UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
...........

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
......................
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ................. to .................

Commission File Number 0-19306

EXCEL TECHNOLOGY, INC.

(Exact name of Registrant as specified in its Charter) 

 Delaware 11-2780242
 (State or other jurisdiction (I.R.S. Employer
 of Incorporation or Organization) Identification No.)

 41 Research Way E. Setauket, NY 11733
(Address of Principal Executive Offices) (Zip Code)

 (631) 784-6175
 (Registrant's Telephone Number, including area code)

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

Common Stock, par value $.001 per share
.......................................
(Title of Class)

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

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

Indicate by check mark whether the registrant (1) has filed all reports 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. [X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to

Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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 [ ] Accelerated filer [X] Non-accelerated filer [ ]

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

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $327,070,222 based on the last sale price of the common stock as reported by NASDAQ on June 29, 2007 (the last business day of the most recently completed second fiscal quarter). Shares held by each officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the Registrant's common stock outstanding as of February 12, 2008 was: 11,049,004.

DOCUMENTS INCORPORATED BY REFERENCE:

Definitive Proxy Statement to be filed in connection with the Registrant's 2007 Annual Meeting of Stockholders


(incorporated by reference under Part III)

TABLE OF CONTENTS 

 .................

 Page
PART I
 ITEM 1. BUSINESS 4
 ITEM 1A. RISK FACTORS 15
 ITEM 1B. UNRESOLVED STAFF COMMENTS 17
 ITEM 2. PROPERTIES 17
 ITEM 3. LEGAL PROCEEDINGS 19
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19

PART II
 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
 STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
 EQUITY SECURITIES 19
 ITEM 6. SELECTED FINANCIAL DATA 21
 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
 CONDITION AND RESULTS OF OPERATIONS 22
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
 ABOUT MARKET RISK 31
 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND
 SUPPLEMENTARY DATA 31
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
 ACCOUNTING AND FINANCIAL DISCLOSURE 55
 ITEM 9A. CONTROLS AND PROCEDURES 55
 ITEM 9B. OTHER INFORMATION 56

PART III
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 56
 ITEM 11. EXECUTIVE COMPENSATION 56
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
 MANAGEMENT AND RELATED STOCKHOLDER MATTERS 56
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
 DIRECTOR INDEPENDENCE 56
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 56

PART IV
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE 57
 SIGNATURES 58
 EXHIBIT INDEX
 EX-21 (EX-21 SUBSIDIAIRIES OF THE COMPANY) 61
 EX-23 (EX-23 CONSENT OF KPMG LLP) 62
 EX-31.1 (EX 31.1 SECTION 302 CERTIFICATION OF CEO) 63
 EX-31.2 (EX 31.2 SECTION 302 CERTIFICATION OF CFO) 64
 EX-32.1 (EX 32.1 SECTION 906 CERTIFICATION OF CEO) 65
 EX-32.2 (EX 32.2 SECTION 906 CERTIFICATION OF CFO) 66

PART I

......

ITEM 1. BUSINESS

General
.......

Excel Technology, Inc. (the "Company") was organized under the laws of Delaware in 1985. The Company designs, manufactures and markets photonics-based solutions, consisting of laser systems and electro- optical components, primarily for industrial and scientific applications. The word laser is an acronym for "Light Amplification by Stimulated Emission of Radiation." The essence of the laser is the ability of a photon (light energy) to stimulate the emission of other photons, each having the same wavelength (color) and direction of travel. The laser beam is so concentrated and powerful that it can produce power densities millions of times more intense than that found on the surface of the sun and is capable of cutting, welding and marking industrial products, yet it can be precisely controlled and directed and is capable of performing delicate surgery on humans.

The Company's strategy is to grow internally and through acquisitions of complementary businesses. Historically, the Company has been successful in integrating acquired companies. The following is a history of its acquisitions and new company formations since October 1992:

In October 1992, the Company acquired Quantronix Corporation ("Quantronix"). The acquisition of Quantronix and its then wholly-owned subsidiaries, Control Laser Corporation ("Control Laser"), located in Orlando, Florida, Excel Technology Europe GmbH ("Excel Europe"), located in Germany, and The Optical Corporation ("TOC"), located in Oxnard, California, provided the Company with its industrial, scientific and semiconductor product lines and provided the Company with a significant revenue base as well as established manufacturing, engineering, marketing and customer service capabilities.

In February 1995, the Company acquired Cambridge Technology, Inc. ("Cambridge"), located in Cambridge, Massachusetts. Cambridge is engaged primarily in the manufacture of laser scanners, essential components to moving a laser beam with precision at a specified speed. Laser scanners have both industrial and consumer applications, such as laser marking and etching, high-density laser printing and writing, digitized x-ray imaging and entertainment laser light shows and displays. The acquisition allowed the Company to expand into new markets and enhanced its market position in the industrial business.

In October 1995, the Company acquired the Photo Research Division ("Photo Research") of Kollmorgen Instruments Corporation. Photo Research is engaged primarily in the business of developing, manufacturing and marketing photometric and spectroradiometer instruments and systems.

In August 1998, the Company acquired substantially all of the assets and properties of Synrad, Inc. ("Synrad"), a company engaged in the business of developing, manufacturing and marketing sealed CO2 lasers and related accessories.

In April 1999, the Company formed Excel Technology Asia Sdn. Bhd. ("Excel Asia"). Excel Asia primarily engages in the business of marketing, selling, distributing, integrating and servicing certain of the Company's products throughout Southeast Asia.

In July 2000, the Company acquired substantially all of the assets and assumed certain liabilities of Baublys GmbH ("Baublys"), a company located in Ludwigsburg, Germany and engaged in the manufacture and sale of customized laser systems and engraving machines.

In January 2001, the Company formed Control Systemation, Inc. ("CSI") which focuses on turnkey laser based micro-machining systems and parts handling workstations for factory automation. In January 2007, the Company merged CSI with Control Laser.

In January 2002, the Company consolidated the product lines and development efforts of Baublys and Control Laser to eliminate duplicative products and efforts, to increase efficiencies, and to create a unified market presence for the Company's laser marking and engraving operations. While the subsidiaries remain legally separate entities, with separate assembly, operations and selling and marketing efforts, they are operating under one name, "Baublys-Control Laser," as though they were one entity with operations in Florida and Germany.

On August 31, 2002, the Company, through a newly-formed, wholly- owned subsidiary, Excel Technology Japan Holding Co., Ltd. ("Excel Japan"), acquired all of the issued and outstanding shares of OptoFocus Corporation ("OptoFocus"), a distribution organization representing the Quantronix product line in Japan.

On October 1, 2002, the Company, through a newly-formed, wholly-owned subsidiary, Continuum Electro-Optics, Inc., acquired substantially all of the assets and properties of Hoya Photonics, Inc. d/b/a Continuum, and Hoya Photonics' wholly-owned subsidiaries, Continuum Electro-Optics GmbH, Continuum France EURL and Hoya Continuum Corporation (collectively, "Continuum"), relating to the business of developing, manufacturing and marketing pulsed lasers and related accessories for the scientific and commercial marketplaces.

On April 23, 2003, the Company created Excel Laser Technology Private Limited ("Excel SouthAsia JV") based in Mumbai, India as a joint venture for the distribution, in Southern Asia, of certain products manufactured by the Company's subsidiaries. Excel SouthAsia JV is focusing on the marketing, sales, installation, applications development and customer service of those products. The Company has a 50% equity ownership interest in the joint venture.

In December 2003, the Company acquired D Green (Electronics) Limited ("DGE"). DGE is engaged primarily in the business of developing, manufacturing and marketing power supplies for laser systems.

Current Products and Applications
.................................

Marking and Engraving Systems
.............................

The Company designs, manufactures and markets industrial, computer- controlled turnkey integrated laser marking/engraving and mechanical marking/engraving and 3D engraving systems with automation at Control Laser in Orlando, Florida and Baublys in Ludwigsberg, Germany.

The Company is a leading source of industrial beam-steered laser marking systems and mechanical marking & engraving systems used for coding, marking, engraving, deep engraving and 3D engraving, producing high quality, permanent, high speed marks on any material. These systems are used for marking part numbers, serial numbers, lot numbers, date codes, graphics, logos, OCR codes, barcodes, 2D Matrix codes, schematics, 2, 2-1/2 and 3D images and other identification marks for the aerospace, automotive, coining and jewelry, consumer/commercial, electronic/semiconductor, medical, mold and die, packaging, tools and tooling and the trophy and award industries. The Company's integrated automation solutions include a wide variety of fully automatic, semi- automatic and manual parts handling systems for any part configuration or material. The fully integrated and stand-alone marking systems offer a comprehensive variety of user-friendly software allowing for seamless integration into any production process.

The laser marking/engraving, deep engraving and 2-1/2 & 3D marking systems include a full product range of CO2, fiber, lamp pumped and diode pumped infrared, frequency doubled, tripled and quadrupled Nd:YAG and Nd:YLF laser systems which are branded as "Concorde", "Comet", "ProWriter F20", "ProWriter L80", "ProWriter L100", "ProWriter D50", "ProWriter D10", "Deep Power Engraver", "BL65" and "BL150" Deep engraving systems, and the Mint Laser Finishing system. The mechanical engraving systems include a "Universal Marking & Engraving Machine", an "Inclined Bed CNC Marking & Engraving Machine", a "Mold Engraving Machine", a "Laser Digitizer" and a "Table Top Engraving Machine". The Company's ProWriter, a series of laser marking systems, incorporates the newest version of Laser Marking Studio. In addition, the Company offers specialized marking software embedded in its laser marking/engraving systems such as its new IC Marking Software.

Laser Micro-machining and Automation Systems ............................................

The Company designs and manufactures laser micro-machining systems, parts handling/automation, systems integration, and software engineering solutions at the Company's subsidiary Baublys-Control Laser/CSI based in Orlando, Florida. The Company produces a variety of micro-machining systems ("TaskMaster" Series) for cutting, drilling, ablating and other micro machining applications. The "TaskMaster" series of micro- machining systems provides a versatile but affordable solution to almost any process requirement. They are modular in design allowing lasers of any wavelength such as green, UV, DUV, infrared, and CO2 in a variety of power levels to be integrated into the same workstation. The workstation can be taken from a basic XY system with a manually adjustable focusing beam delivery system and enhanced with a variety of options such as XY with a programmable focusing beam delivery system, vision system for part alignment and semi-automatic focusing adjustment, gas assist with programmable pressure regulator and part fixturing. The Company offers a Vision Assisted graphical programming environment for CNC based laser micro-machining centers. This software platform requires no programming, simply place a part into the machine and the real time vision system allows the user to draw right onto the part. CADD files can be imported and "dragged and dropped" onto the part, scaled, rotated, or moved and lased.

The Company's FA/Lit (trademark) product targets the integrated circuit ("IC") failure analysis market. This system utilizes a process for de-capping, cross-sectioning and performing material characterization (Alpha Spectrometry) on ICs, providing a non- destructive method of removing the mold compound and allowing parts to be tested and visibly inspected. This makes it possible to inspect wire bonds, dies and other internal components, even to the point of doing a wire pull test on die leads. Scanning Acoustic Microscope (SAM), x-ray and other failure analysis analytical instrument images of the internal IC can be imported and used by the Company's FA-Pro software to locate and target defects for analysis. These images are then used to navigate the system directly to the defect. Options available include 3D summation utilizing layer by layer spectral analysis data of the mold compound, color vision system with auto zoom (also used for defect and feature navigation), and even a second femtosecond laser system for detailed die analysis on the ICs. Subsequently, the Company has introduced a new version of its FA/Lit(trademark)called the Ultra/Lit, targeting smaller scale independent failure analysis labs and production lines that require quick failure analysis results. The new Ultra/Lit is a streamlined table-top limited capability failure analysis tool featuring air cooled diode lasers from Quantronix.

The Company also designs and builds custom micro-machining systems such as active and passive resistor trimmers, glove box welders, diamond cutting systems and specialized sub-micron processing systems utilizing ultrafast lasers. In 2004, the Company launched a new Photomask Repair System (Model 860X) to address the current industry requirements. The Company continues to make updates on this system. Other products include the L2S2 System for Lead-frame Singulation and the BOARDmaster automated PCB Depaneling System.

The Company continues to actively pursue opportunities in automation, parts handling, systems integration, and software engineering.

CO2 Lasers
..........

The Company manufactures a range of sealed CO2 lasers for cutting, marking, drilling, and other machining applications for a variety of materials at Synrad, the Company's subsidiary located in Mukilteo, Washington. The CO2 lasers range in power from 5W to 400W. Synrad's "Firestar" series of sealed CO2 lasers, initially introduced in 2001, offers users the choice of higher performance and smaller size, with output powers from 20W to 100W. In 2002, further developments of the "firestar" technology produced the f200, the world's only fully integrated 200W CO2 laser. In 2003, the Company launched a wide range of new products including a unique, fully-integrated 400W laser ("firestar" f400), a single tube (linear polarization) fully-integrated 200W laser ("firestar" f201), and a compact, low cost 30W laser ("firestar" v30). In addition, the Company extended its "firestar" t- technology to include an 80W laser, available in either air or water- cooled versions. In 2004, the Company introduced its high performance, air-cooled 100W laser ("firestar" t100), and in 2005 introduced a new, 5W laser. Developments for 2006 included a new t-technology laser with an integrated RF power supply, the production roll-out of new RF technology for the "firestar" f-series lasers for improved reliability and performance, 9.3 and 9.6um versions of the "firestar" v, t, and f- series lasers, and the development of an innovative superpulse technology for both industrial and medical applications.

In August 2007 Synrad shipped its 100,000th laser, and development continues on both high and low power CO2 technologies, as well as innovative RF technology and packaging design, to improve both the performance and efficiency of the Company's lasers.

The Company sells primarily to original equipment manufacturers ("OEMs") and system integrators who integrate the lasers with suitable motion systems and optical assemblies and then sell the complete system. Applications include desktop engraving systems found in many trophy and award shops throughout the world, large area flatbed systems for cutting dieboard or airbag material, and 3D prototyping using paper, sintered metals and other materials to create 3D models and molds directly from CAD packages. The Company's lower power lasers are the lasers of choice for the majority of the CO2 marking and coding systems in use throughout the world. Higher power lasers also are finding uses in manufacturing plants for trimming flashing from injection-molded parts in the automobile industry, cutting textiles and woven fabrics on continuous production lines and slitting and sealing of plastic packaging.

The Company also manufactures the FH-Series of OEM marking-heads which, when configured with its laser, provide a fast and effective method of permanently marking parts with lot codes, serial number/date information and bar codes. In 2006, Synrad released the FH Flyer, a high speed marking head with an onboard processor, and both a USB and Ethernet controller. The Flyer is a fully digital marking head capable of stand-alone operation, and marking/coding in either stationary or "on-the-fly" mode. The Company's WinMark software has been developed specifically for its marking heads, is fully Windows-compatible, and available in multiple language versions.

Scanners
........

The Company is a market leader in galvanometer based optical scanners, which are manufactured at Cambridge, the Company's subsidiary based in Lexington, Massachusetts. This technology is critical to a broad, diversified and growing market of laser based system applications. The breadth of laser applications served by the Company's scanners include: product laser marking and coding, laser machining and welding, high density via hole PCB drilling for the cell phone industry, scanning microscopy for Genomic DNA research and drug discovery, retinal scanning and OCT (Optical Coherence Tomography) imaging for laser-based biomedical diagnostics, Laser-based Vision Correction, high resolution printing, holographic storage, semiconductor wafer inspection and processing, 2D or 3D imaging, and laser projection and entertainment.

The Company is recognized worldwide for its technology and its leadership in the market for laser scanning systems that require the highest accuracy and highest speed beam steering and positioning for industrial, medical, scientific, military and academic applications and environments. The strong growth of scanner sales is fueled by the Company's R&D commitment to advancing optical scanner technology and the enabling of new OEM applications in the laser systems market. In 2007, the Company continued to advance and extend the application range and performance of its highest performance 62XXXH product line of Optical Scanners with new product offerings, including its new model 6260H for high speed laser welding. These have set new standards for scanning and application performance and extended the product line. In addition the Company has extended its new line of value-added digital product offerings with the lower cost DC2000 dual axis version of its industry leading DC900 State Space DSP Servo and broadened its offerings and penetration of the laser marking subsystem market with its first digital controller product, the model EC1000 Ethernet-based Digital Embedded Controller with an open software interface and third party software support for both its current customer base and to open new subsystem markets for Cambridge. For higher precision uV applications, Cambridge has also extended its analog servo product lines to support the higher accuracy requirements of developing laser material processing applications.

The Company's other major galvanometer product line is its' exclusive Moving Coil Optical Scanner line with its patented capacitive position detection, whose design was pioneered by Cambridge for applications requiring the highest levels of scanning accuracy. In addition, the Company today offers a more extensive line of high performance analog and digital servo electronics products along with other value-added products such as a wide range of optics from uV to iR and mounts for complete scanning subassemblies and solutions.

High Power Solid-State Lasers and Ultrafast Lasers ..................................................

The Company designs, manufactures and markets solid-state lasers for science, industry and OEM uses at Quantronix, which is located in E. Setauket, NY. On a worldwide basis, scientific lasers (used by chemists, biologists, physicists and engineers) represent one of the most stable and long-established laser markets. In this market, end- users are generally familiar with the various product specifications, features and reliability, which are the major factors in choosing between competing products.

The Company's current line of scientific products includes the "Integra C", "Integra E", "Integra I" and "Odin II" Series of Ultrafast Amplifiers and High Power Green lasers that include the "Falcon" and "Darwin" series. The Company's Ultrafast Amplifiers incorporate a material called Titanium-doped Sapphire ("Ti:Sapphire"), which has created opportunities for a greater volume of research than previous laser materials. Ultrafast Amplifiers deliver high-energy short pulses on a femtosecond (one quadrillionth of a second) or picosecond (one trillionth of a second) time scale. These short pulses enable the investigation of a wide range of physical, chemical and biological phenomena.

The Company's scientific systems utilize Nd:YLF lasers to produce high-energy pulses at a rate of 1 kHz (1,000 pulses per second). These pulses drive the Ti:Sapphire Amplifier that pump other optical systems such as optical parametric amplifiers, (also marketed by Quantronix), which deliver tunable light from ultraviolet to infrared regions of the spectrum. In 2006 and 2007, the Company further expanded its Integra-C line of amplifiers to include systems with higher energies and shorter pulse durations. The Company has also used its experience designing software controlled scanning beam delivery systems for industrial applications to deliver ultrafast material processing systems with integrated scanning beam delivery optics. In addition, the Company released a higher energy, 25-mJ frequency-doubled Nd:YLF laser optimized for Ti:Sapphire pumping. Using this new technology, the Company further expanded its custom laser program for scientific applications by releasing an integrated12-mJ, 35-fs pulsed laser using a cryogenically cooled Ti:Sapphire crystal.

In 2007, the Company added to its Darwin-Duo line of kilohertz Particle Image Velocimetry (PIV) lasers. These lasers are widely used in both scientific and industrial applications for studying high speed fluid flows. The Company's PIV lasers now cover economical 40-mJ versions for small area studies and up to 200-W high power systems for measuring large areas of turbulent flows such as in jet engines.

The Company's industrial and OEM offerings consist of a variety of high power lamp pumped and diode pumped Nd:YVO4, Nd:YAG and Nd:YLF lasers, available in infrared, green, and ultraviolet wavelengths. These lasers are ideal for a wide range of marking and micromachining applications. The Company has expanded its Osprey series of air-cooled vanadate lasers to powers of more than 20 Watts in the infrared. The Company has also increased the Osprey's output power in the green and ultraviolet regions of the spectrum while maintaining the air-cooling and ease-of-use required by system integrators and industrial laser users. In 2007, the Company added the Harrier Nd:YAG laser to its line of industrial- grade, air-cooled lasers. Because of its high energy per pulse, this laser is well-suited to high speed marking of tooling and other hardened materials.

The Company has launched a series of 90-Watt, diode-pumped Nd:YAG lasers specifically designed for deep material penetration. Also, the Company released a new version of its "Design Commander" marking and engraving software to include features for deep engraving, more advanced marking features, and expanded laser controls as well as capabilities for ultrafast marking and micromachining. In addition to its lasers, the Company offers a variety of laser options and accessories such as power monitoring systems, beam delivery systems, laser energy controllers, pulse shapers and motorized apertures. These options are available with software drivers and can be integrated with any laser system.

High Energy Solid State Lasers
..............................

The Company is a leading manufacturer of high energy solid-state laser systems, which are manufactured at Continuum, the Company's subsidiary located in Santa Clara, California. These systems produce pulsed laser energy outputs with very short duration (less than 10 billionths of a second) and very high (gigawatt) levels of peak power for a variety of scientific and industrial applications.

The unique performance characteristics of these lasers allow researchers in the fields of chemistry, biology, and physics to explore a wide range of chemical and physical phenomena. Spectroscopic applications include Laser Induced Breakdown Spectroscopy (LIBS) for metallurgical analysis of alloys, laser absorption and laser induced fluorescence (LIF) spectroscopy for chemical analysis, nonlinear spectroscopic techniques for combustion diagnostics, time of flight mass spectroscopy for isotopic analysis, and time-resolved spectroscopy for analysis of chemical reaction rates. These high energy lasers can be coupled to tunable dye lasers or devices known as Optical Parametric Oscillators (OPO's) to provide laser outputs that can be continuously tuned in wavelength from the deep ultraviolet to the far infrared region of the electromagnetic spectrum. These tunable laser systems are required for many spectroscopy applications.

Continuum's scientific product offerings include the "Minilite" and "Surelite" product lines, a series of "single oscillator" self-contained laser systems that do not require external water cooling and offer turnkey performance in a compact package. For advanced higher energy lasers, the Company manufactures and sells the "Powerlite" series of lasers. The Precision II 8000 and Precision II 9000 and "Powerlite" Plus operate in oscillator/amplifier configurations that provide enhanced output energies with excellent beam quality. The Company's wavelength tunable product lines, the "Surelite" OPO, the "Panther" (registered trademark) EX OPO and the ND 6000 dye laser, produce laser light with wavelengths from 200 nm to 4500 nm, providing researchers with full wavelength coverage over the range of greatest interest for optical spectroscopy. Key labs all over the world have been investing in upgrading their multiple TeraWatt laser systems with additional amplifiers to reach even higher energies. The Company designed a series of pump lasers with improved beam quality for this application and they have been well received.

The Company introduced "Inlite", a YAG laser system designed specifically to address and penetrate the industrial markets. The basic design features include an on-board microprocessor to manage laser head housekeeping functions, harmonic generators for 532 nm, 355 nm and 266 nm that fit inside the laser head, and Pyro detectors that can be added to control the laser in power mode or diagnose harmonics conversion efficiency. Subsequently, the Company added the higher power Inlite III and an integrated PIV laser. The Company also developed an interleaved, 500 Hz system with integrated control for generating X-rays for EUV lithography. The Company continues to focus on emerging OEM applications using this technology. The Company has delivered a high energy YAG laser system for laser shock peening, as well as a version of the Inlite for ultrasonic defect inspection.

Homeland security is driving a host of new industrial applications from remote sensing and measurement to a number of important spectroscopic techniques. Specific examples in the remote sensing area include atmospheric analysis of airborne contaminants and pollutants, Particle Image Velocimetry (PIV) for measuring fluid dynamic properties in gases and liquids, and laser range finding techniques for precise distance measurements and terrain mapping. The reliability and cost- effectiveness of Continuum's industrial lasers are also driving new applications in metals sorting, inspection and measurement, particle detection, laser shock peening and defect detection.

The Company is also investing in developing intelligent systems for control and operation of all of its Inlite technology-based products. A series of graphical user interfaces was developed for the standard Inlite family, Inlite PIV and custom laser systems in glass and YAG. These have ranged from standard interfaces operating on a laptop or desktop computer to a Bluetooth (trademark) enabled wireless remote control. The Company will continue to move its products in this direction to improve functionality and ease of use.

In addition to standard high energy laser products, the Company offers custom laser solutions to fit precise customer needs. These include mode-locked picosecond and long-pulse Nd:YAG lasers, chirped pulse amplification systems, Nd:glass macropulse systems, and Ti:Sapphire pump laser systems. Modular design and time proven reliability make these lasers flexible, versatile and easy to operate or upgrade. In 2006, the Company delivered a novel custom system that generates a beam that is spatially and temporally flat - the first of its kind. This laser has generated multiple orders from the high energy community, interested in amplifying laser pulses to the petawatt class. A derivative of this laser system that is flexible in pulse width has also generated repeat sales. The Company also completed the migration of its custom systems power supplies to the power supply technology of its Inlite products, including the development of a set of graphical user interfaces. Customers now have complete control of these sophisticated laser systems within a convenient, full-featured, easy to use graphical user interface.

In 2007, the Company developed a new standard product named Agilite based on the flexible pulse width technology developed for its custom systems. This product is the first of its kind in the world that allows users to truly map out pulse width parameter space. It will be used as a tool to develop applications in therapeutic medical and materials processing markets.

Optical Products
................

TOC, a subsidiary of the Company based in Oxnard, California, specializes in the manufacturing of custom precision optical components. TOC is an industry leader in the manufacturing of flying height test disks used in the disk drive industry. For more than 75 years, TOC has provided precision fabrication and coating services to meet demanding applications.

The Company offers custom optics services which incorporate polishing optics to extreme flatness (better than 1/20 wave) with low surface roughness and difficult aspect ratios. The Company provides a complete range of thin film coatings in the UV-Visible-Near IR. This includes Edge Filters, Bandpass Filters, Hot Mirrors, Cold Mirrors, Beamsplitters, Neutral Density Filters, Enhanced Metallics, Polarizer's, Broadband AntiReflection Coatings, V Coats, High Reflectors, Dielectric and Metallic Mirrors and Scanning Mirrors. The substrates and coated components are used in various systems such as optical scanners, laser systems, professional motion picture cameras and a myriad of other industrial and scientific applications, as well as interferometry and research and development.

Light and Color Measurement
...........................

The Company is a world leader and innovator in high precision, state-of-the-art electro-optical instrumentation and systems, which are manufactured at Photo Research, the Company's Chatsworth, California subsidiary. Photo Research has delivered world-class light and color measurement solutions, serving the cathode ray tube ("CRT")/flat panel display ("FPD"), automotive, aerospace, lighting, motion picture, research and development and related industries for over 66 years.

The Company has three main product lines. The Spectra product line offers systems to a wide variety of industries for research, quality control and on-line testing. This line includes the only truly portable battery operated Spectroradiometer; the fast scanning PR-655. The multi- aperture PR-670, the patent pending PR-680 SpectraDuo and PR-705/715 SpectraScan complement this line.

The Pritchard line originated with the industry workhorse the PR- 1980 series. The Pritchard is the most widely used photometer in the world. The newest addition to this series is the PR-880 Automated Photometer. This is the only fully automated filter photometer available today. The PR-880 is ideal for today's automated factory and ATE/OEM environments.

Photo Research developed the first commercially available video photometer over 20 years ago. The newest and most advanced video photometer, the PR-920 digital video photometer, is the latest addition to this product line. Video instrumentation provides high-resolution inspection of CRT and flat panel displays and instrument panels.

Photo Research Optical Metrology Laboratory (PROML) is a supplier of optical radiation standards and calibration and measurement services to major manufacturers of instruments, displays, devices and materials. All Photo Research instruments are calibrated to NIST-traceable standards.

The Company has developed many industry standards, such as Spectra Pritchard Optics, utilized in astronomical and star-simulation measurements. The Company is also instrumental in supporting standards for organizations including VESA, ISO and SAE.

In 2007, the Company introduced the low cost PR-610 Spectroradiometer, User Self Calibration software for the PR-655, 670 & 680 and the much sought after VideoWin-3 software using the .Net platform for display characterizations.

The PR-610 addresses a need in the digital cinema industry for low cost spectroradiometer. The calibration software enables the user to calibrate their own instruments without having to send them into the factory. This is very valuable for users of multiple instruments as they can save a lot of expense and down time by performing the calibrations themselves. VideoWin-3 is very sophisticated application and control software which replaces the VideoWin-2 and PhotoWin-2 software used in PR-920 & 905 digital video photometers. This technology is used for characterizing automobile panels, aircraft cockpits, led clusters and heads up displays (HUD's).

Marketing and Sales
...................

The Company markets its products and services through several media sources in addition to the presentation of its product lines at domestic and international trade shows. The marketing and sales staff's efforts are enhanced by means of presentations and training at conferences, professional meetings, and through in-person and telephone sales and support calls. The Company also engages independent manufacturers' representatives for the sale of its products.

Foreign sales of the Company's products are made primarily through foreign equipment distribution organizations, by representatives at: 

 Sales
 Relationship Territory Staff Operations
 to Company Covered Size Located In/Near
 ........................................................
Excel Europe German Europe 91 Munich, Germany
 Subsidiary Frankfurt, Germany
 Ludwigsburg, Germany
 Savigny sur Orge,
 France
 Milan, Italy
Excel Japan Japanese Japan 25 Tokyo, Japan
 Subsidiary
Excel Asia Malaysian Southeast Asia 11 Penang, Malaysia
 Subsidiary

Excel SouthAsia Joint Venture
in India South Asia 45 Mumbai, India

These subsidiaries engage in the business of marketing, distributing, installing, integrating and servicing laser systems (for industrial, semiconductor, scientific, and electronic products) manufactured at the Company's facilities in East Setauket, New York; Santa Clara, California; Orlando, Florida; and Mukilteo, Washington. In addition, they also provide spare parts for their installed base.

Net sales for foreign and domestic operations by origin is as follows (in thousands): 

 The year ended December 31,
 2007 2006 2005
 ........ ........ ........
Net sales and services to
 unaffiliated customers from:
 United Stated operations $120,193 $116,984 $ 98,997
 European operations 32,296 28,908 28,867
 Asian operations 7,534 8,604 9,853
 ........ ........ ........
 $160,023 $154,496 $137,717
 ........ ........ ........
 ........ ........ ........

The following table presents the Company's net sales and services by destination for the years ended December 31, 2007, 2006 and 2005 (in thousands):

2007 2006 2005 ................ ................ ................


Dollars Percent Dollars Percent Dollars Percent 

 ........ ....... ........ ....... ........ .......
To U.S. Customers $ 59,131 37% $ 57,713 37% $ 53,793 39%
To Non-U.S.
 Customers 100,892 63% 96,783 63% 83,924 61%
 ........ .... ........ .... ........ ....
TOTAL $160,023 100% $154,496 100% $137,717 100%
 ........ .... ........ .... ........ ....
 ........ .... ........ .... ........ ....

Of the net sales and services to non-U.S. customers above, net sales and services to customers in Germany accounted for approximately $24.6 million, $20.1 million and $19.8 million of total consolidated net sales and services for 2007, 2006, and 2005, respectively, and net sales and services to customers in Japan accounted for approximately $16.6 million, $17.0 million and $15.3 million of total consolidated net sales and services for 2007, 2006 and 2005, respectively. No other individual foreign country accounted for more than 10% of total consolidated net sales and services in 2007, 2006 or 2005.

Manufacturing
.............

The Company manufactures its products at its facilities in East Setauket, New York; Orlando, Florida; Oxnard, California; Cambridge, Massachusetts; Chatsworth, California; Santa Clara, California; Mukilteo, Washington and Ludwigsburg, Germany. The Company relies upon unaffiliated suppliers for the material components and parts used to assemble its products. Most parts and components purchased from suppliers are available from multiple sources. To date, the Company has not experienced any significant delays in obtaining parts and components for its products. The Company believes that it will be able to continue to obtain most required components and parts from a number of different suppliers, although there can be no assurance thereof. Lack of availability of certain components could require major redesign of the products and could result in production delays.

Warranty and Customer Services
..............................

The Company's warranty for its new products generally varies between three months and twelve months. The Company also provides field support services on an individual call basis and through service maintenance contracts, and provides customer support services by telephone to customers with operational and service problems.

Research and Development
........................

Due to the intense competition and rapid technological change in the photonics industry, and specifically for laser and optical products, the Company believes that it must continue to improve and refine its existing products and systems and develop new applications for its technology. Research and development expenses for the years ended December 31, 2007, 2006, and 2005 were $14.8 million, $14.5 million, and $14.5 million, respectively.

Competition
...........

The laser industry is subject to intense competition and rapid technological change. Several of the Company's competitors are substantially larger and have greater financial and other resources than the Company. Competition among laser manufacturers extends to attracting and retaining qualified technical personnel. The overall competitive position of the Company will depend primarily upon a number of factors, including the price and performance of its products, the compatibility of its products with existing laser systems and the Company's overall reputation in the laser industry.

The Company's marking/engraving systems compete primarily with those manufactured by Rofin-Sinar, Electrox, Foba, Laservall, SEI
s.p.A., Cheval Frere, Fotona, E.O. Technics, Trumpf-Haas, IPG Photonics and Hans Laser. These products are subject to intense price competition in recent years.

The Company's laser micro-machining and automation systems compete primarily with GSI Group, Rofin-Sinar, Electro Scientific Industries and other specialized systems manufacturers.

Competition for sealed carbon dioxide lasers comes from Coherent (Bloomfield, CT), Rofin (Hull, UK), ULS (Scottsdale, AZ), and GSI Group (Rugby, UK).

In the optical scanner market, GSI Group is a significant competitor of the Company and there are a number of other small competitors in the international markets.

The Company's scientific and industrial solid-state laser products face a number of competing product lines from Spectra-Physics, Coherent, Clark-MXR, Femtolaser, Thales Laser, Rofin-Sinar, GSI Group and Cyber Laser.

Competition for the high energy solid state laser products comes from New Wave Research (a division of ESI), Quantel Lasers and their subsidiary Big Sky Lasers, Spectra-Physics, Thales Laser, Amplitide, GSI Group, Litron and Ekspla.

In light and color measurement, the major competitor to the Company's Spectra product is Minolta. Topcon is the prime competitor to the Pritchard line. In video-based products, the company's video photometer is utilized to characterize new display technologies, with Radiant Imaging as its key competitor.

Backlog
.......

As of December 31, 2007, the Company had a backlog of firm orders of approximately $34.8 million as compared to a backlog of $36.0 million as of December 31, 2006. The Company believes that the current backlog will be filled during the present fiscal year. Historically, backlog is shipped within 90 days from the order date.

Patents and Licenses
....................

The Company has several United States patents covering a wide variety of its products and has applications pending in the United States patent office. There can be no assurance that any other patents will be issued to the Company or that such patents, if and when issued, will provide any protection or benefit to the Company. Although the Company believes that its patents and its pending patent applications are valuable, the Company does not consider the ownership of patents essential to its business. The Company believes that, in general, the best protection of proprietary technology in the laser industry will come from market position, technological innovation and product performance. There is no assurance that the Company will realize any of these advantages.

Government Regulation
.....................

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

The FDA also imposes various requirements on manufacturers and sellers of products under its jurisdiction, such as labeling, manufacturing practices, record keeping and reporting requirements. The FDA also may require post-market testing and surveillance programs to monitor a product's effects. There can be no assurance that the appropriate approvals from the FDA will be granted, that the process to obtain such approvals will not be excessively expensive or lengthy or that the Company will have sufficient funds to pursue such approvals at the time they are sought. The failure to receive requisite approvals for the Company's products or processes, when and if developed, or significant delays in obtaining such approvals would prevent the Company from commercializing its products as anticipated and would have a materially adverse effect on the business of the Company.

Employees
.........

As of December 31, 2007, the Company had 719 full-time employees consisting of 2 executive officers; 24 subsidiary executive officers; 221 scientists, engineering and technical personnel; and 472 manufacturing, administrative, sales support and finance personnel. The Company believes that its relations with its employees are satisfactory. None of the Company's employees is represented by a union.

Financial Information About Foreign and Domestic Operations ...........................................................
and Export Sales
................

Net sales and services to customers in the domestic U.S. amounted to approximately $59.1 million, $57.7 million and $53.8 million for the years ended December 31, 2007, 2006, and 2005, respectively (approximately 37%, 37% and 39% of total net sales and services, respectively).

For the years ended December 31, 2007, 2006, and 2005, the Company had net sales and services to customers in foreign countries amounting to approximately $100.9 million, $96.8 million and $83.9 million, respectively (approximately 63%, 63% and 61%, of total net sales and services, respectively). These sales included sales by Excel Europe, Excel Asia, Excel Japan, and Excel SouthAsia JV, the Company's foreign subsidiaries. Excel Europe buys laser systems, spare parts and related consumable materials from Quantronix, Baublys-Control Laser and Synrad for resale to European and other foreign customers, and also furnishes field repair services. Excel Asia primarily engages in the business of marketing, selling, distributing, integrating and servicing Quantronix and Baublys-Control Laser products in Southeast Asia. Excel Japan engages in the business of marketing, selling, distributing, integrating and servicing Quantronix and Continuum products in Japan. Excel SouthAsia JV focuses on the business of marketing, sales, installation, applications and service of Quantronix and Baublys-Control Laser products in South Asia. See Note 14 of the "Notes to Consolidated Financial Statements."

The carrying amounts of long-lived assets held by the Company's foreign subsidiaries (Excel Europe, Excel Asia , Excel Japan and Excel SouthAsia JV) at December 31, 2007, 2006 and 2005 primarily include property, plant and equipment and goodwill whose combined carrying amounts were approximately $8.4 million, $8.1 million and $7.1 million, respectively. The carrying amounts of the aforementioned long-lived assets held by the Company's domestic subsidiaries at December 31, 2007, 2006 and 2005 were approximately $50.5 million, $49.7 million and $50.5 million, respectively.

Access to Information
.....................

The Company is required to file its annual reports on Forms 10-K and quarterly reports on Forms 10-Q, and other reports and documents as required from time to time with the United States Securities and Exchange Commission (the "SEC"). The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street NE, Washington, DC 20549-0213. Such information may be obtained from the Public Reference Room by calling the SEC at 1-800-SEC- 0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding the Company's electronic filings with the SEC at http://www.sec.gov.

The Company's website is located at http://www.exceltechinc.com. At this website, users can access, free of charge, the Company's filings with the SEC and annual, quarterly, and current reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. In addition, the Company will provide electronic or paper copies of such reports free of charge upon request. Requests may be made by calling Investor Relations at (631) 784-6175 or by writing to Investor Relations at 41 Research Way, East Setauket, New York 11733.

Safe Harbor For Forward-Looking Statements ..........................................
Under the Securities Litigation Reform Act of 1995 ..................................................

This Annual Report on Form 10-K and the other reports, releases, and statements (both written and oral) issued by the Company and its officers from time to time may contain statements concerning the Company's future results, future performance, intentions, objectives, plans, and expectations that are deemed to be "forward-looking statements." Such statements are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results, performance, and achievements may differ significantly from those discussed or implied in the forward-looking statements as a result of a number of known and unknown risks and uncertainties including, without limitation, those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." In light of the significant uncertainties inherent in such forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the Company's objectives and plans will be achieved. Words such as "believes," "anticipates," "expects," "intends," "may," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. The Company undertakes no obligation to revise any of these forward-looking statements.

Sometimes the Company communicates with securities analysts. It is against the law and the Company's policy to disclose to analysts any material non-public information or other confidential commercial information. You should not assume that the Company agrees with any statement or report issued by any analyst regardless of the content of the statement or report. The Company has a policy against issuing financial forecasts or projections or confirming the accuracy of forecasts or projections issued by others. If reports issued by securities analysts contain projections, forecasts or opinions, those reports are not the responsibility of the Company.

ITEM 1A. RISK FACTORS

The risks presented below may not be all of the risks the Company may face. These are the factors that the Company believes could cause actual results to be different from expected and historical results. Other sections of this report include additional factors that could have an effect on the Company's business and financial performance. The industry that the Company competes in is very competitive and changes rapidly. Sometimes new risks emerge and management may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements. You should not rely upon forward-looking statements as a prediction of future results.

Uncertain Market Acceptance. The Company's overall marketing objective is to strengthen its presence in existing markets, and establish its market presence in other industrial markets. With any technology, there is the substantial risk that the market may not appreciate the benefits or recognize the potential applications of the technology. Market acceptance of the Company's products will depend, in large part, upon the ability of the Company to demonstrate the potential advantages of its products over products manufactured by other companies. There can be no assurance that the Company will be able to achieve all or any of its marketing objectives, or that the Company's products will be accepted in their intended marketplaces on any significant basis.

Intense Competition. The photonics industry, particularly for laser and electro-optical component products, generally is subject to intense competition. The Company's current and proposed products compete with existing and proposed products marketed by other manufacturers. Some of the Company's competitors are substantially larger in size and have substantially greater financial, managerial, technical and other resources than the Company. There can be no assurance that the Company will successfully differentiate its current and proposed products from the products of its competitors or that the marketplace will consider the Company's products to be superior to competing products.

Technological Obsolescence. The laser and electro-optical component industry is characterized by extensive research and rapid technological change. The development by others of new or improved products, processes or technologies may make the Company's current or proposed products obsolete or less competitive.

Compliance with Government Regulations. The Company currently is subject to the laser radiation safety regulations of the Radiation Control for Health and Safety Act administered by the National Center for Devices and Radiological Health of the FDA. The National Center for Devices and Radiological Health is empowered to seek fines and other remedies for violations of these regulatory requirements.

Patent Protection. The Company's ability to effectively compete may depend upon the proprietary nature of its technologies. The Company owns several patents and has other applications pending. The Company expects to file additional patent applications in the future. There can be no assurance, however, that other companies are not investigating or developing other technologies that are similar to the Company's technologies, or that any additional patents will be issued to the Company or that such patents will afford the Company sufficiently broad patent coverage to provide any significant deterrent to competitive products. Even if a competitor's products were to infringe products owned by the Company, it could be very costly for the Company to enforce its rights in an infringement action. The validity and enforceability of such patents may be significant to the Company and may be important to the success of the Company. The Company, however, believes that the best protection of proprietary technology in the laser industry comes from market position, technical innovation and product performance. There can be no assurance that any of these will be realized or maintained by the Company.

The Company has obtained licenses under certain patents covering lasers and related technology incorporated into the Company's products. However, there may be other patents covering the Company's current or proposed products. If valid patents are infringed, the patent owner will be able to prevent the future use, sale and manufacture of the subject products by the Company and also will be entitled to damages for past infringement. Alternatively, the Company may be required to pay damages for past infringement and license fees or royalties on future sales of the infringing components of its systems. Infringement of any patents also may render the Company liable to purchasers and end-users of the infringing products. If a patent infringement claim is asserted against the Company, the defense of such claim may be very costly (whether or not the Company is successful in defending such claim). While the Company is unable to predict what such costs, if any, will be incurred if the Company is obligated to devote substantial financial or management resources to patent litigation, its ability to fund its operations and to pursue its business goals may be substantially impaired.

Dependence on Suppliers. The Company relies on outside suppliers for most of its manufacturing supplies, parts and components. Most parts and components used by the Company currently are available from multiple sources. There can be no assurance that, in the future, its current or alternative sources will be able to meet all of the Company's demands on a timely basis. Unavailability of necessary parts or components could require the Company to re-engineer its products to accommodate available substitutions which would increase costs to the Company and/or have a material adverse effect on manufacturing schedules, product performance and market acceptance.

Dependence on Resellers, Distributors and OEMs. The Company sells some of its products through resellers, distributors and OEMs. Reliance upon third party distribution sources subjects the Company to risks of business failure by these individual resellers, distributors and OEMs, and potential credit, inventory and business concentration risks.

Dependence on Foreign Sales. A significant amount of the Company's product sales are made to customers outside the United States. These sales are subject to the normal risks of foreign operations, such as:

- Currency fluctuations
- Protective tariffs
- Trade barriers and export/import controls
- Transportation delays and interruptions
- Reduced protection for intellectual property rights in some countries
- The impact of recessionary foreign economies
- Longer receivable collection periods

The Company cannot predict whether the United States or any other country will impose new quotas, tariffs, taxes or other trade barriers upon the importation of the Company's products or supplies, or gauge the effect that new barriers would have on its financial position or results of operations.

Manufacturing. The Company assembles its products at its various facilities in the United States and Germany. If use of any of the Company's manufacturing facilities were interrupted by natural disaster or otherwise, the Company's operations could be negatively affected until the Company could establish alternative production and service operations. In addition, the Company may experience production difficulties and product delivery delays in the future as a result of:

- Changing process technologies
- Ramping production
- Installing new equipment at its manufacturing facilities
- Shortage of key components

Financial Performance. The Company's operating results may vary in the future as a result of a number of factors, including:

- Changes in technology
- New competition
- Economic conditions
- Customer demand
- A shift in the mix of the Company's products
- A shift in sales channels
- The market acceptance of new or enhanced versions of the Company's products
- The timing of introduction of other products and technologies
- Any cancellation or postponement of orders
- Any charges to earnings associated with the foregoing

Research and Development. The Company is active in research and development of new products and technologies. The Company's research and development efforts may not lead to the successful introduction of new or improved products. The Company may encounter delays or problems in connection with its research and development efforts. New products often take longer to develop, have fewer features than originally considered desirable and cost more to develop than initially estimated. There may be delays in starting volume production of new products and new products may not be commercially successful. Products under development are often announced before introduction and these announcements may cause customers to delay purchases of existing products until the new or improved versions of those products are available. Delays or deficiencies in development, manufacturing, delivery of, or demand for, new products or higher development cost, could have a negative affect on the Company's business, operating results or financial condition.

Acquisitions. The Company has in the past and may in the future acquire businesses or product lines as a way of expanding its product offerings and acquiring new technology. If the Company does not identify future acquisition opportunities and/or integrate businesses that it may acquire effectively, the Company's growth may be negatively affected.

Product Liability Claims. The testing, manufacturing, marketing and sale of laser products subjects the Company to the risk of liability claims or product recalls. Although the Company maintains product liability insurance in the countries in which it conducts business, the Company cannot assure that such coverage is adequate or will continue to be available at affordable rates. Product liability insurance is expensive and may not be available in the future on acceptable terms, if at all. A product recall or successful product liability claim could inhibit or prevent commercialization of the Company's products, impose a significant financial burden on the Company, or both, and could have a material adverse effect on the Company's business and financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company's corporate headquarters is located in East Setauket, New York. Manufacturing and other operations are conducted in several locations worldwide. The following tables provide certain information about the Company's principal general offices and manufacturing facilities. The Company believes that its existing facilities are adequate to meet its currently projected needs for the next 12 months and that suitable additional or alternative space would be available, if necessary in the future on commercially reasonable terms. 

 Size
Principal Properties Owned: (sq. ft.) Primary Activity
........................... ......... ...........................
North America
.............
Orlando, Florida 80,000 Baublys-Control Laser's
 manufacturing operations,
 sales and administrative
 offices, and research and
 development facility

East Setauket, New York 65,000 Quantronix' manufacturing
 operations, sales and
 administrative offices, and
 research and development and
 engineering and laser
 application facility
Mukilteo, Washington 63,000 Synrad's manufacturing
 operations, sales and
 administrative offices, and
 research and development
 facility
Chatsworth, California 22,000 Photo Research's
 manufacturing operations,
 sales and administrative
 offices, and research and
 development facility
Asia
....
Mumbai, India 16,769 Excel SouthAsia JV's sales
 and administrative offices,
 service and repair centers,
 and a laser applications
 laboratory



Principal Properties Size Lease
 Leased: (sq. ft.) Expiration Primary Activity
.................... ......... ............. .....................
North America
.............
Santa Clara, California 47,000 December 2008 Manufacturing, admin-
 istrative and sales
 offices for Continuum

Lexington, Massachusetts 33,339 December 2016 Manufacturing, admin-
 istrative and sales
 offices for Cambridge

Oxnard, California 14,000 August 2009 Manufacturing and
 administrative offices
 for TOC

Auburn, California 597 May 2008 Sales office for
 Cambridge

Europe
......
Ludwigsburg, Germany 22,500 June 2011 Manufacturing and
 services operations,
 sales and marketing,
 research and
 development and
 executive offices for
 Baublys-Control Laser

Darmstadt, Germany 7,800 December 2009 Administrative,
 marketing and services
 offices for Excel
 Europe and its
 division Quantronix
 Europe

Munich, Germany 7,800 December 2008 Sales, marketing and
 services offices for
 Excel Europe and its
 division Synrad Europe

Northumberland,
 United Kingdom 4,119 February 2010 Sales and marketing,
 manufacturing and
 administrative offices
 for DGE

Villebon Sur Yvette,
 France 3,300 December 2010 Sales and services
 office for Excel
 Europe

Milan, Italy 750 November 2009 Sales and services
 office for Excel Europe

Asia
....
Penang, Malaysia 7,597 December 2008 Administrative, sales
 and marketing offices,
 light repair and
 integration services,
 technical and support
 offices, as well as
 applications
 laboratories for Excel
 Asia

Kuala Lumpur, Malaysia 1,000 July 2008 Sales office for
 Excel Asia

Kuala Lumpur, Malaysia 750 January 2008 Sales office for
 Excel Asia

Tokyo, Japan 4,917 September 2008 Administrative, sales
 and marketing offices
 for Excel Technology
 Japan

Tokyo, Japan 568 October 2008 Warehouse for Excel
 Technology Japan

Colombo, Sri Lanka 4,500 April 2008 Office for product
 development activities
 of Excel Technology-
 Lanka

ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are subject to various claims, which have arisen in the normal course of business. The impact of the final resolution of these matters on the Company's results of operations or liquidity in a particular reporting period is not known. Management is of the opinion, however, that the ultimate outcome of such matters will not have a material adverse effect upon the Company's financial condition or liquidity.

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

The Company's Annual Meeting of Stockholders was held on November 20, 2007. At the Meeting:

(i) The following persons were elected as directors of the Company, to serve until the next Annual Meeting of Stockholders and until their successors are duly elected and qualified, each receiving the number of votes set forth opposite their names:

FOR WITHHELD 

 .......... .........
J. Donald Hill 10,626,676 597,348
Antoine Dominic 10,771,178 452,846
Steven Georgiev 8,217,100 3,006,924
Ira J. Lamel 8,348,939 2,875,085
Donald E. Weeden 8,214,500 3,009,524

(ii) The appointment of KPMG LLP as the Company's independent registered public accounting firm for the year ending December 31, 2007 was ratified, with 11,175,846 shares voting in favor of the appointment, 39,455 shares voting against, and 8,724 shares abstaining from voting.

PART II

.......

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED

STOCKHOLDER MATTERS, AND ISSUER PURCHASES
OF EQUITY SECURITIES

Price Range of Common Stock

The Company's Common Stock trades on the NASDAQ National Market System under the symbol "XLTC." The following table sets forth the high and low closing sales prices reported on the NASDAQ for the Common Stock for the periods indicated. 

Year ended: High Low
 ...... ......
December 31, 2007
 First Quarter $27.78 $25.05
 Second Quarter $28.18 $25.84
 Third Quarter $28.40 $24.41
 Fourth Quarter $28.26 $25.39

December 31, 2006
 First Quarter $29.95 $23.86
 Second Quarter $29.92 $29.43
 Third Quarter $29.84 $28.90
 Fourth Quarter $29.64 $24.87

As of February 12, 2008, there were approximately 598 holders of record of the Common Stock.

Dividend Policy

The Company has never paid cash dividends on its common stock. Payment of dividends to holders of the common stock is within the discretion of the Company's Board of Directors and will depend, among other factors, on earnings, capital requirements and the operating and financial condition of the Company. At the present time, the Company's anticipated capital requirements are such that it intends to follow a policy of retaining its earnings, if any, in order to finance the development of its business.

Issuer Purchases of Equity Securities

Effective November 1, 2006, the Company's Board of Directors authorized a stock buy-back program for the repurchase of up to 2,000,000 shares of its common stock. Purchases have occurred and will continue to occur from time to time in open market transactions or privately negotiated transactions at the Company's discretion, including the quantity, timing and price thereof. This program replaced the program that the Board of Directors had authorized in January 1998.

A summary of the activity by month is as follows: 

 Total
 number of Maximum
 Total shares number of
 number of purchased shares that
 shares Average as part may yet be
 purchased price of publicly purchased
 (In thou- paid per announced plan under the plan
 Period sands) (a) share (b) (In thousands) (In thousands)
.................. ........... .......... .............. ...............
 1/01/07 - 1/26/07 0 N/A 0 1,920
 1/27/07 - 2/23/07 0 N/A 0 1,920
 2/24/07 - 3/30/07 7 27.18 0 1,920
 3/31/07 - 4/27/07 0 N/A 0 1,920
 4/28/07 - 5/25/07 150 26.47 147 1,773
 5/26/07 - 6/29/07 150 26.46 145 1,628
 6/30/07 - 7/27/07 19 26.34 12 1,616
 7/28/07 - 8/31/07 235 25.31 230 1,386
 9/01/07 - 9/28/07 85 25.15 83 1,303
 9/29/07 - 10/26/07 22 26.50 15 1,288
10/27/07 - 11/30/07 165 26.92 165 1,123
12/01/07 - 12/31/07 172 26.80 172 951
 ........... .......... .............. ...........

Total 1,005 26.22 969 951

(a) Includes 36 thousand shares repurchased to satisfy employee minimum tax withholding obligations upon vesting of restricted stock granted to employees under the Company's equity compensation plans.

(b) The average price paid per share of stock repurchased under the stock buy-back program includes the commissions paid to the brokers.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated statement of income data for the years ended December 31, 2007, 2006 and 2005, and the consolidated balance sheet data as of December 31, 2007 and 2006, have been derived from the Company's audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of income data for the years ended December 31, 2004 and 2003, and the selected consolidated balance sheet data as of December 31, 2005, 2004 and 2003, are derived from the Company's audited consolidated financial statements which are not included in this Annual Report on Form 10-K.

The following tables summarize (in thousands, except per share data) the Company's consolidated statement of income and balance sheet data. You should read this information together with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes to those statements included elsewhere in this Annual Report on Form 10-K.

Statement of Income Data (in thousands, except per share data) 

 Year Ended December 31,
 ................................................
 2007 2006 2005 2004 2003
 ........ ........ ........ ......... ........
Net sales and services $160,023 $154,496 $137,717 $136,631 $122,681

Net income $ 17,732 $ 14,019 $ 15,208 $ 14,762 $ 11,318

Net income per share
 Basic $1.49 $1.16 $1.26 $1.23 $0.95
 Diluted $1.46 $1.12 $1.24 $1.20 $0.93

Weighted average common
 and common equivalent
 shares outstanding
 Basic 11,864 12,071 12,054 12,026 11,853
 Diluted 12,131 12,488 12,246 12,351 12,231

Balance Sheet Data (in thousands) 

 As of December 31,
 ................................................
 2007 2006 2005 2004 2003
 ........ ........ ........ ......... ........
Total assets $180,532 $181,979 $164,038 $152,478 $133,738
Total liabilities $ 18,945 $ 18,254 $ 15,348 $ 16,477 $ 16,466
Working capital $107,799 $110,548 $ 94,656 $ 80,006 $ 59,540
Stockholders' equity $161,587 $163,725 $148,690 $136,001 $117,272
Long-term liabilities $ 5,196 $ 4,612 $ 3,540 $ 2,807 $ 997

Refer to Item 1 "Business" and Item 8 "Financial Statements and Supplementary Data" for additional information affecting the comparability of amounts above.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

General
.......

The following discussion should be read in conjunction with the consolidated financial statements of the Company and notes thereto set forth in Item 8.

Overview
........

The Company designs, manufactures and markets photonics-based solutions, consisting of laser systems and electro-optical components, primarily for industrial and scientific applications. The Company's current range of products include laser marking and engraving systems, laser micro-machining systems, CO2 lasers, optical scanners, high power solid state CW and Q-switched lasers, Ultrafast lasers, high energy solid state pulsed lasers, precision optical components and light and color measurement instruments. The laser and electro-optical industry is subject to intense competition and rapid technological developments. The Company's strength and success is dependent upon developing and delivering successful, timely and cost effective solutions to its customers. The Company believes, for it to maintain its performance, it must continue to increase its operational efficiencies, improve and refine its existing products, expand its product offerings and develop new applications for its technology. The Company's strategy is to grow internally and through acquisitions of complementary businesses. Historically the Company has successfully integrated acquired companies into its existing operations.

Critical Accounting Policies and Estimates ..........................................

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. 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. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, bad debts, inventories, and income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be relevant under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition
...................

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB 104"), as amended. SAB 104 requires that the following four basic criteria must be met before revenue can be recognized: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the fee is fixed and determinable; and 4) collectibility is reasonably assured. Generally, the Company receives a customer purchase order as evidence of an arrangement and product shipment terms are F.O.B. shipping point.

The Company's revenues are generated from: 1) product sales, product upgrades and replacement part sales; 2) maintenance agreements; and 3) services. The Company's product lines principally consist of laser systems and electro-optical components used in a wide range of applications by different types of end-users and are often used as sub- assemblies required for end products manufactured by the customer. Revenue relating to these products is recognized upon transfer of title and risk of loss to the customer, which is generally the shipment date, assuming the other criteria of SAB 104 are met. If title and risk of loss do not pass to the customer until the product reaches the customer's delivery site, then recognition of revenue is deferred until that time. Related shipping and handling costs are included in cost of sales and services. With respect to maintenance agreements, revenue is recognized and customers are generally billed on a monthly or quarterly basis over the term of the agreement. When a customer pays an annual maintenance fee, it is recorded as deferred revenue and recognized as revenue ratably over the term of the agreement. For services rendered, customers are billed and revenues are recognized as the related services are performed. When a sales arrangement involves multiple elements, such as the sale of products that require installation, training or other services, the Company records deferred revenue for the fair value of the undelivered element and recognizes the revenue when the revenue recognition criteria for that element is met. Fair value is established for an element based on the price when the element is sold separately. Product returns have historically been insignificant.

The Company has occasionally entered into contracts to design, develop and produce laser systems to customer specifications. These contracts specify milestones and related progress billings and typically include terms that specify progress payments are non-refundable or the customer may terminate the contract for convenience, at which time the Company will be paid a percentage of the contract price that reflects the percentage of work performed to that date. Such contracts are accounted for in accordance with AICPA Statement of Position 81-1, "Accounting for Performance of Construction - Type and Certain Production - Type Contracts," whereby revenue is recognized under the percentage-of-completion method with the extent of progress towards completion measured by the achievement of contractual milestones.

The Company manufactures one product called a Photomask Defect Repair System ("DRS") that is a laser-based system for use in semiconductor photomask repair. The DRS provides a means to repair defects on the complex photomasks used to produce integrated circuits. These are very large, highly complex machines, customized for each customer and ranging in price from $1.5 million to $2.0 million per unit (based upon the most recent range of historical sales prices). The terms of sale with respect to DRS's require that the Company perform installation due to the technical expertise required for this product. Due to the nature of the post-shipment installation obligations with respect to the DRS's, the Company defers revenue recognition on the sale of DRS's until installation has been completed.

Allowances for Doubtful Accounts
................................

The Company is required to estimate the collectibility of its trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of receivables, including the current credit- worthiness of each customer. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The collectibility of accounts receivable is evaluated based on a combination of factors. In circumstances where the Company is aware of a specific customer's inability to meet its financial obligations (e.g., bankruptcy filings), a specific reserve for bad debts is recorded against amounts due, to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, management estimates an allowance for bad debts based upon the total accounts receivable balance and the percentage expected to be realized through subsequent cash collections. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations to us), the Company's estimates of the recoverability of amounts due to the Company could be reduced by a material amount.

Inventories
...........

On a quarterly basis, the Company compares the amount of inventory on hand and under commitment with its latest forecasted requirements and historical usage or sales to determine whether write-downs for excess or obsolete inventory are required. Although the write-downs for excess or obsolete inventory reflected in the Company's consolidated balance sheet at December 31, 2007 and 2006 are considered adequate by the Company's management, there can be no assurance that these write-downs will prove to be adequate over time to cover ultimate losses in connection with the Company's inventory. In addition, the Company will reduce the carrying value of its finished goods inventory to net realizable value, if the selling price of the product is less than its cost.

Income Taxes
............

The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. As of December 31, 2007 and 2006, the Company has approximately $1.0 million and $1.0 million of net deferred tax liabilities, respectively, related principally to inventory basis differences, benefits of foreign net operating loss carryforwards and tax deductible goodwill amortization. Should future pretax book income and taxable income be considerably lower than projected, an increase to the valuation allowance may be required. Likewise, if future foreign taxable income is achieved, a decrease to the valuation allowance may be required.

Recent Accounting Pronouncements
................................

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. Adoption is required as of the beginning of the first fiscal year that begins after November 15, 2007. The FASB subsequently deferred the adoption of SFAS 157 for nonfinancial assets and liabilities to the fiscal year beginning after November 15, 2008. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. Management is evaluating the impact the adoption of this statement will have on the Company's consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115" ("SFAS 159") which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, although early application is allowed. Management is currently evaluating the impact the adoption of this statement will have on the Company's consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS 141(R)") which requires the acquiring entity in a business combination to recognize most identifiable assets acquired, liabilities assumed, noncontrolling interests and goodwill acquired in a business combination at full fair value; establishes the acquisition- date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. As SFAS 141(R) will be applied to business combinations occurring after the effective date, management does not believe that adoption of this standard will have any impact on the Company's consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No.51" ("SFAS 160") which requires all entities to report noncontrolling interests (previously referred to as minority interests) in subsidiaries as a separate component of equity in the consolidated financial statements. Moreover, SFAS 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS 160 is effective for fiscal years beginning after December 15, 2008. Management is evaluating the impact the adoption of this standard will have on the Company's consolidated financial statements.

Results of Operations
.....................

The following table presents consolidated financial data for the years ended December 31, 2007, 2006 and 2005 (in thousands of dollars and as a percentage of total net sales and services).

2007 2006 2005 ................ ................ ................


Dollars Percent Dollars Percent Dollars Percent 

 ........ ....... ........ ....... ........ .......
Net Sales and
 Services $160,023 100.0% $154,496 100.0% $137,717 100.0%

Cost of Sales and
 Services 90,271 56.4% 85,602 55.4% 72,295 52.5%
 ........ ....... ........ ....... ........ .......
Gross Profit / Margin 69,752 43.6% 68,894 44.6% 65,422 47.5%

Operating Expenses:
 Selling and Marketing 17,671 11.0% 18,745 12.1% 18,959 13.8%
 General and
 Administrative 15,930 10.0% 13,051 8.4% 12,448 9.0%
 Research and
 Development 14,834 9.3% 14,523 9.4% 14,477 10.5%
 Merger Related and
 Deferred Compensation 0 0% 2,875 1.9% 0 0%
 Merger Expenses 0 0% 2,194 1.4% 0 0%
 ........ ....... ........ ....... ........ .......

Income from Operations 21,317 13.3% 17,506 11.4% 19,538 14.2%

Non-Operating Income 3,328 2.1% 2,936 1.9% 1,133 0.8%
 ........ ....... ........ ....... ........ .......

Income before Provision
 for Income Taxes 24,645 15.4% 20,442 13.3% 20,671 15.0%
Provision for
 Income Taxes 6,913 4.3% 6,423 4.2% 5,463 4.0%
 ........ ....... ........ ....... ........ .......
Net Income $ 17,732 11.1% $ 14,019 9.1% $ 15,208 11.0%
 ........ ....... ........ ....... ........ .......
 ........ ....... ........ ....... ........ .......

Net Sales and Services
......................

Net sales and services for 2007 increased to $160.0 million from $154.5 million in 2006, an increase of $5.5 million or 3.6%. Net sales and services for 2006 increased to $154.5 million from $137.7 million in 2005. The increase from 2006 to 2007 was attributable to increased sales of CO2 lasers, scanners, high power and high energy laser sales offset partially by reduced sales for light and color measure instruments. Increased sales of CO2 lasers, scanners, marking systems and high energy solid-state laser systems were the primary contributors towards the increase in sales from 2005 to 2006.

Gross Margins and Cost of Sales
...............................

Gross margins in 2007 were 43.6% compared to 44.6% in 2006. Cost of sales and services increased by $4.7 million or 5.5% to $90.3 million in 2007 from $85.6 million in 2006. The decrease in gross margins as a percentage of sales is primarily due to the product mix as gross margins vary among the numerous Company product configurations. In addition, gross margins decreased in 2007 due to a reduction in light and color measurement instrument sales, which typically experience higher gross margins than the Company's other products. Gross margins for distributor sales are generally lower than those for direct sales. Gross margins in 2007 were also impacted by higher distributor sales. Gross margins in 2006 were 44.6% compared to 47.5% in 2005. Cost of sales and services increased by $13.3 million or 18.4% to $85.6 million in 2006 from $72.3 million in 2005. The decrease in gross margins as a percentage of sales is due to the mix of products being sold, which have different levels of variable costs. In addition, the gross profit and margins were negatively affected in 2006 due to a higher provision for excess inventory for some discontinued product lines and lower margins associated with a newly introduced product during the initial phase of production. The increases in cost of sales and services from 2006 to 2007 and also from 2005 to 2006 are primarily attributable to the increased sales volume.

Operating Expenses
..................

Selling and Marketing

Selling and marketing expenses were $17.7 million in 2007 compared to $18.7 million in 2006 and $19.0 million in 2005. The decrease of $1.1 million or 5.7% from 2006 to 2007 was primarily attributable to lower variable costs, such as commissions, associated with outside sales representatives. The decrease of $213 thousand or 1.1% from 2005 to 2006 was primarily attributable to lower costs associated with a reduced sales force due to loss of personnel while the terminated merger with Coherent was pending. Selling and marketing expenses as a percentage of sales were 11.0% in 2007, 12.1% in 2006 and 13.8% in 2005. The decreases in selling and marketing expenses as a percentage of sales from 2006 to 2007 and from 2005 to 2006 are primarily attributable to fixed personnel costs being absorbed by higher sales volume.

General and Administrative

General and administrative expenses were $15.9 million in 2007 as compared with $13.1 million in 2006. The increase of $2.9 million or 22.1% from 2006 to 2007 was primarily attributable to increases in stock-based compensation expenses in 2007 of $2.7 million. General and administrative expenses from 2005 to 2006 increased $602 thousand or 4.8% to $13.1 million. The increase is primarily attributable to higher bonus expense as a result of higher operating income (excluding merger, merger related and deferred compensation expenses). General and administrative expenses as a percentage of sales increased to 10.0% in 2007 as compared to 8.4% in 2006 and 9.0% in 2005. From 2006 to 2007, general and administrative expense as a percentage of sales increased due to the increase in stock-based compensation expense in 2007. From 2005 to 2006, general and administrative expense as a percentage of sales decreased due to an increased sales volume, as many general and administrative costs are fixed in nature and do not significantly fluctuate as sales volume changes.

Research and Development

Research and development expenses were $14.8 in 2007 and $14.5 million in 2006 and 2005. The increase of $311 thousand or 2.1% from 2006 to 2007 was primarily attributable to modest increases in research and development expenses at most of the Company's subsidiaries. There was a small increase in research and development expenses of $46 thousand or 0.3% from 2005 to 2006.

Merger Related and Deferred Compensation Expenses

Merger related and deferred compensation expenses for 2006 of $2.9 million consisted primarily of $1.4 million of deferred executive compensation, $1.0 million of compensation in lieu of option grants, and $500 thousand of bonus expense.

Merger Expenses

Merger expenses of $2.2 million for 2006 were primarily for professional fees related to the terminated merger with Coherent, Inc. more fully described in Note 2 to the consolidated financial statements.

Non-Operating Income (Expenses)

Interest income for 2007 was $3.0 million, as compared to $2.5 million in 2006 and $1.2 million in 2005. The increases in interest income of $496 thousand or 19.5% from 2006 to 2007 and $1.4 million or 115.7% from 2005 to 2006 are primarily due to the increase in the average investable cash balances. In addition, during 2007 and 2006 the average interest rates increased.

Foreign currency gains and other income, net for 2007 was $362 thousand compared to $410 thousand in 2006 and $1 thousand in 2005. Foreign currency gains and other income in 2007 and 2006 includes $249 thousand and $307 thousand, respectively of foreign currency transaction gains. Foreign currency gains and other income in 2005 includes $77 thousand of foreign currency transaction losses. The foreign currency gains in 2007 and 2006 were primarily attributable to the recording of foreign currency exchange transaction gains at Excel Europe for the settlement of payables due in U.S. dollars for the purchase of inventories from the Company's U.S. domestic subsidiaries as a result of the decline in the value of the U.S. dollar against the Euro.

Provision for Income Taxes

The provision for income taxes for 2007 was $6.9 million, compared to $6.4 million in 2006 and $5.5 million in 2005. The Company's effective tax rate was 28.1% for 2007, as compared to 31.4% in 2006 and 26.4% in 2005. The decrease in the Company's effective tax rate in 2007 is primarily due to the jurisdictions where income was earned, higher non-taxable investment income and an increase in tax credits earned. In 2006, due to the non-deductibility of certain expenses, the reduction of a tax contingency liability due to a settlement in 2005 that did not reoccur in 2006 and investing in a higher percentage of taxable versus non-taxable instruments, the Company's effective tax rate increased approximately 5 percentage points.

Liquidity and Capital Resources
...............................

Cash Flow Overview
..................

Cash and investments decreased $5.6 million during the year 2007 to $57.5 million. The decrease during the year was primarily due to cash used for financing activities of $24.6 million and net cash used for capital expenditures of $1.6 million offset partially by the net cash provided by operating activities of $20.3 million. The Company also experienced a favorable foreign exchange effect on cash of $262 thousand in 2007. As of December 31, 2007 the Company had no bank debt.

Net cash provided by operating activities was $20.3 million for the year ended December 31, 2007 and $15.3 million for the year ended December 31, 2006, which was primarily attributable to net income plus the depreciation and amortization expenses, offset partially by net changes in working capital items, primarily accounts receivable, inventory, accounts payable and accrued expenses and other current liabilities. Depreciation and amortization for the year ended December 31, 2007 was $2.6 million. Accounts receivable at December 31, 2007 of $24.0 million increased $1.3 million from December 31, 2006 due to increased sales volume in the fourth quarter of 2007 compared to the fourth quarter of 2006. Inventory at December 31, 2007 of $33.8 million decreased $1.1 million from December 31, 2006 due to increased focus on purchasing efficiency. Accounts payable at December 31, 2007 of $5.1 million decreased $1.3 million from December 31, 2006 primarily due to the timing of payments.

Net cash provided by investing activities of $4.2 million for the year ended December 31, 2007 was attributable to the net redemption of short-term auction rate notes for $5.7 million offset partially by the purchase of property, plant and equipment for $1.6 million and the proceeds from the sale of equipment of $61 thousand. Net cash used in investing activities of $21.2 million for the year ended December 31, 2006 was attributable to the purchase of short-term auction rate notes for $19.2 million, purchase of property, plant and equipment for $2.3 million offset partially by the proceeds from the sale of equipment of $354 thousand.

Net cash used in financing activities of $24.6 million for the year ended December 31, 2007 was primarily attributable to the repurchase of common stock for $26.4 million, offset by $1.2 million of proceeds received upon the exercise of employee stock options and a $528 thousand income tax benefit from employee stock option exercises. Net cash used in financing activities of $573 thousand for the year ended December 31, 2006 was primarily attributable to the repurchase of common stock for $2.0 million, offset by $655 thousand of proceeds received upon the exercise of employee stock options and an $816 thousand income tax benefit from employee stock option exercises.

As of December 31, 2007, the Company has working capital of $107.8 million including cash and investments of $57.5 million, compared to working capital of $110.5 million including cash and investments of $63.1 million at December 31, 2006. The working capital decreased by $2.7 million and cash and investments decreased by $5.6 million during the year ended December 31, 2007.

As of December 31, 2007, the Company's contractual obligations were as follows (in thousands): 

Contractual Obligations Payments Due by Period
 Less More
 than 1-3 4-5 than
 Total 1 Year Years Years 5 Years

Operating Leases (a) $8,055 $1,967 $2,212 $1,433 $2,443

Deferred Compensation Plan (b) $1,535 $ 0 $1,535 $ 0 $ 0

Total $9,590 $1,967 $3,747 $1,433 $2,443

(a) Certain of the Company's operating lease obligations include escalation clauses. These escalating payment requirements are reflected in the table.

(b) These payments relate to obligations under the Company's deferred compensation plan whereby payment of certain compensation earned by a participant can be deferred. Since the Company cannot reasonably estimate the timing of withdrawals for the participant, the future obligation to this participant has been included in the "1-3 Years" column of the table, based on the terms of existing employment agreements and the deferred compensation plan.

Purchase orders for the purchase of raw materials and other goods and services are not included in the table above. The Company is not able to determine the total amount of these purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. In addition, these purchase orders generally allow for cancellation without significant penalties. The Company does not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed expected short-term requirements.

The expected timing of payments and the amounts of the obligations discussed above are estimated based on current information.

Off-Balance Sheet Arrangements

As of December 31, 2007, the Company had no off-balance sheet financing arrangements.

Line of Credit

As of December 31, 2007, the Company has no lines of credit.

Stock Repurchases

Repurchases of the Company's common stock have occurred from time to time in the open market. The following table presents stock repurchase activity during the last three fiscal years under programs authorized by the Board of Directors, disclosing total shares repurchased under each program and the associated cost. Upon authorization of each new stock repurchase program, the former program is superseded and replaced. The current repurchase program has no set expiration date. In addition to shares purchased in the open market under the buy-back program, the Company may also purchase shares of common stock in privately negotiated transactions at the Company's discretion, including the quantity, timing and price thereof. 

 (in thousands)
Year Ended December 31, 2007 2006 2005
 .............. .............. ..............
 Shares Cost Shares Cost Shares Cost
 ...... ....... ...... ....... ...... .......
Stock repurchase programs:
2 million, authorized
 January 1998 0 $ 0 0 $ 0 0 $ 0
2 million, authorized
 November 2006 969 $25,394 0 $ 0 0 $ 0
 ...... ....... ...... ....... ...... .......
Total stock repurchases 969 $25,394 80 $ 2,044 0 $ 0
 ...... ....... ...... ....... ...... .......
 ...... ....... ...... ....... ...... .......

The Company also repurchased 36 thousand shares of common stock for $970 thousand related to employee minimum tax withholding requirements due upon the vesting of restricted stock.

The Company intends to continue to invest in support of its growth strategy. These investments aid in retaining and acquiring new customers, expanding the Company's current product offerings and further developing its operating infrastructure. The Company believes that current cash and investments will be sufficient to meet these anticipated cash needs for at least the next twelve months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. If current cash and investments and those that may be generated from operations are insufficient to satisfy the Company's liquidity requirements, the Company may seek to sell additional equity or debt securities or secure lines of credit. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. In addition, the Company will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services and technologies, which might impact the Company's liquidity requirements or cause the Company to issue additional equity or debt securities. There can be no assurance that financing will be available, on terms that are acceptable to the Company or at all.

Selected Quarterly Financial Data
.................................

Unaudited quarterly financial data (in thousands, except per share amounts) for 2007 and 2006 is summarized as follows: 

 2007 2006
 ................................................. .................................................
 Q1 Q2 Q3 Q4 YEAR Q1 Q2 Q3 Q4 YEAR
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
 <C

Net sales and services $ 40,941 $ 40,532 $ 37,446 $ 41,104 $160,023 $ 36,325 $ 39,530 $ 40,299 $ 38,343 $ 154,496
Cost of sales and services 23,100 22,470 21,285 23,416 90,271 19,056 21,484 22,350 22,713 85,602
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
Gross profit 17,841 18,062 16,161 17,688 69,752 17,269 18,046 17,949 15,630 68,894
Operating expenses:
 Selling and marketing 4,327 4,619 4,107 4,618 17,671 4,776 4,965 4,611 4,393 18,745
 General and administrative 4,174 3,944 3,933 3,879 15,930 2,895 3,070 3,724 3,362 13,051
 Research and development 3,826 3,783 3,662 3,563 14,834 3,625 3,655 3,527 3,716 14,523
 Merger related and deferred
 compensation expenses 0 0 0 0 0 0 0 2,875 0 2,875
 Merger expenses 0 0 0 0 0 838 1,146 210 0 2,194
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
 12,327 12,346 11,702 12,060 48,435 12,134 12,836 14,947 11,471 51,388
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
Income from operations 5,514 5,716 4,459 5,628 21,317 5,135 5,210 3,002 4,159 17,506

Non-operating (expenses)
 income:
 Interest income 781 843 703 714 3,041 435 581 755 774 2,545
 Minority interest 1 (59) (9) 5 (62) (3) (10) (28) 22 (19)
 Interest expense 0 0 0 (13) (13) 0 0 0 0 0
 Foreign currency gains
 (losses) and other
 income, net 97 41 177 47 362 120 165 (15) 140 410
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
Income before provision for
 income taxes 6,393 6,541 5,330 6,381 24,645 5,687 5,946 3,714 5,095 20,442

Provision for income taxes 1,738 2,028 1,417 1,730 6,913 1,820 1,956 1,226 1,421 6,423
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
Net income $ 4,655 $ 4,513 $ 3,913 $ 4,651 $ 17,732 $ 3,867 $ 3,990 $ 2,488 $ 3,674 $ 14,019
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
Basic income per common share $ 0.38 $ 0.37 $ 0.33 $ 0.40 $ 1.49 $ 0.32 $ 0.33 $ 0.21 $ 0.30 $ 1.16
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
Weighted average common
 shares outstanding 12,107 12,063 11,795 11,509 11,864 12,060 12,066 12,066 12,089 12,071
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
Diluted income per
 common share $ 0.38 $ 0.37 $ 0.33 $ 0.40 $ 1.46 $ 0.31 $ 0.32 $ 0.20 $ 0.30 $ 1.12
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
Weighted average common and
 Common equivalent shares
 outstanding 12,409 12,352 12,030 11,750 12,131 12,614 12,531 12,522 12,437 12,488
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........
 ........ ........ ........ ......... ......... ........ ........ ........ ........ .........

Note 1: The Company's quarterly closing dates are on the last Friday
prior and closest to the last day of each calendar quarter. The
Company's fiscal year always ends on December 31st. Note 2: The sum of the quarterly earnings per common share amounts do not
always equal the annual amount reported, as per share amounts are
computed independently for each quarter and for the year based on
the weighted average common and common equivalent shares outstanding in each such periods.

Inflation
.........

In the opinion of management, inflation has not had a material effect on the operations of the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

The principal market risks (i.e. the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed are interest rates on demand deposits with banks and money market funds and exchange rates, generating translation and transaction gains and losses.

Interest Rates
..............

The Company manages its cash and investment portfolios considering investment opportunities and risks, tax consequences and overall investing strategies. The Company's investment portfolios consist primarily of cash and investments, with carrying amounts approximating market value. Assuming year-end 2007 cash and investment levels, a one- point change in interest rates would have an approximate $575 thousand impact on the annual interest income of the Company.

Foreign Currency Exchange Rates
...............................

Operating in international markets involves exposure to movements in currency exchange rates that are volatile at times. The economic impact of currency exchange rate movements on the Company is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause the Company to adjust its financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.

The Company's net sales and services to foreign customers represented approximately 63% of total net sales and services in 2007, 63% in 2006 and 61% in 2005. The Company expects net sales and services to foreign customers will continue to represent a large percentage of its total net sales and services. The Company's net sales and services denominated in foreign currencies represented approximately 25% of its total net sales and services in 2007, 24% of its total net sales and services in 2006 and 28% in 2005. The Company generally has not engaged in foreign currency hedging transactions. The aggregate foreign exchange gains (losses) included in determining consolidated results of operations were $249 thousand, $307 thousand and $(77) thousand in 2007, 2006 and 2005, respectively.

Changes in the Euro and Yen have the largest impact on the Company's operating profits. The Company estimates that a 10% change in foreign exchange rates would not materially impact reported operating profits.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The audited financial statements and supplementary data follow on pages 33 to 55.

EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements and Financial Statement Schedule filed with the Annual Report of the Company on Form 10-K For the Year ended December 31, 2007. 

 Page
 ....

Report of Independent Registered Public Accounting Firm 33

Consolidated Financial Statements:

 Consolidated Balance Sheets as of December 31, 2007 and 2006 35

 Consolidated Statements of Income for the years
 ended December 31, 2007, 2006 and 2005 36

 Consolidated Statements of Stockholders' Equity and
 Comprehensive Income for the years ended December 31, 2007,
 2006 and 2005 37

 Consolidated Statements of Cash Flows for the years ended
 December 31, 2007, 2006 and 2005 38

 Notes to Consolidated Financial Statements 39


Consolidated Financial Statement Schedule:

 Schedule II - Valuation and Qualifying Accounts 55

...........................

Schedules not listed above have been omitted because they are either not applicable or the required information has been provided elsewhere in the consolidated financial statements or notes thereto.

Report of Independent Registered Public Accounting Firm .......................................................

The Board of Directors and Stockholders
Excel Technology, Inc.:

We have audited the accompanying consolidated balance sheets of Excel Technology, Inc. and subsidiaries (Excel Technology) as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule. We also have audited Excel Technology's internal control over financial reporting as of December 31, 2007, based on criteria established in "Internal Control
- Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Excel Technology's management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management's Report on Internal Control Over Financial Reporting" included in Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Excel Technology, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein and, in our opinion, Excel Technology, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Notes 6 and 1 to the consolidated financial statements, the Company adopted FASB Interpretation No. 48, "Accounting For Uncertainty in Income Taxes - an Interpretation of SFAS No. 109", effective January 1, 2007 and Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment," effective January 1, 2006. 

/s/ KPMG LLP


Melville, New York
February 13, 2008

EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES 

 Consolidated Balance Sheets
 December 31, 2007 and 2006
 (In thousands, except per share amounts)

Assets 2007 2006
...... ........ .........
Current assets:
 Cash $ 9,981 $ 9,903
 Investments 47,550 53,220
 Accounts receivable, less allowance
 for doubtful accounts of $833 and $784
 in 2007 and 2006, respectively 24,008 22,716
 Inventories 33,792 34,906
 Deferred income taxes 2,518 2,131
 Other current assets 1,544 1,314
 Income taxes receivable 2,155 0
 ........ ........
 Total current assets 121,548 124,190
 ........ ........
Property, plant and equipment 24,679 25,503
Other assets 1,925 391
Goodwill 32,380 31,895
 ........ ........
Total Assets $180,532 $181,979
 ........ ........
 ........ ........

Liabilities and Stockholders' Equity
....................................
Current liabilities:
 Accounts payable $ 5,090 $ 6,386
 Accrued expenses and other current liabilities 7,116 6,902
 Income taxes payable 1,543 354
 ........ ........
 Total current liabilities 13,749 13,642
 ........ ........

Deferred income taxes 3,533 3,171
Accrued deferred compensation 1,535 1,375
Minority interest in subsidiary 128 66

Stockholders' equity:
 Preferred stock, par value $.001 per share:
 2,000 shares authorized, none issued 0 0
Common stock, par value $.001 per share:
 20,000 shares authorized, 11,280 and 12,088
 shares issued and outstanding in 2007 and
 2006, respectively 11 12
Additional paid-in capital 27,361 49,161
Retained earnings 129,334 111,602
Accumulated other comprehensive income 4,881 2,950
 ........ ........
 Total stockholders' equity 161,587 163,725
 ........ ........
Total Liabilities and Stockholders' Equity $180,532 $181,979
 ........ ........
 ........ ........

See Accompanying Notes to Consolidated Financial Statements.

EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Income

Years ended December 31, 2007, 2006 and 2005


(In thousands, except earnings per share) 

 2007 2006 2005
 ........ ........ ........

Net sales and services $160,023 $154,496 $137,717
Cost of sales and services 90,271 85,602 72,295
 ........ ........ ........

Gross profit 69,752 68,894 65,422
Operating expenses:
 Selling and marketing 17,671 18,745 18,959
 General and administrative 15,930 13,051 12,448
 Research and development 14,834 14,523 14,477
 Merger related and deferred
 compensation expenses 0 2,875 0
 Merger expenses 0 2,194 0
 ........ ........ ........
 48,435 51,388 45,884
 ........ ........ ........
Income from operations 21,317 17,506 19,538

Non-operating income (expenses):
 Interest income 3,041 2,545 1,180
 Interest expense (13) 0 0
 Minority interest (62) (19) (48)
 Foreign currency gains
 and other income, net 362 410 1
 ........ ........ ........
Income before provision for income taxes 24,645 20,442 20,671
Provision for income taxes 6,913 6,423 5,463
 ........ ........ ........
Net income $ 17,732 $ 14,019 $ 15,208
 ........ ........ ........
 ........ ........ ........
Basic income per common share $1.49 $1.16 $1.26
 ........ ........ ........
 ........ ........ ........

Weighted average common shares outstanding 11,864 12,071 12,054
 ........ ........ ........
 ........ ........ ........

Diluted income per common share $1.46 $1.12 $1.24
 ........ ........ ........
 ........ ........ ........

Weighted average common and
 common equivalent shares outstanding 12,131 12,488 12,246
 ........ ........ ........
 ........ ........ ........

See Accompanying Notes to Consolidated Financial Statements. 

 Accumulated
 Additional Other
 Preferred Stock Common Stock Treasury Stock Paid-In Retained Comprehensive Comprehensive
 Shares Amounts Shares Amounts Shares Amounts Capital Earnings Income Total Income
Balances at
 December 31, 2004 0 $ 0 12,053 $ 12 0 $ 0 $ 49,573 $ 82,375 $ 4,041 $ 136,001
Exercise of common
 stock options 0 0 2 0 0 0 41 0 0 41
Tax benefit from
 employee stock
 option exercises 0 0 0 0 0 0 7 0 0 7
Net income for
 the year 0 0 0 0 0 0 0 15,208 0 15,208 $15,208
Foreign currency
 Translation
 adjustment 0 0 0 0 0 0 0 0 (2,567) (2,567) (2,567)
 ...........
Comprehensive income 0 0 0 0 0 0 0 0 0 0 $12,641
 ..... ...... ........ ....... ...... ........ ......... ........ ............. .......... ...........
 ...........

Balances at
 December 31, 2005 0 0 12,055 12 0 0 49,621 97,583 1,474 148,690
Exercise of common
 stock options 0 0 113 0 0 0 655 0 0 655
Tax benefit from
 employee stock
 option exercises 0 0 0 0 0 0 816 0 0 816
Stock-based
 Compensation
 expense 0 0 0 0 0 0 113 0 0 113
Repurchases of
 common stock 0 0 0 0 (80) (2,044) 0 0 0 (2,044)
Retirement of
 treasury stock 0 0 (80) 0 80 2,044 (2,044) 0 0 0
Net income for
 the year 0 0 0 0 0 0 0 14,019 0 14,019 $14,019
Foreign currency
 Translation
 adjustment 0 0 0 0 0 0 0 0 1,476 1,476 1,476
 ...........

Comprehensive income 0 0 0 0 0 0 0 0 0 0 $15,495
 ..... ...... ........ ....... ...... ........ ......... ........ ............ .......... ...........
 ...........

Balances at
 December 31, 2006 0 0 12,088 12 0 0 49,161 111,602 2,950 163,725
Exercise of common
 stock options 0 0 114 0 0 0 1,218 0 0 1,218
Issuance of
 restricted stock 0 0 83 0 0 0 0 0 0 0
Excess tax benefit
 from employee stock
 option exercises &
 vested restricted
 stock 0 0 0 0 0 0 528 0 0 528
Repurchase of common
 stock relating to
 employee minimum
 tax withholdings 0 0 (36) 0 0 0 (970) 0 0 (970)
Stock-based
 compensation expense 0 0 0 0 0 0 2,817 0 0 2,817
Repurchases of
 common stock 0 0 0 0 (969) (25,394) 0 0 0 (25,394)
Retirement of
 treasury stock 0 0 (969) (1) 969 25,394 (25,393) 0 0 0
Net income
 for the year 0 0 0 0 0 0 0 17,732 0 17,732 $17,732
Foreign currency
 translation
 adjustment 0 0 0 0 0 0 0 0 1,931 1,931 1,931
 ...........

Comprehensive income 0 0 0 0 0 0 0 0 0 0 $19,663
 ..... ...... ........ ....... ...... ........ ......... ........ ............ .......... ...........
 ...........

Balances at
 December 31, 2007 0 $ 0 11,280 $ 11 0 $ 0 $ 27,361 $129,334 $ 4,881 $ 161,587
 ..... ...... ........ ....... ...... ........ ......... ........ ............ ..........
 ..... ...... ........ ....... ...... ........ ......... ........ ............ ..........

See Accompanying Notes to Consolidated Financial Statements.

EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows Years ended December 31, 2007, 2006 and 2005


(In thousands) 

 2007 2006 2005
 ........ ........ ........
Operating activities:
Net income $ 17,732 $ 14,019 $ 15,208
Adjustments to reconcile net
 income to net cash provided by
 operating activities:
 Minority interest 62 19 48
 Depreciation and amortization 2,611 2,695 2,891
 Stock-based compensation expense 2,817 113 0
 Tax benefit from employee stock
 option exercises 0 0 7
 Stock-based compensation excess
 income tax benefit (528) (816) 0
 (Gain) loss on sale of equipment 24 (120) 7
 (Recovery) provision for
 doubtful accounts 147 (16) 252
 Deferred income taxes (25) (792) 622
 Changes in operating assets
 and liabilities:
 Accounts receivable (747) 822 (4,534)
 Inventories 1,931 (3,928) (1,777)
 Other current assets (2,335) 85 282
 Other assets (1,677) (507) 1,101
 Accounts payable (1,424) 1,422 (290)
 Accrued expenses and other
 current liabilities 1,531 933 (1,088)
 Accrued deferred compensation 160 1,375 0
 ........ ........ ........
 Net cash provided by
 operating activities 20,279 15,304 12,729
 ........ ........ ........
Investing activities:
 Proceeds from investment redemptions,
 net of purchases 5,670 0 0
 Purchases of investments,
 net of redemptions 0 (19,220) (3,575)
 Purchases of property, plant and equipment (1,576) (2,339) (3,272)
 Proceeds from the sale of equipment 61 354 18
 ........ ........ ........
 Net cash provided by (used in)
 investing activities 4,155 (21,205) (6,829)
 ........ ........ ........
Financing activities:
 Proceeds from exercise of common
 stock options 1,218 655 41
 Repurchases of common stock (26,364) (2,044) 0
 Stock-based compensation excess
 income tax benefit 528 816 0
 ........ ........ ........
 Net cash (used in) provided by
 financing activities (24,618) (573) 41
 ........ ........ ........

Effect of exchange rate changes on cash 262 74 (967)
 ........ ........ ........
Net increase (decrease) in cash 78 (6,400) 4,974
Cash - beginning of year 9,903 16,303 11,329
 ........ ........ ........
Cash - end of year $ 9,981 $ 9,903 $ 16,303
 ........ ........ ........
 ........ ........ ........

Supplemental Cash Flow Information
..................................
Cash paid for:
 Interest $ 13 $ 0 $ 0
 ........ ........ ........
 ........ ........ ........
 Income taxes $ 7,427 $ 7,144 $ 5,411
 ........ ........ ........
 ........ ........ ........

See Accompanying Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements December 31, 2007 and 2006

(1) Summary of Significant Accounting Policies ..........................................

Excel Technology, Inc. and Subsidiaries (the "Company") designs, manufactures and markets photonics-based solutions, consisting of laser systems and electro-optical components, primarily for industrial and scientific applications. The significant accounting policies used in the preparation of the consolidated financial statements of the Company are as follows:

Basis of Presentation
.....................

The consolidated financial statements include the accounts of Excel Technology, Inc. (Excel), its wholly-owned subsidiaries and its 50% owned joint venture, Excel Laser Technology Private Limited (Excel SouthAsia JV) since it is a variable interest entity and the Company is the primary beneficiary of the joint venture. All material intercompany transactions and balances have been eliminated in consolidation.

Revenue Recognition
...................

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB 104"), as amended. SAB 104 requires that the following four basic criteria must be met before revenue can be recognized: 1) persuasive evidence of an arrangement exists;
2) delivery has occurred or services have been rendered; 3) the fee is fixed and determinable; and 4) collectibility is reasonably assured.

The Company's revenues are generated from: 1) product sales, product upgrades and replacement part sales; 2) maintenance agreements; and 3) services. The Company's product lines principally consist of laser systems and electro-optical components used in a wide range of applications by different types of end-users and are often used as sub-assemblies required for end products manufactured by the customer. Revenue relating to these products is recognized upon transfer of title and risk of loss to the customer, which is generally upon shipment, assuming the other criteria of SAB 104 are met. If title and risk of loss do not pass to the customer until the product reaches the customer's delivery site, then recognition of revenue is deferred until that time. Related shipping and handling costs are included in cost of sales and services. With respect to maintenance agreements, revenue is recognized and customers are generally billed on a monthly or quarterly basis over the term of the agreement. When a customer pays an annual maintenance fee, it is recorded as deferred revenue and recognized as revenue ratably over the term of the agreement. For services rendered, customers are billed and revenues are recognized as the related services are performed. When a sales arrangement involves multiple elements, such as the sale of products that require installation, training or other services, the Company records deferred revenue for the fair value of the undelivered element and recognizes the revenue when the revenue recognition criteria for that element is met. Fair value is established for an element based on the price when the element is sold separately. Product returns have historically been insignificant.

The Company occasionally has entered into contracts to design, develop and produce laser systems to customer specifications. These contracts specify milestones and related progress billings and typically include terms that specify progress payments are non-refundable or the customer may terminate the contract for convenience, at which time the Company will be paid a percentage of the contract price that reflects the percentage of work performed to that date. Such contracts are accounted for in accordance with AICPA Statement of Position 81-1, "Accounting for Performance of Construction - Type and Certain Production - Type Contracts," whereby revenue is recognized under the percentage-of-completion method with the extent of progress towards completion measured by the achievement of contractual milestones.

The Company manufactures one product, a Photomask Defect Repair System ("DRS"), which is a large, highly complex customized machine. The terms of sale with respect to DRS's require that the Company perform installation due to the technical expertise required for this product. Due to the nature of the post- shipment installation obligations with respect to the DRS's, the Company defers revenue recognition on the sale of DRS's until installation has been completed.

Cash and Investments
....................

Cash of $10.0 million and $9.9 million at December 31, 2007 and 2006, respectively, consists of demand deposits with banks and highly liquid money market funds. The Company considers investments with maturities of three months or less when purchased to be cash equivalents. Available-for-sale investments of $47.6 million and $53.2 million at December 31, 2007 and 2006, respectively, consist of auction rate notes for which the carrying value equaled their fair value. Auction rate notes represent long-term (generally maturities of ten to thirty-five years from the date of issuance) variable rate bonds tied to short-term interest rates that are reset through an auction process, which occurs every seven to thirty-five days. Auction rate notes are considered highly liquid by market participants due to the auction process. Included in other long-term assets at December 31, 2007 are $141 thousand of held to maturity securities for which their carrying value equaled their fair value.

Inventories
...........

Inventories consist of material, labor and overhead and are stated at the lower of cost on a first-in, first-out basis or market. On a quarterly basis, the Company compares the amount of the inventory on hand and under commitment with its latest forecasted requirements and historical usage or sales to determine whether write-downs for excess or obsolete inventory are required. In addition, the Company will reduce the carrying value of its finished goods inventory to net realizable value, if the selling price of the product is less than its cost.

Property, Plant and Equipment
.............................

The Company's property, plant and equipment, recorded at cost, are depreciated or amortized over their estimated useful lives under the straight-line method. Leasehold improvements are amortized over the life of the lease or over the estimated life of the asset, whichever is less.

Goodwill
........

Goodwill represents the excess of cost over fair value of net assets of businesses acquired. Goodwill and intangible assets with indefinite lives are not amortized but are evaluated annually for impairment and whenever events or circumstances indicate impairment might have occurred. The Company's annual assessment for impairment is performed on December 31st of each year. The recoverability of goodwill is evaluated using a two- step impairment test approach at the reporting unit level. In the first step, which is used to identify potential impairments, the overall fair value for the reporting unit is compared to its carrying amount including goodwill. If the fair value of a reporting unit is less than the carrying amount, a second step is performed which compares the implied fair value of the reporting unit's goodwill to the carrying amount of the goodwill. The implied fair value for the goodwill is determined based on the difference between the fair value of the reporting unit and the fair value of its net identifiable assets. If the implied fair value of the goodwill is less than its carrying amount, the difference is recognized as an impairment.

Research and Development Costs
..............................

Research and development costs include material, labor and overhead associated with Company-sponsored projects. Such costs are expensed as incurred.

Long-Lived Assets
.................

The Company reviews long-lived assets for impairment when events or circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Accrued Warranty Costs
......................

The Company analyzes its warranty liability for reasonableness on a quarterly basis, based upon a five-year history of warranty costs incurred, the nature of the products shipped subject to warranty and anticipated warranty trends.

Changes in the warranty liability in 2007 and 2006 were as follows (In thousands): 

 2007 2006
 ...... .......

 Balance at January 1 $ 754 $ 720
 Provision for warranties
 during the year 682 706
 Costs of warranty obligations
 during the year (590) (672)
 ...... .......
 Balance at December 31 $ 846 $ 754
 ...... .......
 ...... .......
Income Taxes
............

The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities at enacted rates in effect when such amounts are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Foreign Currency Translation
............................

The financial statements of foreign subsidiaries have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. The resulting cumulative translation adjustment of approximately $4.9 million and $3.0 million at December 31, 2007 and 2006, respectively, is reflected as accumulated other comprehensive income, a component of stockholders' equity. In addition, there were transaction gains and losses and inter-company balances not deemed long-term in nature at the balance sheet date that resulted in net transaction gains (losses) of $249 thousand, $307 thousand and $(77) thousand for the years ended December 31, 2007, 2006 and 2005, respectively, which is reflected in foreign currency gains and other income, net in the consolidated statements of income.

Income Per Share
................

The Company presents two income per share amounts, basic and diluted. Basic income per share is calculated based on net income and the weighted-average number of common shares outstanding during the reported period. Diluted income per share includes the effect of potentially dilutive securities (stock options and non-vested restricted stock), using the treasury stock method, on weighted-average shares outstanding.

Fair Value of Financial Instruments ...................................

The recorded amounts of the Company's cash, investments, accounts receivable, accounts payable and accrued expenses and other current liabilities approximate their fair values because of the short-term nature of these items.

Use of Estimates
................

The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Concentration of Credit Risk
............................

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of its holdings of cash, investments and accounts receivable. Cash and investments are deposited with high credit quality financial institutions. Concentration of credit risk with respect to accounts receivable is limited due to the Company's large number of customers and their dispersion throughout the United States, Europe and Asia. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral.

Accounting for Stock-Based Compensation .......................................

The Company's stock-based employee compensation plans are described in Note 8. Prior to January 1, 2006, the Company accounted for stock-based compensation related to those plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related Interpretations, as permitted by Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). As such, prior to January 1, 2006, no stock-based employee compensation expense was recognized in net income, as all options granted under those plans had an exercise price equal to the fair market values of the underlying common stock on the date of grant.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), "Share-Based Payment" ("SFAS No. 123 (R)"), using the modified prospective transition method. Under that transition method, compensation expense recognized for 2007 and 2006 includes compensation expense for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value determined in accordance with the original provisions of SFAS No. 123. The fair value of the options was determined at the date of grant using the Black-Scholes option pricing model and is being amortized to expense over the options' vesting periods. Stock-based compensation expense for an award with only service conditions that has a graded vesting schedule is recognized on a straight-line basis over the requisite service period for the entire award, with such amount recognized at any date at least equaling the portion of the grant date fair value of the award that is vested at that date. Stock-based compensation expense for an award that includes a performance condition that has a graded vesting schedule is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. As SFAS No. 123(R) requires that stock- based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation is reduced for estimated forfeitures, which is based on historical experience. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were accounted for as they occurred in the pro forma stock-based compensation expense presented for periods prior to January 1, 2006. Results for prior periods have not been restated.

There were 125 thousand shares of restricted stock granted in 2007, of which 83 thousand had vested and were issued as of December 31, 2007. There were no restricted stock grants in 2006. At December 31, 2007, 17 thousand shares of restricted stock vest contingent on attainment of a performance condition. Of the 83 thousand restricted shares that vested and were issued to employees during 2007, 36 thousand were surrendered to the Company to fulfill the employee's minimum statutory tax withholding obligations of $970 thousand for the applicable income. The 36 thousand acquired shares were retired. This net share settlement had no impact on the amount of compensation cost recognized in respect of these awards. Restricted stock with performance conditions is not included in issued and outstanding common stock until the shares are vested and issued to the employee. There were no stock option grants during the years ended December 31, 2007 and 2006.

The following table illustrates the stock-based compensation expense recorded in the consolidated statements of income in 2007 and 2006 and the impact of adopting SFAS No. 123(R) effective January 1, 2006 on the Company's income before provision for income taxes, net income and income per share (In thousands, except per share data). 

 Year ended Year ended
 December 31, 2007 December 31, 2006
Stock-based compensation expense:
 Stock options $ 56 $ 113
 Restricted stock $ 2,761 0
Impact on income before
 provision for taxes $ 2,817 $ 113
Impact on net income $ 1,823 $ 113
Impact on basic income per common share $ 0.15 $ 0.01
Impact on diluted income per common share $ 0.15 $ 0.01

Prior to the adoption of SFAS No. 123(R), the Company reported all tax benefits from employee stock option exercises as operating cash flows in its consolidated statement of cash flows. In accordance with SFAS No. 123(R), effective January 1, 2006, the Company reports excess tax benefits as financing cash inflows. Excess tax benefits are realized tax benefits from tax deductions for options exercised and restricted stock issued in excess of the deferred tax asset attributable to stock compensation costs for such awards. The excess income tax benefit realized for the tax deductions from stock option exercises for the years ended December 31, 2007 and 2006 was $502 thousand and $816 thousand, respectively. In addition, the excess tax benefit associated with vested restricted stock was $26 thousand for 2007.

There was a $994 thousand tax benefit recognized related to the compensation expense for restricted stock awards for the year ended December 31, 2007, of which $780 thousand related to restricted stock that vested and was issued, resulting in a $214 thousand deferred tax asset at December 31, 2007. There was no tax benefit recognized related to the $56 thousand and $113 thousand of compensation expense for stock options for the years ended December 31, 2007 and 2006, respectively, as all the related options were incentive stock options and the tax benefit associated with disqualified incentive stock options is recognized by the Company only after such incentive stock options are exercised and disqualified.

The following table illustrates the effect on net income and income per share for the year ended December 31, 2005 as if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company's stock plans prior to adoption of SFAS No. 123(R) on January 1, 2006. No pro forma disclosures have been made for 2007 and 2006, as all stock-based compensation has been recognized in net income. For purposes of this pro forma disclosure and compensation expense recorded in the Company's consolidated financial statements, the value of the options is estimated using a Black-Scholes option pricing model and amortized to expense over the options' vesting periods. 

 (In thousands, except per share data)
 Year ended
 .................
 December 31, 2005
 .................
Net income, as reported $15,208
Deduct: Total stock-based
 employee compensation
 expense determined under
 fair value based method
 for all awards, net of
 related tax effects (3,018)
 .......
Proforma net income $12,190
 .......
 .......

Income per share:
 Basic - as reported $1.26
 .....
 Basic - proforma $1.01
 .....
 Diluted - as reported $1.24
 .....
 Diluted - proforma $1.00
 .....

The per share weighted-average fair value of stock options granted during 2005 was $8.20 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0%, risk free interest rate of 3.60%-4.31%, expected stock volatility of 39%-41% and expected life of approximately 3.9 years.

Stock-based employee compensation expense under the fair value method for the year ended December 31, 2005 includes $3.7 million which represents the entire fair value of 449 thousand options granted to employees and directors in 2005, all of which had an exercise price equal to or greater than the market value of the common stock on the date of the grants, as those options were vested as of the date of the grants.

The Company has placed exclusive reliance on historical volatility in its estimate of expected volatility. The Company used a sequential period of historical data equal to the expected term (or expected life) of the options using a simple average calculation based upon the daily closing prices during the aforementioned period.

The expected life (years) represents the period of time for which the options granted are expected to be outstanding. This estimate was derived from historical share option exercise experience, which management believes provides the best estimate of the expected term.

Accumulated Other Comprehensive Income ......................................

Accumulated other comprehensive income ("comprehensive income") refers to revenues, expenses, gains and losses that under U.S. generally accepted accounting principles are included in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders' equity, net of tax. The Company's comprehensive income is composed of net income and unrealized gains and losses on foreign currency translation adjustments.

(2) Terminated Merger .................

On February 20, 2006, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Coherent, Inc. ("Coherent"). Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of common stock of the Company would have been automatically converted into the right to receive $30.00 per share in cash. The Merger was conditioned upon, among other things, the adoption of the Merger Agreement by the stockholders of the Company pursuant to applicable law, the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and obtaining material foreign antitrust approvals reasonably determined by Coherent to be required.

On April 4, 2006, the stockholders of the Company voted to adopt the Merger Agreement providing for the acquisition of the Company by Coherent. On May 9, 2006, Coherent received U.S. antitrust approval to acquire the Company. On October 25, 2006 the German Federal Cartel Office issued a prohibition order on the merger. On November 1, 2006, the Merger Agreement between the Company and Coherent was terminated.

In connection with the merger, the Company incurred $2.2 million of expenses, which consist primarily of legal and other professional fees, including $200 thousand for the law firm of a then director of the Company for reimbursement of expenses by the director's law firm in connection with the merger. Such costs, which were previously separately disclosed as non- operating expense in the 2006 consolidated statement of income have been reclassified to operating expenses. In the third quarter of 2006, as a result of effectively addressing all merger-related matters while the announced merger was pending for eight months and as payment in lieu of options that, but for the proposed merger, would have been granted towards the end of 2005, an executive of the Company was awarded $1.5 million of compensation, of which the payment of $1.0 million was subject to the attainment of specified Company performance criteria that were achieved as of December 31, 2006. Such compensation, along with $1.4 million of deferred executive compensation awarded for prior services during the third quarter of 2006 (under a deferred compensation plan approved by the Board of Directors), is included in operating expenses in the 2006 consolidated statement of income.

(3) Inventories ...........

Inventories consist of the following (In thousands): 

 December 31,
 .......................
 2007 2006
 .......... ..........

 Raw materials $ 18,421 $ 18,584
 Work-in-process 8,206 9,410
 Finished goods 5,064 4,907
 Consigned inventory 2,101 2,005
 .......... ..........
 $ 33,792 $ 34,906
 .......... ..........
 .......... ..........
 .......... ..........
(4) Property, Plant and Equipment
 .............................

Property, plant and equipment at cost consists of the following (In thousands): 

 December 31,
 ................
 Useful life 2007 2006
 ........... ....... .......

Land 0 $ 4,711 $ 4,659
Buildings 30 years 20,240 20,067
Leasehold improvements Lease term 814 715
Fixtures and computer equipment 3-10 years 3,118 2,898
Machinery and equipment 3-10 years 7,864 7,120
Laboratory equipment 3-10 years 4,086 3,707
 ....... .......
 40,833 39,166
Less accumulated depreciation
 and amortization 16,154 13,663
 ....... .......
 $24,679 $25,503
 ....... .......
 ....... .......

Depreciation and amortization expense aggregated approximately $2.6 million, $2.7 million and $2.9 million for the years ended December 31, 2007, 2006 and 2005, respectively.

(5) Goodwill ........

The change in the net carrying amount of goodwill for the years ended December 31, 2007 and 2006 is attributable to the change in foreign currency exchange rates used to translate the goodwill contained in the financial statements of foreign subsidiaries.

(6) Income Taxes ............

Pre-tax income for the years ended December 31, 2007, 2006, and 2005 was comprised of domestic income of $24.1 million, $20.6 million and $20.6 million, respectively, and foreign income
(loss) of $570 thousand, $(177) thousand, and $77 thousand, respectively.

The provision for income taxes consists of (In thousands): 

 Year ended December 31,
 .........................
 2007 2006 2005
 ....... ....... .......
Current:
 Federal $ 6,120 $ 6,624 $ 4,088
 State and local 896 545 712
 Foreign (78) 46 41
 ....... ....... .......
 6,938 7,215 4,841
 ....... ....... .......
Deferred:
 Federal and state (25) (697) 622
 Foreign 0 (95) 0
 ....... ....... .......
 (25) (792) 622
 ....... ....... .......
 $ 6,913 $ 6,423 $ 5,463
 ....... ....... .......
 ....... ....... .......

The effective income tax rate differed from the statutory Federal income tax rate due to the following items (In thousands): 

 Year ended December 31,
 .........................
 2007 2006 2005
 ....... ....... .......

Taxes at statutory Federal
 income tax rate $ 8,625 $ 7,155 $ 7,235
State income taxes, net of
 Federal benefit 582 546 464
Tax credits (686) (498) (426)
QPAI / ETI benefit (479) (868) (825)
Change in valuation allowance (389) (8) 75
Foreign tax rate differential (28) 13 15
Non-taxable income (387) (144) (248)
Settlement of and change in tax
 contingencies (194) (228) (655)
Non-deductible expenses 44 550 42
Other (175) (95) (214)
 ....... ....... .......
 $ 6,913 $ 6,423 $ 5,463
 ....... ....... .......
 ....... ....... .......

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2007 and 2006 are as follows (In thousands): 

 December 31,
 .................
 2007 2006
 ....... ........
Deferred tax assets:
 Excess of tax over financial statement
 basis of inventory $ 1,533 $ 1,516
 Allowance for doubtful accounts 184 153
 State credit carryforward 414 404
 Accrued warranty costs 169 137
 Other accrued expenses 274 230
 Deferred compensation expenses 553 495
 Stock-based compensation expenses 214 0
 Benefits of foreign net operating
 loss carryforwards 3,343 3,603
 ........ ........
 Total deferred tax assets 6,684 6,538
 Less valuation allowance (2,808) (3,912)
 ........ ........
 3,876 2,626
 ........ ........
Deferred tax liabilities:
 Plant and equipment depreciation (200) (270)
 Goodwill amortization (4,691) (3,396)
 ........ ........
Total deferred tax liabilities (4,891) (3,666)
 ....... .......
Net deferred tax liabilities $(1,015) $(1,040)
 ........ ........
 ........ ........

As of December 31, 2007, the Company has foreign tax net operating loss carryforwards of $9.4 million (6.4 million Euro) in Germany, $1.0 million (692 thousand Euro) in France, $179 thousand in the U.K. and $350 thousand in Japan. A valuation allowance of $2.8 million, as of December 31, 2007 has been provided against a portion of the state credit carryforward and the Company's net operating loss carryforwards in Germany, the U.K. and France. There can be no assurance that the Company will generate sufficient taxable earnings in future years to fully realize the tax benefits associated with foreign net operating loss carryforwards in Germany, France and the U.K. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the other deferred tax assets.

Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $2.0 million, at December 31, 2007. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credit carryforwards would be available to reduce some portion of the U.S. tax liability. Foreign currency translation adjustments are not adjusted for income taxes, as they relate to indefinite investments in non-U.S. subsidiaries.

On January 1, 2007, the Company adopted FASB Interpretation No.
("FIN") 48, Accounting for Uncertainty in Income Taxes-an Interpretation of SFAS No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in an income tax return. FIN 48 provides that unrecognized tax benefits should be based on the facts, circumstances and information available at each balance sheet date and that subsequent changes in judgment should be based on new facts and circumstances and any resulting change in the amount of unrecognized tax benefit should be accounted for in the interim period in which the change occurs. The adoption of FIN 48 had no impact on the Company's consolidated financial statements.

The aggregate amount of unrecognized tax benefits included in liabilities was as follows (in thousands): 

Balance at January 1, 2007 $1,725
 Impact of tax positions taken during 2007 35
 Gross decrease related to tax positions
 taken prior to 2007 (81)
 Gross increase related to tax positions
 taken prior to 2007 111
 Decrease from settlements with taxing authorities 0
 Reduction as a result of a lapse of the
 applicable statute of limitations (259)
 ......
Balance at December 31, 2007 $1,531
 ......
 ......

The decrease in the liability for tax positions taken prior to 2007 was for the reversal of a liability for previously unrecognized tax positions when a tax return was subsequently filed excluding the uncertain tax position.

All unrecognized tax benefits, if recognized, would affect the effective tax rate. The liability for unrecognized tax benefits includes accrued interest for tax positions, which either do not meet the more-likely-than-not recognition threshold or where the tax benefit is measured at an amount less than the tax benefit claimed or expected to be claimed on an income tax return. At December 31, 2007 and 2006, accrued interest on uncertain tax positions was approximately $205 thousand and $180 thousand, respectively.

Interest expense recognized in the statement of income related to liabilities for unrecognized tax benefits for the year ended December 31, 2007 was $71 thousand.

Interest expense related to income tax liabilities recognized in accordance with the provisions of FIN 48 is included in income tax expense, consistent with the Company's historical policy.

With a few exceptions, the Company is no longer subject to federal, state or local income tax audits by taxing authorities for years before 2004. The most significant jurisdictions in which the Company is required to file income tax returns include the states of California, Massachusetts and New York. As of December 31, 2007, the Company is being audited by the Internal Revenue Service for the tax years ended December 31, 2005 and 2006. Although the Company believes the probable outcome of these audits will not materially affect the Company's consolidated financial statements, the ultimate resolution of the audits is uncertain and, therefore, the Company cannot estimate the impact, if any, on its unrecognized tax benefits.

(7) Accrued Expenses and Other Current Liabilities ..............................................

Accrued expenses and other current liabilities consist of the following (In thousands): 

 December 31,
 .................

 2007 2006
 ........ ........
 Salaries, wages, commissions
 and bonuses $ 2,592 $ 3,396
 Accrued vacation/holiday/sick pay 965 949
 Deferred revenue 230 214
 Customer deposits 750 541
 Accrued warranty costs 846 754
 Professional fees payable 365 183
 Other 1,368 865
 ........ ........
 $ 7,116 $ 6,902
 ........ ........
 ........ ........

(8) Stockholders' Equity
 ....................

 Stock Option Plans
 ..................

In 1990, the Company adopted a stock option plan (the "Plan") which provided for the granting of incentive stock options and non- incentive stock options to certain key employees, including officers and directors, to purchase an aggregate of 2,000,000 shares of common stock, as amended, at prices and terms determined by the Board of Directors. Options granted under the Plan, which terminated on July 30, 2000, may be exercisable for a period of up to ten years. All options granted to employees under the Plan have exercise prices equal to the market value of the stock on the date of grant, vest ratably over three or five years and expire either five or ten years from the date of grant.

In 1998, the Company adopted a stock option plan (the "1998 Plan") which provides for the granting of incentive stock options and non-incentive stock options to certain key employees, including officers and directors, and consultants to purchase an aggregate of 1,000,000 shares of common stock at prices and terms determined by the Board of Directors. The exercise price per share of incentive stock options must be at least 100% of the market value of the stock on the date of the grant, except in the case of shareholders owning more than 10% of the outstanding shares of common stock, the option price must be at least 110% of the market value on the date of the grant, and for non- incentive stock options such price may be less than 100% of the market value of the stock on the date of grant. Options granted under the 1998 Plan, which terminates on April 8, 2008, may be exercisable for a period up to ten years. Through December 31, 2007, all options granted to employees under the 1998 Plan have exercise prices equal to the market value of the stock on the date of grant, vest ratably over three or five years, and expire either five or ten years from the date of grant. As of December 31, 2007, options for the purchase of 20,692 shares were available for future grant under the 1998 Plan.

In 2004, the Company adopted a stock option plan (the "2004 Plan") which provides for the granting of incentive stock options and non-incentive stock options to certain key employees, including officers and directors of the Company and consultants to purchase an aggregate of 1,000,000 shares of common stock at prices and terms determined by the Board of Directors. The option price per share of incentive stock options must be at least 100% of the market value of the stock on the date of the grant, except in the case of shareholders owning more than 10% of the outstanding shares of common stock, the option price must be at least 110% of the market value on the date of the grant, and for non-incentive stock options such price may be less than 100% of the market value of the stock on the date of grant. Options granted under the 2004 Plan, which terminates on February 23, 2014, may be exercisable for a period up to ten years. Through December 31, 2007, all options granted to employees under the 2004 Plan have exercise prices equal to the market value of the stock on the date of grant, vest immediately, and expire ten years from the date of grant. Although there were 445,000 shares of common stock available for issuance under the 2004 Plan, when the 2006 option plan discussed below was approved, the Company agreed to discontinue granting options under the 2004 Plan.

In 2006, the Company's shareholders approved a stock option / stock issuance plan (the "2006 Plan"), which provides for an aggregate of up to 750,000 shares of common stock, which may be directly issued to eligible participants, granted as incentive stock options to employees of the Company or granted as non-statutory stock options to employees, including officers and directors of the Company, as well as to certain advisors and consultants. Shares of common stock issued under the 2006 Plan may, in the discretion of the Company's Compensation Committee ("the Committee"), be fully and immediately vested upon issuance or may vest in one or more installments over the participant's period of service and / or upon attainment of specified performance objectives. The exercise price for the common stock underlying the options is determined by the Committee, but in no event shall it be less than 100% of the fair market value of the Company's common stock on the date the option is granted (110% in the case of incentive stock options granted to optionees who own more than 10% of the voting power of all classes of stock of the Company). No option granted under the 2006 Plan may be exercised after the expiration of the option, which may not, in any case, exceed ten years from the date of grant (five years in the case of incentive options granted to persons who own more than 10% of the voting power of all classes of the stock of the Company). Options granted under the 2006 Plan are exercisable on such basis as determined by the Committee, and become fully exercisable upon the sale or merger of the Company, as defined in the 2006 Plan. As of December 31, 2007, no options were granted and 124,847 restricted common shares were awarded under the 2006 Plan.
A summary of activity related to the Company's stock option / stock issuance plans is as follows: 

 Stock Weighted
 Number of Options' Average Aggregate
 restricted Number of Weighted Remaining Intrinsic
 shares (in stock options Average Contractual Value
 thousands) (in thousands) Exercise Price Term (in years) (in thousands)
 .......... .............. .............. ............... ..............

Outstanding at December 31, 2004 0 1,002 $ 19.37
Granted 0 449 $ 22.60
Exercised 0 (2) $ 15.89
Cancelled 0 (8) $ 19.79
 .......... ..............
Outstanding at December 31, 2005 0 1,441 $ 20.38
Granted 0 0 $ 0
Exercised 0 (142) $ 10.05
Cancelled 0 0 $ 0
 .......... ..............
Outstanding at December 31, 2006 0 1,299 $ 21.51
Granted 125 0 $ 0
Restricted stock vested/
 Options exercised (83) (129) $ 13.03
Cancelled 0 (31) $ 32.47
 .......... ..............
Outstanding at December 31, 2007 42 1,139 $ 22.18 5.26 $ 6,421
 .......... ..............
 .......... ..............
Shares / Options expected to vest
 at December 31, 2007 42 2 $ 29.70 6.23 $ 0
Exercisable at December 31, 2007 0 1,137 $ 22.16 5.26 $ 6,421

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company's closing common stock price on the last trading day of 2007 and the exercise price, multiplied by the number of in-the- money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2007. This amount changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised for the years ended December 31, 2007, 2006 and 2005 was $1.4 million, $2.3 million and $20 thousand, respectively. The grant date fair value of all 125 thousand restricted shares granted was $26.00 per share and the aggregate intrinsic value of outstanding restricted shares at December 31, 2007 is $1.1 million.

As of December 31, 2007, there was $15 thousand of unrecognized stock-based compensation expense related to non-vested stock options, which is expected to be recognized over a weighted average period of approximately 1.2 years and $477 thousand of unrecognized stock-based compensation expense related to non- vested restricted stock, which is expected to be recognized over a weighted average period of approximately 1.5 years.

When an option is exercised, the Company issues new shares of common stock.

In 2007 and 2006, 15 thousand and 29 thousand shares of common stock, respectively, were used by employees to exercise options. Such shares, which had a market value of $420 thousand and $770 thousand, respectively, were retired. No shares were used by employees to exercise options in 2005.

At December 31, 2007, 2006 and 2005, a total of 1,137 thousand, 1,289 thousand and 1,410 thousand options were exercisable at weighted average exercise prices of $22.16, $21.51 and $20.37, respectively, and at December 31, 2007 options for the purchase of an aggregate of 646 thousand common shares were available for future grants under the 1998 Plan and 2006 Plan.

The options outstanding as of December 31, 2007 are summarized as follows: 

 Number of Weighted
 options average Options
Exercise outstanding contractual Exercisable
 price (In thousands) remaining life (In thousands)
....... .............. .............. ..............

$ 6.50 2 0.80 years 2
$ 7.00 1 0.48 years 1
$ 13.06 21 1.47 years 21
$ 15.15 262 4.13 years 262
$ 16.66 29 4.78 years 29
$ 19.71 13 3.30 years 13
$ 22.16 58 5.38 years 58
$ 22.59 398 7.11 years 398
$ 23.03 5 7.79 years 5
$ 23.04 4 7.98 years 4
$ 24.63 161 2.22 years 161
$ 26.51 40 7.00 years 40
$ 27.41 20 6.79 years 20
$ 29.00 20 2.42 years 20
$ 29.70 5 6.23 years 3
$ 34.68 100 6.33 years 100
 .............. ..............

 1,139 5.26 years 1,137
 .............. ..............
 .............. ..............

Shares Reserved for Issuance
............................

At December 31, 2007, the Company had reserved 1,826,167 authorized and unissued common shares for the following purposes (In thousands): 

 Shares
 ......
 1990 Stock option plan 40
 1998 Stock option plan 627
 2004 Stock option plan 492
 2006 Stock option /issuance plan 667

(9) Deferred Compensation
 .....................

The Company has a deferred compensation plan whereby certain compensation earned by a participant can be deferred and, if funded, the related assets are placed in an employee benefit trust, also known as a "rabbi trust." Under the deferred compensation plan, the participant may choose from several investment designations. At December 31, 2007, the Company has $1.5 million of accrued deferred compensation, which was funded and the related assets are included in non-current assets in the accompanying consolidated balance sheet. The assets in the rabbi trust at December 31, 2007 are marketable securities that are classified as trading securities and recorded at their fair value with unrealized gains and losses reported in net income.

(10) Income Per Share ................

The following is a reconciliation of the numerators and denominators of the basic and diluted income per share computations (In thousands, except per share amounts): 

 2007
 ..................................
 Net Income Shares Per-Share
 (Numerator) (Denominator) Amount
 .......... ............. .........
Basic Income Per Share $17,732 11,864 $1.49
Effect of Dilutive Securities:
 Stock Options and
 Restricted Stock 267
 .............
Diluted Income Per Share $17,732 12,131 $1.46
 .......... ............. .........
 .......... ............. .........

 2006
 ..................................
 Net Income Shares Per-Share
 (Numerator) (Denominator) Amount
 .......... ............. .........
Basic Income Per Share $14,019 12,071 $1.16
Effect of Dilutive Securities:
 Stock Options and
 Restricted Stock 417
 .............
Diluted Income Per Share $14,019 12,488 $1.12
 .......... ............. .........
 .......... ............. .........

 2005
 ..................................
 Net Income Shares Per-Share
 (Numerator) (Denominator) Amount
 .......... ............. .........
Basic Income Per Share $15,208 12,054 $1.26
Effect of Dilutive Securities:
 Stock Options and
 Restricted Stock 192
 .............
Diluted Income Per Share $15,208 12,246 $1.24
 .......... ............. .........
 .......... ............. .........

There were 145 thousand, 175 thousand, and 378 thousand unexercised stock options outstanding as of December 31, 2007, 2006 and 2005, respectively, not included as part of the diluted income per share calculations for 2007, 2006 and 2005, respectively, because their effect would have been antidilutive for the periods presented.

(11) Treasury Stock ..............

Effective November 1, 2006, the Company's Board of Directors authorized a stock buy-back program for the repurchase of up to 2,000,000 shares of its common stock. Purchases have occurred and will continue to occur from time to time in open market transactions or privately negotiated transactions at the Company's discretion, including the quantity, timing and price thereof. This program replaced the program that the Board of Directors had authorized in January 1998. During the years ended December 31, 2007 and 2006, the Company repurchased 969,368 and 79,500 shares of common stock for $25.4 million and $2.0 million, respectively. As of December 31, 2007, the Company repurchased 1,048,868 shares of common stock under the program as treasury stock and all of its treasury stock had been retired.

(12) Employee Benefit Plan .....................

The Company has a voluntary defined contribution plan, which complies with Section 401(k) of the Internal Revenue Code, as amended. The plan permits employees to make a voluntary contribution of pretax dollars, with a matching contribution by the Company equal to 50% of an employee's basic contribution to the plan up to a maximum of 3% of salaries. Company contributions to the plan were approximately $536 thousand, $558 thousand and $546 thousand in 2007, 2006 and 2005, respectively.

(13) Commitments and Contingencies .............................

Operating Leases

The Company and its subsidiaries lease certain buildings, vehicles and equipment under non-cancelable operating leases. At December 31, 2007, the future minimum lease payments under non- cancelable operating leases are as follows (In thousands): 

2008 $ 1,967
2009 1,204
2010 1,008
2011 764
2012 669
Thereafter 2,443
 .........
 $ 8,055
 .........
 .........

Rent expense, which is recorded on a straight line basis over the lease term, was $1.7 million for the year ended December 31, 2007 and $1.4 million for each of the years ended December 31, 2006 and 2005.

Employment Agreements
.....................

Excel has entered into employment agreements with certain key executives that provide for severance upon termination without cause, as of December 31, 2007, aggregating approximately $5.6 million. In addition, certain employment agreements include a change of control clause that call for payments equal to the product of (a) 2.99 and (b) the employee's annualized includable compensation as defined under Internal Revenue Code Section 280 (G).

Contingencies
.............

The Company and its subsidiaries are subject to various claims, which have arisen in the normal course of business. The impact of the final resolution of these matters on the Company's results of operations or liquidity in a particular reporting period is not known. Management is of the opinion, however, that the ultimate outcome of such matters will not have a material adverse effect upon the Company's financial condition or liquidity.

(14) Foreign and Domestic Operations and Export Sales ................................................

The Company conducts its business in the following geographic regions that are aggregated into one reportable segment. The Company provides photonics-based solutions, primarily consisting of laser systems and electro-optical components, in a broad range of commercial, scientific research and semiconductor applications. The Company's product lines have similar long- term economic characteristics and utilize similar manufacturing processes. The Company distributes, sells and services its products to similar customers in all regions. Information concerning foreign and domestic operations, including net sales by origin is as follows (In thousands): 

 As of or the year ended
 December 31,
 2007 2006 2005
 ......... ......... .........

Net sales and services to
 unaffiliated customers:
 United States operations $ 120,193 $ 116,984 $ 98,997
 European operations 32,296 28,908 28,867
 Asian operations 7,534 8,604 9,853
 ......... ......... .........
 $ 160,023 $154,496 $ 137,717
 ......... ......... .........
 ......... ......... .........
Operating income (loss):
 United States operations $ 20,826 $ 17,704 $ 19,014
 European operations 204 (356) (112)
 Asian operations 287 158 636
 ......... ......... .........
 $ 21,317 $ 17,506 $ 19,538
 ......... ......... .........
 ......... ......... .........
Identifiable assets:
 United States operations $ 149,935 $ 154,439 $ 137,694
 European operations 24,131 21,863 20,413
 Asian operations 6,466 5,677 5,931
 ......... ......... .........
 $ 180,532 $ 181,979 $ 164,038
 ......... ......... .........
 ......... ......... .........

Identifiable assets are those tangible and intangible assets used in operations in each geographic area.

During the years ended December 31, 2007, 2006 and 2005, the Company had foreign and export sales of approximately $100.9 million, $96.8 million and $83.9 million, representing 63%, 63% and 61%, respectively, of total net sales and services.

Of the net sales and services to non-U.S. customers above, net sales and services to customers in Germany accounted for approximately $24.6 million, $20.1 million and $19.8 million of total consolidated net sales and services for 2007, 2006, and 2005, respectively, and net sales and services to customers in Japan accounted for approximately $16.6 million, $17.0 million and $15.3 million of total consolidated net sales and services for 2007, 2006 and 2005, respectively. No other individual foreign country accounted for more than 10% of total consolidated net sales and services in 2007, 2006 or 2005.

No single customer accounted for more than 10% of the Company's net sales and services in 2007, 2006 and 2005. One accounts receivable from a customer was 6.6% of the Company's total accounts receivable at December 31, 2007 and no account receivable from a customer exceeded 5% of the Company's total accounts receivable at December 31, 2006.

(15) Related Party Transactions ..........................

During 2006 and 2005, one former director of the Company provided services to the Company as legal counsel, and the Company paid $219 thousand and $51 thousand, respectively for legal services rendered by the director's law firm. As of December 31, 2007, $5 thousand was due to the former director's law firm.

Schedule II
...........

EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts

Years ended December 31, 2007, 2006 and 2005 

 Column A Column B Column C Column D Column E
 ........ ........ ........ ........ ........
 (Recoveries)
 Balance at Additions charged (Deductions) Balance at
 beginning to cost and additions - end of
 Description of period expenses describe period
............... ......... ................. ........... ..........

Allowance for doubtful
accounts (In thousands):
Year ended December 31,: 

2007 $ 784 $ 147 $ (98) (1) $ 833

2006 $ 810 $ (16) $ (10) (1) $ 784

2005 $ 796 $ 252 $ (238) (1) $ 810

(1) Uncollectible accounts written off, net of recoveries.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.

Management's Report on Internal Control Over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of such management, including the CEO and CFO, an evaluation of the effectiveness of the Company's internal control over financial reporting was conducted based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control - Integrated Framework, the Company's management concluded that its internal control over financial reporting was effective as of December 31, 2007.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the quarterly period ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

........

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by this Item 10 is incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which proxy statement is anticipated to be filed within 120 days after the end of the Company's year ended December 31, 2007.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item 11 is incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which proxy statement is anticipated to be filed within 120 days after the end of the Company's year ended December 31, 2007.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by this Item 12 is incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which proxy statement is anticipated to be filed within 120 days after the end of the Company's year ended December 31, 2007.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by this Item 13 is incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which proxy statement is anticipated to be filed within 120 days after the end of the Company's year ended December 31, 2007.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this Item 14 is incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which proxy statement is anticipated to be filed within 120 days after the end of the Company's year ended December 31, 2007.

PART IV

.......

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

(a) The following documents are filed as part of this report:

1. Consolidated Financial Statements (included in Part II, Item 8):

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2007 and 2006

Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005.

Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2007, 2006 and 2005.

Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005.

Notes to Consolidated Financial Statements

2. Consolidated Financial Statement Schedule (included in Part II Item 8)*

Schedule
........

II Valuation and Qualifying Accounts

3. Exhibits included herein:

See Exhibit Index below for exhibits filed as part of this Annual Report on Form 10-K.

.............................

* Financial statement schedules other than those listed are omitted because they are either not applicable or not required, or because the information sought is included in the Consolidated Financial Statements or the Notes thereto.

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) 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.

EXCEL TECHNOLOGY, INC. 

 By: /s/ Antoine Dominic
 ........................................
 Antoine Dominic, Chief Executive Officer

 By: /s/ Alice H. Varisano
 ...........................................
 Alice H. Varisano, Chief Financial Officer


Date: February 13, 2008

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. 

 Signature Title Date

/s/ J. Donald Hill Chairman of the Board February 13, 2008
..................... and Director
J. Donald Hill

/s/ Antoine Dominic Director, Chief Executive February 13, 2008
..................... Officer, President, and
Antoine Dominic Chief Operating Officer
 (Principal Executive Officer)

/s/ Alice H. Varisano Chief Financial Officer February 13, 2008
..................... (Principal Financial Officer)
Alice H. Varisano


/s/ Steven Georgiev Director February 13, 2008
.....................
Steven Georgiev


/s/ Donald Weeden Director February 13, 2008
.....................
Donald Weeden


/s/ Ira J. Lamel Director February 13, 2008
.....................
Ira J. Lamel

INDEX TO EXHIBITS 

 Exhibit
 Number Document
 ....... ........

 3.1 Restated Certificate of Incorporation dated
 November 13, 1990, as amended. Incorporated by reference
 to the Company's Registration Statement on Form S-1, File
 No. 33-39375.

 3.2 By-Laws, as amended. Incorporated by reference to the
 Company's Registration Statement on Form S-4,
 File No. 33-47440. Further amendments are incorporated by
 reference to the Company's report on Form 8-K, dated
 October 29, 2007, File No. 000-19306.

 4 Specimen Certificate for Company's Common Stock.
 Incorporated by reference to the Company's Registration
 Statement on Form S-1, File No. 33-39375.

 10.1 1990 Stock Option Plan, as amended. Incorporated by
 reference to the Company's Registration Statement on Form
 S-1, File No. 33-52612. ^

 10.2 Employment Agreement, dated as of October 10, 2000, between
 the Company and J. Donald Hill (Incorporated by reference
 to Exhibit 10(b) to the Company's Annual Report on
 Form 10-K for the year ended December 31, 2000), as amended
 by letter agreement, dated October 3, 2002 (Incorporated by
 reference to Exhibit 10(b) to the Company's Annual Report
 on Form 10-K for the year ended December 31, 2002), as
 further amended by letter agreements, dated March 11, 2005,
 March 21, 2005 and May 5, 2005 (Incorporated by reference
 to the Company's Current Reports on Form 8-K filed on March
 14, 2005, March 21, 2005 and May 6, 2005, respectively).^

 10.3 Employment Agreement, dated as of October 9, 2006, between
 the Company and Antoine Dominic. Incorporated by reference
 to Exhibit 10.3 to the Company's Annual Report on Form 10-K
 for the year ended December 31, 2006. ^

 10.4 1998 Stock Option Plan. Incorporated by reference as
 Exhibit A to the Company's Definitive Proxy Statement,
 dated April 27, 1998 for the Annual Meeting of Stockholders
 held on June 24, 1998.^

 10.5 2004 Stock Option Plan. Incorporated by reference to the
 Company's Registration Statement on Form S-8,
 File No. 333-117513.^

 10.6 Employment Agreement, dated as of February 15, 2007 between
 the Company and Alice Varisano. Incorporated by reference
 to Exhibit 10.6 to the Company's Annual Report on Form 10-K
 for the year ended December 31, 2006. ^

 10.7 2006 Stock Option / Stock Issuance Plan. Incorporated by
 reference to the Company's Registration Statement on Form
 S-8, File No. 333-140063. ^

 10.8 Form of Stock Issuance Agreement under the Company's 2006
 Stock Option / Stock Issuance Plan. Incorporated by
 reference to Exhibit 10.8 to the Company's Annual Report on
 Form 10-K for the year ended December 31, 2006. ^

 10.9 Form of Stock Purchase Agreement For Shares Not Fully
 Vested under the Company's 2006 Stock Option / Stock
 Issuance Plan. Incorporated by reference to Exhibit 10(b)
 to the Company's Annual Report on Form 10-K for the year
 ended December 31, 2006. ^

 10.10 Form of Stock Option Agreement under the Company's 2006
 Stock Option / Stock Issuance Plan. Incorporated by
 reference to Exhibit 10(b) to the Company's Annual Report
 on Form 10-K for the year ended December 31, 2006. ^

 14 Code of Ethics. Incorporated by reference to the Company's
 Form 10-K, dated March 15, 2004.

 21 List of subsidiaries.*

 23.1 Consent of KPMG LLP.*

 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
 Act of 2002.*

 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
 Act of 2002.*

 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
 Act of 2002, 18 U.S.C. Section 1350.*

 32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley
 Act of 2002, 18 U.S.C. Section 1350.*
`

* filed herewith
^ compensatory plan or arrangement

EXHIBIT 21

LIST OF SUBSIDIARIES 

Name of Subsidiary: Incorporated in:
................... ................
Cambridge Technology, Inc. Massachusetts
Continuum Electro-Optics, Inc. (d/b/a "Continuum") Delaware
Control Laser Corporation (d/b/a "Baublys-Control Laser") Florida
D Green (Electronics) Limited United Kingdom
Quantronix Corporation Delaware
Photo Research, Inc. Delaware
Synrad, Inc. Washington
The Optical Corporation California
Excel Technology Asia Sdn. Bhd. Malaysia
Excel Technology Europe GmbH Germany
Baublys GmbH (1) Germany
Excel Technology France S.A.S. (1) France
Excel Technology Japan Holding Co., Ltd. Japan
Excel Technology Japan K.K. (2) Japan
Excel Laser Technology Private Limited (3) India
Excel Technology Lanka (Private) Limited Sri Lanka
Excel Technology Italy Srl. (1) Italy

(1) A wholly-owned subsidiary of Excel Technology Europe GmbH
(2) A wholly-owned subsidiary of Excel Technology Japan Holding Co., Ltd.
(3) A joint venture in which Excel Technology, Inc. has a 50% equity ownership interest

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Excel Technology, Inc.:

We consent to the incorporation by reference in the registration statements (No. 33-71122, 333-59340, 333-117513 and 333-140063) on Form S-8 of Excel Technology, Inc. of our report dated February 13, 2008 with respect to the consolidated balance sheets as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007, and the related financial statement schedule and the effectiveness of internal control over financial reporting as of December 31, 2007, which report appears in the December 31, 2007 Annual Report on Form 10-K of Excel Technology, Inc. Our report refers to the adoption of FASB Interpretation No. 48, "Accounting For Uncertainty in Income Taxes - an Interpretation of SFAS No. 109", effective January 1, 2007, and Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment," effective January 1, 2006. 

/s/ KPMG LLP


Melville, New York
February 13, 2008

EXHIBIT 31.1

CERTIFICATION

I, Antoine Dominic, certify that:

1. I have reviewed this annual report on Form 10-K of Excel Technology, 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 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. 

 By: /s/ Antoine Dominic
 ....................................
 Antoine Dominic, Director, President,
 Chief Executive Officer, and
 Chief Operating Officer

Date: February 13, 2008

EXHIBIT 31.2

CERTIFICATION

I, Alice Varisano, certify that:

1. I have reviewed this annual report on Form 10-K of Excel Technology, 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 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. 

 By: /s/ Alice Varisano
 .......................
 Alice Varisano,
 Chief Financial Officer


Date: February 13, 2008

EXHIBIT 32.1

CERTIFICATION OF PERIODIC REPORT

I, Antoine Dominic, Chief Executive Officer of Excel Technology, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, 18 U.S.C. Section 1350, that, to my knowledge,:

(1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2007 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15. U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 

Dated: February 13, 2008

 /s/ Antoine Dominic
 .....................................
 Antoine Dominic, Director, President,
 Chief Executive Officer, and
 Chief Operating Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.

EXHIBIT 32.2

CERTIFICATION OF PERIODIC REPORT

I, Alice Varisano, Chief Financial Officer of Excel Technology, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, 18 U.S.C. Section 1350, that, to my knowledge,:

(1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2007 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15. U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 

Dated: February 13, 2008

 /s/ Alice Varisano
 .......................
 Alice Varisano,
 Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.

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