,827
Provision (benefit) for income taxes	4,295			(4,728		)	5,659			(1,958		)
Income before minority interest	8,173			19,577			17,489			24,785
Minority interest in subsidiaries’ losses, net of taxes	—			—			—			180
Net income	$	8,173		$	19,577		$	17,489		$	24,965

Net income per share:
Basic	$	0.27		$	0.64		$	0.57		$	0.82
Diluted	$	0.26		$	0.63		$	0.56		$	0.81

Shares used in computation
Basic	30,754			30,628			30,939			30,555
Diluted	31,316			31,112			31,396			30,991

See Accompanying Notes to Condensed Consolidated Financial Statements

COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except par value)

	April 1, 2006			October 1, 2005

ASSETS
Current assets:
Cash and cash equivalents	$	353,294		$	97,507
Restricted cash and cash equivalents	15,469			15,467
Short-term investments	75,842			133,407
Accounts receivable—net of allowances of $3,253 and $3,136, respectively	99,005			87,684
Inventories	95,633			102,730
Prepaid expenses and other assets	20,100			17,034
Deferred tax assets	39,837			37,892
Total current assets	699,180			491,721
Property and equipment, net	151,339			155,316
Restricted cash and cash equivalents	2,577			1,220
Goodwill	69,895			68,097
Intangible assets, net	39,423			42,186
Other assets, net	55,433			39,750
	$	1,017,847		$	798,290

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term obligations	$	12,737		$	12,736
Accounts payable	24,365			18,451
Income taxes payable	13,250			16,597
Other current liabilities	57,570			63,803
Total current liabilities	107,922			111,587
Long-term obligations	1,376			—
Other long-term liabilities	60,206			50,437
Convertible subordinated notes	199,719			—
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock, par value $.01 per share:
Authorized—500,000 shares
Outstanding—30,720 shares and 31,173 shares, respectively	305			309
Additional paid-in capital	318,126			325,818
Notes receivable from stock sales	(324		)	(324		)
Accumulated other comprehensive income	33,411			30,846
Retained earnings	297,106			279,617
Total stockholders’ equity	648,624			636,266
	$	1,017,847		$	798,290

See Accompanying Notes to Condensed Consolidated Financial Statements.

COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

	Six Months Ended
	April 1, 2006			April 2, 2005
Cash flows from operating activities:
Net income	$	17,489		$	24,965
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,181			14,413
Amortization of intangible assets	4,641			3,021
Deferred income taxes	572			(2,794		)
Stock-based compensation	6,735			—
Excess tax benefits from stock-based payment arrangements	(15		)	—
Purchased in-process research and development	690			—
Other	102			659
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(11,929		)	8,513
Inventories	7,544			(3,270		)
Prepaid expenses and other assets	(3,071		)	(1,609		)
Other assets	(2,068		)	655
Accounts payable	5,760			(735		)
Income taxes payable	(2,158		)	93
Other current liabilities	(3,893		)	3,500
Other long-term liabilities	(250		)	1,293
Net cash provided by operating activities	33,330			48,704
Cash flows from investing activities:
(Increase) decrease in restricted cash and cash equivalents	(1,352		)	8,411
Purchases of property and equipment	(8,073		)	(7,945		)
Proceeds from dispositions of property and equipment	182			214
Acquisition of businesses, net of cash acquired	(5,114		)	(12,129		)
Deferred business acquisition costs	(2,106		)	—
Purchases of available-for-sale securities	(117,981		)	(196,211		)
Proceeds from sales and maturities of available-for-sale securities	175,546			165,793
Premiums paid on life insurance	—			(1,184		)
Other – net	(146		)	(554		)
Net cash provided by (used in) investing activities	40,956			(43,605		)
Cash flows from financing activities:
Proceeds received from issuance of convertible subordinated notes	200,000			—
Debt issuance costs	(5,112		)	—
Long-term debt borrowings	1,387			—
Long-term debt payments	—			(745		)
Cash overdrafts decrease	(2,686		)	(520		)
Sales of shares under employee stock plans	6,947			7,285
Repurchase of common stock	(22,250		)	—
Collection of notes receivable from stock sales	—			69
Excess tax benefits from stock-based payment arrangements	15			—
Net cash provided by financing activities	178,301			6,089

Effect of exchange rate changes on cash and cash equivalents	3,200			155
Net increase in cash and cash equivalents	255,787			11,343
Cash and cash equivalents, beginning of period	97,507			87,659
Cash and cash equivalents, end of period	$	353,294		$	99,002
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	659		$	1,143
Income taxes	$	6,891		$	3,140
Cash received during the period for:
Income taxes	$	1,390		$	2,074

Noncash investing and financing activities:
Tax benefit from stock option exercises	$	391		$	958

See Accompanying Notes to Condensed Consolidated Financial Statements

COHERENT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes should be read in conjunction with the Coherent, Inc. (referred to herein as the Company, we, our or Coherent) consolidated financial statements and notes thereto filed on Form 10-K/A for the fiscal year ended October 1, 2005. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

During the first quarter of fiscal 2006, we established a new organizational and reporting structure whereby our previously reportable segments, Electro-Optics and Lambda Physik, were fully integrated into one operating segment. Accordingly, we operate in one segment, the development and marketing of lasers, precision optics and related accessories. Prior period segment information has been restated to conform to the current presentation.

2. ACQUISITIONS

Iolon, Inc.

On November 10, 2005, we acquired the assets of privately held Iolon, Inc. (Iolon) of San Jose, California for approximately $4.9 million in cash, net of acquisition costs of $0.1 million. I olon designs and manufactures optical components including widely tunable lasers and filters. We intend to utilize the acquired technology in our core portfolio. We have accounted for the acquisition of Iolon’s assets as a business combination and the operating results of Iolon have been included in our consolidated financial statements from the date of acquisition. We expect to finalize the allocation of the purchase price to identifiable assets by the end of the fourth quarter of fiscal 2006. Our preliminary allocation is as follows (in thousands):

Tangible assets	$	1,678
Goodwill	799
In-process research and development (IPR&D)	690
Intangible assets:
Existing technology	1,800
Total	$	4,967

The goodwill recognized from this acquisition resulted primarily from anticipated increases in market share from implementing the acquired technology into our core products. All of the goodwill from this purchase is expected to be deductible for tax purposes. The existing technology is being amortized over an estimated useful life of eight years.

At the date of acquisition, we immediately charged $0.7 million to expense, representing purchased IPR&D related to a development project that had not yet reached technological feasibility and had, in management’s opinion, no alternative future use. The assigned value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the net cash flows from such project, and discounting the net cash flows back to its present value. Separate projected cash flows were prepared for both the existing, as well as the in-process projects. The key assumptions used in the valuation include, among others, the expected completion date of the in-process project identified as of the acquisition date, the estimated costs to complete the project, revenue contribution and expense projection assuming the resulting products have entered the market, and the discount rate based on the risks associated with the development life cycle of the in-process technology acquired. The discount rate used in the present value calculations was obtained from a weighted-average cost of capital analysis, adjusted upward to account for the inherent uncertainties surrounding the successful development of the in-process research and development, the expected profitability level of such

technology, and the uncertainty of technological advances that could potentially impact the estimates. Projected net cash flows were based on estimates of revenue and operating profit (loss) of the project. The project became commercially viable in the second quarter of fiscal 2006.

Pro forma financial information has been excluded as the information is considered immaterial.

Excel Technology, Inc.

On February 21, 2006, we announced that we had entered into a definitive agreement to acquire Excel Technology, Inc. (“Excel Technology”) in an all-cash merger transaction. Pursuant to the agreement, each outstanding share of Excel Technology common stock will be exchanged for $30.00, for a total approximate offer value of $376.0 million, before fees and transaction costs. The acquisition is expected to close in our third fiscal quarter of 2006 and is subject to customary closing conditions, including regulatory approvals.

3. RECENT ACCOUNTING STANDARDS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151, “Inventory Costs” (“SFAS 151”), an amendment of Accounting Research Bulletin No. 43, Chapter 4. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. We adopted the provisions of SFAS 151 on October 2, 2005 and the adoption did not have a material effect on our consolidated results of operations or financial position.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies that conditional asset retirement obligations meet the definition of liabilities and should be recognized when incurred if their fair values can be reasonably estimated. We adopted FIN 47 on October 2, 2005, and the adoption did not have a material effect on our consolidated results of operations or financial position.

4. REVENUE RECOGNITION

We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, the product has been delivered or the service has been rendered, the price is fixed or determinable and collection is probable. Revenue from product sales is recorded when all of the foregoing conditions are met and risk of loss and title passes to the customer. Our products typically include a one-year warranty and the estimated cost of product warranty claims (based on historical experience) is recorded at the time the sale is recognized. Sales to customers are generally not subject to any price protection or return rights.

The vast majority of our sales are made to original equipment manufacturers (“OEMs”), distributors, resellers and end-users in the non-scientific market. Sales made to these customers do not require installation of the products by us and are not subject to other post-delivery obligations, except in occasional instances where we have agreed to perform installation or provide training. In those instances, we defer revenue related to installation services or training until these services have been rendered. We allocate revenue from multiple element arrangements to the various elements based upon relative fair values, which is determined based on the price charged for each deliverable on a standalone basis.

Our sales to distributors, resellers and end-user customers typically do not have customer acceptance provisions and only certain of our sales to OEM customers have customer acceptance provisions. Customer acceptance is generally limited to performance under our published product specifications. For the few product sales that have customer acceptance provisions because of other than published specifications, (1) the products are tested and accepted by the customer at our site or by the customer’s acceptance of the results of our testing program prior to shipment to the customer, or (2) the revenue is deferred until customer acceptance occurs.

Sales to end-users in the scientific market typically require installation and, thus, involve post-delivery obligations; however, our post-delivery installation obligations are not essential to the functionality of our products. We defer revenue related to installation services until completion of these services.

For most products, training is not provided, therefore, no post-delivery training obligation exists. In cases where training is provided to our customers, it is typically priced separately and recognized as revenue after these services have been provided .

5. SHORT-TERM INVESTMENTS

We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Marketable short-term investments in debt and equity securities are classified and accounted for as available-for-sale securities and are valued based on quoted market prices. Investments classified as available-for-sale are reported at fair value with unrealized gains and losses, net of related tax, recorded as a separate component of other comprehensive income (OCI) in stockholders’ equity until realized. Interest and amortization of premiums and discounts for debt securities are included in interest income. Gains and losses on securities sold are determined based on the specific identification method and are included in other income (expense).

Cash, cash equivalents and short-term investments consist of the following (in thousands):

	April 1, 2006
	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$	371,340	$	—	$	—		$	371,340
Less: restricted cash and cash equivalents								(18,046		)
Total cash and cash equivalents								$	353,294

Short-term investments classified as available-for-sale:
U.S. government and agency obligations	$	25,955	$	159	$	(204	)	$	25,910
State and municipal obligations	36,229		443		(111		)	36,561
Corporate notes and obligations	13,323		117		(69		)	13,371
Total short-term investments	$	75,507	$	719	$	(384	)	$	75,842

	October 1, 2005
	Cost Basis				Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$			114,194	$	—	$	—		$	114,194
Less: restricted cash and cash equivalents										(16,687		)
Total cash and cash equivalents										$	97,507

Short-term investments classified as available-for-sale:
Commercial paper	$		992		$	8	$	—		$	1,000
Certificates of deposit	1,000				8		—			1,008
U.S. government and agency obligations	53,646				365		(236		)	53,775
State and municipal obligations	30,981				370		(23		)	31,328
Corporate notes and obligations	46,128				293		(125		)	46,296
Total short-term investments	$	132,747			$	1,044	$	(384	)	$	133,407

At April 1, 2006, $15.2 million of our cash and cash equivalents were restricted pursuant to our Star notes agreement (see Note 8), $1.3 million were restricted pursuant to an outstanding long-term debt arrangement at a subsidiary, $1.2 million were restricted for remaining close out costs related to the purchase of the shares of Lambda Physik, and $0.3 million were restricted for other purposes. At October 1, 2005, $15.2 million of our cash and cash equivalents were restricted pursuant to our Star notes agreement, $1.2 million were restricted for remaining close out costs associated with our purchase of the remaining outstanding shares of Lambda Physik and $0.3 million were restricted for other purposes.

The amortized cost and estimated fair value of available-for-sale investments in debt securities at April 1, 2006 and October 1, 2005, classified as short-term investments on our condensed consolidated balance sheets were as follows (in thousands):

	April 1, 2006					October 1, 2005
	Amortized Cost			Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in less than 1 year	$		59,399	$	59,740	$	90,865	$	91,509
Due in 1 to 5 years	16,098			16,091		36,395		36,404
Due in 5 to 10 years	—			—		—		—
Due beyond 10 years	10			11		5,487		5,494
Total investments in available-for-sale debt securities	$	75,507		$	75,842	$	132,747	$	133,407

In the first six months of fiscal 2006, we received proceeds totaling $88.6 million from the sale of available-for-sale securities and realized gross losses of $0.2 million. In the first six months of fiscal 2005, we received proceeds totaling $11.0 million from the sale of available-for-sale securities and realized gross losses of $0.1 million.

6. INTANGIBLE ASSETS

Components of our amortizable intangible assets are as follows (in thousands):

	April 1, 2006							October 1, 2005
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Existing technology	$	47,236	$	(16,585	)	$	30,651	$	45,359	$	(14,018	)	$	31,341
Patents	8,715		(4,776		)	3,939		8,669		(4,365		)	4,304
Drawings	1,187		(1,168		)	19		1,181		(1,043		)	138
Order backlog	4,153		(3,810		)	343		4,133		(2,766		)	1,367
Customer lists	3,890		(1,496		)	2,394		3,929		(1,309		)	2,620
Trade name	1,974		(665		)	1,309		1,958		(547		)	1,411
Non-compete agreement	1,848		(1,080		)	768		1,840		(835		)	1,005
Total	$	69,003	$	(29,580	)	$	39,423	$	67,069	$	(24,883	)	$	42,186

Amortization expense for intangible assets for the three and six months ended April 1, 2006 were $2.3 million and $4.6 million, respectively. At April 1, 2006 estimated amortization expense for the remainder of fiscal 2006, the next five succeeding fiscal years and all years thereafter are as follows (in thousands):

	Estimated Amortization Expense
2006 (remainder)	$	3,830
2007	6,747
2008	6,488
2009	6,084
2010	5,118
2011	4,151
Thereafter	7,005
Total	$	39,423

7. BALANCE SHEET DETAILS:

Inventories are as follows (in thousands):

	April 1, 2006		October 1, 2005
Purchased parts and assemblies	$	17,656	$	23,778
Work-in-process	49,323		48,036
Finished goods	28,654		30,916
Inventories	$	95,633	$	102,730

Prepaid expenses and other assets consist of the following (in thousands):

	April 1, 2006		October 1, 2005
Prepaid expenses and other	$	17,274	$	14,090
Prepaid and refundable income taxes	1,720		2,944
Prepaid debt issuance costs	1,106		2,944
Total prepaid expenses and other assets	$	20,100	$	17,034

Other assets, net consist of the following (in thousands):

	April 1, 2006		October 1, 2005
Assets related to deferred compensation arrangements	$	22,601	$	20,827
Deferred tax assets	24,679		17,134
Prepaid debt issuance costs	4,386		—
Other assets	3,767		1,789
Total other assets, net	$	55,433	$	39,750

Other current liabilities consist of the following (in thousands):

	April 1, 2006		October 1, 2005
Accrued payroll and benefits	$	23,800	$	24,915
Accrued expenses and other	13,871		17,939
Reserve for warranty	10,398		10,424
Deferred income	5,593		4,985
Customer deposits	1,711		3,043
Accrued restructuring charges	2,197		2,497
Total other current liabilities	$	57,570	$	63,803

In the first quarter of fiscal 2006, we exited our Fort Lauderdale, Florida facility and as a result, we recorded a facility closure charge of $0.6 million. The facility closure charge included the estimated contractual obligations for lease and other facility costs, net of estimated sublease income. During the six month period ended April 1, 2006, we recorded $0.9 million of payments made against our accrued restructuring charges for remaining lease liabilities. During the six month period ended April 2, 2005, we recorded an additional provision of $0.3 million to our accrued restructuring charges for remaining lease liabilities, which was offset by payments made against the accrual of $0.6 million.

We provide warranties on certain of our product sales (generally one year) and allowances for estimated warranty costs are recorded during the period of sale. 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 currently establish warranty reserves based on historical warranty costs for each product line. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be required in future periods.

Components of the reserve for warranty costs during the six months of fiscal 2006 and 2005 were as follows (in thousands):

	April 1, 2006			April 2, 2005
Beginning balance	$	10,424		$	10,638
Additions related to current period sales	9,370			7,126
Warranty costs incurred in the current period	(9,269		)	(6,154			)
Adjustments to accruals related to prior period sales	(127		)	265
Ending balance	$	10,398		$		11,875

Other long-term liabilities consist of the following (in thousands):

	April 1, 2006		October 1, 2005
Deferred compensation	$	26,463	$	25,120
Deferred tax liabilities	27,638		17,315
Deferred income	3,678		3,554
Other long-term liabilities	2,427		4,448
Total other long-term liabilities	$	60,206	$	50,437

8. CURRENT AND LONG-TERM OBLIGATIONS

Star Notes

At April 1, 2006 and October 1, 2005, our current portion of long-term obligations primarily consisted of our notes payable to finance our acquisition of Star Medical (Star notes). The Star notes agreement requires that we place cash and short-term investment balances in an amount equal to 120% of the principal balance in a restricted collateral account. At April 1, 2006, $15.2 million of current restricted cash and cash equivalents were related to the Star notes (see Note 5).

Convertible Subordinated Notes

The notes may be converted, at the option of the holder, into shares of our common stock at a conversion rate of 26.1288 shares of our common stock per $1,000 principal amount of notes, which is equal to an initial conversion price of approximately $38.27 per share, only under the following circumstances: (1) if the closing price of our common stock reaches, or the trading price of the notes falls below, specified thresholds, (2) if specified distributions to holders of our common stock occur, (3) if a fundamental change occurs or (4) during the period from, and including February 1, 2011 to, but excluding, the maturity date. Upon conversion, in lieu of shares of our common stock, for each $1,000 principal amount of notes a holder will receive an amount in cash equal to the lesser of (i) $1,000 or (ii) the conversion value of the number of shares of our common stock equal to the conversion rate. If the conversion value exceeds $1,000, we will also deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the remaining common stock deliverable upon conversion. If a holder elects to convert its notes in connection with a fundamental change, we will pay a make whole premium by increasing the conversion rate applicable to such notes.

The indenture under which the notes were issued provides that an event of default will occur if (i) we fail to pay the principal or fundamental change purchase price of any security, when they become due and payable under the terms of the agreement, (ii) we fail to pay interest on the notes and fail to cure such non-payment within 30 days, (iii) we fail to deliver when due all cash and shares of common stock deliverable upon conversion within 15 days, (iv) we fail to perform or observe any other term, covenant or agreement required of us in the indenture and the failure is not cured or waived within 60 days, or (v) we fail to pay the principal by the end of any applicable grace period or the acceleration of other indebtedness of the Company for borrowed money where the aggregate principal amount with respect to which the default or acceleration exceeds $25 million and the indebtedness has not been rescinded or annulled or the indebtedness repaid within a period of 30 days after receipt of notice of default, or the default is not cured, waived, rescinded or annulled. If any of these events of default occurs, either the trustee or the holders of at least 25% of the outstanding notes may declare the principal amount of the notes to be due and payable. In addition, an event of bankruptcy, insolvency or reorganization involving either the Company or any of our significant subsidiaries will constitute an event of default under the indenture and, in that case, the principal amount of the notes will automatically become due and payable.

In the event of a fundamental change, holders may require us to purchase for cash all or a portion of their notes, subject to specified exceptions, at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest, if any, to the fundamental change purchase date.

The carrying value of the convertible subordinated notes approximates fair value at April 1, 2006.

9. STOCK-BASED COMPENSATION

Stock-Based Benefit Plans

We have two Stock Option Plans and two non-employee Directors’ Stock Option Plans. Under these plans, we may grant options to purchase up to an aggregate of 11,800,000 and 981,000 shares of common stock, respectively. Employee options are generally exercisable between two to four years from the grant date at a price equal to the fair market value of the common stock on the date of the grant and generally vest 25% to 50% annually. Director options are automatically granted to our non-employee directors. Such directors initially receive a stock option for 24,000 shares exercisable over a three-year period. Additionally, the non-employee directors receive an annual grant of 6,000 shares exercisable as to 50% of the shares on each anniversary from the date of grant. Grants under employee plans expire six years from the original grant date and grants under director plans expire ten years from the original grant date. In addition, each non-employee director receives an annual grant of 2,000 shares of restricted stock awards that vests on the third anniversary of the date of grant.

Restricted stock awards granted under our Stock Option Plans are independent of option grants and are subject to restrictions. At April 1, 2006, we had 113,950 shares of restricted stock outstanding, all of which are subject to forfeiture if employment terminates prior to the release of restrictions, which is generally three years from the date of grant. During this period, ownership of the shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. The cost of the awards, determined to be the fair market value of the shares at the date of grant, is expensed ratably over the period the restrictions lapse.

We have an Employee Stock Purchase Plan (“ESPP”) whereby eligible employees may authorize payroll deductions of up to 10% of their regular base salary to purchase shares at the lower of 85% of the fair market value of the common stock on the date of commencement of the offering or on the last day of the six-month offering period. At April 1, 2006, 404,744 shares of our common stock were reserved for future issuance under the plan.

Adoption of SFAS 123(R)

Prior to October 2, 2005, our stock-based employee compensation plans were accounted for under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, no compensation expense has been recorded for stock options granted with exercise prices greater than or equal to the fair value of the underlying common stock at the option grant date. Costs of restricted stock awards granted, determined to be the fair market value of the shares at the date of grant, have been recognized as compensation expense ratably over the respective vesting period. The ESPP qualified as a non-compensatory plan under APB 25, therefore, no compensation cost was recorded in relation to the discount offered to employees for purchases made under the ESPP.

Effective October 2, 2005, we adopted the fair value recognition provisions of SFAS No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS 123(R)”), requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected to use the modified prospective transition method as permitted by SFAS 123(R) and therefore have not restated our financial results for prior periods. Under this transition method, stock-based compensation expense for the three and six months ended April 1, 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of October 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, as adjusted for estimated forfeitures. Stock-based compensation expense for all stock-based compensation awards granted subsequent to October 1, 2005 was based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Under SFAS 123(R), the ESPP is considered a compensatory plan and we are required to recognize compensation cost for grants made under the ESPP. We recognize compensation expense for all share-based payment awards on a straight-line basis over the respective requisite service period of the awards.

As a result of adopting SFAS 123(R) on October 2, 2005, our net income for the three and six months ended April 1, 2006 was $2.4 million and $4.3 million lower, respectively, than if we had continued to account for share-based compensation

under APB 25. Basic and diluted net income per share for the three months ended April 1, 2006 would have been $0.34 and $0.34, respectively, and would have been $0.71 and $0.70 for the six months ended April 1, 2006, respectively, had we not adopted SFAS 123(R).

Determining Fair Value

Valuation and amortization method —We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Expected Term —The expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

Expected Volatility— Our computation of expected volatility for the quarter ended April 1, 2006 is based on historical volatility.

Risk-Free Interest Rate —The risk-free interest rate used in the Black-Scholes-Merton valuation method is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.

Expected Dividend —The expected dividend assumption is based on our current expectations about our anticipated dividend policy.

The fair value of the Company’s stock options granted to employees for the three and six months ended April 1, 2006 and April 2, 2005 was estimated using the following weighted-average assumptions:

	Employee Stock Options Plans												Employee Stock Purchase Plans
	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	April 1, 2006			April 2, 2005			April 1, 2006			April 2, 2005			April 1, 2006			April 2, 2005			April 1, 2006			April 2, 2005
Expected life in years	5.3			4.2			5.2			4.0			0.5			0.5			0.5			0.5
Expected volatility	36.3		%	49.5		%	36.3		%	50.1		%	34.8		%	37.5		%	34.1		%	38.2		%
Risk-free interest rate	4.6		%	4.1		%	4.6		%	3.7		%	4.2		%	2.2		%	4.1		%	2.1		%
Expected dividends	none			none			none			none			none			none			none			none
Weighted average fair value	$	14.01		$	13.38		$	13.92		$	12.28		$	7.54		$	6.37		$	7.57		$	6.44

Stock Compensation Expense

The following table shows total stock-based compensation expense included in the Condensed Consolidated Statements of Operations for the three and six months ended April 1, 2006 (in thousands):

	Three Months Ended April 1, 2006			Six Months Ended April 1, 2006
Cost of sales	$	289		$	364
Research and development	679			1,175
Selling, general and administrative	2,720			5,196
Income tax benefit	(1,064		)	(1,966		)
	$	2,624		$	4,769

To tal stock-based compensation cost capitalized as part of inventory during the three and six months ended April 1, 2006 were immaterial. As required by SFAS 123(R), management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

At April 1, 2006, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock option plans but not yet recognized was approximately $13.1 million, net of estimated forfeitures of $0.9 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.6 years and will be adjusted for subsequent changes in estimated forfeitures.

At April 1, 2006, the total compensation cost related to options to purchase common shares under the ESPP but not yet recognized was approximately $0.1 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately one month.

Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in our statement of cash flows. In accordance with SFAS 123(R), the cash flows resulting from excess tax benefits (tax benefits related to the excess of proceeds from employee’s exercises of stock options over the stock-based compensation cost recognized for those options) are classified as financing cash flows. During the six months ended April 1, 2006, we recorded less than $0.1 million of excess tax benefits as a financing cash inflow.

Stock Options & Awards Activity

The following is a summary of option activity for our Stock Option Plans (in thousands, except per share amounts and remaining contractual term in years):

	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at October 1, 2005	4,785		$	31.63
Granted	244		34.36
Exercised	(168	)	27.50
Forfeitures and expirations	(634	)	49.11
Outstanding at April 1, 2006	4,227		$	29.33	3.4	$	27,717

Vested and expected to vest at April 1, 2006	4,162		$	29.32	3.4	$	27,356

Exercisable at April 1, 2006	2,201		$	31.64	2.4	$	10,885

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock for the 4.0 million options that were in-the-money at April 1, 2006. During the three and six months ended April 1, 2006, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $0.6 million and $0.8 million, respectively, determined as of the date of option exercise. During the three and six months ended April 2, 2005, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $2.3 million and $0.8 million, respectively, determined as of the date of option exercise.

The following table summarizes our restricted stock award activity for the six months ended April 1, 2006 (in thousands, except per share amounts):

	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested stock at October 1, 2005	96		$	33.43
Granted	20		33.65
Vested	—		—
Forfeited	(2	)	33.18
Nonvested stock at April 1, 2006	114		33.47
Vested and expected to vest at April 1, 2006	113		$	33.46

Pro-forma Disclosures

The following table illustrates the effect on net income and net income per share as if we had applied the fair value recognition provisions of SFAS 123 to stock-based compensation during the three and six months period ended April 2, 2005 (in thousands, except per share amounts):

	Three Months Ended April 2, 2005		Six Months Ended April 2, 2005
Net income, as reported	$	19,577	$	24,965
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of income taxes	2,961		6,883
Pro forma net income	$	16,616	$	18,082

Net income per share:
Basic – as reported	$	0.64	$	0.82
Basic – pro forma	$	0.54	$	0.59

Diluted – as reported	$	0.63	$	0.81
Diluted – pro forma	$	0.53	$	0.58

For purposes of this pro forma disclosure, the value of the options was estimated using a Black-Scholes-Merton option-pricing formula and amortized on a straight-line basis over the respective vesting periods of the awards, with forfeitures recognized as they occurred.

10. COMMITMENTS AND CONTINGENCIES

Certain claims and lawsuits have been filed or are pending against us. In the opinion of management, all such matters have been adequately provided for, are without merit, or are of such kind that if disposed of unfavorably, would not have a material adverse effect on our consolidated financial position or results of operations.

11. STOCKHOLDERS’ EQUITY

In September 2005, our Board of Directors authorized a share repurchase program of up to 1.5 million shares of our common stock. Under the terms of the repurchase program, purchases may be made from time to time in both the open market and in private transactions, as conditions warrant. The program will remain in effect through September 30, 2007, unless earlier terminated or completed. On February 20, 2006, the repurchase program was placed on hold as a result of the announcement of our pending acquisition of Excel Technology. During the six months ended April 1, 2006, we purchased and cancelled a total of 721,942 shares of our common stock for approximately $22.3 million.

12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income, net of income taxes, are as follows (in thousands):

	Three Months Ended					Six Months Ended
	April 1, 2006		April 2, 2005			April 1, 2006			April 2, 2005
Net income	$	8,173	$	19,577		$	17,489		$	24,965
Translation adjustment	4,717		(6,762		)	2,586			9,134
Net gain (loss) on derivative instruments, net of taxes	3		(47		)	5			(28		)
Changes in unrealized losses on available-for-sale securities, net of taxes	23		(108		)	(26		)	(180		)
Total comprehensive income	$	12,916	$	12,660		$	20,054		$	33,891

The following summarizes activity in accumulated other comprehensive income (loss) related to derivatives, net of income taxes, held by us (in thousands):

Balance, October 2, 2004	$	(122	)
Changes in fair value of derivatives	—
Net losses reclassified from OCI	(28		)
Balance, April 2, 2005	$	(150	)

Balance, October 1, 2005	$	(114	)
Changes in fair value of derivatives	—
Net losses reclassified from OCI	5
Balance, April 1, 2006	$	(109	)

Accumulated other comprehensive income (net of tax) at April 1, 2006 is comprised of accumulated translation adjustments of $33.9 million, net loss on derivative instruments of $0.1 million and unrealized losses on available-for-sale securities of $0.4 million. Accumulated other comprehensive income (net of tax) at October 1, 2005 is comprised of accumulated translation adjustments of $31.3 million, net loss on derivative instruments of $0.1 million and unrealized loss on available-for-sale securities of $0.4 million .

13. EARNINGS PER SHARE

Basic earnings per share is computed based on the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive stock options and awards and stock purchase contracts using the treasury stock method.

The following table presents information necessary to calculate basic and diluted earnings per common share (in thousands, except per share data):

	Three Months Ended				Six Months Ended
	April 1, 2006		April 2, 2005		April 1, 2006		April 2, 2005
Weighted average shares outstanding – basic	30,754		30,628		30,939		30,555
Dilutive effect of employee stock options and awards	562		484		457		436
Weighted average shares and equivalents – diluted	31,316		31,112		31,396		30,991

Net income	$	8,173	$	19,577	$	17,489	$	24,965

Net income per basic share	$	0.27	$	0.64	$	0.57	$	0.82
Net income per diluted share	$	0.26	$	0.63	$	0.56	$	0.81

A total of 2,034,276 and 2,623,000 potentially dilutive securities have been excluded from the dilutive share calculation for the three months ended April 1, 2006 and April 2, 2005, respectively, as their effect was anti-dilutive. A total of 2,262,631 and 2,709,000 po tentially dilutive securities have been excluded from the dilutive share calculation for the six months ended April 1, 2006 and April 2, 2005, respectively, as their effect was anti-dilutive

14. INCOME TAXES

As a result of the consolidation of two of our entities in Japan, accumulated earnings which had previously been treated as permanently invested, became available for distribution. As a result, we recognized a net tax benefit of approximately $1.8 million in the first quarter of fiscal 2006. The total amount of unremitted earnings of foreign subsidiaries for which we have not yet recorded federal income taxes was approximately $110.8 million at April 1, 2006. In addition to federal income taxes (which are not practicably determinable), withholding taxes of approximately $1.7 million would be payable upon repatriation of such earnings which would result in additional foreign tax credits.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMPANY OVERVIEW

BUSINESS BACKGROUND

We are one of the world’s leading suppliers of photonics-based solutions in a broad range of commercial and scientific research applications. We design, manufacture and market lasers, precision optics and related accessories for a diverse group of customers. Since inception in 1966, we have grown through internal expansion and through strategic acquisitions of complementary businesses, technologies, intellectual property, manufacturing processes and product offerings.

There are many types of lasers and one way of classifying them is by the material used to create the lasing action. We manufacture gas, liquid, semiconductor and solid-state lasers. Lasers can also be classified by their output wavelength: ultraviolet, visible, infrared or wavelength tunable. There are also many options in terms of pulsed output versus continuous wave, pulse duration, output power, beam dimensions, etc. In fact, each application has its specific requirements in terms of laser performance. The broad technical depth at Coherent enables us to offer a diverse product line characterized by lasers targeted at growth opportunities and key technology applications. In all cases, we aim to be the supplier of first choice by offering a high-value combination of superior technical performance and high reliability.

Photonics is now taking its place alongside electronics as a critical enabling technology for the twenty-first century. In the field of photonics, the laser is the undisputed workhorse. Consequently, the role of the laser is far-reaching in an ever more diverse set of applications. Growth in these applications stems from two sources. First, there are many applications where the laser is displacing conventional technology because it can do the job faster, better or more economically. Second, there are also new applications where the laser is the enabling tool that makes the work possible.

Key laser applications include: microtechnologies and nanotechnology; semiconductor inspection; microlithography; measurement, test and repair of electronic circuits; medical and biotechnology; consumer electronics; industrial process and quality control; materials processing; imaging and printing; graphic arts display; and research and development. In particular, ultraviolet (“UV”) lasers are profiting from the trend towards miniaturization, which is a driver of innovation and growth in many markets. The short wavelength of lasers that emit light in the UV spectral region make it possible to produce extremely small structures—with maximum precision—consistent with the latest state-of—the-art technology.

We were originally incorporated in California on May 26, 1966 and reincorporated in Delaware on October 1, 1990.

FUTURE TRENDS

Microelectronics

After several years of process development, lasers are now used in mass production applications because these laser-based fabrication and testing methods are faster, deliver superior end products, increase yields, and/or cut production costs. This is reflected in our strong microelectronics sales during fiscal 2005. Moreover, we anticipate this trend to continue, driven primarily by the increasing sophistication of consumer electronic goods and their convergence via the internet, resulting in increasing demand for more bandwidth and memory. Although this market has historically been cyclical in nature, we believe that the future will see a strong and overarching trend of increased adoption of solid-state, CO 2 and excimer lasers as all these lasers enable both next-generation performance improvements and reduced process costs. In particular, we expect future demands in the advanced packaging market to steadily shift towards the use of ultraviolet laser-based tools, as these are the only commercial technologies capable of providing the high spatial resolution critical for next-generation chip-scale and wafer-level packages.

Graphic arts and display

This is a well-established market for diode lasers with three routes to market for our products – direct diode applications, diodes within our solid-state systems, and diodes sold into other solid-state laser systems. The ongoing improvements in diode laser performance are enabling the direct use of diode lasers and is gaining increased acceptance, thereby reducing costs for end users in this applications segment. We believe this trend will continue to accelerate in 2006, in what will be an increasingly important market for our diode lasers.

Materials processing

The market for low to medium power lasers used in industrial material processing continues to expand, driven by the need for cost-effective manufacturing solutions for the cutting, joining, marking and engraving of non-metal materials. A number of application areas are performing well. These include marking/coding, flat bed cutting and engraving, and, in Asia, the production of capital equipment for apparel and leather goods manufacture. Several factors are enabling us to gain market share in the materials process market. First, we have developed an expanded portfolio of wavelengths, enabling optimum marking solutions for virtually every non-metal material type. At the same time, the reliability of these products has increased, lowering the cost of ownership. In addition, the acquisition of TuiLaser has brought about the Prisma family of lasers, which fill an important niche in the power spectrum. Prisma lasers are the leading choice for coding images in the fast-growing ID card market and these lasers, which complement our existing offerings, will allow us to offer a more complete portfolio of products to our existing laser source customers and OEMs.

Scientific research and government programs

We expect modest growth rates in the scientific research market for fiscal 2006, with applications in ultrashort pulses and in bio-research being the drivers of this anticipated expansion.

OEM components and instrumentation

The instrumentation market is seeing a gradual migration from the use of mature laser technologies, such as water-cooled ion lasers, to new technologies that are primarily based on solid-state, crystal and semiconductors. Using our unique portfolio of solid-state and semiconductor lasers and our patented OPS technology, we are able to both assist and stimulate this transition. Furthermore, this trend is helping in the development of new applications such as security and clinical diagnostics. These applications are likely to require an increased number of lasers; however, the majority of these activities are still in the research and development stage and we expect only moderate impacts on the laser industry in fiscal 2006, with increases expected in future years. Nevertheless, we anticipate greater future opportunities in microscopy, flow cytometry, lab-on-a-chip and DNA sequencing based on our product enhancements and evolving market developments.

OUR STRATEGY

We strive to develop innovative and proprietary products and solutions that meet the needs of our customers and that are based on our distinctive expertise in lasers and optical technologies. In pursuit of our strategy, we intend to:

• Leverage our technology portfolio and application engineering to lead the proliferation of photonics into broader markets – We will continue to identify opportunities in which our technology portfolio and application engineering can be used to offer innovative solutions and gain access to new markets.

• Optimize our leadership position in existing markets – There are a number of markets where we have historically been at the forefront of technological development and product deployment and from which we have derived a substantial portion of our revenues. We plan to optimize our financial returns from these markets.

• Maintain and develop additional strong collaborative customer and industry relationships – We believe that the Coherent brand name and reputation for product quality, technical performance and customer satisfaction will help us to further develop our loyal customer base. We plan to maintain our current customer relationships and develop new ones with customers that are industry leaders and to work together with these customers to design and develop innovative product systems and solutions as they develop new technologies.

• Develop and acquire new technologies – We will continue to enhance our market position through our existing technologies and develop new technologies through our internal research and development efforts, as well as through the acquisition of additional complementary technologies, intellectual property, manufacturing processes and product offerings.

• Emphasize supply chain management – We will continue to focus on operational efficiency through an emphasis on supply chain management with the explicit intent of improving gross margins and increasing inventory turns.

• Focus on long-term improvement of return on invested capital – We will continue to focus on long-term improvement of return on invested capital.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared pursuant to the rules and regulations of the SEC. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We have identified the following as the items that require the most significant judgment and often involve complex estimation: revenue recognition, accounting for long-lived assets (including goodwill and intangible assets), inventory valuation, warranty reserves, stock-based compensation and accounting for income taxes.

Revenue Recognition

The vast majority of our sales are made to original equipment manufacturers (OEMs), distributors, resellers and end-users in the non-scientific market. Sales made to these customers do not require installation of the products by us and are not subject to other post-delivery obligations, except in occasional instances where we have agreed to perform installation or provide training. In those instances, we defer revenue related to installation services or training until these services have been rendered. We allocate revenue from multiple element arrangements to the various elements based upon relative fair values, which is determined based on the price charged for each deliverable on a standalone basis.

Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Failure to obtain anticipated orders due to delays or cancellations of orders could have a material adverse effect on our revenue. In addition, pressures from customers to reduce our prices or to modify our existing sales terms may result in material adverse effects on our revenue in future periods.

For most products, training is not provided, therefore, no post-delivery training obligation exists. However, when training is provided to our customers, it is typically priced separately and is recognized as revenue after these services have been provided .

Long-lived Assets

We evaluate long-lived assets whenever events or changes in business circumstances or our planned use of assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. Reviews are performed to determine whether the carrying values of assets are impaired based on comparison to either the discounted expected future cash flows (in the case of goodwill) or to the undiscounted expected future cash flows (for all other long-lived assets). If the comparison indicates that impairment exists, the impaired asset is written down to its fair value. Significant management judgment is required in the forecast of future operating results that are used in the preparation of expected discounted and undiscounted cash flows.

At April 1, 2006, we had $109.3 million of goodwill and purchased intangible assets on our condensed consolidated balance sheet. At April 1, 2006, we had $151.3 million of property and equipment on our condensed consolidated balance sheet. As no impairment indicators were present during the second quarter of fiscal 2006, we believe these values remain recoverable.

It is reasonably possible that the estimates of anticipated future net revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to assess the recoverability of these assets. In that event, impairment charges or shortened useful lives of certain long-lived assets could be required.

Inventory Valuation

We record our inventory at the lower of cost (computed on a first-in, first-out basis) or market. We write-down our inventory to its estimated market value based on assumptions about future demand and market conditions. Inventory write-downs are generally recorded within guidelines set by management when the inventory for a device exceeds 12 months of its estimated demand and when individual parts have been in inventory for greater than 12 months. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required which could materially affect our future results of operations. We write-down our demo inventory by amortizing the cost of demo

inventory over a twenty month period starting from the fourth month after such inventory is placed in service. Due to rapidly changing forecasts and orders, additional write-downs for excess or obsolete inventory, while not currently expected, could be required in the future. In the event that alternative future uses of fully written down inventories are identified, we may experience better than normal profit margins when such inventory is sold. Differences between actual results and previous estimates of excess and obsolete inventory could materially affect our future results of operations.

Warranty Reserves

We provide warranties on certain of our product sales (generally one year) and allowances for estimated warranty costs are recorded at the time of sale. The determination of such allowances requires us to make estimates of product failure rates and expected costs to repair or replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product line. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be required in future periods.

Stock-Based Compensation

We account for stock-based compensation in accordance with the provisions of SFAS No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS 123(R)”). Under the fair value recognition provisions of SFAS 123(R), stock-based compensation cost is estimated at the grant date based on the value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date requires judgment, including estimating stock price volatility, forfeiture rates and expected option life. If actual forfeitures differ significantly from our estimates, adjustments to compensation cost may be required in future periods.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves the estimation of our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets.

We record a valuation allowance to reduce our deferred tax assets to an amount that more likely than not will be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the allowance for the deferred tax assets would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the allowance for the deferred tax assets would be charged to income in the period such determination was made.

Federal income taxes have not been provided for on a portion of the unremitted earnings of foreign subsidiaries either because such earnings are intended to be permanently reinvested or because foreign tax credits are available to offset any planned distributions of such earnings. As a result of the consolidation of two of our entities in Japan, accumulated earnings which had previously been treated as permanently invested, became available for distribution. Accordingly, we recognized a net tax benefit of approximately $1.8 million in the first quarter of fiscal 2006. The total amount of unremitted earnings of foreign subsidiaries for which we have not yet recorded federal income taxes was approximately $110.8 million at April 1, 2006. In addition to federal income taxes (which are not practicably determinable), withholding taxes of approximately $1.7 million would be payable upon repatriation of such earnings which would result in additional foreign tax credits.

KEY PERFORMANCE INDICATORS

The following is a summary of some of the quantitative performance indicators (as defined below) that may be used to assess our results of operations and financial condition:

	Three Months Ended
	April 1, 2006			April 2, 2005			Change				% Change
	(Dollars in thousands)

Bookings	$	146,334		$	129,350		$	16,984		13.1		%
Net sales	$	145,988		$	131,175		$	14,813		11.3		%
Gross profit as a percentage of net sales	43.7		%	44.6		%	(0.9		)%	(2.0		)%
Research and development as a percentage of net sales	13.2		%	10.8		%	2.4		%	22.2		%
Income before income taxes and minority interest	$	12,468		$	14,849		$	(2,381	)	(16.0		)%
Cash provided by operating activities	$	12,808		$	18,414		$	(5,606	)	(30.4		)%
Days sales outstanding in receivables	61.0			62.0			(1.0		)	(1.6		)%
Days sales outstanding in inventories	59.0			74.7			(15.7		)	(21.0		)%
Capital spending as a percentage of net sales	2.8		%	2.8		%	0.0		%	0.0		%

	Six Months Ended
	April 1, 2006			April 2, 2005			Change			% Change
	(Dollars in thousands)

Bookings	$	277,993		$	257,933		$	20,060		7.8	%
Net sales	$	276,982		$	257,197		$	19,785		7.7	%
Gross profit as a percentage of net sales	43.3		%	42.8		%	0.6		%	1.3	%
Research and development as a percentage of net sales	12.2		%	11.1		%	1.2		%	10.5	%
Income before income taxes and minority interest	$	23,148		$	22,827		$	321		1.4	%
Cash provided by operating activities	$	33,330		$	48,704		$	(15,374	)	(31.6	)%
Capital spending as a percentage of net sales	2.9		%	3.1		%	(0.2		)%	(5.6	)%

Definitions and analysis of these performance indicators are as follows:

Bookings

Bookings represent orders expected to be shipped within 12 months. Bookings are generally cancelable by our customers without substantial penalty and, historically, we generally have not experienced a significant rate of cancellation.

Second quarter bookings increased 13.1% and bookings for the six months ended April 1, 2006 increased 7.8% from the same periods one year ago . For the quarter, increases in the microelectronics and OEM components and instrumentation markets were partially offset by decreases in the scientific and government programs, graphic arts and display and materials processing markets. During the first six months of fiscal 2006 , increases in the microelectronics, OEM components and instrumentation, graphic arts and display and materials processing markets were partially offset by decreases in the scientific and government programs market.

Microelectronics bookings increased significantly. We experienced record demand for lasers used in advanced packaging applications including via drilling and laser direct imaging. The two biggest drivers were high-density microvias for cell phone boards and flip-chip substrates for a variety of end use applications. We also benefited from high utilization rates in 300mm fabs for logic and memory devices. In addition, the shift to copper for the 65nm node led to an increase for lasers used in metrology applications. Orders were also strong from semiconductor and FPD photomask writing and inspection applications and the wafer inspection application rebounded nicely from the previous quarter due to an increase in demand

for solid-state lasers and higher service orders from the installed base. Bookings in the FPD space were robust with a solid order stream for our new LSX annealing lasers and our high-powered CO 2 lasers used in LCD glass cutting.

Bookings in the OEM components and instrumentation market increased due primarily to higher OEM medical orders. Bookings for medical OEM lasers and components, especially those used in refractive surgery, were solid. We are completing the conversion to the ExiStar platform for the refractive market. The instrumentation market was predictably slower following two quarters of strong bookings, with customers expressing interest in our Cube product line, which offers wavelength flexibility and an attractive total cost of ownership. In addition, our high power green and yellow OPS prototypes are attracting attention from the medical and instrumentation customer base.

Bookings in the graphic arts and display market increased during the first six months of fiscal 2006, but decreased compared to the same quarter one year ago. The current quarter decrease is primarily due to annual orders from several customers placed in the first quarter of fiscal 2006, rather than a change in market share or dynamics. The driver for our business is the expansion of highly configured infrared devices for high-volume printing.

Bookings in the materials processing market increased during the first six months of fiscal 2006, but decreased compared to the same quarter one year ago. Carbon dioxide lasers used in marking, engraving and cutting again led bookings. We again experienced an expected seasonal upswing in China. We benefited from decreased cyclicality compared with previous years due to an overall growth in the marking and engraving markets over the past few quarters. Our high-power CO 2 lasers also saw strong performance this quarter with non-metal drilling and cutting end users experiencing a lift in end customer demand.

Bookings in the scientific and government programs market decreased due to lower Chameleon orders in the current quarter after several strong quarters. This does not appear to be a market share issue, but rather a timing issue as some customers are awaiting funding and facility upgrades. The lower Chameleon orders were partially offset by bookings for Verdi, Mira and custom lasers. Geographically, Europe posted a record quarter, while the U.S. was substantially flat and Asia was down compared to the prior quarter. The softness in Asia reflects lower orders in Japan following a record in the prior quarter.

Net Sales

Net sales include sales of lasers, precision optics, related accessories and service contracts. Net sales for the second quarter and six months ended April 1, 2006 increased 11.3% and 7.7%, respectively, from the same periods one year ago. For a more complete description of the reasons for changes in net sales refer to the “Results of Operations” section of this Form 10-Q.

Gross Profit as a Percentage of Net Sales

Gross profit as a percentage of net sales (“gross profit percentage”) is calculated as gross profit for the period divided by net sales for the period. Gross profit percentage in the second quarter decreased to 43.7% from 44.6% in the same quarter one year ago. Gross profit percentage for the six months ended April 1, 2006 increased to 43.3% from 42.8% in the same period one year ago. For a more complete description of the reasons for changes in gross profit refer to the “Results of Operations” section of this Form 10-Q.

Research and Development as a Percentage of Net Sales

Research and development as a percentage of net sales (“R&D percentage”) is calculated as research and development expense for the period divided by net sales for the period. Management considers R&D percentage to be an important indicator in managing our business as investing in new technologies is a key to future growth. R&D percentage increased to 13.2% from 10.8% in the second fiscal quarter and increased to 12.2% from 11.1% for the six months ended April 1, 2006 from the same quarter and during the first six month period one year ago, respectively. For a more complete description of the reasons for changes in R&D percentage refer to the “Results of Operations” section of this Form 10-Q.

Net Cash Provided by Operating Activities

Net cash provided by operating activities shown on our Condensed Consolidated Statements of Cash Flows primarily represents the excess of cash collected from billings to our customers and other receipts, including tax refunds, over cash paid to our vendors for expenses and inventory purchases to run our business. This amount represents cash generated by current operations to pay for equipment, technology, and other investing activities, to repay debt, to fund acquisitions and for other financing purposes. We believe this is an important performance indicator because cash generation over the long term is essential to maintaining a healthy business and providing funds to help fuel growth. We believe generating positive cash from operations is an indication that our products are achieving a high level of customer satisfaction and that we are appropriately monitoring our expenses, inventory levels and cash collection efforts.

Days Sales Outstanding in Receivables

We calculate days sales outstanding (“DSO”) in receivables as net receivables at the end of the period divided by net sales during the period and then multiplied by the number of days in the period, using 90 days for quarters. DSO in receivables indicates how well we are managing our collection of receivables, with lower DSO in receivables resulting in more cash flow available. The more money we have tied up in receivables, the less money we have available for research and development, acquisitions, expansions, marketing and other activities to grow our business. Our DSO in receivables for the second quarter of fiscal 2006 decreased 1.0 days from the same quarter one year ago. The improvement in DSO is primarily due to a lower volume of receivables with longer payment terms.

Days Sales Outstanding in Inventories

We calculate DSO in inventories as net inventories at the end of the period divided by net sales of the period and then multiplied by the number of days in the period, using 90 days for quarters. DSO in inventories indicates how well we are managing our inventory levels, with lower DSO in inventories resulting in more cash flow available. The more money we have tied up in inventory, the less money we have available for research and development, acquisitions, expansions, marketing and other activities to grow our business. Our DSO in inventories for the second quarter of fiscal 2006 decreased 15.7 days from the same quarter one year ago primarily due to better management of inventory levels in relation to sales volumes, a $6.8 million charge for excess Lambda Physik inventories in the fourth quarter of fiscal 2005 (4.7 days) and the outsourcing of non-core production to contract manufacturers.

Capital Spending as a Percentage of Net Sales

Capital spending as a percentage of net sales (“capital spending percentage”) is calculated as capital expenditures for the period divided by net sales for the period. Capital spending percentage indicates the extent to which we are expanding or modernizing our operations, including investments in technology. Management monitors capital spending levels as such monitoring assists management in measuring our cash flows, net of capital expenditures. Our capital spending percentage for both the current quarter and the same quarter one year ago was 2.8%. Our capital spending percentage decreased to 2.9% from 3.1% in the six months ended April 1, 2006 compared to the same period one year ago primarily due to higher sales volumes in the first six months of fiscal 2006 . We anticipate that capital spending for fiscal 2006 will be approximately 4% to 5% of net sales.

SIGNIFICANT EVENTS

On February 21, 2006, we entered into a definitive agreement to acquire Excel Technology, Inc., a manufacturer of photonics-based solutions, consisting of laser systems and electro-optical components, primarily for industrial, commercial, and scientific applications. The acquisition will be an all-cash transaction at a price of $30.00 per share of Excel Technology, Inc. common stock, for a total approximate offer value of $376 million before fees and transaction costs. The completion of the acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to close in the third fiscal quarter of 2006.

On March 10, 2006 we issued $200.0 million of 2.75% convertible subordinated notes due March 2011. The notes are unsecured and subordinate to all existing and future senior debt. The notes mature on March 1, 2011, unless earlier redeemed or converted. Interest on the notes is payable in cash semi-annually in arrears on March 1 and September 1 of each year. The notes may be converted, at the option of the holder, into shares of our common stock at a conversion rate of 26.1288 shares of our common stock per $1,000 principal amount of notes, which is equal to an initial conversion price of approximately $38.27 per share, only under the following circumstances: (1) if the closing price of our common stock

reaches, or the trading price of the notes falls below, specified thresholds, (2) if specified distributions to holders of our common stock occur, (3) if a fundamental change occurs or (4) during the period from, and including February 1, 2011 to, but excluding, the maturity date. Upon conversion, in lieu of shares of our common stock, for each $1,000 principal amount of notes a holder will receive an amount in cash equal to the lesser of (i) $1,000 or (ii) the conversion value of the number of shares of our common stock equal to the conversion rate. If the conversion value exceeds $1,000, we will also deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the remaining common stock deliverable upon conversion. If a holder elects to convert its notes in connection with a fundamental change, we will pay a make whole premium by increasing the conversion rate applicable to such notes.

RESULTS OF OPERATIONS

CONSOLIDATED SUMMARY

The following table sets forth, for the periods indicated, the percentage of total net sales represented by the line items reflected in our condensed consolidated statements of operations:

	Three Months Ended				Six Months Ended
	April 1, 2006		April 2, 2005		April 1, 2006		April 2, 2005
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	56.3	%	55.4	%	56.7	%	57.2	%
Gross profit	43.7	%	44.6	%	43.3	%	42.8	%
Operating expenses:
Research and development	13.2	%	10.8	%	12.2	%	11.1	%
In-process research and development	—		—		0.2	%	—
Selling, general and administrative	22.0	%	21.9	%	22.2	%	22.2	%
Restructuring, impairment and other charges (recoveries)	(0.1	)%	(0.0	)%	(0.0	)%	0.1	%
Amortization of intangible assets	1.6	%	1.2	%	1.7	%	1.2	%
Total operating expenses	36.7	%	33.9	%	36.3	%	34.6	%
Income from operations	7.0	%	10.7	%	7.0	%	8.2	%
Other income (expense):
Interest and dividend income	1.9	%	0.8	%	1.7	%	0.8	%
Interest expense	(0.4	)%	(0.3	)%	(0.3	)%	(0.5	)%
Foreign exchange gain (loss)	(0.7	)%	0.2	%	(0.6	)%	0.1	%
Other—net	0.7	%	(0.1	)%	0.6	%	0.3	%
Total other income, net	1.5	%	0.6	%	1.4	%	0.7	%
Income before income taxes and minority interest	8.5	%	11.3	%	8.4	%	8.9	%
Provision (benefit) for income taxes	2.9	%	(3.6	)%	2.1	%	(0.8	)%
Income before minority interest	5.6	%	14.9	%	6.3	%	9.7	%
Minority interest in subsidiaries’ losses, net of taxes	—		—		—		0.0	%
Net income	5.6	%	14.9	%	6.3	%	9.7	%

Net income for the second quarter of fiscal 2006 was $8.2 million ($0.26 per diluted share) including $0.2 million in Excel Technology integration related costs. Second quarter 2006 results also included approximately $2.4 million of stock-based compensation expense as required by SFAS 123(R). Net income prior to fiscal 2006 did not include stock-based compensation expense under SFAS 123(R). Net income for the second quarter of fiscal 2005 was $19.6 million ($0.63 per diluted share) including a tax benefit from the reversal of a deferred tax valuation allowance of $9.6 million relating to Lambda Physik and a favorable adjustment of $0.3 million related to Lambda Physik’s previously communicated decision to discontinue future lithography investments. Net income for the first six months of fiscal 2006 was $17.5 million ($0.56 per diluted share) including a one-time tax benefit of approximately $1.8 million, a facility closure charge of $0.4 million, an in-process research and development (IPR&D) charge of $0.4 million associated with the purchase of the assets of Iolon during the first quarter of fiscal 2006 and $0.2 million in Excel Technology integration related costs. Results for the first six months of fiscal 2006 also included approximately $4.3 million of stock-based compensation expense as required by SFAS 123(R). Net income for the first six months of fiscal 2005 was $25.0 million ($0.81 per diluted share) including a

tax benefit from the reversal of a deferred tax valuation allowance of $9.6 million related to our Lambda Physik segment and a tax benefit of $0.5 million related to federal tax law changes enacted in the first quarter of fiscal 2005, partially offset by a charge of $2.7 million related to our decision to discontinue future lithography investments.

NET SALES

The following tables sets forth, for the periods indicated, the amount of net sales and their relative percentages of total net sales.

	Three Months Ended
	April 1, 2006				April 2, 2005
	Amount		Percentage of Total Net Sales		Amount		Percentage of Total Net Sales
	(Dollars in thousands)

Domestic	$	42,659	29.2	%	$	44,141	33.7	%
Foreign	103,329		70.8	%	87,034		66.3	%
Total	$	145,988	100.0	%	$	131,175	100.0	%

	Six Months Ended
	April 1, 2006				April 2, 2005
	Amount		Percentage of total net sales		Amount		Percentage of total net sales
	(Dollars in thousands)

Domestic	$	89,198	32.2	%	$	89,070	34.6	%
Foreign	187,784		67.8	%	168,127		65.4	%
Total	$	276,982	100.0	%	$	257,197	100.0	%

Net sales for the second quarter of fiscal 2006 increased by $14.8 million, or 11%, compared to the second quarter of fiscal 2005, with increases in the microelectronics, graphic arts and display, materials processing and OEM components and instrumentation markets partially offset by decreases in the scientific and government programs market. Net sales for the six months ended April 1, 2006 increased by $19.8 million, or 8%, compared to the same period one year ago, with increases in the microelectronics, graphic arts and display, OEM components and instrumentation and materials processing markets partially offset by decreases in the scientific and government programs market.

The quarterly increase in the microelectronics market of $12.4 million, or 29%, is primarily due to higher sales in advanced packaging applications, including laser direct imaging and via drilling. Graphics arts and display market sales for the quarter increased $4.5 million, or 72%, primarily due to individually addressable semiconductor bar shipments for reprographics applications. Sales in the material processing market increased $2.5 million, or 15%, primarily due to higher commercial laser shipments for non-metal cutting and marking applications. The increase in the OEM components and instrumentation market of $2.1 million, or 7%, is due primarily to higher sales to the medical market driven by the acquisition of TuiLaser in the third quarter of fiscal 2005. Quarterly scientific and government program sales decreased $6.7 million, or 19%, due to lower demand for pumping, measuring and advanced research applications used by university and government research groups.

The increase in the microelectronics market of $9.8 million, or 11%, during the first six months of fiscal 2006 is primarily due to higher sales in advanced packaging applications, including laser direct imaging and via drilling. Graphics arts and display market sales increased $7.9 million, or 68%, primarily due to individually addressable semiconductor bar shipments for reprographics applications. The increase in the OEM components and instrumentation market of $6.7 million, or 12%, during the first six months of fiscal 2006 is due primarily to higher sales to the medical market driven by the acquisition of TuiLaser in the third quarter of fiscal 2005. Sales in the material processing market increased $5.4 million, or 17%, primarily due to higher commercial laser shipments for non-metal cutting and marking applications. Scientific and government program sales decreased $10.0 million, or 15%, due to lower demand for pumping, measuring and advanced research applications used by university and government research groups.

We anticipate that our microelectronics and material processing markets will show the greatest growth potential in the future as feature sizes continue to shrink and new materials are introduced. The graphic arts market should also exhibit significant growth based upon the release of a highly differentiated product platform in this market. The OEM components

and instrumentation market is stronger due to the acquisition of TuiLaser and we believe this market will continue to be strong in the remainder of fiscal 2006. The scientific research and OEM components and instrumentation markets are projected to show more modest growth. Although we continue to have a sizeable backlog of orders, current market conditions make it difficult to predict future orders.

GROSS PROFIT

The gross profit rate decreased to 43.7% from 44.6% in the second fiscal quarter and increased to 43.3% from 42.8% for the six months ended April 1, 2006, compared to the same periods one year ago.

The second quarter 0.9% decrease in gross profit was primarily due to higher variances resulting from lower salvage recovery in the semiconductor business (2.9%) and a less favorable product mix with lower sales volumes of higher margin microelectronics products (0.7%), partially offset by lower warranty costs due to improving quality (1.0%) and lower other costs (1.7%) due to lower provisions for slow-moving lithography inventory and lower royalty expense.

The gross profit increase of 0.5% during the first six months of fiscal 2006 was primarily due to lower other costs (2.2%) due to lower lithography inventory provisions including the first quarter of 2005 lithography charge for write-downs of excess and obsolete inventories, charges related to government grants and exiting certain purchase commitments and lower royalty expense and lower warranty costs due to improving quality (0.4%), partially offset by higher variances due to lower salvage recovery in the semiconductor business (2.1%).

Our gross profit rate has been and will continue to be affected by a variety of factors including market mix, manufacturing efficiencies, excess and obsolete inventory write-downs, warranty costs, pricing by competitors or suppliers, new product introductions, production volume, customization and reconfiguration of systems and foreign currency fluctuations. We anticipate that our gross margin for the third quarter of fiscal 2006 will be in the range of 43.5% to 44.5% and that we will exit the fourth quarter of fiscal 2006 with a gross margin of 46%. We anticipate that the increase to 46% from the second quarter’s 43.7% will be accomplished primarily through leveraging fixed costs through volume, material cost reductions and improved cycle times and yields.

OPERATING EXPENSES:

	Three Months Ended
	April 1, 2006					April 2, 2005
	Amount			Percentage of total net sales		Amount			Percentage of total net sales
	(Dollars in thousands)
Research and development	$	19,263		13.2	%	$	14,175		10.8	%
Selling, general and administrative	32,131			22.0	%	28,765			21.9	%
Restructuring, impairment and other charges (recoveries)	(90		)	(0.1	)%	(40		)	(0.0	)%
Amortization of intangible assets	2,335			1.6	%	1,528			1.2	%
Total operating expenses	$	53,729		36.7	%	$	44,428		33.9	%

	Six Months Ended
	April 1, 2006					April 2, 2005
	Amount			Percentage of total net sales		Amount		Percentage of total net sales
	(Dollars in thousands)
Research and development	$	33,881		12.2	%	$	28,476	11.1	%
In-process research and development	690			0.2	%	—		—
Selling, general and administrative	61,542			22.2	%	57,137		22.2	%
Restructuring, impairment and other charges (recoveries)	(90		)	(0.0	)%	260		0.1	%
Amortization of intangible assets	4,641			1.7	%	3,021		1.2	%
Total operating expenses	$	100,664		36.3	%	$	88,894	34.6	%

Research and development (“R&D”) expenses increased $5.1 million, or 36%, and $5.4 million, or 19%, during the fiscal quarter and six months ended April 1, 2006 compared to the comparable periods one year ago. The second fiscal quarter increase is primarily due to higher headcount related and supplies and tooling spending on projects ($1.7 million) including spending associated with the “greening” of our products to comply with new European environmental directives, lower net reimbursements from customers for development projects ($1.5 million), the acquisition of TuiLaser in the third quarter of fiscal 2005 ($1.1 million), $0.6 million of stock-based compensation expense under SFAS 123(R) and the acquisition of Iolon in the first quarter of fiscal 2006 ($0.8 million). The increase during the first six months of fiscal 2006 is primarily due to the acquisition of TuiLaser in the third quarter of fiscal 2005 ($2.3 million), lower net reimbursements from customers for development projects ($1.2 million), $1.1 million of stock-based compensation expense under SFAS 123(R), the acquisition of Iolon in the first quarter of fiscal 2006 ($0.9 million) and higher project spending on headcount, tooling and supplies ($0.7 million) including spending associated with the “greening” of our products to comply with new European environmental directives, partially offset by the lithography charge in the first quarter of fiscal 2005 ($0.6 million). We anticipate R&D expenses to be approximately 13% of net sales in the third quarter of fiscal 2006. While we expect R&D spending to remain high for a few more quarters due to the European greening initiatives and increased investment in the automated packaging of our OPS technology, we anticipate it will return to a more normal rate towards the end of the fourth quarter of fiscal 2006.

The in-process research and development (“IPR&D”) charge recognized in the six months ended April 1, 2006, resulted from our acquisition of Iolon. At the date of acquisition, we immediately charged $0.7 million to expense, representing purchased IPR&D related to a development project that had not yet reached technological feasibility and had no alternative future use. The assigned value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the net cash flows from such project, and discounting the net cash flows back to its present value. At the time of the acquisition, the project was expected to be commercially viable in the second quarter of fiscal 2006 with $0.1 million of estimated expenditures to complete. The project was completed and products were shipped in the second quarter of fiscal 2006.

Selling, general and administrative (“SG&A”) expenses increased $3.4 million, or 12% during the second fiscal quarter of 2006 and $4.4 million, or 8% during the first six months of 2006, compared to the comparable periods one year ago. The second fiscal quarter increase was primarily due to $2.6 million of stock-based compensation expense under SFAS 123(R), higher charges due to higher gains on deferred compensation plan liabilities ($1.0 million), the acquisition of TuiLaser ($0.9 million) in the third quarter of fiscal 2005 and Excel integration costs of $0.3M, partially offset by lower headcount-related spending ($0.9 million), and lower facilities and facilities repair costs ($0.8 million). The increase during the first six months of fiscal 2006 was primarily due to $4.8 million of stock-based compensation expense under SFAS 123(R), the acquisition of TuiLaser ($1.8 million) in the third quarter of fiscal 2005, a facility closure charge of $0.7 million and Excel integration costs of $0.3 million, partially offset by lower headcount-related spending ($2.7 million) including the impact of consolidating Lambda Physik’s former operations in the U.S. and Japan into Coherent’s operations and lower facilities and facilities repair costs ($1.0 million). We anticipate SG&A expenses to be in the range of 21.0% to 22.0% of net sales in the third quarter of fiscal 2006.

Restructuring, impairment and other charges (recoveries) during the three and six months ended April 1, 2006 and April 2, 2005 were related to adjustments to the estimated contractual obligation for lease and other facility costs of a previously vacated building, net of estimated sublease income.

Amortization of intangible assets increased $0.8 million, or 53%, and $1.6 million, or 54%, in the second fiscal quarter and six months ended April 1, 2006 from the same periods one year ago. The increases were primarily due to amortization of intangibles related to our TuiLaser acquisition.

OTHER INCOME (EXPENSE)

Other income, net of other expense, increased $1.5 million and $2.1 million during the second quarter and six months ended April 1, 2006, respectively, compared to the comparable periods one year ago. The quarterly increase was primarily due to higher interest income ($1.7 million) as a result of higher returns and higher cash balances and higher investment gains, net of expenses, associated with our deferred compensation plans ($1.1 million), partially offset by higher foreign currency exchange net losses ($1.3 million). The increase during the first six months of fiscal 2006 was primarily due to higher interest income ($2.6 million) as a result of higher returns and higher cash balances, lower losses from Lambda

Physik’s investment in a joint venture ($0.7 million) and lower interest expense ($0.5 million) primarily due to principal payments made on our Star notes, repayments of loans in Lambda Physik and higher capitalized interest, partially offset by interest on the convertible subordinated notes; the increases were partially offset by $2.0 million higher foreign currency exchange net losses.

INCOME TAXES

The effective tax rate on income before minority interest for the second quarter of fiscal 2006 of 34.4% was lower than the statutory rate of 35.0% primarily due to increased use of export tax incentives and California R&D tax credits. The effective tax rate on income before minority interest for the six months ended April 1, 2006 of 24.4% was lower than the statutory rate of 35.0% primarily due to increased use of export tax incentives and California R&D tax credits, as well as a benefit of $1.8 million resulting from the consolidation of two entities in Japan. The effect of the consolidation resulted in accumulated earnings, which had previously been treated as permanently invested, becoming available for distribution.

The effective tax rate on income before minority interest for the second quarter of fiscal 2005 of (31.8%) was lower than the statutory rate of 35.0% primarily due to a benefit of $9.6 million related to the reversal of deferred tax valuation allowances at Lambda Physik. The effective tax rate on income before minority interest for the six months ended April 2, 2005 of (8.6%) was lower than the statutory rate of 35.0% primarily due to a benefit of $9.6 million related to the reversal of deferred tax valuation allowances at Lambda Physik and benefits from R&D tax credits, including benefits of federal tax law changes enacted in the first quarter of fiscal 2005.

MINORITY INTEREST IN SUBSIDIARIES (EARNINGS) LOSSES

Minority interest in subsidiaries’ losses in the six months ended April 2, 2005 related to our Lambda Physik subsidiary, which we completed the purchase of in the second quarter of fiscal 2005.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Historically, our primary source of cash has been provided through operations. Other recent sources of cash include proceeds from our convertible subordinated note offering, proceeds received from the sale of stock through employee stock option and purchase plans, as well as through other debt borrowings. Our historical uses of cash have primarily been for capital expenditures, acquisitions of businesses and payments of principal and interest on outstanding debt obligations. Supplemental information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our condensed consolidated statements of cash flows and the notes to condensed consolidated financial statements:

	Six Months Ended
	April 1, 2006			April 2, 2005
	(in thousands)
Net cash provided by operating activities	$	33,330		$	48,704
Sales of shares under employee stock plans	6,947			7,285
Net proceeds from convertible subordinated notes	194,888			—
Repurchase of common stock	(22,250		)	—
Capital expenditures	(8,073		)	(7,945		)
Acquisition of businesses, net of cash acquired	(5,114		)	(12,129		)
Net payments on debt borrowings	—			(745		)

Net cash provided by operating activities decreased by $15.4 million for the six months ended April 1, 2006 compared to the same period one year ago. The decrease was primarily due to lower cash flows from accounts receivable, partially offset by lower inventories. We believe that cash provided by operating activities will be adequate to cover our working

capital needs, debt service requirements and planned capital expenditures for at least the next 12 months to the extent such items are known or are reasonably determinable based on current business and market conditions. However, we may elect to finance certain of our capital expenditure requirements through borrowings under our bank credit facilities or other sources of capital. We continue to follow our strategy to further strengthen our financial position by using available cash flow to primarily fund operations.

We intend to continue pursuing acquisition opportunities at prices we believe are reasonable based upon market conditions. However, we cannot accurately predict the timing, size and success of our acquisition efforts or our associated potential capital commitments. Furthermore, we cannot assure you that we will be able to acquire businesses on terms acceptable to us. We expect to fund future acquisitions through unrestricted cash balances, cash flows from operations, additional borrowings or the issuance of securities. The extent to which we will be willing or able to use our common stock to make acquisitions will depend on its market value from time to time and the willingness of potential sellers to accept it as full or partial payment.

Additional sources of cash available to us included a multi-currency line of credit and bank credit facilities totaling $21.1 million as of April 1, 2006, of which $20.8 million was unused and available. These credit facilities were used in Europe during the first six months of fiscal 2006.

Our ratio of current assets to current liabilities was 6.5:1 at April 1, 2006 compared to 4.4:1 at October 1, 2005. The increase in our ratio from October 1, 2005 to April 1, 2006 is primarily due to increases in cash and cash equivalents due to the proceeds from our convertible subordinated note offering and increases in accounts receivable, partially offset by decreases in inventories, cash overdrafts and income taxes payable. Our cash position, short-term investments, working capital and debt obligations are as follows:

	April 1, 2006		October 1, 2005
	(in thousands)
Cash and cash equivalents	$	353,294	$	97,507
Short-term investments	75,842		133,407
Working capital	591,258		380,134
Total debt obligations	213,832		12,736

Debt Obligations and Restricted Cash, Cash Equivalents and Short-term Investments

In September 2003, we amended the notes used to finance our acquisition of Star Medical (“Star notes”) to eliminate all financial covenant requirements. In place of the covenants, the amendment requires that we place cash and short-term investment balances in an amount equal to 120% of the principal balance in a restricted collateral account. At April 1, 2006, $15.2 million of current restricted cash and cash equivalents were related to the Star notes (see Note 8 “Current Obligations” in our Notes to Condensed Consolidated Financial Statements).

As part of our tender offer to purchase the remaining outstanding shares of Lambda Physik, we were required by local regulations to have funds available for the offer in an account located in Germany. As of April 1, 2006, we had $1.2 million restricted for remaining close out costs associated with our purchase of the remaining outstanding shares of Lambda Physik, which are included in non-current restricted cash and cash equivalents on our consolidated balance sheets. At April 1, 2006, we also had $1.4 million in non-current restricted cash related to outstanding long-term debt at a subsidiary.

In March 2006, we issued $200.0 million of 2.75% convertible subordinated notes due March 2011. The notes are unsecured and subordinate to all existing and future senior debt. The notes mature on March 1, 2011, unless earlier redeemed or converted. Interest on the notes is payable in cash semi-annually in arrears on March 1 and September 1 of each year. We intend to use the proceeds from the issuance of these notes to facilitate a portion of our proposed $376.0 million acquisition of Excel Technology, Inc.

common stock occur, (3) if a fundamental change occurs or (4) during the period from, and including February 1, 2011 to, but excluding, the maturity date. Upon conversion, in lieu of shares of our common stock, for each $1,000 principal amount of notes a holder will receive an amount in cash equal to the lesser of (i) $1,000 or (ii) the conversion value of the number of shares of our common stock equal to the conversion rate. If the conversion value exceeds $1,000, we will also deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the remaining common stock deliverable upon conversion. If a holder elects to convert its notes in connection with a fundamental change, we will pay a make whole premium by increasing the conversion rate applicable to such notes.

The indenture under which the notes were issued provides that an event of default will occur if (i) we fail to pay when due the principal or fundamental change purchase price of any security, when they become due and payable under the terms of the agreement, (ii) we fail to pay interest on the notes and fail to cure such non-payment within 30 days, (iii) we fail to deliver when due all cash and shares of common stock deliverable upon conversion within 15 days, (iv) we fail to perform or observe any other term, covenant or agreement required of us in the indenture and the failure is not cured or waived within 60 days, or (v) we fail to pay the principal by the end of any applicable grace period or the acceleration of other indebtedness of the Company for borrowed money where the aggregate principal amount with respect to which the default or acceleration exceeds $25 million and the indebtedness has not been rescinded or annulled or the indebtedness repaid within a period of 30 days after receipt of notice of default, or the default is not cured, waived, rescinded or annulled. If any of these events of default occurs, either the trustee or the holders of at least 25% of the outstanding notes may declare the principal amount of the notes to be due and payable. In addition, an event of bankruptcy, insolvency or reorganization involving either the Company or any of our significant subsidiaries will constitute an event of default under the indenture and, in that case, the principal amount of the notes will automatically become due and payable.

Contractual Obligations and Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined under Regulation S-K of the Securities Act of 1933. Information regarding our long-term debt payments, operating lease payments, purchase commitments with suppliers and purchase obligations is provided in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form
10-K/A for the fiscal year ended October 1, 2005. There have been no material changes in contractual obligations since October 1, 2005, with the exception of the issuance of $200.0 million of 2.75% convertible subordinated notes due March 2011. Information regarding our other financial commitments at April 1, 2006 is provided in the Notes to the Condensed Consolidated Financial Statements in this filing.

Changes in Financial Condition

Cash provided by operating activities during the six months ended April 1, 2006 was $33.3 million, which included net income of $17.5 million, depreciation and amortization of $17.8 million, stock-based compensation expense of $6.7 million, IPR&D of $0.7 million, increases in net deferred tax assets of $0.6 million and other items aggregating $0.1 million, partially offset by cash used by operating assets and liabilities of $10.1 million.

Cash provided by investing activities during the six months ended April 1, 2006 was $41.0 million, which included $57.6 million, net, proceeds from available-for-sale securities and other items aggregating $0.1 million, partially offset by $8.1 million used to acquire property and equipment, invest in information technology and improve buildings, $5.1 million used to purchase Iolon, $2.1 million of pre-acquisition costs related to the purchase of Excel and $1.4 million increase in restricted cash.

Cash provided by financing activities during the six months ended April 1, 2006 was $178.3 million, which included $200.0 million proceeds from our convertible subordinated notes offering, $6.9 million generated from our employee stock purchase and stock option plans and $1.4 million in long-term borrowings, partially offset by $22.2 million used to purchase common stock, $5.1 million of debt issuance costs associated with the convertible subordinated notes offering and a decrease in cash overdraft of $2.7 million.

Changes in exchange rates during the six months ended April 1, 2006 provided $3.2 million, primarily due to the weakening of the Japanese Yen, partially offset by the strengthening of the Euro in relation to the U.S. dollar.

RECENT ACCOUNTING STANDARDS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs” (“SFAS 151”), an amendment of Accounting Research Bulletin No. 43, Chapter 4. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. We adopted the provisions of SFAS 151 on October 2, 2005 and the adoption did not have a material effect on our consolidated results of operations or financial position.

BUSINESS ENVIRONMENT AND INDUSTRY TRENDS

Risks Related to our Business

We may experience quarterly and annual fluctuations in our net sales and operating results in the future, which may result in volatility in our stock price.

Our net sales and operating results may vary significantly from quarter to quarter and from year to year in the future. A number of factors, many of which are outside of our control, may cause these variations, including:

• general economic uncertainties;

• fluctuations in demand for, and sales of, our products or prolonged downturns in the industries that we serve;

• ability of our suppliers to produce and deliver components and parts, including sole or limited source components, in a timely manner, in the quantity and quality desired and at the prices we have budgeted;

• timing or cancellation of customer orders and shipment scheduling;

• fluctuations in our product mix;

• foreign currency fluctuations;

• commodity pricing, including increases in oil prices;

• introductions of new products and product enhancements by our competitors, entry of new competitors into our markets, pricing pressures and other competitive factors;

• our ability to develop, introduce, manufacture and ship new and enhanced products in a timely manner without defects;

• rate of market acceptance of our new products;

• delays or reductions in customer purchases of our products in anticipation of the introduction of new and enhanced products by us or our competitors;

• our ability to control expenses;

• level of capital spending of our customers;

• potential obsolescence of our inventory; and

• costs related to acquisitions of technology or businesses.

In addition, we often recognize a substantial portion of our sales in the last month of the quarter. 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 enough to compensate for the shortfall. We also 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. Accordingly, variations in timing of sales, particularly for our higher priced, higher margin products, can cause significant fluctuations in quarterly operating results.

Due to these and other factors, we believe that quarter-to-quarter and year-to-year comparisons of our historical operating results may not be meaningful. You should not rely on our results for any quarter or year as an indication of our future performance. Our operating results in future quarters and years may be below public market analysts’ or investors’ expectations, which would likely cause the price of our common stock to fall. In addition, over the past several years, the stock market has experienced extreme price and volume fluctuations that have affected the stock prices of many technology companies. There has not always been a direct correlation between this volatility and the performance of particular companies subject to these stock price fluctuations. These factors, as well as general economic and political conditions or investors’ concerns regarding the credibility of corporate financial statements and the accounting profession, may have a material adverse affect on the market price of our stock in the future.

We are exposed to risks associated with worldwide economic slowdowns and related uncertainties.

Concerns about consumer and investor confidence, volatile corporate profits and reduced capital spending, international conflicts, terrorist and military activity, civil unrest and pandemic illness could cause a slowdown in customer orders or cause customer order cancellations. In addition, political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions in the United States and abroad. Unstable political, social and economic conditions make it difficult for our customers, our suppliers and us to accurately forecast and plan future business activities. In particular, it is difficult to develop and implement strategy, sustainable business models and efficient operations, as well as effectively manage supply chain relationships. If such conditions persist, our business, financial condition and results of operations could suffer.

We depend on sole source or limited source suppliers for some of the key components and materials, including exotic materials and crystals, in our products, which make us susceptible to supply shortages or price fluctuations that could adversely affect our business.

We currently purchase several key components and materials used in the manufacture of our products from sole source or limited source suppliers. Some of these suppliers are relatively small private companies that may discontinue their operations at any time. We typically purchase our components and materials through purchase orders and we have no guaranteed supply arrangement with any of these suppliers. We may fail to obtain these supplies in a timely manner in the future. We may experience difficulty identifying alternative sources of supply for certain components used in our products. We would experience further delays while identifying, evaluating and testing the products of these potential alternative suppliers. Furthermore, financial or other difficulties faced by these suppliers or significant changes in demand for these components or materials could limit their availability. Any interruption or delay in the supply of any of these components or materials, or the inability to obtain these components and materials from alternate sources at acceptable prices and within a reasonable amount of time, would impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

We rely exclusively on our own production capability to manufacture certain strategic components, optics and optical systems, crystals, semiconductor lasers, lasers and laser-based systems. Because we manufacture, package and test these components, products and systems at our own facilities, and such components, products and systems are not readily available from other sources, any interruption in manufacturing would adversely affect our business. In addition, our failure to achieve adequate manufacturing yields of these items at our manufacturing facilities may materially and adversely affect our operating results and financial condition.

Our future success depends on our ability to increase our sales volumes and decrease our costs to offset anticipated declines in the average selling prices of our products and, if we are unable to realize greater sales volumes and lower costs, our operating results may suffer.

Our future success depends on the continued growth of the markets for lasers, laser systems, precision optics and related accessories, as well as our ability to identify, in advance, emerging markets for laser-based systems. We cannot assure you that we will be able to successfully identify, on a timely basis, new high-growth markets in the future. Moreover, we cannot assure you that new markets will develop for our products or our customers’ products, or that our technology or pricing will enable such markets to develop. Future demand for our products is uncertain and will depend to a great degree on continued technological development and the introduction of new or enhanced products. If this does not continue, sales of our products may decline and our business will be harmed.

We have historically been the industry’s high quality, high priced supplier of laser systems. We have, in the past, experienced decreases in the average selling prices of some of our products. We anticipate that as competing products become more widely available, the average selling price of our products may decrease. If we are unable to offset the anticipated decrease in our average selling prices by increasing our sales volumes, our net sales will decline. In addition, to maintain our gross margins, we must continue to reduce the cost of our products. Furthermore, as average selling prices of our current products decline, we must develop and introduce new products and product enhancements with higher margins. If we cannot maintain our gross margins, our operating results could be seriously harmed, particularly if the average selling prices of our products decrease significantly.

Our future success depends on our ability to develop and successfully introduce new and enhanced products that meet the needs of our customers.

Our current products address a broad range of commercial and scientific research applications in the photonics markets. We cannot assure you that the market for these applications will continue to generate significant or consistent demand for our products. Demand for our products could be significantly diminished by disrupting technologies or products that replace them or render them obsolete. Furthermore, the new and enhanced products generally continue to be smaller in size and have lower average selling prices (“ASPs”), and therefore, we have to sell more units to maintain revenue levels.

Over the last three fiscal years, our research and development expenses have been in the range of 11% to 13% of net sales. Our future success depends on our ability to anticipate our customers’ needs and develop products that address those needs. Introduction of new products and product enhancements will require that we effectively transfer production processes from research and development to manufacturing and coordinate our efforts with those of our suppliers to achieve volume production rapidly. If we fail to transfer production processes effectively, develop product enhancements or introduce new products in sufficient quantities to meet the needs of our customers as scheduled, our net sales may be reduced and our business may be harmed.

We face risks associated with our foreign sales that could harm our financial condition and results of operations.

For the three and six months ended April 1, 2006, 71% and 68%, respectively, of net sales were derived from customers outside of the United States. For fiscal years 2005, 2004, and 2003, 65%, 61% and 61%, respectively, of our net sales were derived from customers outside of the United States. We anticipate that foreign sales will continue to account for a significant portion of our revenues in the foreseeable future. A global economic slowdown could have a negative effect on various foreign markets in which we operate. Such a slowdown may cause us to reduce our presence in certain countries, which may negatively affect the overall level of business in such countries. The majority of our foreign sales occur through our foreign sales subsidiaries and the remainder of our foreign sales result from exports to foreign distributors, resellers and customers. Our foreign operations and sales are subject to a number of risks, including:

• longer accounts receivable collection periods;

• the impact of recessions in economies outside the United States;

• unexpected changes in regulatory requirements;

• certification requirements;

• environmental regulations;

• reduced protection for intellectual property rights in some countries;

• potentially adverse tax consequences;

• political and economic instability; and

• preference for locally produced products.

We are also subject to the risks of fluctuating foreign exchange rates, which could materially adversely affect the sales price of our products in foreign markets, as well as the costs and expenses of our foreign subsidiaries. While we use forward exchange contracts and other risk management techniques to hedge our foreign currency exposure, we remain exposed to the economic risks of foreign currency fluctuations.

We may not be able to protect our proprietary technology, which could adversely affect our competitive advantage.

We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We cannot assure you that our patent applications will be approved, that any patents that may be issued will protect our intellectual property or that any issued patents will not be challenged by third parties. Other parties may independently develop similar or competing technology or design around any patents that may be issued to us. We cannot be certain that the steps we have taken will 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.

We could become subject to litigation regarding intellectual property rights, which could seriously harm our business.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. In the future, we may be a party to litigation to protect our intellectual property or as a result of an alleged infringement of others’ intellectual property. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages or invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation could also force us to do one or more of the following:

• stop manufacturing, selling or using our products that use the infringed intellectual property;

• obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, although such license may not be available on reasonable terms, or at all; or

• redesign the products that use the technology.

If we are forced to take any of these actions, our business may be seriously harmed. We do not have insurance to cover potential claims of this type.

We may, in the future, initiate claims or litigation against third parties for infringement of our proprietary rights to protect these rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could result in costly litigation and the diversion of our technical and management personnel.

We depend on skilled personnel to operate our business effectively in a rapidly changing market, and if we are unable to retain existing or hire additional personnel when needed, our ability to develop and sell our products could be harmed.

Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. Recruiting and retaining highly skilled personnel in certain functions continues to be difficult. At certain locations where we operate, the cost of living is extremely high and it may be difficult to retain key employees and management at a reasonable cost. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs. Our failure to attract additional employees and retain our existing employees could adversely affect our growth and our business.

Our future success depends upon the continued services of our executive officers and other key engineering, sales, marketing, manufacturing and support personnel, any of whom may leave, which could harm our business.

The long sales cycles for our products may cause us to incur significant expenses without offsetting revenues.

Customers often view the purchase of our products as a significant and strategic decision. As a result, customers typically expend significant effort in evaluating, testing and qualifying our products before making a decision to purchase them, resulting in a lengthy initial sales cycle. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales and marketing and research and development expenses to customize our products to the customer’s needs. We may also expend significant management efforts, increase manufacturing capacity and order long lead-time components or materials prior to receiving an order. Even after this evaluation process, a potential customer may not purchase our products. As a result, these long sales cycles may cause us to incur significant expenses without ever receiving revenue to offset such expenses.

The markets in which we sell our products are intensely competitive and increased competition could cause reduced sales levels, reduced gross margins or the loss of market share.

Competition in the various photonics markets in which we provide products is very intense. We compete against a number of large companies, including Newport Corporation; Excel Technology, Inc.; JDS Uniphase Corp.; Rofin-Sinar Technologies, Inc.; and Cymer, Inc., as well as other smaller companies. Some of our competitors are large companies that have significant financial, technical, marketing and other resources. These competitors may be able to devote greater resources than we can to the development, promotion, sale and support of their products. Some of our competitors that have more cash reserves are much better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines. Any of these acquisitions could give our competitors a strategic advantage. Any business combinations or mergers among our competitors, forming larger competitors with greater resources, could result in increased competition, price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, results of operations and financial condition.

Additional competitors may enter the market and we are likely to compete with new companies in the future. We may encounter potential customers that, due to existing relationships with our competitors, are committed to the products offered by these competitors. As a result of the foregoing factors, we expect that competitive pressures may result in price reductions, reduced margins and loss of market share.

Some of our laser systems are complex in design and may contain defects that are not detected until deployed by our customers, which could increase our costs and reduce our revenues.

Laser systems are inherently complex in design and require ongoing regular maintenance. The manufacture of our lasers, laser products and systems involves a highly complex and precise process. As a result of the technical complexity of our products, changes in our or our suppliers’ manufacturing processes or the inadvertent use of defective materials by us or our suppliers could result in a material adverse effect on our ability to achieve acceptable manufacturing yields and product reliability. To the extent that we do not achieve such yields or product reliability, our business, operating results, financial condition and customer relationships would be adversely affected. We provide warranties on certain of our product sales, and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires us to make estimates of failure rates and expected costs to repair or replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product line. If actual return rates and/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 vendors, 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; and

• legal actions 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.

If we fail to accurately forecast component and material requirements for our products, we could incur additional costs and incur significant delays in shipments, which could result in loss of customers.

We use rolling forecasts based on anticipated product orders and material requirements planning systems to determine our product requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. We depend on our suppliers for most of our product components and materials. Lead times for components and materials that we order vary significantly and depend on factors including the specific supplier requirements, the size of the order, contract terms and current market demand for components. For substantial increases in our sales levels, some of our suppliers may need at least six months lead-time. If we overestimate our component and material requirements, we may have excess inventory, which would increase our costs. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to our customers. Any of these occurrences would negatively impact our net sales, business or operating results.

Our increased reliance on contract manufacturing may adversely impact our financial results and operations.

Our manufacturing strategy includes relying heavily on sourcing from contract manufacturers, including some performed at international sites located in Asia. Our ability to resume internal manufacturing operations for certain products in a timely manner has been eliminated. The cost, quality, performance and availability of contract manufacturing operations are and will be essential to the successful production and sale of many of our products. The inability of any contract manufacturer to meet our cost, quality, performance and availability standards could adversely impact our financial condition or results of operations. We may not be able to provide contract manufacturers with product volumes that are high enough to achieve sufficient cost savings. If shipments fall below forecasted levels, we may incur increased costs or be required to take ownership of the inventory. Also, our ability to control the quality of products produced by contract manufacturers may be limited and quality issues may not be resolved in a timely manner, which could adversely impact our financial condition or results of operations.

If we fail to manage our growth effectively, our business could be disrupted, which could harm our operating results.

Our ability to successfully offer our products and implement our business plan in evolving markets requires an effective planning and management process. We continue to expand the scope of our operations domestically and internationally. The growth in sales, combined with the challenges of managing geographically-dispersed operations, has placed a significant strain on our management systems and resources, and our anticipated growth in future operations could continue to place such a strain. The failure to effectively manage our growth could disrupt our business and harm our operating results.

Any acquisitions we make could disrupt our business and harm our financial condition.

We have in the past made strategic acquisitions of other corporations, and we continue to evaluate potential strategic acquisitions of complementary companies, products and technologies. In the event of any future acquisitions, we could:

• issue stock that would dilute our current stockholders’ percentage ownership;

• pay cash;

• incur debt;

• assume liabilities; or

• incur expenses related to in-process research and development, impairment of goodwill and amortization.

These purchases also involve numerous risks, including:

• problems combining the acquired operations, technologies or products;

• unanticipated costs or liabilities;

• diversion of management’s attention from our core businesses;

• adverse effects on existing business relationships with suppliers and customers; and

• potential loss of key employees, particularly those of the purchased organizations.

We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, which may harm our business.

We use standard laboratory and manufacturing materials that could be considered hazardous and we could be liable for any damage or liability resulting from accidental environmental contamination or injury.

Although most of our products do not incorporate hazardous or toxic materials and chemicals, some of the gases used in our excimer lasers and some of the liquid dyes used in some of our scientific laser products are highly toxic. In addition, our operations involve the use of standard laboratory and manufacturing materials that could be considered hazardous. Also, if a facility fire were to occur at our Tampere, Finland, site and were to spread to a reactor used to grow semiconductor wafers, it could release highly toxic emissions. We believe that our safety procedures for handling and disposing of such materials comply with all federal, state and offshore regulations and standards. However, the risk of accidental environmental contamination or injury from such materials cannot be entirely eliminated. 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 and the resources of our business.

Compliance or the failure to comply with current and future environmental regulations could cause us significant expense.

We are subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process or requiring design changes or recycling of products we manufacture. If we fail to comply with any present and future regulations, we could be subject to future liabilities, the suspension of production or a prohibition on the sale of products we manufacture. In addition, such regulations could restrict our ability to expand 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, in 2003 the European Union 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 country that is a member of the European Union. RoHS and WEEE regulate the use of certain hazardous substances in, and require the collection, reuse and recycling of waste from, certain products we manufacture. We are aware of similar legislation that is currently in force or is being considered in the United States, as well as other countries, such as Japan and China. RoHS and WEEE are in the process of being implemented by individual countries in the European Union. It is likely that each jurisdiction will interpret RoHS and WEEE differently as they each implement them. We will continue to monitor RoHS and WEEE guidance as it is announced by individual jurisdictions to determine our responsibilities. The incomplete guidance available to us to date suggests that in some instances we will not be directly responsible for compliance with RoHS and WEEE because some of our products may be subject to exemptions. However, because some products may not be exempt and because the products are sold under our brand name, we may at times become contractually or directly subject to such regulations. Also, final guidance from individual jurisdictions may impose different or additional responsibilities upon us. 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 the European Union.

Private companies outside of Europe, most notably in Japan, are undertaking similar “green initiatives.” Noncompliance would result in similar risks.

If our facilities were to experience catastrophic loss, our operations would be seriously harmed.

Our facilities could be subject to a catastrophic loss from fire, flood, earthquake or terrorist activity. A substantial portion of our research and development activities, manufacturing, our corporate headquarters and other critical business operations are located near major earthquake faults in Santa Clara, California, an area with a history of seismic events. Any such loss at any of our facilities could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility. While we have obtained insurance to cover most potential losses, after reviewing the costs and limitations associated with earthquake insurance, we have decided not to procure such insurance. We believe that this decision is consistent with decisions reached by numerous other companies located nearby. We cannot assure you that our existing insurance coverage will be adequate against all other possible losses.

Provisions of our charter documents, Delaware law, our Common Shares Rights Plan, our Change-of-Control Severance Plan and our convertible notes may have anti-takeover effects that could prevent or delay a change in control.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition or make removal of incumbent directors or officers more difficult. These provisions may discourage takeover attempts and bids for our common stock at a premium over the market price. These provisions include:

• the ability of our board of directors to alter our bylaws without stockholder approval;

• limiting the ability of stockholders to call special meetings;

• limiting the ability of our stockholders to act by written consent; and

• establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a publicly held Delaware corporation from engaging in a merger, asset or stock sale or other transaction with an interested stockholder for a period of three years following the date such person became an interested stockholder, unless prior approval of our board of directors is obtained or as otherwise provided. These provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us without obtaining the prior approval of our board of directors, which may cause the market price of our common stock to decline. In addition, we have adopted a change of control severance plan, which provides for the payment of a cash severance benefit to each eligible employee based on the employee’s position. If a change of control occurs, our successor or acquirer will be required to assume and agree to perform all of our obligations under the change of control severance plan.

Our common shares rights agreement permits the holders of rights to purchase shares of our common stock to exercise the stock purchase rights following an acquisition of or merger by us with another corporation or entity, following a sale of 50% or more of our consolidated assets or earning power, or the acquisition by an individual or entity of 20% or more of our common stock. Our successor or acquirer is required to assume all of our obligations and duties under the common shares rights agreement, including in certain circumstances the issuance of shares of its capital stock upon exercise of the stock purchase rights. The existence of our common shares rights agreement may have the effect of delaying, deferring or preventing a change of control and, as a consequence, may discourage potential acquirers from making tender offers for our shares.

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, 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 in integral multiples of $1,000. We may also be required to issue additional shares upon conversion or provide for conversion into the acquirer’s capital stock in the event of certain fundamental changes.

Changes in tax rates or tax liabilities could affect future results.

As a global company, we are subject to taxation in the United States and various other countries. Significant judgment is required to determine worldwide tax liabilities. Our future tax rates could be affected by changes in the composition of earnings in countries with differing tax rates, changes in the valuation of our deferred tax assets and liabilities, or changes in

the tax laws. For example, recent U.S. legislation governing taxation of extraterritorial income (“ETI”) repealed certain export subsidies that were prohibited by the World Trade Organization and enacted different tax provisions. These new tax provisions are not expected to fully offset the loss of the repealed tax provisions and, as a result, our U.S. tax liability may increase. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different than the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our results of operations.

Compliance with changing regulation of corporate governance and public disclosure may create uncertainty regarding compliance matters.

Changing laws, regulations and standards relating to corporate governance and public disclosure may create uncertainty regarding compliance matters. New or changed laws, regulations and standards are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time. We are committed to maintaining high standards of ethics, corporate governance and public disclosure. Complying with evolving interpretations of new or changed legal requirements may cause us to incur higher costs as we revise current practices, policies and procedures, and may divert management time and attention from revenue generating to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may also be harmed.

We may not be able to successfully integrate Excel Technology’s business with our business.

The realization of the benefits of the Excel Technology acquisition, if completed as currently anticipated, will depend in part on the successful integration of technology, operations and personnel. The integration process will be complex, time consuming and expensive and may disrupt our business if not completed in a timely and efficient manner. We cannot assure you that Excel Technology’s business can be successfully integrated in a timely manner or at all or that any of the anticipated benefits from the acquisition will be realized. Risks to the successful integration of Excel Technology with our company include:

• the impairment of relationships with employees, customers and suppliers as a result of integration of management and other key personnel;

• the potential disruption of our business and the distraction of our management;

• the difficulty of incorporating the acquired technology and rights into the product offerings of our company; and

• unanticipated expenses related to the integration of Excel Technology.

We may not succeed in addressing these risks or any other problems encountered in connection with the acquisition. Our inability to timely and efficiently achieve integration could result in a material adverse effect on our business, financial condition and results of operations.

Charges to earnings resulting from the application of the purchase method of accounting to the Excel Technology acquisition may adversely affect our results of operations.

In accordance with generally accepted accounting principles, we will account for the Excel Technology acquisition using the purchase method of accounting, which will result in charges to earnings that could have a material adverse effect on the market value of our common stock following completion of the acquisition. Under the purchase method of accounting, we will allocate the total purchase price to Excel Technology’s net tangible and identifiable intangible assets based upon their estimated fair values at the acquisition date. The excess of the purchase price over net tangible and identifiable intangible assets will be recorded as goodwill. We will expense the portion of the estimated purchase price allocated to in-process research and development in the quarter in which the merger is completed. We will incur additional depreciation and amortization expense over the useful lives of certain of the net tangible and intangible assets acquired in connection with the acquisition. In addition, to the extent the value of goodwill or intangible assets with indefinite lives becomes impaired, we may be required to incur material charges relating to the impairment of those assets. These depreciation, amortization, in-process research and development and potential impairment charges could have a material impact on our results of operations.

The market price of our common stock may decline as a result of the acquisition of Excel Technology.

The market price of our common stock may decline as a result of the acquisition of Excel Technology if, among other things, the integration of the our business and Excel Technology’s business is unsuccessful, if the operational cost savings estimates are not realized, or if the transaction costs related to the acquisition of Excel Technology are greater than expected. The market price also may decline if we do not achieve the perceived benefits of the acquisition of Excel Technology as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the acquisition of Excel Technology on our financial results is not consistent with the expectations of financial or industry analysts.

Risks related to our industry

Our market is unpredictable and characterized by rapid technological changes and evolving standards, and, if we fail to address changing market conditions, our business and operating results will be harmed.

The photonics industry is characterized by extensive research and development, rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. Because this market is subject to rapid change, it is difficult to predict its potential size or future growth rate. Our success in generating revenues in this market will depend on, among other things:

• maintaining and enhancing our relationships with our customers;

• the education of potential end-user customers about the benefits of lasers, laser systems and precision optics; and

• our ability to accurately predict and develop our products to meet industry standards.

For the three and six months ended April 1, 2006, our research and development costs were $19.3 million (13% of net sales) and $33.9 million (12% of net sales), respectively. For our fiscal years 2005, 2004 and 2003, our research and development costs were $57.5 million (11% of net sales), $62.7 million (13% of net sales) and $51.0 million (13% of net sales), respectively. We cannot assure you that our expenditures for research and development will result in the introduction of new products or, if such products are introduced, that those products will achieve sufficient market acceptance. Our failure to address rapid technological changes in our markets could adversely affect our business and results of operations.

Continued volatility in the semiconductor manufacturing industry could adversely affect our business, financial condition and results of operations.

Our net sales depend in part on the demand for our products by semiconductor equipment companies. The semiconductor market has historically been characterized by sudden and severe cyclical variations in product supply and demand, which have often severely affected the demand for semiconductor manufacturing equipment, including laser-based tools and systems. 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 will 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 must be able to rapidly and effectively increase our manufacturing capacity to meet increases in customer demand that may be extremely rapid, and if we fail to do so we may lose business to our competitors and our relationships with our customers may be harmed.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk disclosures

We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

Interest rate sensitivity

A portion of our investment portfolio is composed of income securities. These securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at April 1, 2006, the fair value of the portfolio, based on quoted market prices, would decline by an immaterial amount. We have the ability to generally hold our fixed income investments until maturity and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. If necessary, we may sell short-term investments prior to maturity to meet our liquidity needs.

At April 1, 2006, the fair value of our available-for-sale debt securities was $92.0 million, of which $16.2 million was classified as cash and equivalents, $75.8 million was classified as short-term investments.

Foreign currency exchange risk

We maintain operations in various countries outside of the United States and foreign subsidiaries that manufacture and sell our products in various global markets. A majority of our sales are transacted in U.S. dollars. However, we do generate revenues in other currencies, primarily the Euro and Yen. As a result, our earnings and cash flows are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of twelve months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for trading purposes.

We do not anticipate any material adverse effect on our consolidated financial position, results of operations or cash flows resulting from the use of these instruments. There can be no assurance that these strategies will be effective or that transaction losses can be minimized or forecasted accurately.

A hypothetical 10% appreciation of the forward adjusted U.S. dollar to April 1, 2006 market rates would decrease the unrealized value of our forward contracts by $6.8 million. Conversely, a hypothetical 10% depreciation of the forward adjusted U.S. dollar to April 1, 2006 market rates would decrease the unrealized value of our forward contracts by $5.3 million.

The following table provides information about our foreign exchange forward contracts at April 1, 2006. The table presents the weighted average contractual foreign currency exchange rates, the value of the contracts in U.S. dollars at the contract exchange rate as of the contract maturity date and fair value. The U.S. notional fair value represents the contracted amount valued April 1, 2006 rates.

Forward contracts to sell (buy) foreign currencies for U.S. dollars (in thousands, except contract rates):

	Average Contract Rate	U.S. Notional Contract Value			U.S. Notional Fair Value
Fair Value Hedges:
Euro	1.2092	$	(57,197	)	$	(57,666	)
British Pound Sterling	1.7486	(455		)	(452		)
Japanese Yen	114.2011	9,982			9,815
Canadian Dollar	1.1508	782			772
Korean Won	975.0000	226			227

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of April 1, 2006. In connection with the previously identified material weakness in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) noted below, we have modified our disclosure controls and procedures to confirm that the financial information and related disclosures fairly present our operating results and financial condition for the period presented. Based on our evaluation of these controls and procedures and the status of the previously reported material weakness, we have concluded that our disclosure controls and procedures were not effective as of April 1, 2006.

Changes in Internal Controls Over Financial Reporting

As previously disclosed in the Company’s quarterly report on Form 10-Q for the quarterly period ended December 31, 2005, management determined that a material weakness existed in the Company’s internal controls over accounting and reporting for complex tax transactions as of December 31, 2005. Specifically, the Company did not accurately evaluate, review and report a non-routine and complex tax transaction related to the merger of two foreign entities. This deficiency in the operation of internal controls had no effect on any prior periods and was identified and corrected during the review of the interim financial statements as of December 31, 2005.

The Company has taken and is taking the following actions to address the material weakness in its tax function:

• We have retained tax advisors and increased the level of involvement of external tax advisers to provide additional quality assurance, and

• We will increase the level of review and discussion of significant tax matters and supporting documentation.

As the Company has not entered into any complex tax transactions during the quarter ended April 1, 2006, the Company has been unable to test its remediation efforts relating to the above mentioned control deficiency as of April 1, 2006. In light of the material weakness described above, we performed additional analysis and other post-closing procedures to ensure that the condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

PART II. OTHER INFORMATION

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information with respect to repurchases by us of our common stock during the fiscal quarter ended April 1, 2006:

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (1)
January 1, 2006 through January 28, 2006	226,071	$	30.37	226,071	999,655
January 29, 2006 through February 25, 2006	221,597	$	30.56	221,597	778,058
February 26 through April 1, 2006	—	—		—	778,058

(1) In September 2005, our Board of Directors authorized a share repurchase program of up to 1.5 million shares of our common stock. Under the terms of the repurchase program, purchases may be made from time to time in both the open market and in private transactions, as conditions warrant. The repurchase program is expected to remain in effect through September 30, 2007, unless earlier terminated or completed. On February 20, 2006, the repurchase program was placed on hold as a result of the announcement of our pending acquisition of Excel Technology. During the three months ended April 1, 2006, we purchased and cancelled a total of 447,668 shares of our common stock for approximately $13.6 million.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of stockholders was held on March 31, 2006. Proposals I, II and III were approved. The results are as follows:

Proposal I

The following directors were elected at the meeting to serve as directors for the ensuing year:

	For	Withheld
Bernard J. Couillaud	28,269,312	715,583
John R. Ambroseo	28,267,713	717,182
Charles W. Cantoni	28,189,778	795,117
John H. Hart	28,427,088	557,807
Robert J. Quillinan	27,763,394	1,221,501
Lawrence Tomlinson	28,425,513	559,392
Garry W. Rogerson	28,427,528	557,367
Sandeep Vij	28,589,735	395,160

Proposal II

The proposal to approve the amendment and restatement of the Company’s 1988 Director Stock Plan.

For		Against		Abstained
15,031,462		10,301,284		285,396

Proposal III

The proposal to ratify the appointment of Deloitte & Touche, LLP as the Company’s independent registered public accounting firm for the fiscal year ended September 30, 2006.

For		Against		Abstained
28,592,410		381,143		11,342

The proposals above are described in detail in the Registrant’s definitive proxy statement filed on February 28, 2006 for the Annual Meeting of Stockholders held on March 31, 2006.

Item 6. EXHIBITS

Exhibit No.		Description

2.1*		Agreement and Plan of Merger by and among the registrant, Spider Acquisition Corporation and Excel Technology, Inc. dated February 20, 2006. (Previously filed as Exhibit 2.1 to Form 8-K filed on February 21, 2006).

3.1*		Restated and Amended Certificate of Incorporation. (Previously filed as Exhibit 3.1 to Form 10-K for the fiscal year ended September 29, 1990).

3.2*		Certificate of Amendment of Restated and Amended Certificate of Incorporation of Coherent, Inc. (Previously filed as Exhibit 3.2 to Form 10-K for the fiscal year ended September 28, 2002).

3.3*		Bylaws of Coherent, Inc, as amended ( Previously filed as Exhibit 3.2 to Form 10-K for the fiscal year ended September 29, 1990).

4.1*		Amended and Restated Common Shares Rights Agreement dated November 2, 1989 between Coherent and the Bank of Boston. (Previously filed as Exhibit 4.1 to Form 8-K filed on November 3, 1989).

4.2*		Agreement of Substitution and Amendment of Common Shares Rights Agreement dated September 8, 2004 between Coherent and American Stock Transfer & Trust Company. (Previously filed as Exhibit 4.1 to Form 10-K/A Amendment No. 2 for the fiscal year ended October 2, 2004).

10.1		Purchase Agreement dated March 7, 2006 between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated.

10.2		Form of Lock-Up Agreement executed by Messrs. Couillard, Ambroseo, Cantoni, Hart, Tomlinson, Quillinan, Rogerson, Vij, Meissner, Spinelli, Victor, Bucek and Miller and Ms. Simonet with Merrill Lynch, Pierce, Fenner & Smith Incorporated.

10.3*		Indenture dated as of March 13, 2006 between the Company and U.S. Bank National Association, as Trustee (including form of 2.75% Convertible Subordinated Notes due 2011). (Previously filed as Exhibit 10.16 to Form 8-K on March 13, 2006).

10.4*		Registration Rights Agreement dated as of March 13, 2006 between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (Previously filed as Exhibit 10.17 to Form 8-K on March 13, 2006).

10.5		Supplementary Retirement Plan

10.6		Deferred Compensation Plan

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

These exhibits were previously filed with the Commission as indicated and are incorporated herein by reference.

COHERENT, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Coherent, Inc.
	(Registrant)


May 10, 2006	/s/:	JOHN R. AMBROSEO
		John R. Ambroseo
		President and Chief Executive Officer
		(Principal Executive Officer)


May 10, 2006	/s/:	HELENE SIMONET
		Helene Simonet
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit No.		Description

2.1*		Agreement and Plan of Merger by and among the registrant, Spider Acquisition Corporation and Excel Technology, Inc. dated February 20, 2006. (Previously filed as Exhibit 2.1 to Form 8-K filed on February 21, 2006).

3.2*		Certificate of Amendment of Restated and Amended Certificate of Incorporation of Coherent, Inc. (Previously filed as Exhibit 3.2 to Form 10-K for the fiscal year ended September 28, 2002).

3.3*		Bylaws of Coherent, Inc, as amended ( Previously filed as Exhibit 3.2 to Form 10-K for the fiscal year ended September 29, 1990).

4.1*		Amended and Restated Common Shares Rights Agreement dated November 2, 1989 between Coherent and the Bank of Boston. (Previously filed as Exhibit 4.1 to Form 8-K filed on November 3, 1989).

4.2*		Agreement of Substitution and Amendment of Common Shares Rights Agreement dated September 8, 2004 between Coherent and American Stock Transfer & Trust Company. (Previously filed as Exhibit 4.1 to Form 10-K/A Amendment No. 2 for the fiscal year ended October 2, 2004).

10.1		Purchase Agreement dated March 7, 2006 between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated.

10.2		Form of Lock-Up Agreement executed by Messrs. Couillard, Ambroseo, Cantoni, Hart, Tomlinson, Quillinan, Rogerson, Vij, Meissner, Spinelli, Victor, Bucek and Miller and Ms. Simonet with Merrill Lynch, Pierce, Fenner & Smith Incorporated.

10.3*		Indenture dated as of March 13, 2006 between the Company and U.S. Bank National Association, as Trustee (including form of 2.75% Convertible Subordinated Notes due 2011). (Previously filed as Exhibit 10.16 to Form 8-K on March 13, 2006).

10.4*		Registration Rights Agreement dated as of March 13, 2006 between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (Previously filed as Exhibit 10.17 to Form 8-K on March 13, 2006).

10.5		Supplementary Retirement Plan

10.6		Deferred Compensation Plan

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

These exhibits were previously filed with the Commission as indicated and are incorporated herein by reference.

Exhibit 10.1

COHERENT, INC.

(a Delaware Corporation)

2.75% Convertible Subordinated Notes due 2011

PURCHASE AGREEMENT

Dated: March 7, 2006

COHERENT, INC.
(a Delaware corporation)

$175,000,000
2.75% Convertible Subordinated Notes due 2011

PURCHASE AGREEMENT

March 7, 2006

MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
4 World Financial Center
New York, New York 10080

Ladies and Gentlemen:

Coherent, Inc., a Delaware corporation (the “Company”), confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch” or the “Initial Purchaser”) with respect to the issue and sale by the Company and the purchase by the Initial Purchaser of $175,000,000 aggregate principal amount of the Company’s 2.75% Convertible Subordinated Notes due 2011 (the “Initial Securities”), and with respect to the grant by the Company to the Initial Purchaser of the option described in Section 2(b) hereof to purchase all or any part of an additional $25,000,000 aggregate principal amount of 2.75% Convertible Subordinated Notes due 2011 (the “Option Securities” and together with the Initial Securities, the “Securities”). The Securities are to be issued pursuant to an indenture dated as of March 13, 2006 (the “Indenture”) between the Company and U.S. Bank National Association, as trustee (the “Trustee”).

The Securities are convertible, subject to certain conditions as described in the Final Offering Memorandum (as defined below), into shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”) in accordance with the terms of the Securities and the Indenture, as described in Schedule A hereto. Securities issued in book-entry form will be issued to Cede & Co. as nominee of The Depository Trust Company (“DTC”) pursuant to a blanket issuer letter of representations, to be dated on or prior to Closing Time (as defined in Section 2(c)) (the “DTC Agreement”), among the Company and DTC.

The Securities are being issued in connection with the potential acquisition (the “Acquisition”) by the Company of all of the outstanding capital stock of Excel Technology, Inc., a Delaware corporation (“Excel Technology”). The Acquisition will be effected pursuant to and in accordance with the Agreement and Plan of Reorganization (“Acquisition Agreement”), dated as of February 21, 2006, among the Company, Spider Merger Corporation, a Delaware corporation (“Merger Sub”) and Excel Technology. The consummation of the Acquisition is not a condition to the closing of the offering and sale of the Securities pursuant to this Agreement.

The Company understands that the Initial Purchaser proposes to make an offering of the Securities on the terms and in the manner set forth herein and agrees that the Initial Purchaser may resell, subject to the conditions set forth herein, all or a portion of the Securities to purchasers (“Subsequent Purchasers”) at any time after this Agreement has been executed and delivered. The Securities are to be

offered and sold through the Initial Purchaser without being registered under the Securities Act of 1933, as amended (the “1933 Act”), in reliance upon exemptions therefrom. Pursuant to the terms of the Securities and the Indenture, investors that acquire Securities may only resell or otherwise transfer such Securities if such Securities are hereafter registered under the 1933 Act or if an exemption from the registration requirements of the 1933 Act is available (including the exemption afforded by Rule 144A (“Rule 144A”) of the rules and regulations promulgated under the 1933 Act by the Securities and Exchange Commission (the “Commission”)).

On or prior to Closing Time, the Company will enter into a registration rights agreement with the Initial Purchaser (the “Registration Rights Agreement”), pursuant to which, subject to the conditions set forth therein, the Company will be required to use its commercially reasonable efforts to file and use its commercially reasonable efforts to have declared effective a registration statement (the “Registration Statement”) under the 1933 Act to register resales of the Securities and the shares of Common Stock issuable upon conversion thereof.

The Company (a) has prepared and delivered to the Initial Purchaser copies of (i) a preliminary offering memorandum dated March 6, 2006 (as supplemented or amended prior to the date hereof, the “Preliminary Offering Memorandum”) and (ii) a pricing term sheet attached hereto as Schedule B, which includes the pricing terms and other information with respect to the Securities and other matters not included in the Preliminary Offering Memorandum, as defined below (the “Pricing Term Sheet”) and (b) will prepare and deliver to the Initial Purchaser, on the date hereof or the second succeeding day, copies of a final offering memorandum dated March 7, 2006 (the “Final Offering Memorandum”), each for use by the Initial Purchaser in connection with its solicitation of purchases of, or offering of, the Securities. “Offering Memorandum” means, with respect to any date or time referred to in this Agreement, the most recent offering memorandum (whether the Preliminary Offering Memorandum or the Final Offering Memorandum, or any amendment or supplement to either such document), including exhibits thereto, and any documents incorporated therein by reference, which has been prepared and delivered by the Company to the Initial Purchaser in connection with its solicitation of purchases of, or offering of, the Securities.

All references in this Agreement to financial statements and schedules and other information which is “contained,” “included,” or “stated” in the Offering Memorandum (or other references of like import) shall be deemed to mean and include, unless modified or superseded by a subsequently filed or provided report, document or disclosure, all such financial statements and schedules and other information which are incorporated by reference in the Offering Memorandum; and all references in this Agreement to amendments or supplements to the Offering Memorandum shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934 (the “1934 Act”) which is incorporated by reference in the Offering Memorandum.

SECTION 1. Representations and Warranties by the Company .

(a) Representations and Warranties . The Company represents and warrants to the Initial Purchaser as of the date hereof and as of the Closing Time referred to in Section 2(c) hereof, and agrees with the Initial Purchaser, as follows:

(i) Disclosure Package and Final Offering Memorandum . As of the Applicable Time (as defined below), neither (x) the Offering Memorandum as of the Applicable Time as supplemented by the final pricing term sheet, in the form attached hereto as Schedule B (the “Pricing Supplement”), that has been prepared and delivered by the Company to the Initial Purchaser in connection with their solicitation of offers to purchase Securities, all considered

together (collectively, the “Disclosure Package”), nor (y) any individual Supplemental Offering Materials (as defined below), when considered together with the Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. “Applicable Time” means 7:00 am EST on March 8, 2006 or such other time as agreed by the Company and Merrill Lynch. This representation does not apply to any Excel Technology filings made with the Commission, except for those portions which are expressly incorporated by reference in the Offering Memorandum.

“Supplemental Offering Materials” means any “written communication” (within the meaning of the 1933 Act Regulations (as defined below)) prepared by or on behalf of the Company, or used or referred to by the Company, that constitutes an offer to sell or a solicitation of an offer to buy the Securities other than the Offering Memorandum or amendments or supplements thereto (including the Pricing Supplement), including, without limitation, any road show relating to the Securities that constitutes such a written communication.

As of its issue date and as of Closing Time, the Final Offering Memorandum will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

The representation and warranties in this subsection shall not apply to statements in or omissions from the Disclosure Package or the Final Offering Memorandum made in reliance upon and in conformity with written information furnished to the Company by the Initial Purchaser expressly for use therein.

(ii) Incorporated Documents . The Offering Memorandum as delivered from time to time shall incorporate by reference the most recent Annual Report of the Company on Form 10-K filed with the Commission and each Quarterly Report of the Company on Form 10-Q and each Current Report of the Company on Form 8-K filed with the Commission since the end of the fiscal year to which such Annual Report relates (except for information contained therein which is furnished). The documents incorporated or deemed to be incorporated by reference in the Offering Memorandum at the time they were or hereafter are filed with the Commission complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the “1934 Act Regulations”), and, when read together with the other information in the Offering Memorandum, at the time the Offering Memorandum was issued and at Closing Time, did not and will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that the foregoing shall not apply to the Excel Technology filings made with the Commission, except for those portions which are expressly incorporated by reference in the Offering Memorandum.

(iii) Independent Accountants .

(a) Deloitte & Touche LLP who certified the financial statements and supporting schedules of the Company and its subsidiaries as of September 30, 2005 and 2004 and for each of the three fiscal years in the period ended September 30, 2005 included or incorporated by reference in the Disclosure Package and the Final Offering Memorandum are independent public accountants with respect to the Company and its

subsidiaries within the meaning of the 1933 Act and the rules and regulations thereunder (the “1933 Act Regulations”).

(b) Ernst & Young AG Wirtschaftspruefungsgesellschaft (“Ernst & Young AG”) were previously the independent auditors of Lambda Physik AG (a subsidiary of the Company) and its subsidiaries, and previously audited and reported on Lambda Physik AG’s consolidated financial statements as of September 30, 2003 and for the periods from October 1, 2002 through July 26, 2003 and also from July 27, 2003 through September 30, 2003. As of the date of Ernst & Young AG’s most recent audit report on the consolidated financial statements of Lambda Physik AG and during the period covered by the consolidated financial statements on which Ernst & Young AG reported, Ernst & Young AG were the independent accountants of Lambda Physik AG within the meaning of Rule 101 of the AICPA’s Code of Professional Conduct, and its interpretations and rulings. However, Ernst & Young AG are no longer the independent auditors of Lambda Physik AG, nor have they ever been the independent registered public accounting firm of Coherent, Inc.

(iv) Financial Statements . The historical financial statements of the Company, together with the related schedules and notes, included in the Disclosure Package and the Final Offering Memorandum present fairly in all material respects the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders’ equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods involved. The supporting schedules, if any, included in the Disclosure Package and the Final Offering Memorandum present fairly in all material respects in accordance with GAAP the information required to be stated therein. The historical financial statements of Excel Technology, together with the related schedules and notes, included in the Disclosure Package and the Final Offering Memorandum, present fairly in all material respects the financial position of Excel Technology and its consolidated subsidiaries at the dates indicated, and the statement of operations, stockholders’ equity and cash flows of Excel Technology and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with GAAP in each case applied on a consistent basis throughout the periods involved. The summary financial information included in the Disclosure Package and the Final Offering Memorandum present fairly in all material respects the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Disclosure Package and the Final Offering Memorandum. Except to the extent disclosed in the pro forma financial statements, the pro forma financial statements of the Company and its subsidiaries and the related notes thereto included in the Disclosure Package and the Final Offering Memorandum present fairly in all material respects the information shown therein, and have been prepared in accordance with the Commission’s rules and guidelines with respect to pro forma financial statements, comply in all material respects as to form with the applicable requirements of Rule 11-02 of Regulation S-X under the 1933 Act and have been properly compiled in all material respects on the bases described therein, and the assumptions used in the preparation thereof are reasonable in all material respects and the adjustments used therein are appropriate in all material respects to give effect to the transactions and circumstances referred to therein and have been properly applied in all material respects to the historical amounts in the compilation of the pro forma financial statements (except in each case to the extent stated in the pro forma financial statements or the footnotes thereto).

(v) No Material Adverse Change in Business . Except as disclosed in the Disclosure Package or the Final Offering Memorandum, since December 31, 2005 (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, in each case whether or not arising in the ordinary course of business other than the termination of the Company’s credit facility as contemplated by disclosure in the Offering Memorandum (a “Material Adverse Effect”), (B) there has been no Material Adverse Effect (as defined in the Acquisition Agreement), to the Company’s knowledge, on Excel Technology and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock.

(vi) Good Standing of the Company . The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Disclosure Package and the Final Offering Memorandum and to enter into and perform its obligations under each of this Agreement, the Registration Rights Agreement, the Securities, the Indenture and the Acquisition Agreement, and to consummate all of the transactions in connection therewith as contemplated in the Disclosure Package and the Final Offering Memorandum; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect.

(vii) Good Standing of Subsidiaries . Each subsidiary of the Company has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Disclosure Package and the Final Offering Memorandum and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Disclosure Package and the Final Offering Memorandum, all of the issued and outstanding capital stock of each subsidiary of the Company has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of the subsidiaries of the Company was issued in violation of any preemptive or similar rights of any securityholder of such subsidiary. “Subsidiary” means any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of capital stock entitled to vote in the election of directors, managers, general partners or trustees thereof is at the time owned or controlled, directly or indirectly, by the Company.

(viii) Capitalization . The authorized, issued and outstanding capital stock of the Company is as set forth in the Disclosure Package and the Final Offering Memorandum in the column entitled “Actual” under the caption “Capitalization” (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements, employee benefit plans referred to in the Disclosure Package and the Final Offering Memorandum or pursuant to the exercise of convertible securities or options referred to in the Disclosure Package and the Final Offering Memorandum). The shares of issued and outstanding capital stock of the Company

have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company.

(ix) Authorization of Agreement . This Agreement has been duly authorized, executed and delivered by the Company.

(x) Authorization of the Indenture . The Indenture has been duly authorized by the Company and, when executed and delivered by the Company and the Trustee, will constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors’ rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law).

(xi) Authorization of the Securities . The Securities have been duly authorized and, at Closing Time, will have been duly executed by the Company and, when authenticated, issued and delivered in the manner provided for in the Indenture and delivered against payment of the purchase price therefor as provided in this Agreement, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors’ rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be in the form contemplated by, and entitled to the benefits of, the Indenture.

(xii) Authorization of the Registration Rights Agreement . The Registration Rights Agreement has been duly authorized by the Company and, when executed and delivered by the Company and the Initial Purchaser, will constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors’ rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law).

(xiii) Authorization of the Acquisition Agreement . The Acquisition Agreement has been duly authorized, executed and delivered by the Company and Merger Sub and constitutes a valid and binding agreement of each of the parties thereto, enforceable against each of them in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors’ rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law).

(xiv) Description of the Securities, the Indenture, the Registration Rights Agreement and the Acquisition Agreement. The Securities, the Indenture, the Registration Rights Agreement and the Acquisition Agreement conform or will conform in all material respects to

the respective statements relating thereto contained in the Disclosure Package and the Final Offering Memorandum and will be in substantially the respective forms last delivered to the Initial Purchase prior to the date of this Agreement.

(xv) Authorization and Description of Common Stock . The Common Stock conforms in all material respects to all descriptions relating thereto set forth in the Disclosure Package and the Final Offering Memorandum. Upon issuance and delivery of the Securities in accordance with this Agreement and the Indenture, the Securities will be convertible at the option of the holder thereof into shares of Common Stock in accordance with the terms of the Securities and the Indenture; the shares of Common Stock issuable upon conversion of the Securities have been duly authorized and reserved for issuance upon such conversion by all necessary corporate action and such shares, when issued upon such conversion in accordance with the terms of the Securities, will be validly issued and will be fully paid and non-assessable; no holder of such shares will be subject to personal liability by reason of being such a holder; and the issuance of such shares upon such conversion will not be subject to the preemptive or other similar rights of any securityholder of the Company.

(xvi) Absence of Defaults and Conflicts . Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws (or other similar constituent document) or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject (collectively, “Agreements and Instruments”) except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the Indenture, the Securities, the Registration Rights Agreement, the DTC Agreement, the Acquisition Agreement and any other agreement or instrument entered into or issued or to be entered into or issued by the Company in connection with the transactions contemplated hereby or thereby or in the Disclosure Package and the Final Offering Memorandum and the consummation of the transactions contemplated herein and in the Disclosure Package and the Final Offering Memorandum (including the Acquisition, the issuance and sale of the Securities, the use of the proceeds from the sale of the Securities as described in the Disclosure Package and the Final Offering Memorandum under the caption “Use of Proceeds” and the issuance of the shares of Common Stock upon conversion of any Securities) and compliance by the Company with its obligations hereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, the Agreements and Instruments except for such conflicts, breaches or defaults or Repayment Events or liens, charges or encumbrances that, singly or in the aggregate, would not result in a Material Adverse Effect, nor will such action result in any violation of the provisions of the charter or by-laws (or other similar constituent documents) of the Company or any of its subsidiaries or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or any of their assets, properties or operations. As used herein, a “Repayment Event” means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its subsidiaries.

(xvii) Absence of Labor Dispute . No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any of its subsidiaries’ principal suppliers, manufacturers, customers or contractors, which, in either case, would result in a Material Adverse Effect.

(xviii) Absence of Proceedings . There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any of its subsidiaries which might result in a Material Adverse Effect, or which might materially and adversely affect the properties or assets of the Company or any of its subsidiaries or the consummation of the transactions contemplated by this Agreement (including the Acquisition) or the performance by the Company of its obligations hereunder or under the Registration Rights Agreement, the Indenture, the Securities, the DTC Agreement and the Acquisition Agreement. The aggregate of all pending legal or governmental proceedings to which the Company or any of its subsidiaries is a party or of which any of their respective property or assets is the subject, which are not described in the Disclosure Package and the Final Offering Memorandum, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect.

(xix) Absence of Manipulation . Neither the Company nor any affiliate of the Company has taken, nor will the Company or any affiliate take, directly or indirectly, any action which is designed to or which has constituted or which would be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities.

(xx) Possession of Intellectual Property . Except as described in the Offering Memorandum and except where such failure to own, possess or acquire would not reasonably be expected to have a Material Adverse Effect, the Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, “Intellectual Property”) necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect.

(xxi) Absence of Further Requirements . No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement (including the Acquisition) or for the due execution, delivery or performance of the Registration Rights Agreement, the Indenture, the Securities or the DTC Agreement by the Company, except (A) such as have been already obtained, (B) with respect to the obligations under the Registration

Rights Agreement, the filing of the registration statement with the Commission under the 1933 Act and the Commission’s declaration of effectiveness of such registration statement and the qualification of the Indenture under Trust Indenture Act of 1939, as amended (the “1939 Act”), (C) as may be required in jurisdictions outside the United States, (D) with respect to the Acquisition, clearance under the Hart-Scott-Rodino Act of 1976, or (E) as expressly set forth in this Agreement, the Registration Rights Agreement, the Indenture or the DTC Agreement.

(xxii) Consents for the Acquisition . Except as disclosed in the Disclosure Package, the Acquisition Agreement (and schedules, exhibits and attachments thereto) and the Final Offering Memorandum, the Company has obtained all authorizations, approvals, consents, licenses, orders or similar approvals necessary to consummate the Acquisition.

(xxiii) Possession of Licenses and Permits . The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, “Governmental Licenses”) issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them, except where the failure so to possess would not, singly or in the aggregate, result in a Material Adverse Effect; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, result in a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except where the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not, singly or in the aggregate, result in a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect.

(xxiv) Title to Property . The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Disclosure Package and the Final Offering Memorandum or (b) would not, singly or in the aggregate, reasonably be expected to cause a Material Adverse Effect to the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Disclosure Package and the Final Offering Memorandum, are in full force and effect, and neither the Company nor any of its subsidiaries has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any of its subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or any subsidiary thereof to the continued possession of the leased or subleased premises under any such lease or sublease.

(xxv) Environmental Laws . Except as described in the Disclosure Package and the Final Offering Memorandum and except such matters as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or

protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, residual materials, toxic substances, hazardous substances, petroleum or petroleum products, asbestos-containing materials or mold (collectively, “Hazardous Materials”) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, “Environmental Laws”), (B) the Company and its subsidiaries have all permits, certificates, licenses, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that would reasonably be expected to form the basis of an order for clean-up, remediation or other corrective or rehabilitation measures, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or Environmental Laws.

(xxvi) Accounting Controls and Disclosure Controls . The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management’s general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management’s general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Disclosure Package and the Final Offering Memorandum, since the end of the Company’s most recent audited fiscal year, there has been (1) no material weakness in the Company’s internal control over financial reporting (whether or not remediated) and (2) no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company and its consolidated subsidiaries employ disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including its principal executive officer or officers and principal financial officer or officers, as appropriate, to allow timely decisions regarding disclosure.

(xxvii) Compliance with the Sarbanes-Oxley Act . There is and has been no failure on the part of the Company or any of the Company’s directors or officers, in their capacities as such, to comply in all material respects with any provision of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith (the “Sarbanes-Oxley Act”), including Section 402 related to loans and Sections 302 and 906 related to certifications, except to the extent stated in the Company’s SEC filings.

(xxviii) Payment of Taxes . The Company and its subsidiaries have filed all tax returns that are required to have been filed by them pursuant to applicable federal, foreign, state, local or other law except insofar as the failure to file such returns would not result in a Material Adverse Effect, and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company and its subsidiaries, except for such taxes, if any, as are being

contested in good faith and as to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Company in respect of any income and corporation tax liability for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined, except to the extent of any inadequacy that would not result in a Material Adverse Effect.

(xxix) Insurance . The Company and its subsidiaries either (i) carry or are entitled to the benefits of insurance, with financially sound and reputable insurers, or (ii) self-insure, in either case in such amounts and covering such risks as is generally maintained by companies of established repute engaged in the same or similar business, and all such insurance is in full force and effect. The Company has no reason to believe that it or any of its subsidiaries will not be able (A) to renew their existing insurance coverage as and when such policies expire or (B) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct their business as now conducted and at a cost that would not result in a Material Adverse Effect. None of the Company or any of its subsidiaries has been denied any insurance coverage that it has sought or for which it has applied.

(xxx) Statistical and Market-Related Data . Nothing has come to the attention of the Company that has caused the Company to believe that the statistical and market-related data included in the Disclosure Package and the Final Offering Memorandum is not based on or derived from sources that are reliable and accurate in all material respects.

(xxxi) Investment Company Act . The Company is not required, and upon the issuance and sale of the offered Securities as herein contemplated and the application of the net proceeds therefrom as described in the Disclosure Package and the Final Offering Memorandum will not be required, to register as an “investment company” under the Investment Company Act of 1940, as amended (the “1940 Act”).

(xxxii) Similar Offerings . Neither the Company nor any of its affiliates, as such term is defined in Rule 501(b) under the 1933 Act (each, an “Affiliate”), has, directly or indirectly, within the preceding six months, solicited any offer to buy, sold or offered to sell or otherwise negotiated in respect of, or will solicit any offer to buy, sell or offer to sell or otherwise negotiate in respect of, in the United States or to any United States citizen or resident, any security which is or would be integrated with the sale of the Securities in a manner that would require the offered Securities to be registered under the 1933 Act other than the Securities sold to the Initial Purchasers.

(xxxiii) Rule 144A Eligibility . The Securities are eligible for resale pursuant to Rule 144A and will not be, at Closing Time, of the same class as securities listed on a national securities exchange registered under Section 6 of the 1934 Act, or quoted in a U.S. automated interdealer quotation system.

(xxxiv) No General Solicitation . None of the Company or any of its subsidiaries or Affiliates or any person acting on its or any of their behalf (other than the Initial Purchaser, as to whom the Company makes no representation) has engaged or will engage, in connection with the offering of the offered Securities, in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the 1933 Act.

(xxxv) No Registration Required . Subject to compliance by the Initial Purchaser with the representations and warranties of the Initial Purchaser and the procedures set forth in Section 6

hereof, it is not necessary in connection with the offer, sale and delivery of the offered Securities to the Initial Purchaser and to each Subsequent Purchaser in the manner contemplated by this Agreement, the Registration Rights Agreement and the Disclosure Package and the Final Offering Memorandum to register the Securities under the 1933 Act or to qualify the Indenture under the 1939 Act.

(xxxvi) Foreign Corrupt Practices Act . Neither the Company nor, to the knowledge of the Company, any director, officer, agent, employee, controlled Affiliate or other person acting on behalf of the Company or any of its subsidiaries is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any “foreign official” as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA and the Company and, to the knowledge of the Company, its controlled Affiliates have conducted their businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.

(xxxvii) Money Laundering Laws . The operations of the Company are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.

(xxxviii) OFAC . Neither the Company nor, to the knowledge of the Company, any director, officer, agent, employee, affiliate or person acting on behalf of the Company is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Company will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

(xxxix) Reporting Company . The Company is subject to the reporting requirements of Section 13 or Section 15(d) of the 1934 Act and is eligible to file a registration statement on Form S-3 for resales of the Securities and shares of Common Stock issuable upon conversion of the Securities.

(xl) Listing of Common Stock . The Company’s Common Stock is registered pursuant to Section 12(g) of the 1934 Act and is listed on the Nasdaq National Market and the Company has taken no action designed to, or, to the knowledge of the Company, likely to have the effect of, terminating the registration of the Common Stock under the 1934 Act or delisting the Common Stock from the Nasdaq National Market, nor has the Company received any notification that the Commission or the Nasdaq National Market is contemplating terminating such registration or listing.

(xli) Common Stock Certificates . The certificates for the shares of Common Stock (including the shares of Common Stock issuable upon conversion of the Securities) conform, in all material respects, to the requirements of the Nasdaq National Market and the Delaware General Corporation Law.

(xlii) ERISA . Except as would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect, each of the Company and, if applicable, its subsidiaries is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (“ERISA”); no “reportable event” (as defined in ERISA) has occurred with respect to any “pension plan” (as defined in ERISA) for which the Company or any of its subsidiaries would have any liability; none of the Company or any of its subsidiaries has incurred or expects to incur liability under (A) Title IV of ERISA with respect to the termination of, or withdrawal from, any “pension plan” or (B) Section 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the “Code”); and each “pension plan” for which the Company or any of its subsidiaries would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification.

(xliii) Accuracy of Exhibits . There are no contracts or documents which are required under the 1933 Act or the 1934 Act or the rules and regulations thereunder to be filed as exhibits to the documents incorporated by reference in the Offering Memorandum which have not been so filed as required, except where the failure to file such contract or document would not have a Material Adverse Effect.

(xliv) Acquisition Agreement . Except as reflected in the Offering Memorandum or the Disclosure Package, as of the date hereof nothing has come to the attention of the Company that has caused the Company to believe that the representations and warranties of Excel Technology set forth in the Acquisition Agreement are not true and correct, except, in each case or in the aggregate, as does not constitute a Material Adverse Effect (as defined in the Acquisition Agreement) on Excel Technology.

(b) Officer’s Certificates . Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Initial Purchaser or to counsel for the Initial Purchaser shall be deemed a representation and warranty by the Company to the Initial Purchaser as to the matters covered thereby.

SECTION 2. Purchase, Sale and Delivery to the Initial Purchaser; Closing .

(a) Initial Securities . On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to the Initial Purchaser, and the Initial Purchaser agrees to purchase from the Company, at the price set forth in Schedule A, $175,000,000 aggregate principal amount of Initial Securities.

(b) Option Securities . In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Initial Purchaser to purchase up to an additional $25,000,000 aggregate principal amount of Option Securities at the same price per Security set forth in Schedule A for the Initial Securities, plus accrued interest, if any, from Closing Time to the Date of Delivery (as defined below) (the “ Option ”). The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from

time to time on one or more occasions only for the purpose of covering overallotments which may be made in connection with the offering and distribution of the Initial Securities upon written notice by Merrill Lynch to the Company setting forth the number of Option Securities (which shall be an integral multiple of $1,000) as to which the Initial Purchaser is then exercising the option and the time and date of payment and delivery for such Option Securities; provided, however, that the Option may not be exercised in more than two installments without the prior written consent of the Company. Any such time and date of delivery (a “Date of Delivery”) shall be determined by Merrill Lynch, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to Closing Time, as hereinafter defined. A “business day” is any weekday that is not a day on which banking institutions in The City of New York are authorized or obligated to close.

(c) Payment . Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the office of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050, or at such other place as shall be agreed upon by the Initial Purchaser and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof, or such other time not later than ten business days after such date as shall be agreed upon by the Initial Purchaser and the Company (such time and date of payment and delivery being herein called the “Closing Time”).

In addition, in the event that any or all of the Option Securities are purchased by the Initial Purchaser, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Initial Purchaser and the Company, on each Date of Delivery as specified in the notice from the Initial Purchaser to the Company.

Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the Initial Purchaser of certificates for the Initial Securities or the Option Securities, if any, to be purchased by them.

(d) Denominations; Registration . Certificates for the Initial Securities and the Option Securities, if any, shall be in such denominations ($1,000 or integral multiples of $1,000 in excess thereof) and registered in such names as the Initial Purchaser may request in writing at least one full business day before Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial Securities and the Option Securities, if any, will be made available for examination and packaging by the Initial Purchaser in The City of New York not later than 10:00 A.M. (Eastern time) on the last business day prior to Closing Time or the relevant Date of Delivery, as the case may be.

SECTION 3. Covenants of the Company . The Company covenants with the Initial Purchaser as follows (and the Initial Purchaser covenants with the Company as to Section 3(l)):

(a) Offering Memorandum . Until the earlier to occur of (A) the completion of the distribution of the Securities by the Initial Purchaser (but no earlier than the date on which the overallotment option set forth in Section 2(b) hereof is exercised in full or expires) and (B) the one-year anniversary of the date hereof, the Company, as promptly as possible, will furnish to the Initial Purchaser, without charge, such number of copies of the Preliminary Offering Memorandum, the Final Offering Memorandum and any amendments and supplements thereto and documents incorporated by reference therein as the Initial Purchaser may reasonably request.

(b) Notice and Effect of Material Events . The Company will immediately notify the Initial Purchaser, and confirm such notice in writing, of (x) any filing made by the Company of information relating to the offering of the Securities with any securities exchange or any other regulatory body in the

United States or any other jurisdiction, and (y) prior to the completion of the placement of the offered Securities by the Initial Purchaser, any material changes in or affecting the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company, Excel Technology and their respective subsidiaries considered as one enterprise which (i) make any statement in the Disclosure Package, any Offering Memorandum or any Supplemental Offering Material false or misleading or (ii) are not disclosed in the Disclosure Package or the Offering Memorandum. In such event or if during such time any event shall occur as a result of which it is necessary, in the reasonable opinion of any of the Company, its counsel, the Initial Purchaser or counsel for the Initial Purchaser, to amend or supplement the Offering Memorandum in order that the Offering Memorandum not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances then existing, the Company will forthwith amend or supplement the Offering Memorandum by preparing and furnishing to the Initial Purchaser an amendment or amendments of, or a supplement or supplements to, the Offering Memorandum (in form and substance satisfactory in the reasonable opinion of counsel for the Initial Purchaser) so that, as so amended or supplemented, the Offering Memorandum will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a Subsequent Purchaser, not misleading.

(c) Amendment and Supplements to the Offering Memorandum; Preparation of Pricing Supplement; Supplemental Offering Materials. Until the completion of the distribution of the Securities by the Initial Purchaser (but no earlier than the date on which the overallotment option set forth in Section 2(b) hereof is exercised in full or expires) the Company will advise the Initial Purchaser promptly of any proposal to amend or supplement the Offering Memorandum (other than any filings with the Commission made pursuant to the 1934 Act or the 1934 Act Regulations, provided that the Company shall give notice of any such filings to the Initial Purchaser prior to making any such filings, to the extent practicable) and will not effect such amendment or supplement without the consent of the Initial Purchaser; provided, however that for the avoidance of doubt nothing herein shall limit the Company’s ability to file any required reports with the Commission nor shall this covenant require the prior review or consent of the Initial Purchaser for any such filings. Neither the consent of the Initial Purchaser, nor the Initial Purchaser’s delivery of any such amendment or supplement, shall constitute a waiver of any of the conditions set forth in Section 5 hereof. The Company will prepare the Pricing Supplement, in form and substance satisfactory to the Initial Purchaser, and shall furnish as soon as practicable but no later than prior to the Applicable Time to the Initial Purchaser, without charge, as many copies of the Pricing Supplement as the Initial Purchaser may reasonably request. The Company represents and agrees that, unless it obtains the prior consent of the Initial Purchaser, it has not made and will not make any offer relating to the Securities by means of any Supplemental Offering Materials; provided, however, for the avoidance of doubt any Supplemental Offering Materials covered under this Section 3(c) shall not include an “issuer free writing prospectus” or “free writing prospectus,” the agreement as to the treatment of which is dealt with under Section 3(l) hereunder.

(d) Qualification of Securities for Offer and Sale . The Company will use its commercially reasonable efforts, in cooperation with the Initial Purchaser, to qualify the offered Securities (and the shares of Common Stock issuable upon conversion of the Securities) for offering and sale under the applicable securities laws of states and other jurisdictions within the United States as the Initial Purchaser may designate to the Company in writing prior to the applicable Closing Time or relevant Date of Delivery and to maintain such qualifications in effect as long as required for the sale of the Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.

(e) DTC . The Company will cooperate with the Initial Purchaser and use its commercially reasonable efforts to permit the offered Securities to be eligible for clearance and settlement through the facilities of DTC.

(f) Use of Proceeds . The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Disclosure Package and the Final Offering Memorandum under “Use of Proceeds.”

(g) Reservation of Shares of Common Stock. The Company will, at all times, reserve and keep available, free of preemptive rights, enough shares of Common Stock for the purpose of enabling the Company to satisfy any obligations to issue shares of Common Stock upon conversion of the Securities.

(h) Listing. The Company will use its commercially reasonable efforts to effect and maintain the quotation of the Common Stock issuable upon conversion of the Securities on the Nasdaq National Market.

(i) Restriction on Sale of Securities and Common Stock . During a period of 90 days from the date of the Final Offering Memorandum, the Company will not, without the prior written consent of Merrill Lynch, (i) directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale of, or otherwise dispose of, any securities of the Company that are convertible into, or exchangeable for, the offered Securities, (ii) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exchangeable or exercisable for or repayable with Common Stock, or file any registration statement under the 1933 Act with respect to any of the foregoing or (iii) enter into any swap or other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, or any securities convertible into or exchangeable or exercisable for or repayable with Common Stock, whether any such swap or transaction described in clause (ii) or (iii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or the Common Stock to be delivered upon conversion thereof, (B) the filing of any registration statement to be filed by the Company pursuant to the Registration Rights Agreement relating to the resale of the Securities and the shares of Common Stock, (C) shares of Common Stock to be issued pursuant to existing employee benefit plans, qualified stock option plans or other employee compensation benefit plans or agreements or pursuant to currently outstanding options, warrants or rights existing on the date hereof and referred to in the Disclosure Package and the Final Offering Memorandum, (D) the grant by the Company of employee, consultant or director stock options or restricted stock, (E) the filing of any registration statements on Form S-8, and (F) up to 1,500,000 shares issued or to be issued by the Company pursuant to acquisitions, including the issuance and assumption of options in connection therewith, provided that any shares of Common Stock issued prior to the expiration of the 90th day period may not be sold by the recipient thereof during such 90 day period. Notwithstanding the foregoing, if: (1) during the last 17 days of the 90-day lock-up period, the Company issues an earnings release or material news or a material event relating to the Company occurs; or (2) prior to the expiration of the 90-day lock-up period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the 90-day lock-up period, the restrictions imposed by this paragraph shall continue to apply until the expiration of the 18-day period beginning upon the issuance of the earnings release or the occurrence of the material news or material event, as applicable.

(j) PORTAL Designation . The Company will use its commercially reasonable efforts to permit the Securities to be designated PORTAL securities in accordance with the rules and regulations adopted by the National Association of Securities Dealers, Inc. (“NASD”) relating to trading in the PORTAL Market.

(k) Reporting Requirements . Until the earlier to occur of (A) the completion of the distribution of the Securities by the Initial Purchaser (but no earlier than the date on which the overallotment option set forth in Section 2(b) hereof is exercised in full or expires) and (B) the one-year anniversary of the date hereof, the Company will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations.

(l) No Other Offering Documents. Each of the Company and the Initial Purchaser represents that (in the case of the Company, without the prior consent of the Initial Purchaser) it has not made any offer relating to the Securities that, if the placement of the Securities contemplated by this Agreement were conducted as a public offering pursuant to a registration statement filed with the Commission, would constitute an “issuer free writing prospectus,” as defined in Rule 433, or that would otherwise constitute a “free writing prospectus,” as defined in Rule 405, required to be filed with the Commission. The Company agrees that until the earlier of (i) the date upon which the Initial Purchaser exercises its overallotment option set forth in Section 2(b) and (ii) the termination of the Option, it will not, unless it obtains the prior consent of the Initial Purchaser, make any offer expressly regarding the Securities that, if the placement of the Securities contemplated by this Agreement were conducted as a public offering pursuant to a registration statement filed with the Commission, would constitute an “issuer free writing prospectus,” as defined in Rule 433, that would be required to be filed with the Commission; provided, however , that the foregoing sentence shall not limit any action by a third party which may be regarded as a “free writing prospectus”. The Initial Purchaser agrees that, unless it obtains the prior consent of the Company, it will not make any offer relating to the Securities that, if the placement of the Securities contemplated by this Agreement were conducted as a public offering pursuant to a registration statement filed with the Commission, would constitute an “issuer free writing prospectus,” as defined in Rule 433, or that would otherwise constitute a “free writing prospectus,” as defined in Rule 405, that would be required to be filed with the Commission.

SECTION 4. Payment of Expenses .

(a) Expenses . The Company will pay all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing, delivery to the Initial Purchaser and any filing of the Disclosure Package or any Offering Memorandum (including financial statements and any schedules or exhibits and any document incorporated by reference) and of each amendment or supplement thereto or of any Supplemental Offering Material, (ii) the preparation, printing and delivery to the Initial Purchaser of this Agreement, the Indenture, the Securities, the Registration Rights Agreement and such other documents as may be required in connection with the offer, purchase, sale, issuance or delivery of the Securities or the issuance or delivery of the Common Stock issuable upon conversion thereof, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Initial Purchaser and the certificates for the Common Stock issuable upon conversion thereof, including any transfer taxes, any stamp or other duties payable upon the sale, issuance and delivery of the Securities to the Initial Purchaser, the issuance and delivery of the Common Stock issuable upon conversion thereof and any charges of DTC in connection therewith, (iv) the fees and disbursements of the Company’s counsel, accountants and other advisors, (v) the qualification of the Securities and the shares of Common Stock issuable upon conversion of the Securities under securities laws in accordance

with the provisions of Section 3(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Initial Purchaser in connection therewith and in connection with the preparation of the blue sky memorandum and any supplement thereto, (vi) any fees of the NASD in connection with the Securities, (vii) the fees and expenses of the Trustee, including the fees and disbursements of counsel for the Trustee in connection with the Indenture and the Securities, (viii) the costs and expenses of the Company relating to investor presentations on any “road show” undertaken in connection with the marketing of the Securities including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel and lodging expenses of the representatives and officers of the Company and any such consultants, excluding, however, the cost of aircraft and other transportation chartered in connection with the road show, which cost shall be borne by the Initial Purchaser, (ix) the fees and expenses of any transfer agent or registrar for the Common Stock, (x) any fees payable in connection with any rating of the Securities, (xi) the fees and expenses incurred in connection with the listing of the Common Stock issuable upon conversion of the Securities on the Nasdaq National Market, and (xii) any fees and expenses payable in connection with the initial and continued designation of the Securities as PORTAL securities under the PORTAL Market Rules pursuant to NASD Rule 5322.

(b) Termination of Agreement . If this Agreement is terminated by the Initial Purchaser in accordance with the provisions of Section 5 or Section 10(a)(i) hereof, the Company shall reimburse the Initial Purchaser for all of its out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Initial Purchaser.

SECTION 5. Conditions of Initial Purchaser’s Obligations . The obligations of the Initial Purchaser hereunder are subject to the accuracy when made of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer of the Company or any of its subsidiaries delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions:

(a) Opinion of Counsel for Company . At Closing Time, the Initial Purchaser shall have received the written opinion, dated as of Closing Time, of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Company, in form and substance reasonably satisfactory to counsel for the Initial Purchaser, substantially to the effect set forth in Exhibit A hereto.

(b) Opinion of Counsel for Initial Purchaser . At Closing Time, the Initial Purchaser shall have received the favorable opinion, dated as of Closing Time, of Fried, Frank, Harris, Shriver & Jacobson LLP, counsel for the Initial Purchaser, with respect to certain matters set forth in Exhibit A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to the Initial Purchaser. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials.

(c) Officers’ Certificate . At Closing Time, there shall not have been, since the date hereof or since the date as of which information is given in the Disclosure Package or the Final Offering Memorandum (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, in each case whether or not arising in the ordinary course of business, and the Initial Purchaser shall have

received a certificate of the Chief Executive Officer of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, on behalf of the Company, to the effect that (i) there has been no such Material Adverse Effect, (ii) the representations and warranties in Section 1 hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, and (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time.

(d) Accountants’ Comfort Letters . At the time of the execution of this Agreement, the Initial Purchaser shall have received from:

(i) Deloitte & Touche LLP a letter dated such date, in form and substance satisfactory to the Initial Purchaser, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to initial purchasers with respect to the financial statements and certain financial information of the Company contained or incorporated by reference in the Disclosure Package and the Final Offering Memorandum;

(ii) KPMG LLP a letter dated such date, in form and substance satisfactory to the Initial Purchaser, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to initial purchasers with respect to the financial statements and certain financial information of Excel Technology contained or incorporated by reference in the Disclosure Package and the Final Offering Memorandum; and

(iii) Ernst & Young AG a letter dated such date, in form and substance satisfactory to the Initial Purchaser, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to initial purchasers with respect to the financial statements and certain financial information of Lambda Physik AG.

(e) Bring-down Comfort Letter . At Closing Time, the Initial Purchaser shall have received from each of Deloitte & Touche LLP, KPMG LLP and Ernst & Young AG, respectively, a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in each of the letters furnished by the respective firm pursuant to subsection (d) of this Section, except that the specified date referred to shall be a date not more than three business days prior to such Closing Time.

(f) PORTAL . At Closing Time, the Securities shall have been designated for trading on PORTAL.

(g) Lock-up Agreements. On or prior to the date of this Agreement, the Initial Purchaser shall have received an agreement substantially in the form of Exhibit B hereto signed by the persons listed in Schedule D hereto.

(h) Indenture and Registration Rights Agreement. At or prior to Closing Time, the Company and the Trustee shall have executed and delivered the Indenture, and the Company and the Initial Purchaser shall have executed and delivered the Registration Rights Agreement.

(i) Listing. At Closing Time, the Company shall have submitted to the Nasdaq National Market an application for the inclusion of the shares of Common Stock issuable upon conversion of the Securities.

(j) Conditions to Purchase of Option Securities. In the event that the Initial Purchaser exercises its option provided in Section 2(b) hereof to purchase all or any portion of the Option

Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished hereunder by the Company or any of its subsidiaries shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Initial Purchaser shall have received:

(i) Officers’ Certificate . A certificate, dated such Date of Delivery, of the Chief Executive Officer of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at Closing Time pursuant to Section 5(c) hereof remains true and correct as of such Date of Delivery.

(ii) Opinion of Counsel for Company . The opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to the Company, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(a) hereof.

(iii) Opinion of Counsel for Initial Purchaser . The opinion of Fried, Frank, Harris, Shriver & Jacobson LLP, counsel for the Initial Purchaser, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof.

(iv) Bring-down Comfort Letter . A letter from each of Deloitte & Touche LLP, KPMG LLP and Ernst & Young AG, respectively, in form and substance satisfactory to the Initial Purchaser and dated such Date of Delivery, substantially in the same form and substance as each of the letters furnished by the respective firm to the Initial Purchaser pursuant to Section 5(d) hereof, except that the specified date in the letters furnished pursuant to this paragraph shall be a date not more than three business days prior to such Date of Delivery.

(k) Additional Documents . At Closing Time and at each Date of Delivery, counsel for the Initial Purchaser shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained.

(l) Termination of Agreement . If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities, on a Date of Delivery which is after Closing Time, the obligations of the Initial Purchaser to purchase the relevant Option Securities, may be terminated by the Initial Purchaser by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 7, 8 and 9 shall survive any such termination and remain in full force and effect.

SECTION 6. Subsequent Offers and Resales of the Securities .

(a) Joint Offer and Sale Procedures . The Initial Purchaser and the Company each hereby agree with respect to itself in connection with the offer and sale of the Securities:

(i) Offers and Sales . Offers and sales of the Securities shall be made to such persons and in such manner as is contemplated by the Offering Memorandum.

(ii) No General Solicitation . No general solicitation or general advertising (within the meaning of Rule 502(c) under the 1933 Act) will be used in the United States in connection with the offering or sale of the Securities.

(iii) Restriction on Transfer . The transfer restrictions and the other provisions set forth in the Preliminary Offering Memorandum and the Final Offering Memorandum under the caption “Transfer Restrictions,” including the legend required thereby, shall apply to the Securities except as otherwise agreed by the Company and the Initial Purchaser.

(iv) Minimum Principal Amount . No sale of the Securities to any one Subsequent Purchaser will be for less than U.S. $1,000 principal amount and no Security will be issued in a smaller principal amount. If the Subsequent Purchaser is a non-bank fiduciary acting on behalf of others, each person for whom it is acting must purchase at least U.S. $1,000 principal amount of the Securities.

(b) Covenants of the Company . The Company covenants with the Initial Purchaser as follows:

(i) Integration . The Company agrees that it will not and will use commercially reasonable efforts to cause its Affiliates not to, directly or indirectly, solicit any offer to buy, sell or make any offer or sale of, or otherwise negotiate in respect of, securities of the Company of any class if, as a result of the doctrine of “integration” referred to in Rule 502 under the 1933 Act, such offer or sale would render invalid (for the purpose of (i) the sale of the offered Securities by the Company to the Initial Purchaser, (ii) the resale of the offered Securities by the Initial Purchaser to Subsequent Purchasers or (iii) the resale of the offered Securities by such Subsequent Purchasers to others) the exemption from the registration requirements of the 1933 Act provided by Section 4(2) thereof or by Rule 144A thereunder or otherwise.

(ii) Restriction on Repurchases . Until the expiration of two years after the original issuance of the offered Securities, the Company will not, and will use commercially reasonable efforts to cause its controlled Affiliates not to, resell any offered Securities which are “restricted securities” (as such term is defined under Rule 144(a)(3) under the 1933 Act), whether as beneficial owner or otherwise (except as agent acting as a securities broker on behalf of and for the account of customers in the ordinary course of business in unsolicited broker’s transactions).

(c) Covenants of the Initial Purchaser . The Initial Purchaser covenants with the Company as follows:

(i) Status of Initial Purchaser . The Initial Purchaser represents and warrants to, and agrees with, the Company that it is a Qualified Institutional Buyer and an “accredited investor” within the meaning of Rule 501(a) under the 1933 Act (an “Accredited Investor”).

(ii) Qualified Institutional Buyers . The Initial Purchaser represents and warrants to, and agrees with, the Company that it will only sell the Securities to a person whom the Initial Purchaser reasonably believes is a Qualified Institutional Buyer within the meaning of Rule 144A under the 1933 Act (a “Qualified Institutional Buyer”).

(iii) Subsequent Purchaser Notification . The Initial Purchaser will take reasonable steps to inform, and cause each of its U.S. Affiliates to take reasonable steps to inform, persons acquiring Securities from such Initial Purchaser or affiliate, as the case may be, in the United States that the Securities (A) have not been and will not be registered under the 1933 Act, (B) are

being sold to them without registration under the 1933 Act in reliance on Rule 144A or in accordance with another exemption from registration under the 1933 Act, as the case may be, and (C) may not be offered, sold or otherwise transferred except (1) to the Company, (2) outside the United States in accordance with Regulation S under the 1933 Act and in compliance with the securities laws of such non-United States jurisdiction, or (3) inside the United States in accordance with (x) Rule 144A to a person whom the seller reasonably believes is a Qualified Institutional Buyer that is purchasing such Securities for its own account or for the account of a Qualified Institutional Buyer to whom notice is given that the offer, sale or transfer is being made in reliance on Rule 144A or (y) pursuant to another available exemption from registration under the 1933 Act.

SECTION 7. Indemnification .

(a) Indemnification of Initial Purchaser . The Company agrees to indemnify and hold harmless the Initial Purchaser, its Affiliates, its selling agents and each person, if any, who controls the Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:

(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any preliminary offering memorandum, the Disclosure Package, the Final Offering Memorandum (or any amendment or supplement thereto) or any Supplemental Offering Materials, or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;

(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 7(d) below) any such settlement is effected with the prior written consent of the Company; and

(iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by the Initial Purchaser), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;

provided , however , that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by the Initial Purchaser expressly for use in any preliminary offering memorandum, the Disclosure Package, the Final Offering Memorandum (or any amendment or supplement thereto) or in any Supplemental Offering Materials.

(b) Indemnification of Company . The Initial Purchaser agrees to indemnify and hold harmless the Company, its Affiliates and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as

incurred (including the fees and disbursements of counsel chosen by the Company), but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in any preliminary offering memorandum, the Disclosure Package, the Final Offering Memorandum or any Supplemental Offering Materials in reliance upon and in conformity with written information furnished to the Company by the Initial Purchaser expressly for use therein.

(c) Actions against Parties; Notification . Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 7(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 7(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided , however , that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section or Section 8 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.

(d) Settlement without Consent if Failure to Reimburse . If at any time an indemnified party shall have requested in writing an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 7(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.

SECTION 8. Contribution . If the indemnification provided for in Section 7 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Initial Purchaser on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Initial Purchaser on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.

The relative benefits received by the Company on the one hand and the Initial Purchaser on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the Initial Purchaser, bear to the aggregate initial offering price of the Securities.

The relative fault of the Company on the one hand and the Initial Purchaser on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the Initial Purchaser and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

The Company and the Initial Purchaser agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.

Notwithstanding the provisions of this Section 8, the Initial Purchaser shall not be required to contribute any amount in excess of the amount by which the total price at which the Securities purchased and sold by it hereunder exceeds the amount of any damages which the Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.

No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

For purposes of this Section 8, each person, if any, who controls the Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and the Initial Purchaser’s Affiliates and selling agents shall have the same rights to contribution as the Initial Purchaser, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company.

SECTION 9. Representations, Warranties and Agreements to Survive . All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries submitted pursuant hereto shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of the Initial Purchaser or its Affiliates or selling agents, any person controlling the Initial Purchaser, its officers or directors, any person controlling the Company and (ii) delivery of and payment for the Securities.

SECTION 10. Termination of Agreement .

(a) Termination; General . The Initial Purchaser may terminate this Agreement, by notice to the Company, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the date as of which information is given in the Preliminary Offering

Memorandum, the Disclosure Package or the Final Offering Memorandum (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, in each case whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Initial Purchaser, impracticable or inadvisable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the Nasdaq National Market, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States, or (v) if a banking moratorium has been declared by either Federal or New York authorities.

(b) Liabilities . If this Agreement is terminated pursuant to this Section 10, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 7, 8 and 9 shall survive such termination and remain in full force and effect.

SECTION 11. Tax Disclosure . Notwithstanding any other provision of this Agreement, immediately upon commencement of discussions with respect to the transactions contemplated hereby, the Company (and each employee, representative or other agent of the Company) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated by this Agreement and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such tax treatment and tax structure. For purposes of the foregoing, the term “tax treatment” is the purported or claimed federal income tax treatment of the transactions contemplated hereby, and the term “tax structure” includes any fact that may be relevant to understanding the purported or claimed federal income tax treatment of the transactions contemplated hereby.

SECTION 12. Notices . All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by facsimile. Notices to the Initial Purchaser shall be directed to Merrill Lynch at 4 World Financial Center, New York, New York 10080, attention of Gopal Garuda, facsimile (650) 849 2240; notices to the Company shall be directed to it at 5100 Patrick Henry Drive, Santa Clara, California 95054, attention of Helene Simonet, facsimile (408) 764 4161. Any such notice shall take effect at the time of receipt thereof.

SECTION 13. No Advisory or Fiduciary Relationship . The Company acknowledges and agrees that (a) the purchase and sale of the Securities pursuant to this Agreement, including the determination of the offering price of the Securities and any related discounts and commissions, is an arm’s-length commercial transaction between the Company, on the one hand, and the Initial Purchaser, on the other hand, (b) in connection with the offering contemplated hereby and the process leading to such transaction the Initial Purchaser is and has been acting solely as a principal and is not the agent or fiduciary of the Company, or its stockholders, creditors, employees or any other party, (c) the Initial Purchaser has not assumed and will not assume an advisory or fiduciary responsibility in favor of the Company with

respect to the offering contemplated hereby or the process leading thereto (irrespective of whether the Initial Purchaser has advised or is currently advising the Company on other matters) and the Initial Purchaser has no obligation to the Company with respect to the offering contemplated hereby except the obligations expressly set forth in this Agreement, (d) the Initial Purchaser and its affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Company, and (e) the Initial Purchaser has not provided any legal, accounting, regulatory or tax advice with respect to the offering contemplated hereby and the Company has consulted its own legal, accounting, regulatory and tax advisors to the extent it deemed appropriate.

SECTION 14. Integration . This Agreement supersedes all prior agreements and understandings (whether written or oral) between the Company and the Initial Purchaser with respect to the subject matter hereof.

SECTION 15. Parties . This Agreement shall inure to the benefit of and be binding upon the Initial Purchaser, the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Initial Purchaser, the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 7 and 8 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Initial Purchaser, the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from the Initial Purchaser shall be deemed to be a successor by reason merely of such purchase.

SECTION 16. GOVERNING LAW . THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

SECTION 17. TIME . TIME SHALL BE OF THE ESSENCE OF THIS AGREEMENT. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.

SECTION 18. Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement.

SECTION 19. Effect of Headings . The Section headings herein are for convenience only and shall not affect the construction hereof.

If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Initial Purchaser and the Company in accordance with its terms.

	Very truly yours,


	COHERENT, INC.

	By	/s/ Helene Simonet
		Name: Helene Simonet
		Title: Executive Vice President and Chief Financial Officer

CONFIRMED AND ACCEPTED,

as of the date first above written:

MERRILL LYNCH & CO.

MERRILL LYNCH, PIERCE, FENNER & SMITH

INCORPORATED

By:	/s/ Stephen Miller
Authorized Signatory

Exhibit 10.2

FORM OF LOCK-UP LETTER AGREEMENT

MERRILL LYNCH & CO.

Merrill Lynch, Pierce, Fenner & Smith

Incorporated,

4 World Financial Center

New York, New York 10080

Re: Proposed Offering by Coherent, Inc.

Dear Ladies and Gentlemen:

The undersigned, an executive officer and/or director of Coherent, Inc., a Delaware corporation (the “Company”), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch” or the “Initial Purchaser”), proposes to enter into a Purchase Agreement (the “Purchase Agreement”) with the Company providing for the offering, pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) of Convertible Subordinated Notes due 2011 of the Company (the “Initial Securities”) and the grant by the Company to the Initial Purchaser of the option to purchase additional Convertible Subordinated Notes due 2011 (the “Option Securities”). The Initial Securities, together with the Option Securities, are collectively referred to as the “Securities.” In recognition of the benefit that such an offering will confer upon the undersigned as an executive officer and/or director of the Company, as the case may be, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with the Initial Purchaser that, during a period of 90 days from the date of the Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company’s common stock $0.01 par value (the “Common Stock”) or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file, or cause to be filed, any registration statement under the Securities Act, with respect to any of the foregoing (collectively, the “Lock-Up Securities”) or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Lock-Up Securities, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise.

Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer all or any portion of the Lock-Up Securities without the prior written consent of Merrill Lynch, provided that (1) Merrill Lynch receives a signed lock-up agreement for the balance of the lockup period from each donee, trustee, distributee, or transferee, as the case may be, (2) any such transfer shall not involve a disposition for value (for purposes of this lock-up agreement, a contribution of all or any portion of the Lock-Up Securities to a partnership or limited liability company that is in exchange for an interest in said partnership or limited liability company shall be deemed not to involve a disposition for value ) , (3) such transfers are not required to be reported in

any public report or filing with the Securities and Exchange Commission, or otherwise, except for a filing on a Form 5 or as included in a Form 4 for another mandatory reported transaction and (4) the undersigned does not otherwise voluntarily effect any public filing or report regarding such transfers:

(i) as a bona fide gift or gifts or by way of bequest or inheritance on death; or

(ii) to any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned (for purposes of this lock-up agreement, “immediate family” shall mean any relationship by blood, marriage or adoption, not more remote than first cousin); or

(iii) to a partnership or limited liability company the sole constituent partners/members of which are any combination of (x) the undersigned, (y) the immediate family of the undersigned or (z) any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned.

Notwithstanding the restrictions set forth herein, the undersigned may enter into any written trading plan or agreement (“Rule 10b5-1 Plan”) with a broker designed to comply with Rule 10b5-1(c)(1) promulgated pursuant to the 1934 Act, as amended, provided that any such Rule 10b5-1 Plan shall specify that any sales of Securities sold for the undersigned’s benefit pursuant to the Rule 10b5-1 Plan shall not occur prior to the expiration of the Lock-Up Period.

Notwithstanding the restrictions set forth herein, Ms Helene Simonet and Mr John R. Ambroseo may sell all or a portion of the Lock-Up Securities during the Lock-Up Period pursuant to the terms of their respective Rule 10b5-1 Plan in existence as of the date hereof.

In addition, during the Lock-Up Period, but no earlier than 45 days after the date of this Agreement, the collective signatories of this form of Lock-Up Agreement may collectively sell up to 250,000 shares (exclusive of any transfers made in accordance with the preceding paragraphs).

Notwithstanding the foregoing, if:

(1) during the last 17 days of the 90-day lock-up period, the Company issues an earnings release or material news or a material event relating to the Company occurs; or

(2) prior to the expiration of the 90-day lock-up period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the 90-day lock-up period,

the restrictions imposed by this lock-up agreement shall continue to apply until the expiration of the 18-day period beginning upon the issuance of the earnings release or the occurrence of the material news or material event, as applicable, unless Merrill Lynch waives, in writing, such extension.

The undersigned hereby acknowledges and agrees that written notice of any extension of the 90-day lock-up period pursuant to the previous paragraph will be delivered by Merrill Lynch to the Company and that any such notice properly delivered will be deemed to have been given to, and received by, the undersigned. The undersigned further agrees that, prior to engaging in any transaction or taking any other action that is subject to the terms of this lock-up agreement during the period from the date of this

lock-up agreement to and including the 34th day following the expiration of the initial 90-day lock-up period, it will give notice thereof to the Company and will not consummate such transaction or take any such action unless it has received written confirmation from the Company that the 90-day lock-up period (as may have been extended pursuant to the previous paragraph) has expired.

The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the Lock-Up Securities except in compliance with the foregoing restrictions.

	Very truly yours,


	Signature:

	Print Name:

Exhibit 10.5

COHERENT, INC. SUPPLEMENTARY RETIREMENT PLAN

(FOR “X” GRADE EMPLOYEES)

PLAN AND TRUST AGREEMENT

(EFFECTIVE JANUARY 1, 1990)

COHERENT, INC.

SUPPLEMENTARY RETIREMENT PLAN AND TRUST

THIS PLAN AND TRUST AGREEMENT , effective as of January 1, 1990 is made and entered into by and between Coherent, Inc. (Company) acting on behalf of itself and any subsidiaries and Robert Quillinan and Dennis Bucek as Co-Trustees (collectively referred to in the singular as the Trustee). Throughout, Company shall include wherever relevant subsidiaries of the Company.

WITNESSETH:

WHEREAS , the Company wishes to establish a supplementary employee retirement plan for the benefit of a select group of highly compensated employees designated by the Company according to Company personnel policies, and in its sole discretion, as “X” grade employees, and

WHEREAS , the Company wishes to provide that the plan to be established under this Agreement shall be designated as the Coherent, Inc. Supplementary Retirement Plan (the “Plan”), and

WHEREAS , the Company wishes to provide under the Plan for the payment of vested accrued benefits to the Executives and their beneficiary or beneficiaries (“Trust Beneficiaries”), and

WHEREAS , the Company wishes to provide under the Plan that the Company shall pay the entire of the vested accrued benefits from its general assets, and

WHEREAS , the Company wishes to establish an irrevocable trust (the “Trust”) to set aside contributions by the Company to meet its obligations under the Plan, and

WHEREAS , the Company wishes to make contributions to the Trust and that such contributions be held by the Trustee and invested, reinvested and distributed, all in accordance with the provisions of this Agreement, and

WHEREAS , the Company intends that amounts allocated to the Trust and the earnings thereon shall be used by the Trustee to satisfy the liabilities of the Company under the Plan with respect to each Executive for whom an Account has been established and such utilization shall be in accordance with the procedures set forth herein, and

WHEREAS , the Company intends that the Trust to be a “grantor trust” with the corpus and income of the Trust treated as assets and income of the Company for federal and state income tax purposes, and

WHEREAS , the Company intends that the assets of the Trust shall at all times be subject to the claims of the general creditors of the Company as provided in Article XI, and

WHEREAS , the Company intends that the existence of the Trust shall not alter the characterization of the Plan as “unfunded” for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and shall not be construed to provide income to the Executives under the Plan prior to actual payment of the vested accrued benefits thereunder,

NOW THEREFORE , the Company does hereby establish the Plan and Trust as follows and does also hereby agree that the Plan and Trust shall be structured, held and disposed of as follows:

ARTICLE I

ELIGIBILITY, PARTICIPATION AND BENEFICIARY DESIGNATION

(a) Any employee designated by the Company according to Company personnel policies, and in its sole discretion, as an “X” grade employee is eligible to participate in the Plan. The Company reserves the right to modify the definition of “X” grade employee at any time. Any “X” grade employee who has commenced participation in the Plan shall be referred to in this Agreement as an “Executive.”

(b) Each “X” grade employee may elect to commence participation in the Plan as of the January 1 coinciding with or next following the later of (i) his date of hire or (ii) the date the employee becomes an “X” grade employee, provided that the “X” grade employee executes the Coherent Supplementary Retirement Plan Deferred Compensation Agreement (“Deferred Compensation Agreement”) prior to the January 1 on which the “X” grade employee elects to enter the Plan.

(c) Each Executive, prior to entering the Plan, shall designate a beneficiary or beneficiaries to receive the remainder of any interest of the Executive under the Plan. An Executive may change his beneficiary designation at any time on written notice to the Company. Each beneficiary designation shall be in a form prescribed by the Company and will be effective only when filed with the Company during the Executive’s lifetime. Each beneficiary designation filed with the Company will cancel all previously filed beneficiary designations. In the absence of a valid designation, or if no designated beneficiary survives the Executive, his interest shall be distributed to his estate.

ARTICLE II

PLAN CONTRIBUTIONS AND ALLOCATIONS

(a) Each Executive participating in the Plan shall elect in the Deferred Compensation Agreement to have the Company make salary deferral contributions on his behalf in an amount not to exceed 24% of the Executive’s Compensation. Compensation shall be defined for purposes of the foregoing as the base salary paid by the Company in a calendar year to an Executive with respect to services rendered during such calendar year including all amounts which an Executive elects to have the Company contribute on his behalf for the calendar year as a salary deferral contribution (“Compensation”). Any salary deferrals made by an Executive under this Plan shall be held as an asset of the Company and the Company intends to deposit the amounts deferred into the Trust.

(b) An Executive may discontinue the Deferred Compensation Agreement at any time; however, no other modifications to the Deferred Compensation Agreement may be made prior to the commencement of the calendar year following written notification to the Company of any desired modifications. The Company has the power to establish uniform and nondiscriminatory rules and from time to time to modify or change such rules governing the manner and method by which salary deferral contributions shall be made, as well as the manner and method by which salary deferral contribution may be changed or discontinued temporarily or permanently. All salary deferral contributions shall be authorized by the Executive in writing, made by payroll deduction, deducted from the Executive’s Compensation without reduction for any taxes or withholding (except to the extent required by law or the regulations) and paid over to the Trust by the Company.

(c) In the event an Executive ceases to be an “X” grade while also a participant in the Plan, such employee may continue to make salary deferral contributions under the Plan through the end of the calendar year in which the employee ceases to be an “X” grade employee. Thereafter, such employee shall not make any further salary deferred contributions to the Plan unless or until he again meets the eligibility requirements of Article I above.

(d) As of the last day of each calendar year, the Company shall make a matching contribution to the Trust, equal to the salary deferral of the Executive to this Plan; provided, however that the matching contribution to this Plan combined with any matching contribution made to the Coherent Employee Retirement and Investment Plan (CERIP) for the year shall not exceed 6% of the Compensation of each such Executive. An Executive may participate in this Plan notwithstanding whether the Executive elects to have the Company make or not make contributions under the Coherent Employee Retirement and Investment Plan in lieu of receiving cash.

(e) The salary deferral contributions and Company matching contributions made under the Plan on behalf of each Executive shall be credited to the Executive’s Account. The Account consists of the aggregate interest of the Executive under the Plan (and in the Trust Fund), as reflected in the records maintained by the Company for such purposes.

ARTICLE III

VESTING, FORFEITURES AND RESTORATIONS

(a) The value of an Executive’s Account shall become fully vested upon:

(i) The Executive attaining age 65 while an employee of the Company,

(ii) Upon the Executive’s termination of employment by reason of death or disability, or

(iii) Upon a Change in Control as defined in Article VI(e).

Disability shall be determined by the Company according to the provisions of the Coherent Employee Retirement and Investment Plan.

The value of that portion of an Executive’s Account which consists of salary deferral contributions shall be fully vested at all times.

Except as otherwise provided in Article III, that portion of an Executive’s Account which consists of matching contributions by the Company shall become vested in accordance with the following schedule:

Years of Service		Vested Percentage
Less than 3 years		0%
3 years		20%
4 years		40%
5 years		60%
6 years		60%
7 years or more		100%

(b) Years of Service for Vesting .

(i) Year of Service . An Executive shall be credited with one year of Service for each 12-month period ending on the last day of the calendar year in which he has at least 1,000 Hours of Service.

(ii) Termination Prior to Vesting . If an Executive’s Service terminates prior to his earning any vested percentage on his Company matching contributions, his Service prior to such termination shall be disregarded for vesting purposes if he is reemployed after he has incurred 5 consecutive Breaks in Service.

(iii) Service Prior to Break in Service . If an Executive is reemployed after a Break in Service, Service prior to a Break in Service which is eligible to be credited to the Executive upon reemployment shall not be credited for purposes of vesting until he has completed one year of Service after renewal of Service.

(i) Forfeitures on Date of Termination . Any remainder of a terminating Executive’s Account which is not vested shall be forfeited on the date his employment with the Company terminates.

(ii) Matching Contribution Forfeitures Reduce Employer Contribution . Forfeitures attributable to that portion of an Executive’s account which consists of Company matching contributions during a calendar year which are not used to restore Executives’ Accounts as of the last day of such calendar year shall reduce the Company’s matching contributions for such year and shall be allocated as of the last day of the calendar year to the Company matching contribution portion of the Accounts of the Executives then participating in the Plan as provided in Article 4.

(iii) Reemployment After Forfeiture . If an Executive is reemployed before incurring 5 consecutive Breaks in Service, the forfeited amount shall be treated as follows:

(aa) Restoration if No Distribution . In the event an Executive did not receive a distribution of his vested interest, the forfeited amount shall be fully restored as provided in (iv) below and shall be recredited to the Executive’s Account as of his reemployment date.

(bb) Restoration If Total Distribution Repaid . In the event a distribution of an Executive’s entire vested Account was made to him, the forfeited amount shall be fully restored as provided in (iv) below if he repays the full amount of the prior distribution before the date which is 5 years after he is reemployed by the Company or before the date on which he incurs 5 consecutive Breaks in Service, if earlier. If the Executive does not make full repayment of the prior distribution by that date, the forfeited amount will not be restored.

(cc) Full or Partial Restoration If Partial Distribution . In the event a distribution was made to an Executive of less than his entire vested interest, his forfeited amount shall be fully restored together with any unpaid vested interest as provided in (dd) below if he repays the full amount of the prior distribution

before the date which is 5 years after he is reemployed by the Company or before the date on which he incurs 5 consecutive Breaks in Service, if earlier.

(dd) Source of Restored Amounts . Forfeited amounts to be restored for any calendar year may be restored from Forfeitures as of the last day of a calendar year, from additional Company contributions for such calendar year or from Trust income, as determined by the Committee.

(iv) No Partial Repayments Permitted . An Executive shall not be permitted to repay part of a distribution.

(v) No Restoration After 5 Consecutive Breaks in Service . If an Executive is reemployed after 5 consecutive Breaks in Service, no portion of his non-vested Account shall be restored and any undistributed vested interest shall be maintained as a separate fully vested Account.

The vested Account balance of an Executive shall be paid from Trust Funds only to the extent the Company is not at the time of payment Insolvent as defined in Article XI. Any vested accrued benefits under the Plan represent an unfunded, unsecured promise by the Company to pay these benefits to the Executives when due. An Executive has no greater right to Trust assets than the general creditors of the Company in the event that the Company shall become Insolvent. Trust assets can be used to pay only vested accrued benefits under the Plan or the claims of the Company’s general creditors.

ARTICLE IV

SERVICE

(a) Definitions .

(i) “ Service ” means an Executive’s total period of employment with the Company.

(ii) “ Hours of Service ” means:

(aa) Each hour for which an Executive is paid, or entitled to payment, for the performance of duties for the Company.

(bb) Each hour for which an Executive is paid, or entitled to payment, by the Company on account of a period of time during which no duties are performed (regardless of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence; provided that no Hours of Service shall be credited to an Executive:

(1) For a period during which no duties are performed if payment is made or due under a plan maintained solely for purpose of complying with applicable workers compensation, unemployment compensation, or disability insurance laws;

(2) On account of any payment made or due an Executive solely as reimbursement for medical or medically related expenses incurred by the Executive.

(cc) Each hour not otherwise credited under the Plan for which back pay, irrespective of mitigation of damages, has either been awarded or agreed to by the Company. Such hours are to be credited to the period or periods to which the award or agreement pertains. If this provision results in an Executive becoming eligible to participate in the Plan for a calendar year in which he was not otherwise eligible to participate under Article II or if this provision results in an increase in the vested percentage applicable to an Executive’s Account which has been forfeited under Article III, the Committee shall establish suitable procedures for determining and allocating any resulting amounts to such Executive’s Account.

(dd) Solely for purposes of determining whether a Break in Service has occurred, each hour not otherwise credited under the Plan that would have been credited if the Executive had not been absent:

(1) By reason of pregnancy or the birth of a child of the Executive;

(2) By reason of the placement of a child with the Executive in connection with his adoption of such child; or

(3) For purposes of caring for any such child for a period beginning immediately following such birth or placement:

In any case in which the Executive is unable to determine the number of hours which would otherwise normally have been credited to such Executive (but for such absence), such individual shall be credited with 8 Hours of Service for each day of such absence. The hours described in this Article 10(ii)(dd) shall be treated as Hours of Service only in the calendar year in which the absence from work begins if the Executive would thereby be prevented from incurring a Break in Service in such calendar year or, in any other case, in the next following calendar year.

(ee) Each hour for any period during which an Executive is not paid but is on an approved leave of absence, military duty or is temporarily laid off, provided that the Executive:

(1) Returns to the employ of the Company immediately after the expiration of the leave or layoff, or in the case of military duty, within 120 days or such longer period as may be prescribed by applicable law, after first becoming eligible for military discharge, and

(2) Remains in the employ of the Company for at least 30 days after such return, or

(3) Fails to return or remain employed as provided above by reason of his death, Disability or normal retirement.

Hours credited for such periods shall be based on a 40-hour week or, if different, on the Executive’s normally scheduled hours per week. However, if the Executive fails to return to the employ of the Company or to remain in the employ of the Company for at least 30 days after his return for reasons other than his death, Disability or normal retirement, then his original leave date shall be deemed to be his termination date.

(ff) No more than 501 Hours of Service shall be credited under Articles IV(ii)(bb), (cc), (dd), (ee) and (ff) to an Executive on account of any single continuous period of time during which the Executive performs no duties for the Company.

(iii) “ Break in Service ” means a 12 month period ending on the last day of a calendar year in which an Executive is credited with 500 or fewer Hours of Service.

(b) Crediting of Hours Subject to DOL Relation . The calculation of the number of Hours of Service to be credited under Articles IV(ii)(bb) and IV(ii)(cc) for periods during which no duties are performed, and the crediting of such Hours of Service to periods of time for purposes of computations under the Plan, shall be determined by the Committee in accordance with the rules set forth in the Department of Labor Regulation Section 2530.200b-2 paragraphs (b) and (c) , which rules shall be consistently applied with respect to all employees within the same job classifications.

(c) Hours of Service Equivalency . Hours of Service for Executives under Articles IV(ii)(aa), (bb) and (cc) shall be determined by crediting each Executive with 190 Hours of Service for each month in which the Employee would have been credited with at least 1 Hour of Service under Articles IV(ii)(aa), (bb) and (cc) . However, for classes of Employees paid on an hourly basis and for Employees for whom records of hours are maintained, Hours of Service under Articles IV(ii)(aa), (bb) and (cc) shall be determined on the basis of hours for which Compensation is paid or due.

ARTICLE V

TRUST FUND

(a) The Company hereby establishes the Trust with the Trustee, consisting of such sums of money and other property acceptable to the Trustee as from time to time shall be paid or delivered to the Trustee. All such money and other property, all investments and reinvestments made therewith or proceeds thereof and all earnings and profits

thereon, less all payments and charges as authorized herein, shall constitute the “Trust Fund” or “Trust”. The Trust Fund shall at all times be subject to the claims of general creditors of the Company as provided in Article XI.

(b) The Trust hereby established shall be irrevocable, but for the issuance by the Internal Revenue Service of unfavorable tax rulings on the status of the Trust as a grantor trust. Subject to Article XI, Trust assets shall be held for the exclusive purpose of providing vested accrued benefits to the Trust Beneficiaries and defraying expenses of the Trust in accordance with the provisions of this Agreement. No part of the income or corpus of the Trust Fund shall be recoverable by or for the Company prior to the termination of the Trust and the satisfaction of all liabilities under the Plans.

(c) No right or interest to receive accrued benefits from the Trust may be assigned, sold, anticipated, alienated or otherwise transferred by the Trust Beneficiaries.

(d) The Trustee accepts the Trust established under this Agreement on the terms and subject to the provisions set forth herein, and it agrees to discharge and perform fully and faithfully all of the duties and obligations imposed upon it under this Agreement.

(e) The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes herein set forth. Neither the Trust Beneficiaries nor the Plan shall have any preferred claim on, or any beneficial ownership interest in, any assets of the Trust prior to the time such assets are paid to a Trust Beneficiary as vested accrued benefits as provided in Article VI, and all rights created under the Plan and the Trust under this Agreement shall be mere unsecured, contractual rights of the Executives against the Company.

ARTICLE VI

GENERAL DUTIES OF THE COMPANY AND THE TRUSTEE

(a) The Company will provide the Trustee with a copy of any future amendment to this Agreement promptly upon its adoption.

(b) The Company may from time to time hire outside consultants, accountants, actuaries, legal counsel or recordkeepers to perform such tasks as the Company may from time to time determine.

(c) The Trustee shall manage, invest and reinvest the Trust Fund as provided in Article XII of this Agreement. The Trustee shall collect the income on the Trust Fund, and make distributions therefrom, all as hereinafter provided.

(d) While the Plan remains in effect, and prior to a Change in Control, as defined below, the Company shall make contributions to the Trust Fund at least once each quarter. The amount of any quarterly contributions shall be at the discretion the Company. At the close of each calendar year, the Company shall make an additional contribution to the Trust Fund to the extent that previous contributions to the Trust Fund for the current calendar year are not equal to the total of the salary deferrals made by each Executive plus Company matching contributions accrued, as of the close of the current calendar year.

(e) In the event of a “Change in Control”, the Company shall make an additional contribution to the Trust Fund to the extent that previous contributions to the Trust Fund for the current calendar year are not equal to the total of the current year’s salary deferrals made by each Executive plus Company matching contributions accrued, as of the date of the Change in Control.

For purposes of this Agreement, a “Change in Control” shall be deemed to have occurred if any person (including a “Group” as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) acquires shares of Coherent, Inc. either (i) having a majority of total number of votes that may be cast for the election of directors of Coherent, Inc. or (ii) possessing, directly or indirectly, the power to control the direction of management or policies of the Company; provided, however, that no Change of Control shall be deemed to occur in the event of a merger, consolidation or reorganization of the Company where the shareholders of the Company are substantially the same as before such merger, consolidation or reorganization. The Trustee shall have no responsibility to determine a change in control and shall be advised of such event by the Company.

(f) The Trustee shall not be liable for any failure by the Company to provide contributions sufficient to pay all vested accrued benefits under the Plan in full in accordance with the terms of this Agreement.

(g) In the event that any Executives are found to be ineligible, that is, not members of a select group of highly compensated employees, according to a determination made by the Department of Labor, the Company will take whatever steps it deems necessary, in its sole discretion to equitably protect the interests of the affected Executives.

ARTICLE VII

ALLOCATION OF TRUST INCOME OR LOSS

(a) Determination of Net Income . As of each Valuation Date, the Company shall determine the net income or loss of the Trust Fund based on a statement from the Trustee of the receipts and disbursements of the Trust Fund since the immediately preceding Valuation Date and of the fair market value of the Fund as of the Valuation Date. If one or more separate investment funds have been established as provided in Article XII, each fund shall be valued separately on each Valuation Date and the net income or loss of each fund shall be allocated to each Account invested in such investment fund. In addition, self-directed accounts as defined under Article XII(b) shall be valued according to Section (c) of this Article.

(b) Valuation . As of each Valuation Date and prior to any allocation of contributions and forfeitures to be made as of such date, the net income or loss of the Trust Fund since the immediately preceding Valuation Date, including net appreciation or depreciation and any expenses paid by the Trust, shall be allocated to each Account in the ratio that the value, as of the immediately preceding Valuation Date of each such Account invested in the Trust Fund bears to the value, as of the immediately preceding Valuation Date, of all Accounts invested in the Trust Fund. If one or more separate investment funds have been established, the net income or loss of each fund shall be allocated to each Account invested in such investment fund in proportion to the value of each Account invested in such funds as of the immediately preceding Valuation Date. The Company shall adopt suitable procedures to establish a proportionate crediting of Trust income or loss to those portions of Accounts in the case of contributions or hardship withdrawals that have occurred in the interim period since the immediately preceding Valuation Date.

(c) Valuation of Segregated Accounts . The portion of any Executive’s Account invested on a segregated basis as provided in Article XII shall be valued separately on each Valuation Date and the net income or loss allocated to such Account shall be based on the assets, including income, gain, loss and/or other change in value of the assets constituting such portion of the Account.

(d) Valuation Dates . The Trust Fund, any separate investment funds and any segregated account shall be valued as of the last day of each calendar year and as of any other date the Company directs the Trustee to value the Trust Fund, as provided in Article VII(e).

(e) Special Valuation Dates at Company Discretion . The Company may direct the Trustee to determine the fair market value of the Trust Fund and may make a determination of Trust income or loss as of any date other than the last day of a calendar year.

ARTICLE VIII

EXECUTIVES’ ACCOUNTS

(a) Separate Accounts . The Company shall open and maintain a separate Account for each Executive. Each Executive’s Account shall reflect the amounts allocated thereto and distributed therefrom and such other information as affects the value of such Account pursuant to this Agreement. The Company may maintain records of Accounts to the nearest whole dollar.

(b) Statement of Accounts . As soon as practicable after the end of each calendar year the Company shall furnish to each Executive a statement of his Account, determined as of the end of such calendar year. Upon the discovery of any error or miscalculation in an Account, the Company shall correct it, to the extent correction is practically feasible. Statements to Executives are for reporting purposes only, and no allocation, valuation or statement shall vest any right or title in any part of the Trust Fund, nor require any segregation of Trust assets, except as is specifically provided in this Agreement.

(c) Accounts Which Are Not Segregated . When employment is terminated and payment is not deferred, the amount of the payment shall be based on the value of the Executive’s Account as of the Valuation Date immediately preceding his termination date plus any contribution subsequently credited to such Account and less any distributions subsequently made from the Account.

(d) Segregated Accounts . Payment to an Executive shall be based on the value of his segregated Account at the date of distribution. The value of his segregated Account shall be the current fair market value, including any income or loss, of the property constituting such segregated Account.

ARTICLE IX

PAYMENTS TO A TRUST BENEFICIARY

(a) Payments of vested accrued benefits to Trust Beneficiaries from the Trust Fund shall be made in accordance with the Deferred Compensation Agreement between the Company and the Executive; provided, however, the Trustee shall make such payments, as directed by the Company, to the extent the Company is not at such time Insolvent as defined in Article XI. Except as otherwise expressly provided in this Agreement, no distribution shall be made or commenced prior to the Executive’s termination of employment or death, whichever occurs earlier.

(b) Where the distribution of all or any portion of an Executive’s Account is to be deferred in the form of cash, the Account shall continue to be held and invested in the Trust subject to revaluation as provided in Article VII.

(c) In kind distributions shall be (i) made only in a form of investment that was held on behalf of the Executive as a segregated investment pursuant to Article XII(b) in a separate investment fund pursuant to Article XII(d) immediately preceding the date of distribution, (ii) limited to the amount of such investment so held, and (iii) based on the fair market value of the distributable property, as determined by the Trustee at the time of distribution.

(d) Payment to any Trust Beneficiary shall be made pursuant to the Deferred Compensation Agreement executed by the Executive, in whole or in part.

(i) In a lump sum, in cash and/or in kind, or

(ii) In annual installments equal to l/n of the Executive’s vested accrued benefit where n is the number of installments remaining to be paid.

(e) In case of any distribution to a minor or to a legally incompetent person, the Company may (1) direct the Trustee to make the distribution to his legal representative, to a designated relative, or directly to such person for his benefit, or (2) instruct the Trustee to use the distribution directly for his support, maintenance, or education. The Trustee shall not be required to oversee the application, by any third party, of any distributions made pursuant to this Article IX(e).

(f) Notwithstanding any other provisions of this Agreement, if any amounts held in the Trust are found in a “determination” (within the meaning of Section 1313(a) of the Internal Revenue Code of 1986, as amended (the “Code”)), to have been includible in the gross income of any Trust Beneficiary prior to payment of such amounts from the Trust, the Trustee shall, as soon as practicable pay such amounts to the Trust Beneficiary, as directed by the Company. For purposes of this Section, the Trustee shall be entitled to written notice from the Company that a determination described in the preceding sentence has occurred and to receive a copy of such notice. The Trustee shall have no responsibility until so advised by the Company.

ARTICLE X

HARDSHIP WITHDRAWALS

(a) At the request of an Executive, the Company shall authorize a withdrawal at any time of the vested accrued benefit attributable to the Executive’s salary deferrals and gains or losses thereon under his Account, provided that authorization for such withdrawal and the amount thereof shall be given only on account of an unforeseeable emergency. The term “unforeseeable emergency” shall mean severe financial hardship to the Executive resulting from a sudden and unexpected illness or accident of the Executive or of a dependent (as defined in Internal Revenue Code section 152(a)) of the Executive, loss of the Executive’s property due to casualty, or other similar extraordinary and unforeseeable

circumstances arising as a result of events beyond the control of the Executive. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but in any case, payment may not be made to the extent that such hardship is or may be relieved —

(i) Through reimbursement or compensation by insurance or otherwise,

(ii) By liquidation of the Executive’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or

(iii) By cessation of deferrals under the Plan.

The Company shall establish reasonable procedures and guidelines uniformly applied, to determine whether an unforeseeable emergency exists; provided, however, that no withdrawal request shall be granted if to do so could result in the inclusion of Trust Fund amounts in the gross income of Trust Beneficiaries prior to payment of such amounts from the Trust Fund because approval of such request would be inconsistent with any applicable statute, regulation, notice, ruling or other pronouncement of the Internal Revenue Service interpreting this or similar provisions.

ARTICLE XI

TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO

TRUST BENEFICIARIES WHEN COMPANY INSOLVENT

(a) The Company shall be considered “Insolvent” and an “Insolvency” shall be deemed to exist for purposes of this Agreement under any of the following circumstances:

(i) The Company is unable to pay its debts as they mature.

(ii) A receiver or trustee is appointed to take possession of all or substantially all of the assets of the Company.

(iii) There is a general assignment by the Company for the benefit of creditors.

(iv) An action or proceeding is commenced by or against the Company under any insolvency or bankruptcy act, or any other statute or regulation having as its purpose the protection of creditors, and the action or proceeding is not discharged within 60 days after the date of commencement.

(b) Notwithstanding any provision in this Agreement to the contrary, if at any time while the Trust is still in existence the Company becomes Insolvent, the Trustee shall upon written notice thereof suspend the payment of all amounts from the Trust Fund and shall thereafter (i) not permit any further elective salary deferrals by the Executives and (ii) discontinue all contributions by the Company to the Trust on behalf of the Executives. The Trustee shall hold the Trust Fund in suspense for the benefit of the Company’s creditors until it receives a court order directing the disposition of the Trust Fund; provided, however, that the Trustee may deduct or continue to deduct its fees and expenses, including fees of any consultants, actuaries, accountants, legal counsel or recordkeepers retained by the Company or Trustee to provide services to the Trust.

(c) By its approval and execution of this Agreement, the Company represents and agrees that its Board of Directors and Chief Executive Officer, as from time to time acting, shall have the fiduciary duty and responsibility on behalf of the Company’s creditors to give to the Trustee prompt written notice of the Company’s Insolvency and the Trustee shall be entitled to rely thereon to the exclusion of all directions or claims to pay vested accrued benefits thereafter made. Absent such notice, the Trustee shall have no responsibility for determining whether or not the Company has become Insolvent.

(d) If after being Insolvent, the Company later becomes solvent without the entry of a court order concerning the disposition of the Trust Fund, or if any bankruptcy or insolvency proceedings referred to in Article XI(a) are dismissed, the Company shall by written notice so inform the Trustee and the Trustee shall thereupon resume all its duties and responsibilities under this Agreement without regard to this Article XI until and unless the Company again becomes Insolvent as such term is defined herein.

(e) If the Trustee discontinues payments from the Trust pursuant to this Article XI and subsequently resumes payments, or removes the suspended status of the Trust, interest will be added to the Accounts of all Executives, including those Accounts from which a payment was held in suspense, for the period of discontinuance at not less than the average rate

on 90-Day Treasury Bills auctioned during the period of discontinuance, to be determined and calculated by the Company. The Company will not make any other contributions to the Trust that otherwise would have been made during the period of discontinuance.

ARTICLE XII

INVESTMENT AND ADMINISTRATION OF TRUST FUND

(a) The Trustee shall have the power:

(i) To invest and reinvest the Trust Funds; provided, however, the Trustee may delegate this investment authority, in whole or in part, and subject to such terms and conditions and as the Trustee shall require, to the Plan Committee of the Coherent Employee Retirement and Investment Plan (“Plan Committee”), an Investment Manager who meets the requirements under Article 10.04(i) of the Coherent Employee Retirement and Investment Plan, and, in accordance with paragraphs (b) through (f) below, Executives participating in the Plan (with respect to their own account);

(ii) To collect and receive any and all money and other property due to the Trust Fund and to give full discharge therefore;

(iii) To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust; to commence or defend suits or legal proceedings to protect any interest of the Trust; and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal;

(iv) Generally to do all acts, whether or not expressly authorized, which the Trustee may deem necessary or desirable for the protection of the Trust Fund.

Persons dealing with the Trustee shall be under no obligation to see to the proper application of any money paid or property delivered to the Trustee or to inquire into the Trustee’s authority as to any transaction.

(b) Segregated Investments — Participant Direction Permitted . At the discretion of the Company, Executives may be permitted to direct the Trustee in writing regarding the investment of funds in their Accounts, in a manner and form prescribed by the Company; provided that such right to direct shall apply on a nondiscriminatory basis to all Executives who meet the requirements established by the Company. Such directed investment Accounts shall be segregated and shall be valued separately by the Trustee under the provisions of Article VII(c). Valuations of such Accounts shall be made at such times as the Company may require, but no less frequently than annually. In no event, for valuation purpose, shall the property constituting such segregated Accounts, or the net income or loss thereon, be commingled with other Executives’ Accounts. Such segregated Accounts may be charged with their proportionate share of any general expenses charged to the Trust or with the full share of any expense incurred directly or indirectly in connection with such Accounts.

(c) Participant Direction Subject to Trustee Approval . The Trustee shall be under no obligation to approve or disapprove any specific investment medium. Neither the Company nor the Trustee has any liability for any losses or damage that may occur or result from (i) the approval of or failure to approve of any specific investment medium; (ii) the imposition of any administrative rules relating to the timing of investment elections of any sort; or (iii) any administrative delay in carrying out or failure to carry out investment elections within a specified time. The Trustee may disapprove or refuse to carry out any investment directions which in its opinion would subject the Trustee to burdensome administrative responsibilities. Prior to carrying out any investment direction of an Executive, the Trustee may require releases or any other documents, agreements or indemnifications as it may consider necessary. The Trustee, in approving any investment medium or in making investments under this Plan, shall not be restricted by statutes governing the legal investment of trust funds.

(d) Separate Investment Funds — Company May Establish Separate Funds . The Company may, in its sole discretion, direct the Trustee to create one or more separate investment funds, having such different specific investment objectives as the Company shall from time to time determine. The Company shall determine and may from time to time redetermine the number of investment funds and the specific objectives of said funds and the investments or kinds of investment which shall be authorized therefor.

Each Participant has the right to instruct the Plan Committee to direct the Trustee in writing to invest his Account in one or more separate investment funds, or in a directed investment, provided, however, that if any Executive fails to make a direction pursuant to this Article as to all or any part of such Account, the undirected portion of an Executive’s Account shall be invested by the Trustee.

(e) Purchase of Life Insurance . In addition, and if authorized by the Company, an Executive may also direct the Trustee in writing to purchase with the vested accrued benefits in his Account insurance on the life of the Executive from an insurance company licensed to do business under the insurance laws of the State of California.

(f) Company To Establish Rules . The Company may at any time make such uniform and nondiscriminatory rules as it determines necessary regarding the administration of the directed investment option. The Company may also develop and maintain rules governing the rights of Executives to change their investment directions and the frequency with which such changes can be made.

ARTICLE XIII

ACCOUNTING BY TRUSTEE

(a) The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be done, including such specific records as shall be agreed upon in writing between the Company and the Trustee. All such accounts, books and records shall be open to inspection and audit at all reasonable times by the Company, the Company’s representatives or agents. Within one hundred and twenty (120) days following the close of each calendar quarter and within one hundred and twenty (120) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such quarter or during the period from the close of the last preceding quarter to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other actions effected by it, including a description of all securities and investments purchased and sold, with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such quarter or as of the date of such removal or resignation, as the case may be. The written approval of any accounting by the Company shall be final as to all matters and transactions stated or shown therein and binding upon the Company and all persons who then shall be or then after shall become interested in this Trust. Failure of the Company to notify the trustee within 180 days after receipt of any accounting of its disapproval of such accounting shall be the equivalent of written approval.

ARTICLE XIV

RESPONSIBILITY OF TRUSTEE

(a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use; provided, however, that the Trustee shall incur no liability to anyone for any action taken pursuant to a direction, request or approval given by the Company or any Executive which is contemplated by and complies with the terms of this Trust Agreement, and to that extent the Trustee shall be relieved of the Prudent Person Rule for investments.

(b) The Trustee may hire agents, accountants, actuaries recordkeepers and financial consultants. Expenses of such persons shall be deemed to be expenses of management and administration of the Trust within the meaning of Article XV(d), below.

(c) The Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law unless expressly provided otherwise herein.

ARTICLE XV

TAXES, EXPENSES AND COMPENSATION OF TRUSTEE

(a) It is the intention of the Company to have the corpus and income of the Trust established hereunder treated as assets and income of the Company to be used to satisfy the Company’s legal liability under the Plan in respect of all of the Executives, and the Company agrees that all income, deductions and credits of the Trust Fund belong to the Company as owner for income tax purposes and will be included on the Company’s income tax returns.

(b) The Company shall from time to time pay taxes (references in this Agreement to the payment of taxes shall include interest and applicable penalties) of any and all kinds whatsoever which at any time are lawfully levied or upon or become payable in respect of the Trust Fund, the income or any property forming a part thereof, or any security transaction pertaining thereto. To the extent that any taxes levied or assessed upon the Trust Fund are not paid by the Company or contested by the Company pursuant to the last sentence of this Article, the Trustee shall pay such taxes out of the Trust Fund, and the Company shall, upon demand by the Trustee, deposit into the Trust Fund an amount equal to the amount paid from the Trust Fund to satisfy such tax liability. If requested by the Company, the Trustee shall at the Company’s expense, contest the validity of such taxes in any manner deemed appropriate by the Company or its counsel, but only if it has received an indemnity bond or other security satisfactory to it to pay any expenses of such contest. Alternatively, the Company may itself contest the validity of any such taxes, but any such contest shall not affect the Company’s obligation to reimburse the Trust Fund for taxes paid from the Trust Fund.

(c) In making payments from the Trust, the Trustee shall be liable for federal income tax withholding, and shall withhold the appropriate amount of tax, if any, as provided by applicable law and regulation, from any payment made to a Trust Beneficiary, unless the Company does not provide the Trustee with the necessary information as set forth in regulations, in which case the Company shall assume all relevant liability.

(d) The Trustee may be paid compensation by the Company in accordance with any written agreement for this purpose between them; provided, however, that a Trustee who is an officer, director or employee of the Company shall serve without compensation. The Trustee shall be reimbursed by the Company for its reasonable expenses of management and administration of the Trust, including reasonable compensation of any agent engaged by the Trustee to assist it in such management and administration. The Trustee shall be able to charge the Trust Fund for such compensation and for any reasonable expenses including counsel, appraisal or accounting fees, and the same may be deducted from the Trust Fund unless paid by the Company within sixty (60) days after the Company receives written billing by the Trustee; provided that this paragraph shall not apply while a dispute over the amount of such charges exists.

ARTICLE XVI

PROTECTION OF TRUSTEE

(a) The Company shall certify to the Trustee the name or names of any person or persons authorized to act for the Company. Such certification shall be signed by the Chief Executive Officer or other officer of the Company duly authorized by the Board of Directors. Until the Company notifies the Trustee, in a similarly signed notice, that any such person is no longer authorized to act for the Company, the Trustee may continue to rely upon the authority of such person. The Trustee may rely upon any certificate, notice or direction of the Company which the Trustee reasonably believes to have been signed by a duly authorized officer or agent of the Company. Notices to the Trustee shall be sent in writing to the Trustee at the offices of the Company, 3290 West Bayshore Road, Post Office Box 10321, Palo Alto, California 94303-0811. No communication shall be binding upon the Trust Fund or the Trustee until it is received by the Trustee and unless it is in writing and signed by an authorized person. Notices to the Company shall be sent in writing attention to the Company’s principal office at 3290 West Bayshore Road, Post Office Box 10321, Palo Alto, California 94303-0811, or to such other address as the Company may specify. No notice shall be binding upon the Company until it is received by the Company.

(b) The Trustee may consult with any legal counsel (“Legal Counsel”) that is appointed according to the Selection Process, except as provided in Article XVIII(c), for the purpose of obtaining advice on topics including but not limited to the construction of this Agreement, its duties hereunder, or any act which it pro poses to take or omit, and shall not be liable for any action taken or omitted in good faith pursuant to such advice. Expenses of Legal Counsel shall be deemed to be expenses of management and administration of the Trust within the meaning of Article XV(d) hereof.

(c) The Trustee shall discharge its duties under the Agreement in a manner consistent with the objectives of this Agreement The Trustee shall not be liable for any loss sustained by the Trust Fund by reason of the purchase, retention, sale or exchange of any investment in good faith and in accordance with the provisions of this Agreement. The Trustee shall have no responsibility or liability for any failure of the Company to make contributions to the Trust Fund or to pay vested accrued benefits when due. The Trustee’s duties and obligations shall be limited to those expressly imposed upon it under the provisions of this Agreement relating to the Trust, and the Trustee shall not have responsibility under the provisions of this Agreement relating to the Plan, notwithstanding any reference to the Plan.

ARTICLE XVII

INDEMNIFICATION OF TRUSTEE

To the fullest extent permitted by law, the Company agrees to indemnify, to defend, and to hold harmless the Trustee against any liability whatsoever for any action taken or omitted by such Trustee in good faith in connection with this Agreement or duties hereunder and for any expenses or losses for which the Trustee may become liable as a result of any such actions or non-actions unless resultant from gross negligence or willful misconduct.

ARTICLE XVIII

RESIGNATION AND REMOVAL OF TRUSTEE AND LEGAL COUNSEL

(a) A Trustee (or a Co-Trustee) may resign upon thirty (30) days’ prior written notice to the Company, except that any such resignation shall not be effective until a successor trustee (or Co-Trustee) has been appointed according to the Selection Process, as defined below, and such successor has accepted the appointment in writing, but in any event no later that 90 days after such resignation. The Company shall condition its acceptance of such successor on the obtaining from such successor of a written statement that the successor has read the Trust Agreement and understands its obligations thereunder.

(b) The Company may remove the Trustee (or a Co-Trustee) upon thirty (30) days’ prior written notice to the Trustee (or the Co- Trustee) . Any such removal shall not be effective until the close of such notice period and delivery by the Company to the Trustee (or Co-Trustee) of (i) an instrument in writing appointing a successor trustee (if required, such appointment shall be according to the Selection Process, as defined below), (ii) an acceptance of such appointment in writing executed by such successor, and (iii) a written statement by such proposed successor that the successor has read the Agreement and understands its obligations thereunder.

(c) During the 12 months following a Change of Control, as defined in Article VI(e), the appointment of Legal Counsel and/or a successor trustee shall be in accordance with the following process (“Selection Process”): (i) the Executives who have the five largest accrued benefits (whether or not vested) under the Accounts established on their behalf in the Trust Fund (“Five Executives”) as of the Valuation Date immediately preceding the day of selection shall be determined, provided that if an Executive’s Account has been reduced to zero after that Valuation Date, that Executive’s Account shall not be considered for purpose of determining the five largest Accounts, and (ii) an appointment or removal of Legal Counsel and/or a successor trustee shall be made by a majority vote of the Five Executives with each of the Five Executives casting one equal vote. Any of the Five Executives may waive the rights described in this paragraph and assign them to the Company. In any case, the rights of the Five Executives described in this paragraph shall revert to the Company following 12 months after the Change of Control.

(d) All of the provisions set forth herein with respect to the Trustee shall relate to each successor with the same force and effect as if such successor had been originally named as the Trustee hereunder.

(e) Upon the resignation or removal of the Trustee (or a Co-Trustee) and appointment of a successor, the Trustee shall transfer and deliver the Trust Fund to such successor. Following the effective date of the appointment of the successor, the Trustee’s responsibility hereunder shall be limited to managing the assets in its possession, transferring such assets to the successor and settling its final account. Neither the Trustee nor the successor shall be liable for the acts of the other.

ARTICLE XIX

DURATION AND TERMINATION OF TRUST AND AMENDMENT

(a) The Trust is hereby declared to be irrevocable and shall continue until all vested accrued benefits have been paid.

(b) If this Trust terminates under the provisions of Article XIX(a), the Trustee shall liquidate the Trust Fund and, after its final accounting has been settled, shall distribute to the Company the net balance of any assets of the Trust Fund remaining after all vested accrued benefits and administration expenses have been paid. Upon making such distribution, the Trustee shall be relieved from all further liability.

(c) This Agreement may be amended, or the Plan terminated or suspended, by an instrument in writing executed on behalf of the Company by the Chief Executive Officer or a duly appointed representative of the Board of Directors and delivered to the Trustee, provided, however, that (i) no amendment will be made to this Agreement which will cause this Agreement, the Trust, the Plan or the assets of the Trust Fund to be governed by or subject to Part 2, 3 or 4 of Title I of ERISA, (ii) no such amendment shall adversely affect any Trust Beneficiary’s accrued benefit, (iii) no such amendment shall increase the duties or responsibilities of the Trustee unless the Trustee consents thereto in writing, (iv) no such amendment which would cause the Trust to be other than a “grantor trust,” or have contributions to the Trust by the Company, or income and gains of the Trust Fund, constitute a taxable event to the Trust or to the Executives, and (v) no such amendment shall cause the vested accrued benefit paid to Trust Beneficiaries from the Trust Fund to become nondeductible to the Company in the year of payment.

(d) Notwithstanding anything to the contrary in this Agreement, during the 12 months following a Change of Control, as defined in Article VI(e), the Five Executives, determined pursuant to Article XVIII(c), shall have the authority in their absolute discretion, to terminate the Plan and direct distribution of all Executive Accounts.

ARTICLE XX

MISCELLANEOUS

(a) This Agreement, the Trust and the Plan hereby created shall be construed and regulated by the laws of the State of California.

(b) The headings of sections in this Agreement are used herein for convenience of reference only and in case of any conflict the text of this Agreement shall control.

(c) This Agreement shall be binding upon and inure to the benefit of any successor to the Company or its business as the result of merger, consolidation, reorganization, transfer of assets or otherwise, and any subsequent successor thereto; and any such successor shall be deemed to be the “Company” under this Agreement. In the event of any such merger, consolidation, reorganization, transfer of assets or other similar transaction, the successor to the Company or its business or any subsequent successor thereto shall promptly notify the Trustee in writing of its successorship and furnish the Trustee with the information specified in Article XVI(a) of this Agreement. In no event shall any such transaction described herein suspend or delay the rights of Trust Beneficiaries to receive their vested accrued benefits hereunder.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written.

COHERENT, INC.			TRUSTEE

By:	/s/ Henry E. Gauthier		/s/ Robert Quillinan
			ROBERT QUILLINAN

Date:		December 4, 1990	Date:	November 28, 1990


			/s/ Dennis Bucek
			DENNIS BUCEK

			Date:	November 28, 1990

Exhibit 10.6

COHERENT, INC.

2005 DEFERRED COMPENSATION PLAN

PREAMBLE

This Coherent, Inc. 2005 Deferred Compensation Plan is adopted by Coherent, Inc. for the benefit of certain of its Employees and members of its Board of Directors, effective as of January 1, 2005 (the “Effective Date”). The purpose of the Plan is to provide supplemental retirement income and to permit eligible Participants the option to defer receipt of Compensation, pursuant to the terms of the Plan. The Plan is intended to be an unfunded deferred compensation plan maintained for the benefit of a select group of management or highly compensated employees under sections 201(2), 301(a)(3) and 401(a)(1) of ERISA and is intended to comply with Section 409A of the Internal Revenue Code. Participants shall have the status of unsecured creditors of Coherent, Inc. with respect to the payment of Plan benefits.

From and after the Effective Date, this Plan replaces the Coherent, Inc. 1995 Deferred Compensation Plan, the Coherent, Inc. Supplementary Retirement Plan and the Director Deferred Compensation Plan, which have been frozen to new deferrals as of December 31, 2004 so as to qualify these prior plans for “grandfather” treatment under Internal Revenue Code Section 409A.

ARTICLE I

Definitions

1.1 Definitions . Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context:

(a) “ Account ” means an account established on the books of the Employer for the purpose of recording amounts credited on behalf of a Participant and any expenses, gains or losses included thereon.

(b) “ Administrator ” means the Employer, or the Committee, if one has been designated by such Employer.

(d) “ Beneficiary ” means the person or persons entitled under Section 6.4 to receive benefits under the Plan upon the death of a Participant.

(e) “ Change of Control Event ” means a change in ownership or effective control of the Company or in the ownership of a substantial portion of the Company’s assets, as defined under Code Section 409A.

(f) “ Code ” means the Internal Revenue Code of 1986, as amended from time to time.

(g) “ Code Section 409A ” means Code Section 409A and the proposed or final (as applicable) Treasury regulations and other official guidance promulgated thereunder.

(h) “ Code Section 409A Distribution ” means a distribution pursuant to Section 6.10 hereof.

(i) “ Committee ” means the Deferred Compensation Committee composed of three or more individuals appointed by the Compensation Committee of the Board of Directors of the Employer, or following a Change of Control, appointed by the Committee, to function as the Administrator. Once appointed, the Deferred Compensation Committee shall interpret and administer this Plan and take such other actions as may be specified herein.

(j) “ Company ” means the Employer and any of its Subsidiaries.

(k) “ Compensation ” means (i) with respect to Eligible Employees, base salary, commissions, variable compensation plan bonuses, sales commission plan bonuses and sales incentive bonuses, including amounts that are otherwise excludable from the gross income of the Participant under a salary reduction agreement by reason of the application of Sections 125 or 402(a)(8) of the Code, and (ii) with respect to Outside Directors, all cash retainers and cash meeting fees, excluding expense reimbursements. Any deferral elections made under Employer’s 401(k) Plan shall be determined based on the Participant’s compensation prior to reduction for the Deferral Contributions to this Plan.

(l) “ Corporate Dissolution ” means a dissolution of the Company that is taxed under Code Section 331.

(m) “ Deferral Contributions ” means, for each Participant, the amount deferred pursuant to Section 3.1 hereof.

(n) “ Disability ” means the Participant (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering Company employees.

(o) “ Domestic Relations Order ” means a court order that qualifies as a domestic relations order under Code Section 414(p)(1)(B).

(p) “ Eligible Participant ” means (i) any employee with an annual base salary in excess of the amount specified by the Committee, (ii) any Outside Director, and (iii) any other employees designated as eligible by the Committee.

(q) “ Employee ” means any employee of the Employer.

(r) “ Employer ” means Coherent, Inc. and any successors and assigns unless otherwise provided herein.

(s) “ Entry Date ” means (i) January 1 (which is also the Entry Date for employees who are promoted or given a base salary increase so as to become an Eligible Participant for the first time and for re-hires who were previously Eligible Participants), (ii) for new employees who are Eligible Participants (including re-hires who were not previously Eligible Participants), the first day of the next payroll period commencing after the next paydate following receipt of their deferral election by the Company; provided, however, that such new employee’s deferral election must be submitted no later than 30 days following their becoming newly eligible, or (iii) for Non-Employee Directors who are Eligible Participants for the first time, the first day of the next Company fiscal quarter following their becoming a Non-Employee Director; provided, however, that such new Non-Employee Director’s deferral election must be submitted no later than 30 days following their becoming a newly eligible Non-Employee Director.

(t) “ ERISA ” means the Employee Retirement Income Security Act of 1974, as from time to time amended.

(u) “ FICA Amount ” means the aggregate Federal Insurance Contributions Act (FICA) tax imposed on any Account under Code Sections 3101, 3121(a) and 3121(v)(2), as applicable.

(v) “ Outside Director ” means a member of the Board whom is not an Employee.

(w) “ Participant ” means any Employee or Outside Director who participates in the Plan in accordance with Article 2 hereof.

(x) “ Plan ” means this Coherent, Inc. 2005 Deferred Compensation Plan.

(y) “ Plan Year ” means the 12-consecutive month period beginning January 1 and ending December 31.

(z) “ Retirement ” means a Participant’s Separation from Service after attaining 50 years of age.

(aa) “ Separation From Service ” means a separation from service as defined under Code Section 409A.

(bb) “ Specified Employee ” means a “key employee” as such term is defined in Code Section 416(i) without regard to paragraph five (5) thereof. As of the Plan effective date, this generally includes (i) the top fifty (50) Company officers making more than $130,000 per year, (ii) a 5% owner of the Company, or (iii) a 1% owner of the Company making more than $150,000 per year. The determination of whom is a Specified Employee shall be made on December 31 of each year and shall be effective on the following April 1.

(cc) “ Subsidiary ” means a subsidiary of the Employer, as such term is defined in Code Section 424(f).

(dd) “ Trading Day ” means a day upon which the major U.S. national stock exchanges are open for trading.

(ee) “ Trust ” means the trust fund established pursuant to the terms of the Plan.

(ff) “ Trustee ” means the corporation or individuals named in the agreement establishing the Trust and such successor and/or additional trustees as may be named in accordance with the Trust Agreement.

(gg) “ Unforeseeable Emergency ” means a severe financial hardship to Participant resulting from an illness or accident of Participant, the Participant’s spouse or a dependent of Participant (as defined in

Section 152(a) of the Code), loss of Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of Participant.

(hh) “ Year of Service ” means a period of 12 consecutive months during which the Participant is employed by the Employer or serves as a Board member. Service commences on the date the Participant first commences service for the Employer and ends on the date that the Participant quits, retires, is discharged, is determined to be Totally Disabled or dies.

(ii) “ Valuation Date ” means (i) for re-allocations of amounts previously deferred, the date of re-allocation, or, if that date is not a Trading Day, then the next Trading Day, (ii) for distributions hereunder, the last day of the preceding month, or, if that day is not a Trading Day, then the most recently concluded Trading Day, and (iii) for allocations of deferrals, the next Trading Day following the payday to which the deferral relates.

ARTICLE II

Participation

2.1 Date of Participation . Each Eligible Participant shall be become a Participant as of the Entry Date next following their timely filing of an election to defer Compensation in accordance with Section 3.1.

2.2 Resumption of Participation Following Return to Service . If a Participant ceases to be an Employee or Outside Director and thereafter returns to the service of the Employer he or she will again become a Participant as of the Entry Date following the date on which he or she re-commences service with the Employer, provided he or she is an Eligible Participant and has timely filed an election to defer Compensation pursuant to Section 3.1. Any scheduled Plan payments the Participant has been receiving shall continue to be paid as scheduled.

2.3 Change in Employment Status . If any Employee Participant continues in the employ of the Employer or Related Employer but ceases to be an Eligible Participant, the individual shall continue to be a Participant until the entire amount of his benefit is distributed; provided, however, the individual shall not be entitled to make Deferral Contributions during the period that he is not an Eligible Participant. In the event that the individual subsequently again becomes an Eligible Participant, the individual shall resume full participation in accordance with Section 3.1.

ARTICLE III

Contributions

3.1 Deferral Contributions .

(a) Annual Open Enrollment . Prior to the beginning of each Plan Year, each Eligible Participant may elect to execute a compensation reduction agreement with the Employer to reduce his Compensation by a specified percentage not exceeding, (i) for Eligible Employees, 75% of their base salary and 100% of their other Compensation, and (ii) for Outside Directors, 100% of their Compensation, equal in either case to whole number multiples of one (1) percent, and in a scheduled amount of not less than $10,000. Such agreement shall become irrevocable as of the last day of the calendar year in which it is made and shall be effective, with respect to Eligible Employees, with the first payday in the following Plan Year and with respect to Outside Directors, with the first day of service in the following Plan Year. Except with respect to payroll periods that cross-over from one calendar year to the next, the election shall not be effective with respect to Compensation relating to services already performed. An election once made will remain in effect for paydays falling in the duration of the Plan Year. Amounts credited to a Participant’s Account prior to the effective date of any new election will not be affected and will be paid in accordance with that prior election.

(b) Newly Eligible Participants . The same rules as in Section 3.1(a) above shall also apply to individuals who become Eligible Participants for the first time, except (i) such new Eligible Participants shall have no more than thirty (30) days following their becoming eligible in which to elect to have their Compensation reduced, and (ii) the agreement shall become effective, with respect to Eligible Employees, with the first full payroll period commencing following the receipt of their election by the Company and with respect to

Outside Directors, with the first day of service following the receipt of their election by the Company. Outside Directors may not, however, defer quarterly fees payable on account of the Company’s fiscal quarter in which the election is made.

(c) Variable Compensation Plan, Sales Commission Plan and Sales Incentive Bonuses Payable in a Subsequent Year . If a Variable Compensation Plan, Sales Commission Plan or Sales Incentive Bonus is earned in one calendar year and would normally be paid in the first quarter of the ensuing calendar year, it shall be deferred and distributed based upon the election made by the Eligible Participant in the open enrollment period in the year prior to the year in which it was earned. For newly Eligible Participants, any such Variable Compensation Plan, Sales Commission Plan or Sales Incentive Bonus shall be deferred and distributed based upon their initial election made with respect to the year in which it was earned.

EXAMPLE : In the December, 2005 open enrollment period, an Eligible Participant elects to defer 75% of her Sales Incentive Bonus for 2006. The 2006 Sales Incentive Bonus is normally paid in March, 2007. The deferral and distribution of her 2006 Sales Incentive Bonus otherwise payable in March 2007 are controlled by her election made in the 2005 open enrollment period.

(d) Year-End Cross-Over Payroll Periods . Paydays relating to periods of service that cross-over the calendar year end shall be covered by the Participant’s deferral election in effect for the later year, consistently with the default rules under Proposed Treasury Regulation §1.409A-2(a)(11) or subsequent IRS guidance.

(e) Limitation on Deferrals . Plan deferrals shall be reduced as necessary to satisfy the Participant’s required employment and income withholding taxes and other Company employee benefit plan withholding elections; provided however, that any deferral elections made under Employer’s 401(k) Plan shall be determined based on the Participant’s Compensation prior to reduction for the Deferral Contributions to this Plan.

3.2 Accounts . The Employer shall credit an amount to the Account maintained on behalf of the Participant corresponding to the amount of said reduction. Under no circumstances may an election to defer Compensation be adopted retroactively. A Participant may not revoke an election to defer Compensation for a Plan Year during that year.

3.3 Company Contributions . The Company may, in its sole discretion, make a contribution to a Participant’s Account, subject to such vesting and distribution conditions and limitations as the Company, in its sole discretion, shall impose. To the extent such Company contributions do not vest, corresponding debits will be made to a Participant’s Account, including any earnings on such forfeited amounts.

3.4 Cancellation of Elections Due to 401(k) Hardship Withdrawal or Unforeseeable Emergency Distribution .

(a) 401(k) Hardship Withdrawal . A Participant’s deferral election shall be automatically cancelled in the event the Participant obtains a hardship distribution from the Employer’s 401(k) plan pursuant to Treasury Regulation §1.401(k)-1(d)(3). The Participant, if still an Eligible Participant, may re-enroll in the Plan in the next open enrollment period.

(b) Unforeseeable Emergency Distribution . A Participant’s deferral election shall be automatically cancelled in the event the Participant obtains an unforeseeable emergency distribution from the Plan pursuant to Section 6.2 hereof. The Participant, if still an Eligible Participant, may re-enroll in the Plan in the next open enrollment period.

(i) In accordance with Internal Revenue Service Notice 2005-1, Q&A-21, Eligible Participants may make a deferral election with respect to 2005 Compensation that has not been paid or become payable at the time of election, and superseding their prior election, if any, with respect to such Compensation, on or before March 15, 2005, or such earlier time as is determined by the Administrator (or its designee) in its sole discretion.

(ii) In accordance with Internal Revenue Service Notice 2005-1 and the proposed Treasury regulations promulgated under Code Section 409A, and notwithstanding any contrary provision of the Plan, a Participant may elect to rescind or reduce his or her 2005 Compensation deferral election made under Section 3.1 by filing a form specified by the Administrator (or its designee) with the Administrator (or its designee) no later than December 31, 2005, or such earlier time as is determined by the Administrator (or its designee), in its sole discretion. The amount subject to such election shall be distributed to the Participant in a single lump sum payment of cash (or its equivalent) in calendar year 2005 or, if later, the Participant’s taxable year in which the amount becomes earned and vested.

ARTICLE IV

Participants’ Accounts

4.1 Individual Accounts . The Administrator will establish and maintain an Account for each Participant which will reflect Deferral Contributions credited to the Account on behalf of the Participant with earnings, expenses, gains and losses credited thereto, attributable to the investments made with the amounts in the Participant’s Account. Participants will be furnished statements of their Account values at least once each Plan Year.

4.2 Accounting for Distributions . As of any date of a distribution to a Participant or a Beneficiary hereunder, the distribution to the Participant or to the Participant’s Beneficiary(ies) shall be charged to the Participant’s Account.

4.3 Separate Accounts . A separate account under the Plan shall established and maintained to reflect the Account for each Participant with subaccounts to show separately the earnings, expenses, gains and losses credited or debited to that Account.

ARTICLE V

Investment of Contributions

5.1 Manner of Investment . All amounts credited to the Accounts of Participants shall be treated as though invested and reinvested only in eligible investments selected by the Employer.

5.2 Investment Decisions .

(a) Investments in which the Accounts of Participants shall be treated as invested and reinvested as directed by the Participant. Participants may change their investment allocations as specified by the Committee.

(b) All dividends, interest, gains and distributions of any nature earned in respect of an investment alternative in which the Account is treated as investing shall be credited to the Account in an amount equal to the net increase or decrease in the net asset value of each investment option since the preceding Valuation Date in accordance with the ratio that the portion of the Account of each Participant that is invested in the designated investment option bears to the aggregate of all amounts invested in the same investment option.

ARTICLE VI

Distributions

6.1 Certain Distributions to Participants and Beneficiaries .

(a) Earliest Distributions

(i) Regular Participants . Except as permitted by the Plan and Code Section 409A in connection with a Change of Control Event, a Corporate Dissolution, pursuant to a Bankruptcy Court Approval, or a Code Section 409A Distribution, in no event may a Participant’s account be distributed earlier than (i) the Participant’s Separation From Service, (ii) the Participant’s Disability, (iii) the Participant’s death, (iv) a specified time under Section 6.3 hereunder, (v) a Change in Control, (vi) the occurrence of an

Unforeseeable Emergency, or (vii) to a former spouse of a Participant pursuant to a Domestic Relations Order.

(ii) Specified Employee Participants . Except as permitted by the Plan and Code Section 409A in connection with a Change of Control Event, a Corporate Dissolution, pursuant to a Bankruptcy Court Approval, or a Code Section 409A Distribution, in no event may a Specified Employee’s account be distributed earlier than (i) six (6) months following the Specified Employee’s Separation From Service (or if earlier, the Specified Employee’s death), (ii) the Specified Employee’s Disability, (iii) the Specified Employee’s death, (iv) a specified time under Section 6.3 hereunder, (v) a Change in Control, or (vi) the occurrence of an Unforeseeable Emergency. In the event a Specified Employee’s Plan distributions are delayed due to the six-month delay requirement, the amounts otherwise payable to the Specified Employee during such period of delay shall be paid on a date that is at least six months and one day following Separation From Service, but no later than the end of the calendar year in which such six month and one day period ends (or, if earlier, upon the death of the Specified Employee). The Participant’s other scheduled distributions, if any, shall not be affected by the period of delay.

(b) Lump-Sum or Installment Payment Initial Elections Upon Retirement or Disability . At the same time their initial elections for any Plan Year are made, Participants shall elect to have their Compensation deferrals for that Plan Year paid out, either following their Retirement or their Disability, in one of the following forms of payment:

(i) Lump sum cash payment; or

(ii) Two to fifteen substantially equal annual installments.

In no event shall any Plan payments be made more than fifteen (15) years following a Participant’s Separation From Service.

(c) Other Plan Payments . All Plan payments not specified in Section 6.1(b), except for certain scheduled in-service withdrawals as specified in Section 6.3, shall be made in the form of a lump-sum payment.

(d) Installment Payments Treated as Single Payments . All installment payments under the Plan are considered a single payment for purposes of complying with Code Section 409A.

(e) Subsequent Election to Delay or Change Form of Payment .

(i) A Participant’s initial election to receive a Retirement, Disability or in-service distribution may be delayed or the form of payment changed by filing an election, in the form required by the Administrator, at least one year in advance of the date upon which any distribution would otherwise have been made pursuant to the prior election. Such election shall not be effective for a period of one (1) year, and must delay the initial payment by a period of at least five (5) years, but may not result in the initial payment occurring more than then ten (10) years following Retirement or Disability. In the absence of such timely filed election, the value of such Participant’s Account shall be distributed in accordance with their previously timely filed Account election.

(ii) Because Plan installment payments are considered a single payment for purposes of Code Section 409A, a subsequent election may accelerate the method of distribution. For example, if a Participant initially elected to receive Retirement or Disability payments in five annual installments following her Separation From Service, she could make a timely election to instead take a lump-sum distribution five years following her Separation From Service. Moreover, a subsequent election may change a lump-sum distribution to an installment election, so long as, in either case, the initial payment is delayed for a period of at least five (5) years, the election is not effective for one (1) year and is made at least one (1) year in advance of the date upon which the first distribution would have otherwise been made.

(iii) Because installment payments are treated as a single payment, any subsequent election must apply to all of the installment payments. For example, if a Participant initially elected to receive Retirement or Disability payments in five annual installments following her Separation From Service, the

Participant may not elect to defer the 1 ^st , 2d, 3 ^rd and 5 ^th installments only, but must also defer the 4 ^th installment.

(f) Lump-Sum Distribution Timing . For Participants receiving a lump-sum distribution, the value of their Account (or portion thereof specified in the Participant’s election) shall be paid in a lump-sum cash payment in February their following Separation From Service, or, for Specified Employees (or their estates or beneficiaries), if later, at least six months and one day after the date upon which they incur a Separation From Service, but no later than the end of the calendar year in which such six month and one day period ends or, if earlier, upon their death.

(g) Lump-Sum Distributions for Certain Accounts . Notwithstanding the Participant’s election under Section 6.1(b) or (e) hereof, if the value of a Participant’s Account is less than $10,000 on the date of his or her triggering initial distribution event (other than a scheduled in-service distribution), then the Participant’s Account shall be paid in a lump sum cash payment.

(h) Installment Amounts . For purposes of this Section 6.1, installment payments shall be determined by dividing the value of the Participant’s Account at the time of such installment by the number of payments remaining. Installment payments other than in-service distributions shall commence in the next February following the triggering distribution event, or, for Specified Employees undergoing a Separation From Service triggering event, as soon as is practicable at least six months and one day after the date upon which they incur a Separation From Service, but no later than the end of the calendar year in which such six month and one day period ends. However, in no event may installment payments be made over a period exceeding fourteen years following the first installment, even if the payments are postponed pursuant to an election made under Section 6.1(e) hereof. In-service distributions will commence in the February of the specified year.

6.2 Unforeseeable Emergency Distributions . With the consent of the Administrator, a Participant may withdraw up to one hundred percent (100%) of his or her Account as may be required to meet a sudden Unforeseeable Emergency of the Participant. Such distribution may only be made if the amounts distributed with respect to an Unforeseeable Emergency may not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship).

6.3 Scheduled In-Service Distribution . A Participant may elect, as provided in his or her Participant deferral election, to receive one or more scheduled in-service (i.e., commencing while employed by the Company, or, for outside director Participants, while serving as a Board member) distributions from their Account balance. Such in-service distributions may only be for years at least two full calendar years following the end of the calendar year to which the deferrals relate. Participants may elect to receive in-service distributions of deferrals of at least $10,000 in annual installments of up to five years. In-service distributions of deferrals of less than $10,000 must be paid out in a lump-sum.

EXAMPLE : In the December, 2005 open enrollment period, an Eligible Participant elects to receive an in-service distribution of 50% of her 2006 plan deferrals, plus earnings and losses thereon, in 2009. This includes a variable compensation plan bonus paid in 2007 but earned in 2006. Because the scheduled in-service distribution is at least two full calendar years following the end of 2006 (the end of the year to which the deferrals relate), the election is permissible.

Each scheduled in-service distribution may only be changed or postponed in accordance with Section 6.1(e) hereof. In the event a Participant incurs a Separation From Service prior to receiving the first scheduled payment, then the scheduled in-service distribution election shall be without further force and effect and the applicable Separation From Service distribution provisions of the Plan and the Participant’s deferral election shall control. Similarly, in the event a Participant incurs a Separation From Service after receiving the first scheduled in-service distribution payment, and if the Separation From Service is not pursuant to Retirement, Disability or death, then any scheduled future installments of the in-service distribution election shall be without further force and effect and the applicable Separation From Service distribution provisions of the Plan and the Participant’s deferral election shall control. If, however, a Participant incurs a Separation From Service due to his or her Retirement,

Disability or death after receiving their first scheduled in-service distribution payment, then the scheduled in-service distributions will be made according to their schedule and will take precedence over the Participant’s other deferral elections; provided, however, that the first scheduled payment following the Separation From Service for a Specified Employee shall be paid on a date that is at least six months and one day following Separation From Service, but no later than the end of the calendar year in which such six month and one day period ends (or, if earlier, upon the death of the Specified Employee).

6.4 Death . Except with respect to certain in-service distributions as provided below, if a Participant dies, his or her designated Beneficiary or Beneficiaries will receive the balance of his or her Account in a lump-sum. Moreover, if such death occurs prior to a Separation From Service, the Account shall vest 100% as to any previously unvested Account balance. Distribution to the Beneficiary or Beneficiaries will be made as soon as administratively practical in the month following the Administrator’s receipt of satisfactory proof of the Participant’s death. If, however, any installments of scheduled in-service distributions have commenced on or prior to the Participant’s death, then the remaining installment payments shall continue to be paid according to schedule.

A Participant may designate a Beneficiary or Beneficiaries, or change any prior designation of Beneficiary or Beneficiaries by giving notice to the Administrator on a form designated by the Administrator (spousal consent to such change may be required on the form designated by the Administrator). If more than one person is designated as the Beneficiary, their respective interests shall be as indicated on the designation form.

If upon the death of the Participant there is, in the opinion of the Administrator, no designated Beneficiary for part or all of the Participant’s Account, the amount as to which there is no designated Beneficiary will be paid to his or her surviving spouse or, if none, to his or her estate (such spouse or estate shall be deemed to be the Beneficiary for purposes of the Plan) as soon as is practicable.

6.5 Notice to Trustee . The Administrator will notify the Trustee in writing whenever any Participant or Beneficiary is entitled to receive benefits under the Plan. The Administrator’s notice shall indicate the form, amount and frequency of benefits that such Participant or Beneficiary shall receive.

6.6 Time of Distribution . In no event will distribution to a Participant be made later than the date specified by the Participant in his or her election to defer Compensation; provided, however, that if a Participant becomes a Specified Employee, his or her election shall be subject to the six (6) month distribution delay requirements of the Plan and Code Section 409A.

6.7 Limitation on Distributions to Covered Employees Prior to a Change of Control . Notwithstanding any other provision of this Article VI, in the event that, prior to a Change of Control, the Participant is a “covered employee” as that term is defined in Section 162(m)(3) of the Code, or would be a covered employee if his or her Account were distributed in accordance with his or her election, and the Administrator reasonably anticipates that Participant’s scheduled Plan distributions would cause the Employer to forego an income tax deduction with respect to such distribution by virtue of Code Section 162(m), then such Participant’s distributions shall be delayed until the earlier of (i) the earliest date at which the Administrator reasonably anticipates that the Employer’s deduction related to the distribution will not be limited by virtue of Code Section 162(m), or (ii) the calendar year in which the Participant undergoes a Separation From Service, subject to complying with any six (6) month distribution delay requirements of this Plan and Code Section 409A.

6.8 Domestic Relations Order Distributions . A payment to the former spouse of a Participant may be accelerated as necessary to comply with the terms of a Domestic Relations Order.

6.9 FICA and Related Income Tax Distribution . The Committee, in its sole discretion, may permit a distribution from a Participant’s Account sufficient to pay any FICA Amounts due upon the vesting of any Company contribution as well as to satisfy the income tax withholding requirements with respect to the FICA Amount and income tax payments under this Section 6.9. In no event may the total payment under this Section 6.9 exceed the aggregate of the FICA Amount and the related income tax withholding.

6.10 Code Section 409A Distribution . In the event that the Plan fails to satisfy the requirements of Code Section 409A, then the Committee, in its sole discretion, may permit a distribution from a Participant’s Account up to the maximum amount required to be included in income as a result of the failure to comply with Code Section 409A.

6.11 Tax Withholding . Payments under this Article VI shall be subject to all applicable withholding requirements for state and federal income taxes and to any other federal, state or local taxes that may be applicable to such payments.

ARTICLE VII

Change of Control

7.1 No New Participants Following Change of Control . No individual may commence participation in the Plan following a Change of Control Event.

7.2 No Deferrals Following a Change of Control . Deferrals shall cease as of the date of a Change of Control Event.

7.3 Discretionary Termination 30 Days Prior to or Within 12 Months Following a Change in Control . The Administrator, in its sole discretion, may terminate the Plan within 30 days prior to or 12 months following a Change in Control Event; provided that such termination complies with the requirements of Code Section 409A.

ARTICLE VIII

Termination Due to Corporate Dissolution or Pursuant to Bankruptcy Court Approval

8.1 Corporate Dissolution . The Administrator, in its sole discretion, may terminate the Plan within 12 months following a Corporate Dissolution; provided that such termination complies with the requirements of Code Section 409A.

8.2 Bankruptcy Court Approval . The Administrator, in its sole discretion, may terminate the Plan pursuant to Bankruptcy Court Approval; provided that such termination complies with the requirements of Code Section 409A.

ARTICLE IX

Amendment and Termination

9.1 Amendment by Employer . The Employer reserves the authority to amend the Plan. Any such change notwithstanding, no Participant’s Account shall be reduced by such change below the amount to which the Participant would have been entitled if he had voluntarily left the employ of the Employer immediately prior to the date of the change. The Employer may from time to time make any amendment to the Plan that may be necessary to satisfy Code Section 409A or ERISA.

9.2 Retroactive Amendments . An amendment made by the Employer in accordance with Section 9.1 may be made effective on a date prior to the first day of the Plan Year in which it is adopted if such amendment is necessary or appropriate to enable the Plan and Trust to satisfy the applicable requirements of Code Section 409A or ERISA or to conform the Plan to any change in federal law or to any regulations or rulings thereunder.

9.3 Plan Deferral Termination . The Employer has adopted the Plan with the intention and expectation that deferrals will be permitted indefinitely. However, the Employer has no obligation to maintain the Plan for any length of time and may discontinue future Compensation deferrals under the Plan in advance of any Plan Year by written notice delivered to Eligible Participants without any liability for any such discontinuance.

9.4 Distribution upon Certain Plan Terminations . Upon termination of the Plan other than pursuant to a Change of Control Event, Corporate Dissolution or pursuant to a Bankruptcy Court Approval, no further Deferral Contributions or Employer Contributions shall be made under the Plan, but Accounts of Participants maintained under the Plan at the time of termination shall continue to be governed by the terms of the Plan until paid out in accordance with the terms of the Plan, Participants’ deferral elections and the requirements of Code Section 409A, which latter shall take precedence over the terms of the Plan and Participants’ deferral elections in the event of any conflict.

ARTICLE X

The Trust

10.1 Establishment of Trust . The Employer shall establish the Trust between the Employer and the Trustee, in accordance with the terms and conditions as set forth in a separate agreement, under which assets are held, administered and managed, subject to the claims of the Employer’s creditors in the event of the Employer’s insolvency, until paid to Participants and their Beneficiaries as specified in the Plan. The Trust is intended to be treated as a grantor trust under the Code, and the establishment of the Trust is not intended to cause Participants to realize current income on amounts contributed thereto.

ARTICLE XI

Miscellaneous

11.1 Limitation of Rights . Neither the establishment of the Plan and the Trust, nor any amendment thereof, nor the creation of any fund or account, nor the payment of any benefits, will be construed as giving to any Participant or other person any legal or equitable right against the Employer, Administrator or Trustee, except as provided herein; and in no event will the terms of employment or service of any Participant be modified or in any way affected hereby

11.2 Nontransferability; Domestic Relations Orders . The right of any Participant, any Beneficiary, or any other person to the payment of any benefits under this Plan shall not be assigned, transferred, pledged or encumbered; provided, however, that a Deferral Account hereunder may be transferred to a Participant’s former spouse pursuant to a Domestic Relations Order.

11.3 Facility of Payment . In the event the Administrator determines, on the basis of medical reports or other evidence satisfactory to the Administrator, that the recipient of any benefit payments under the Plan is incapable of handling his affairs by reason of minority, illness, infirmity or other incapacity, the Administrator may direct the Trustee to disburse such payments to a person or institution designated by a court which has jurisdiction over such recipient or a person or institution otherwise having the legal authority under State law for the care and control of such recipient. The receipt by such person or institution of any such payments therefore, and any such payment to the extent thereof, shall discharge the liability of the Trust for the payment of benefits hereunder to such recipient.

11.4 Information between Employer and Trustee . The Employer agrees to furnish the Trustee, and the Trustee agrees to furnish the Employer with such information relating to the Plan and Trust as may be required by the other in order to carry out their respective duties hereunder, including without limitation information required under the Code or ERISA and any regulations issued or forms adopted thereunder.

11.5 Notices . Any notice or other communication in connection with this Plan shall be deemed delivered in writing if addressed as provided below and if either actually delivered at said address or, in the case of a letter, three business days shall have elapsed after the same shall have been deposited in the United States mails, first-class postage prepaid and registered or certified:

(a) If it is sent to the Employer or Administrator, it will be at the address specified by the Employer;

(b) If it is sent to the Trustee, it will be sent to the address set forth in the Trust Agreement; or, in each case at such other address as the addressee shall have specified by written notice delivered in accordance with the foregoing to the addressor’s then effective notice address.

11.6 Governing Law . The Plan will be construed, administered and enforced according to ERISA, and to the extent not preempted thereby, the laws of the state of California.

ARTICLE XII

Plan Administration

12.1 Powers and responsibilities of the Administrator . The Administrator has the full power and the full responsibility to administer the Plan in all of its details, subject, however, to the applicable requirements of ERISA. The Administrator’s powers and responsibilities include, but are not limited to, the following:

(a) To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan;

(b) The discretionary authority to construe and interpret the Plan, its interpretation thereof in good faith to be final and conclusive on all persons claiming benefits under the Plan;

(d) To administer the claims and review procedures specified in Section 12.3;

(e) To compute the amount of benefits which will be payable to any Participant, former Participant or Beneficiary in accordance with the provisions of the Plan;

(f) To determine the person or persons to whom such benefits will be paid;

(g) To authorize the payment of benefits;

(h) To appoint such agents, counsel, accountants, and consultants as may be required to assist in administering the Plan;

(i) By written instrument, to allocate and delegate its responsibilities.

12.2 Nondiscriminatory Exercise of Authority . Whenever, in the administration of the Plan, any discretionary action by the Administrator is required, the Administrator shall exercise its authority in a nondiscriminatory manner so that all persons similarly situated will receive substantially the same treatment.

12.3 Claims and Review Procedures .

(a) Purpose . Every Participant or Beneficiary (or his or her representative who is authorized in writing by the Claimant to act on his or her behalf) (hereinafter collectively, “Claimant”) shall be entitled to file with the Administrator (and subsequently with the individual(s) designated to review claims appealed after being initially denied by the Administrator (the “Review Panel”)) a written claim for benefits under the Plan. The Administrator and Review Panel shall each be able to establish such rules, policies and procedures, consistent with ERISA and the Plan, as it may deem necessary or appropriate in carrying out its duties and responsibilities under this Section 12.3. In the case of a denial of the claim, the Administrator or Review Panel, as applicable, shall provide the Claimant with a written or electronic notification that complies with Department of Labor Regulation Section 2520.104b-1(c)(1).

(b) Denial of Claim . If a claim is denied by the Administrator (or its authorized representative), in whole or in part, then the Claimant shall be furnished with a denial notice that shall contain the following:

(i) specific reason(s) for the denial;

(ii) reference to the specific Plan provision(s) on which the denial is based;

(iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why the material or information is necessary; and

(iv) an explanation of the Plan’s claims review procedure and the time limits applicable to such procedures, including a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following a denial on review (as set forth in Section 12.4 below).

The denial notice shall be furnished to the Claimant no later than ninety (90)-days after receipt of the claim by the Administrator, unless the Administrator determines that special circumstances require an extension of time for processing the claim. If the Administrator determines that an extension of time for processing is required, then notice of the extension shall be furnished to the Claimant prior to the termination of the initial ninety (90)-day period. In no event shall such extension exceed a period of ninety (90)-days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan expects to render the benefits determination.

(c) Claim Review Procedure . The Claimant may request review of the denial at any time within sixty (60) days following the date the Claimant received notice of the denial of his or her claim. The Administrator shall afford the Claimant a full and fair review of the decision denying the claim and, if so requested, shall:

(i) provide the Claimant with the opportunity to submit written comments, documents, records and other information relating to the claim for benefits;

(ii) provide that the Claimant shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information (other than documents, records and other information that is legally-privileged) relevant to the Claimant’s claim for benefits; and

(iii) provide for a review that takes into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

(d) If the claim is subsequently also denied by the Review Panel, in whole or in part, then the Claimant shall be furnished with a denial notice that shall contain the following:

(i) specific reason(s) for the denial;

(ii) reference to the specific Plan provision(s) on which the denial is based; and

(iii) an explanation of the Plan’s claims review procedure and the time limits applicable to such procedures, including a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following the denial on review.

(e) The decision on review shall be issued within sixty (60) days following receipt of the request for review. The period for decision may, however, be extended up to one hundred twenty (120) days after such receipt if the Review Panel determines that special circumstances require extension. In the case of an extension, notice of the extension shall be furnished to the Claimant prior to the expiration of the initial sixty (60)-day period. In no event shall such extension exceed a period of sixty (60) days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan expects to render the benefits determination.

(f) Special Procedure for Claims Due to Disability . To the extent an application for distribution as a result of a Disability requires the Administrator or the Review Panel, as applicable, to make a determination of Disability under the terms of the Plan, then such determination shall be subject to all of the general rules described in this Article, except as they are expressly modified by this Section.

(i) The initial decision on the claim for a Disability distribution will be made within forty-five (45) days after the Plan receives the Claimant’s claim, unless special circumstances require additional time, in which case the Administrator will notify the Claimant before the end of the initial forty-five (45)-day period of an extension of up to thirty (30) days. If necessary, the Administrator may notify the Claimant, prior to the end of the initial thirty (30)-day extension period, of a second extension of up to thirty (30) days. If an extension is due to the Claimant’s failure to supply the necessary information,

then the notice of extension will describe the additional information and the Claimant will have forty-five (45) days to provide the additional information. Moreover, the period for making the determination will be delayed from the date the notification of extension was sent out until the Claimant responds to the request for additional information. No additional extensions may be made, except with the Claimant’s voluntary consent. The contents of the notice shall be the same as described in Section 13.3(b) above. If a disability distribution claim is denied in whole or in part, then the Claimant will receive notification, as described in Section 13.3(b).

(g) If an internal rule, guideline, protocol or similar criterion is relied upon in making the adverse determination, then the denial notice to the Claimant will either set forth the internal rule, guideline, protocol or similar criterion, or will state that such was relied upon and will be provided free of charge to the Claimant upon request (to the extent not legally-privileged) and if the Claimant’s claim was denied based on a medical necessity or experimental treatment or similar exclusion or limit, then the Claimant will be provided a statement either explaining the decision or indicating that an explanation will be provided to the Claimant free of charge upon request.

(h) Any Claimant whose application for a Disability distribution is denied in whole or in part, may appeal the denial by submitting to the Review Panel a request for a review of the application within one hundred and eighty (180) days after receiving notice of the denial. The request for review shall be in the form and manner prescribed by the Review Panel. In the event of such an appeal for review, the provisions of Section 13.3(c) regarding the Claimant’s rights and responsibilities shall apply. Upon request, the Review Panel will identify any medical or vocational expert whose advice was obtained on behalf of the Review Panel in connection with the denial, without regard to whether the advice was relied upon in making the determination. The entity or individual appointed by the Review Panel to review the claim will consider the appeal de novo , without any deference to the initial denial. The review will not include any person who participated in the initial denial or who is the subordinate of a person who participated in the initial denial.

(i) If the initial Disability distribution denial was based in whole or in part on a medical judgment, then the Review Panel will consult with a health care professional who has appropriate training and experience in the field of medicine involved in the medical judgment, and who was neither consulted in connection with the initial determination nor is the subordinate of any person who was consulted in connection with that determination; and upon notifying the Claimant of an adverse determination on review, include in the notice either an explanation of the clinical basis for the determination, applying the terms of the Plan to the Claimant’s medical circumstances, or a statement that such explanation will be provided free of charge upon request.

(j) A decision on review shall be made promptly, but not later than forty-five (45) days after receipt of a request for review, unless special circumstances require an extension of time for processing. If an extension is required, the Claimant will be notified before the end of the initial forty-five (45)-day period that an extension of time is required and the anticipated date that the review will be completed. A decision will be given as soon as possible, but not later than ninety (90) days after receipt of a request for review. The Review Panel shall give notice of its decision to the Claimant; such notice shall comply with the requirements set forth in paragraph (h) above. In addition, if the Claimant’s claim was denied based on a medical necessity or experimental treatment or similar exclusion, then the Claimant will be provided a statement explaining the decision, or a statement providing that such explanation will be furnished to the Claimant free of charge upon request. The notice shall also contain the following statement: “You and your Plan may have other voluntary alternative dispute resolution options, such as mediation. One way to find out what may be available is to contact your local U.S. Department of Labor Office and your State insurance regulatory agency.”

12.4 Exhaustion of Claims Procedure and Right to Bring Legal Claim . No action in law or equity shall be brought more than one (1) year after the Review Panel’s affirmation of a denial of the claim, or, if earlier, more than four (4) years after the facts or events giving rise to the Claimant’s allegation(s) or claim(s) first occurred.

12.5 Plan’s Administrative Costs . The Employer shall pay all reasonable costs and expenses (including legal, accounting, and employee communication fees) incurred by the Administrator and the Trustee in administering the Plan and Trust.

IN WITNESS WHEREOF, the Employer by its duly authorized officer(s), has caused this Plan to be adopted effective January 1, 2005.

	COHERENT, INC.


	By:	/s/ Henry Gauthier

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, John R. Ambroseo, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Coherent, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2006


/s/ JOHN R. AMBROSEO
John R. Ambroseo
President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Helene Simonet, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Coherent, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2006


/s/ HELENE SIMONET
Helene Simonet
Executive Vice President and Chief Financial Officer

Exhibit 32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the As Sarbanes-Oxley Act of 2002

I, John R. Ambroseo, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Coherent, Inc. on Form 10-Q for the fiscal quarter ended April 1, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Coherent, Inc.

Date: May 10, 2006


/s/ JOHN R. AMBROSEO
John R. Ambroseo
President and Chief Executive Officer

Exhibit 32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the As Sarbanes-Oxley Act of 2002

I, Helene Simonet, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Coherent, Inc. on Form 10-Q for the fiscal quarter ended April 1, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Coherent, Inc.

Date: May 10, 2006


/s/ HELENE SIMONET
Helene Simonet
Executive Vice President and Chief Financial Officer