(Mark One)

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

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

(Exact name of registrant as specified in its charter)

Delaware		84-0846841
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1625 Sharp Point Drive, Fort Collins, CO		80525
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (970) 221-4670

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

Title of each class		Name of each exchange on which registered
Common Stock, $0.001 par value		NASDAQ Global Select Market

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yeso Noþ.

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

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

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

The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant was $813,409,490 as of June 29, 2007, based upon the price at which such common stock was last sold on such date.

43,732,707
(Number of shares of Common Stock outstanding as of March 12, 2008)

Part III of this Annual Report on Form 10-K incorporates information by reference from the registrant’s definitive proxy statement for its 2008 Annual Meeting of Stockholders, scheduled to be held on May 7, 2008. Except as expressly incorporated by reference, the registrant’s definitive proxy statement shall not be deemed to be a part of this Annual Report on Form 10-K.

 

 

ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS

		Page
PART I
ITEM 1. BUSINESS		1
ITEM 1A. RISK FACTORS		8
ITEM 1B. UNRESOLVED STAFF COMMENTS		14
ITEM 2. PROPERTIES		15
ITEM 3. LEGAL PROCEEDINGS		15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		15
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		15
ITEM 6. SELECTED FINANCIAL DATA		16
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		56
ITEM 9A. CONTROLS AND PROCEDURES		56
ITEM 9B. OTHER INFORMATION		57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT		57
ITEM 11. EXECUTIVE COMPENSATION		57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		57
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES		57
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES		57
SIGNATURES		61
Advisory Services Agreement
Subsidiaries
Consent of Grant Thornton LLP
Certification of Chief Executive Officer - Section 302
Certification of Principal Financial Officer - Section 302
Certification of Chief Executive Officer - Section 906
Certification of Principal Financial Officer - Section 906

          Unless the context otherwise requires, as used in this Form 10-K, references to “Advanced Energy”, “the Company”, “we”, “us” or “our” refer to Advanced Energy Industries, Inc. and its consolidated subsidiaries.

     We develop innovative power and control technologies that enable high-growth, plasma-based thin-film manufacturing processes worldwide, including semiconductors, flat panel displays, data storage products, solar cells, architectural glass, and other advanced product applications. We also develop grid-connect inverters for the solar energy market.

     Our installed base enables recurring revenue opportunities as we sell spare parts, repair services and field upgrades worldwide through our customer service and technical support organization.

     We provide solutions to a diverse range of markets and geographic regions, with the semiconductor capital equipment industry being our largest market. Sales to customers in the semiconductor capital equipment industry comprised 69% of our sales in each of 2006 and 2007 and 63% of our sales in 2005. Other markets we serve include flat panel display, data storage, architectural glass, solar and other industrial thin-film manufacturing.

     We incorporated in Colorado in 1981 and reincorporated in Delaware in 1995. Our executive offices are located at 1625 Sharp Point Drive, Fort Collins, Colorado 80525, and our telephone number is 970-221-4670.

          Our products fall into five categories: Power Conversion, Flow Control Technologies, Solar Inverter, Thermal Instrumentation, and Source Technology. Our products are designed to enable new process technologies, improve productivity and lower the cost of ownership for our customers.

     Our power conversion systems include direct current (DC), high power, low and mid frequency, and radio frequency (RF) power supplies, matching networks and RF instrumentation. Our power conversion systems refine, modify and control the raw electrical power from a utility and convert it into power that is customized, predictable and repeatable. Our power conversion systems are primarily used by semiconductor and similar thin-film manufacture including flat panel display, data storage and architectural glass manufacturers in the following applications: physical vapor deposition; chemical vapor deposition; reactive sputtering; electroplating; plasma vacuum processes; oxide, poly and conductor etch; and carbon dioxide laser excitation.

     Our flow control technology products include thermal mass flow controllers (MFCs), pressure-based MFCs, liquid MFCs, liquid vapor delivery systems, pressure control systems and ultrasonic control systems. Our flow control technology products control or monitor the flow of high-purity liquids, liquid vapor, and gases encompassing a wide range of input pressures. Our flow control technology products are primarily used in semiconductor, flat panel display manufacturing and similar thin-film applications, fiber optics, safe delivery systems and silica industries.

SOLAR INVERTER

     Our solar inverter products include a line of photovoltaic (PV) energy inverters that offer an advanced, transformerless, grid-tie PV solution for commercial system installations. Our PV inverter is designed to convert raw, solar DC power from standard solar arrays to high-quality AC grid electricity enabling commercial installations to produce targeted output power levels with fewer solar modules.

THERMAL INSTRUMENTATION

     Our thermal instrumentation products, used primarily in the semiconductor industry, provide thermal management and control solutions for applications in which time-temperature cycles affect productivity and yield. They are used in physical vapor deposition, chemical vapor deposition, rapid thermal processing and other semiconductor applications requiring non-contact temperature measurement.

SOURCE TECHNOLOGY

     Our source technology products include plasma and ion beam sources which are used in the direct deposition of thin films of diamond-like carbon, ion-assisted deposition, ion beam etching, optical coating, industrial coating, pre-cleaning and chamber cleaning. Our plasma-source platforms are complete systems, including a remote plasma source, a power supply and an active matching network.

Markets, Applications and Customers

MARKETS

     The following is a discussion of the major markets for our products.

     SEMICONDUCTOR CAPITAL EQUIPMENT MARKET. The majority of our sales have been to customers in the semiconductor capital equipment industry for incorporation into equipment used in the major semiconductor processing steps that make integrated circuits, as well as to other equipment manufacturers discussed below. Sales to customers in the semiconductor capital equipment industry comprised 69% of our sales in each of 2007 and 2006 and 63% of our sales in 2005. Our power conversion systems provide the energy to enable chemical reaction for thin-film processes such as deposition and etch. Our flow control technology products control the fluid or gas being delivered to ensure accuracy, repeatability and stability. Our thermal instrumentation products measure the temperature of the process chamber. Our source technology products optimize chemical vapor deposition (CVD) clean, deposition and etch processes. Precise control over the energy delivered to plasma-based processes enables the production of integrated circuits with reduced feature sizes and increased speed and performance. We anticipate that the semiconductor capital equipment industry will continue to be a substantial part of our business for the foreseeable future.

     FLAT PANEL DISPLAY CAPITAL EQUIPMENT MARKET. We sell our products to manufacturers of flat panel displays and flat panel projection devices, which have thin film deposition processes similar to those employed in manufacturing integrated circuits. Flat panel technology produces bright, sharp, large, color-rich images on flat screens for products ranging from hand-held devices to laptop and desktop computer monitors to plasma and liquid crystal display (LCD) screen televisions. The transition to larger panel sizes and higher display resolution is driving the need for tighter process controls to reduce manufacturing costs and defects. There are three major types of flat panel displays: LCD’s, field emitter displays, and gas plasma displays. We sell our products to all of the flat panel markets.

     SOLAR CAPITAL EQUIPMENT MARKET. We sell our products to original equipment manufacturers (OEMs) and manufacturers of solar cells who use our products to produce thin-films using both bulk silicon substrates as

well as glass or metal substrates. The majority of solar cell manufacturing currently uses a bulk silicon wafer as the substrate, which requires both CVD and physical vapor deposition (PVD) thin film processes. The solar cell industry also has developed processes for manufacturing solar cells on non-silicon substrates such as glass, plastic or metal using thin film processes that will also employ CVD and PVD tools. Our RF and DC power supply and flow products are designed for use in these CVD and PVD tools. The CIGS, CIS and CADtel solar cell manufacturing process also requires thin film processing which requires our power supply and flow products.

     DATA STORAGE CAPITAL EQUIPMENT MARKETS. We sell products to manufacturers of data storage equipment and data storage devices for use in producing a variety of products, including CDs and DVDs (read-only, one-time recordable and rewriteable); computer hard discs, including both media and thin-film heads; and magneto-optical storage media. These products use a PVD process to produce optical and magnetic thin-film layers as well as a protective-wear layer. In this market, the trend towards higher recording densities requires thinner and more precise films. The use of equipment incorporating magnetic media to store analog and digital data expands with the growth of the laptop, desktop and workstation computer markets and the consumer electronics audio, video, gaming and entertainment markets.

     ARCHITECTURAL GLASS CAPITAL EQUIPMENT MARKET. We sell our products to OEMs and to producers of Low Emissivity or Low-E architectural glass. This glass is used in commercial and residential buildings to reflect heat and cold through the use of thin films coated directly on the glass which reduces the energy used in the building. The thin film deposition process employs PVD tools which use our DC power products. This market is driven by end market demand for glass related to the residential and commercial construction industry.

     INDUSTRIAL PRODUCTS CAPITAL EQUIPMENT MARKETS. We sell our products to OEMs and producers of end products who use thin films in a variety of industrial markets. Thin films of diamond-like coatings and other materials are applied to products in plasma-based processes to strengthen and harden surfaces on such diverse products as tools, automotive parts and various other end products. The advanced thin-film production processes allow precise control of various optical and physical properties, including color, transparency and electrical and thermal conductivity. The improved adhesion and high-film quality resulting from plasma-based processing make it the preferred method of applying the thin films. Many of these thin-film industrial applications require power levels substantially greater than those used in our other markets.

     COMMERCIAL SOLAR INVERTER MARKET. We sell a commercial solar inverter to integrators who integrate our Solaron™ inverter into their solar array solutions. The Solaron™ converts DC power, which is produced by the solar panels in the array, into AC power for consumption on-site or to be sold back through the public utility grid. The commercial solar inverter market is characterized by installations generating power above 100kw. We introduced the 333kw Solaron™ product in September 2007.

          Our products are sold worldwide to more than 100 OEMs and directly to more than 500 end users. Our ten largest customers accounted for 61%, of our sales in 2007, 63% of our sales in 2006 and 57% of our sales in 2005. We expect that sales of our products to these customers will continue to account for a large percentage of our sales for the foreseeable future.

          Applied Materials Inc., our largest customer, accounted for 29% of our sales in 2007, 30% of our sales in 2006 and 23% of our sales in 2005. Ulvac, Inc., our largest customer in the flat panel display industry, accounted for 11% of our sales in 2005. With the exceptions of Applied Materials and Ulvac, no single customer accounted for more than 10% of our sales during 2007, 2006 or 2005.

     Our backlog decreased 18% from $56 million at December 31, 2006 to $46 million at December 31, 2007. We schedule production of our systems based on order backlog and customer commitments. Backlog includes orders scheduled to ship in the following twelve months for which written authorizations have been accepted and revenue has not been recognized. Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular date is not indicative of actual sales for any succeeding period. Delays in delivery schedules and/or a reduction of backlog during any particular period could have a material adverse effect on our business and results of operations.

     We sell our products primarily through direct sales personnel to customers in the United States, Europe and Asia. Our sales personnel are located at our headquarters in Fort Collins, Colorado, and in sales offices in San Jose, California; Austin Texas; and Vancouver, Washington. To serve customers in Asia and Europe, we have offices in Shanghai, China; Bicester, England; Filderstadt, Germany; Hachioji, Japan; Sungnam City, South Korea; and Hsinchu and Taipei, Taiwan. These offices have primary responsibility for sales in their respective markets. We also

have sales representatives and distributors inside and outside the United States. We maintain customer service offices at many of the locations listed above, as well as other sites chosen considering our customer locations as we believe that customer service and technical support are important competitive factors and are essential to building and maintaining close, long-term relationships with our customers.

     The following table represents our net sales by geographic region and percentage of net sales for the years ended 2007, 2006 and 2005:

		Years Ended December 31,												Years Ended December 31,
		2007				2006				2005				2007				2006				2005
		(In thousands)
United States		$	207,265			$	238,468			$	163,657				54	%			58	%			50	%
Europe			42,051				41,760				34,228				11	%			10	%			11	%
Asia			135,383				130,514				127,597				35	%			32	%			39	%
Total sales		$	384,699			$	410,742			$	325,482				100	%			100	%			100	%

     See “Item 1A. Risk Factors” beginning on page 8 for a discussion of certain risks attendant to our foreign operations.

     Our manufacturing locations are in Shenzhen, China; Fort Collins, Colorado; Hachioji, Japan; and Vancouver, Washington. In 2005, we completed the realignment of our worldwide manufacturing infrastructure, with Shenzhen, China being the central high-volume manufacturing site. The rest of our manufacturing locations produce low volume, high end products, service and support.

     We manufacture different products at each facility. Our manufacturing activities consist of the assembly and testing of components and subassemblies, which are then integrated into our final products. Once final testing of all electrical and electro-mechanical subassemblies is completed, the final product is subjected to a series of reliability-enhancing operations prior to shipment to our customers. We purchase a wide range of electronic, mechanical and electrical components, some of which are designed to our specifications.

     We have a practice of seeking patent protection for inventions governing new products or technologies as part of our ongoing research, development and manufacturing activities. We currently hold 89 United States patents, 54 foreign-issued patents, and have over 100 patent applications pending in the United States, Europe and Asia. Generally, our efforts to obtain international patents have been concentrated in the industrialized countries of Europe and Asia, because there are other manufacturers and developers of power conversion and control systems in those countries as well as customers for those systems.

     Litigation may from time to time be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us, to defend us against claimed infringement of the rights of others or to determine the scope and validity of the proprietary rights of others. See “Item 1A. Risk Factors — We are highly dependent on our intellectual property.”

     The markets we serve are highly competitive and characterized by ongoing technological development and changing customer requirements. Significant competitive factors in our markets include product performance, compatibility with adjacent products, price, quality and reliability and level of customer service and support. We believe that we currently compete effectively with respect to these factors, although we cannot assure that we will be able to compete effectively in the future.

     The markets in which we compete have seen an increase in global competition, especially from Asian and European-based equipment vendors. We have several foreign and domestic competitors for each of our product lines. Some of these competitors are larger and have greater resources than us. Our ability to continue to compete successfully in these markets depends on our ability to make timely introductions of system enhancements and new products. We expect our competitors will continue to improve the design and performance of their products and to introduce new products with competitive performance characteristics.

Operating Segment

     We operate and manage our business of manufacturing, marketing and servicing components and products for thin-film manufacturing processes as one segment. All segment financial information required by SFAS No. 131 is found in Note 15 Foreign Operations and Major Customers in the accompanying consolidated financial statements included in Part II, Item 8 of this Form 10-K.

Research and Development

     The market for our products is characterized by ongoing technological changes. We believe that continued and timely development of new highly differentiated products and enhancements to existing products to support OEM requirements is necessary for us to maintain a competitive position in the markets we serve Accordingly, we devote a significant portion of our personnel and financial resources to research and development projects and seek to maintain close relationships with our customers and other industry leaders in order to remain responsive to their product requirements. Research and development expenses were $50.4 million in 2007, $44.8 million in 2006 and $39.7 million in 2005, representing 13.1% of our sales in 2007, 12.2% of our sales in 2006 and 12.9% of our sales in 2005.

Number of Employees

     As of December 31, 2007, we had a total of 1,611 employees. There is no union representation of our employees, notwithstanding statutory organization rights applicable to our employees in China, and we have never experienced an involuntary work stoppage. We consider our employee relations to be good.

Effect of Environmental Laws

     We are subject to federal, state and local environmental laws and regulations, as well as the environmental laws and regulations of the foreign federal and local jurisdictions in which we have manufacturing facilities. We believe we are in material compliance with all such laws and regulations.

Website Access

     Our website address is www.advanced-energy.com. We make available, free of charge on our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports as soon as reasonably practicable after filing such reports with, or furnishing them to, the Securities and Exchange Commission (SEC). Such reports are also available at www.sec.gov. Information contained on our website is not incorporated by reference in, or otherwise part of, this Annual Report on Form 10-K or any of our other filings with the SEC.

Special Note Regarding Forward-Looking Statements

     This Annual Report on Form 10-K includes or incorporates by reference “forward-looking statements” within the meanings of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained or incorporated by reference in this Annual Report on Form 10-K, other than statements of historical fact, are “forward-looking statements.” For example, statements relating to our

beliefs, expectations, plans and projections are forward-looking statements as are statements that specified actions, conditions or circumstances will continue or change. Forward-looking statements involve risks and uncertainties. In some cases, forward-looking statements can be identified by the inclusion of words such as “believe,” “expect,” “plan,” “anticipate,” “estimate” and similar words.

     Some of the forward-looking statements in this Annual Report on Form 10-K are or reflect our expectations or projections relating to:

	•		Our future revenues;
	•		Our future gross profit;
	•		Reducing our operating breakeven point;
	•		Incremental profit above our breakeven point;
	•		Market acceptance of our products;
	•		Customer inventory levels, requirements and order levels;
	•		Research and development expenses;
	•		Selling, general and administrative expenses;
	•		Sufficiency and availability of capital resources;
	•		Capital expenditures;
	•		Restructuring activities and expenses; and
	•		General global economic conditions.

     Our actual results could differ materially from those projected or assumed in our forward-looking statements, because forward-looking statements by their nature are subject to risks and uncertainties. Factors that could contribute to these differences or prove our forward-looking statements, by hindsight, to be overly optimistic or unachievable include the factors described in “Item 1A. Risk Factors” beginning on page 8. Other factors might also contribute to the differences between our forward-looking statements and our actual results. We assume no obligation to update any forward-looking statement or the reasons why our actual results might differ.

Executive Officers of the Registrant

Our executive officers, their positions and their ages as of March 12, 2008 are as follows:

Dr. Hans Georg Betz, 61, has been our Chief Executive Officer and President since August 2005 and has been a member of our Board of Directors since July 2004. From August 2001 until he became our Chief Executive Officer and President, Dr. Betz served as chief executive officer of West Steag Partners GmbH, a German-based venture capital company focused on the high-technology industry. In his over 30-year career in the electronics industry, Dr. Betz also has served as chief executive officer of STEAG Electronic Systems AG and a managing director at Leybold AG. Dr. Betz currently serves as a director of Mattson Technology, Inc., a publicly held supplier of advanced process equipment used to manufacture semiconductors, and serves as a member of its compensation committee.

Lawrence D. Firestone, 49, joined us in August 2006 as Executive Vice President and Chief Financial Officer. Immediately prior to joining the Company, Mr. Firestone had served as the chief financial officer, secretary and treasurer of Applied Films Corporation, a supplier of thin film deposition equipment, since 1999. From 1996 to 1999, Mr. Firestone served as vice president and chief operating officer of Avalanche Industries, a contract manufacturer of custom cables and harnesses.

Yuval Wasserman, 53, joined us in August 2007 as Executive Vice President of Sales, Marketing and Service. Immediately prior to joining the Company, Mr. Wasserman had served as the president and chief executive officer of Tevet Process Control Technologies, Inc., an integrated metrology equipment provider, since 2002. In his 25 years in the semiconductor industry, Mr. Wasserman also has held the positions of senior vice president for sales and marketing at Boxer Cross, a metrology company; vice president and general manager of Fusion Systems, a plasma strip equipment manufacturer and a division of Axcelis Technologies, Inc; and executive and senior management positions in technology and marketing at AG Associates, a manufacturer of RTP processing equipment. Mr. Wasserman started his career at National Semiconductor, where he held various process engineering and management positions from 1983 to 1989.

Charles S. Rhoades, 47, joined us in September 2002 as Senior Vice President and General Manager of Control Systems and Instrumentation. In November 2004 he was named Executive Vice President of Products and Operations. On December 19, 2005, Mr. Rhoades was appointed as Chief Operating Officer. From March 2000 to September 2002, Mr. Rhoades was Vice President, Corporate Development at Portera Systems. Prior to Portera Systems, he was Managing Director of Product Development at Lam Research. Mr. Rhoades tendered his resignation on December 31, 2007 with an agreement to continue his employment until June 30, 2008.

ITEM 1A. RISK FACTORS

The semiconductor, semiconductor capital equipment and flat panel display industries are highly cyclical, which impacts our operating results.

     Our business and operating results depend in significant part upon capital expenditures by manufacturers of semiconductors and flat panel displays, which in turn depend upon current and anticipated demand for their products. Historically, these industries have been highly cyclical, with recurring periods of over-supply that have had a negative impact on the demand for capital equipment used to manufacture their products.

     During periods of declining demand, such as they are currently experiencing, our customers typically reduce purchases of, and cancel orders for, our products and delay delivery of their own products. We may incur significant charges as we seek to align our cost structure with any such reduction in sales to these customers. In addition, we may not be able to respond adequately or quickly to the declining demand by reducing our costs. We may also be required to record significant reserves for excess and obsolete inventory as demand for our products changes. Our inability to reduce costs and the charges resulting from other actions taken in response to changes in demand for our products would adversely affect our business, financial condition and operating results.

Our quarterly and annual operating results fluctuate significantly and are difficult to predict.

     Our operating results may be adversely affected by a variety of factors, many of which are beyond our control and difficult to predict. These factors include:

	•		Fluctuations in demand in the semiconductor, semiconductor capital equipment and flat panel display industries and other industries in which our customers operate;
	•		The timing and nature of orders placed by our customers;

	•		Seasonal variations in capital spending by our customers;
	•		Changes in our customers’ inventory management practices;
	•		Customer cancellation or postponement of previously placed orders;
	•		Pricing competition from our competitors;
	•		Customer requests for us to reduce prices, enhance features, improve reliability, shorten delivery times and extend payment terms;
	•		Component shortages or allocations or other factors that result in delays in manufacturing and sales or result in changes to our inventory levels or cause us to substantially increase our spending on inventory;
	•		The introduction of new products by us or our competitors;
	•		Changes in macroeconomic conditions;
	•		Litigation, especially regarding intellectual property
	•		Currency exchange rate fluctuations; at December 31, 2007, a 10% change in exchange rates would have had an approximately 2% to 4% impact on reported revenues and expenses; and
	•		Our estimates of the fair value of our auction rate securities and expectations regarding our ability to liquidate such securities.

We have transferred the production of substantially all of our product lines to our manufacturing facility in Shenzhen, China, and may experience unforeseen difficulties and challenges with these operations.

     We have invested significant human and financial resources to establish our manufacturing facility in Shenzhen, China. These investments were made with the goal of reducing our labor costs by increasing our workforce in China and correspondingly decreasing our workforce in the United States. We cannot predict with certainty the impact that this relatively new facility will have on our operating results. We may incur unforeseen costs with respect to this facility and the related workforce, including escalations of costs that could have an adverse impact on our operating results.

We might not realize all of the intended benefits of transitioning our supply base to Asian suppliers.

     We are continuing our transition to purchasing a substantial portion of components for our products from Asian suppliers to lower our materials costs and shipping expenses. These components might require us to incur higher than anticipated testing or repairing costs, which would have an adverse effect on our operating results. Customers, including major customers who have strict and extensive requirements, might not accept our products if they contain these lower-priced components. A delay or refusal by our customers to accept such products, as well as an inability of our suppliers to meet our purchasing requirements, might require us to continue to purchase higher-priced components from our existing suppliers or might cause us to lose sales to these customers, which would have an adverse effect on our operating results.

A significant portion of our sales is concentrated among a few customers.

     Our ten largest customers accounted for 61% of our sales in 2007, 63% of our sales in 2006 and 57% of our sales in 2005. Applied Materials Inc., our largest customer, accounted for 29% of our sales in 2007, 30% of our sales in 2006 and 23% of our sales in 2005. Ulvac, Inc., our largest customer in the flat panel display industry, accounted for 11% of our sales in 2005. With the exceptions of Applied Materials and Ulvac, no single customer accounted for more than 10% of our sales during 2007, 2006 or 2005. The loss of any of our significant customers or a material reduction in any of their purchase orders could significantly harm our business, financial condition and results of operations.

          Our customers continually exert pressure on us to reduce our prices and extend payment terms. Given the nature of our customer base and the highly competitive markets in which we compete, we may be required to reduce our prices or extend payment terms to remain competitive. We may not be able to reduce our expenses in an amount sufficient to offset potential margin declines.

Raw material, part, component and subassembly shortages, exacerbated by our dependence on sole and limited source suppliers, could affect our ability to manufacture products and systems and could delay our shipments.

          Our business depends on our ability to manufacture products that meet the rapidly changing demands of our customers. Our ability to manufacture our products timely depends in part on the timely delivery of raw materials, parts, components and subassemblies from suppliers. We rely on sole and limited source suppliers for some of our raw materials, parts, components and subassemblies that are critical to the manufacturing of our products. This reliance involves several potential risks, including the following:

	•		Inability to obtain an adequate supply of required parts, components or subassemblies;
	•		Supply shortages if a sole or limited source provider ceases operations;
	•		Having to fund the operating losses of a sole or limited source provider;
	•		Reduced control over pricing and timing of delivery of raw materials and parts; components or subassemblies;
	•		Need to qualify alternative suppliers which could be time consuming and lead to delays in delivery of products to our customers, as well as increased costs; and
	•		Inability of our suppliers to develop technologically advanced products to support our growth and development of new products.

          If we are unable to qualify additional suppliers and manage relationships with our existing and future suppliers successfully, if our suppliers experience financial difficulties including bankruptcy or if our suppliers cannot meet our performance or quality specifications or timing requirements, we may experience shortages, delays, or increased costs of raw materials, parts, components or subassemblies. This in turn could limit our ability to manufacture and ship our products, which could adversely and materially affect our business, financial condition and operating results and relationships with our current and prospective customers.

We generally have no written long-term contracts with our customers requiring them to purchase any specified quantities from us.

     As is typical in the industries we serve, our sales are primarily made on a purchase order basis, and we generally have no written long-term purchase commitments from our customers. As a result, we are limited in our ability to predict the level of future sales or commitments from our current customers, which may diminish our ability to allocate labor, materials and equipment in the manufacturing process effectively. In addition, we may accumulate inventory in anticipation of sales that do not materialize, resulting in excess and obsolete inventory write-offs.

If we are unable to adjust our business strategy successfully for some of our product lines to reflect the increasing price sensitivity on the part of our customers, our business and financial condition could be harmed.

     Our business strategy for many of our product lines has been focused on product performance and technology innovation to provide enhanced efficiencies and productivity. As a result of recent economic conditions and changes in various markets that we serve, our customers have experienced significant cost pressures and, as a result, we have observed increased price sensitivity on the part of our customers. If competition for any of our product lines should come to focus solely on price rather than on product performance and technology innovation, we will need to adjust our business strategy and product offerings accordingly and, if we are unable to do so, our business, financial condition and operating results could be materially and adversely affected.

The markets in which we operate are highly competitive.

     We face substantial competition, primarily from established companies, some of which have greater financial, marketing and technical resources than we do. We expect our competitors will continue to develop new products in direct competition with ours, improve the design and performance of their products and introduce new products with enhanced performance characteristics.

     To remain competitive, we must improve and expand our products and product offerings. In addition, we may need to maintain a high level of investment in research and development and expand our sales and marketing efforts, particularly outside of the United States. We might not be able to make the technological advances and investments necessary to remain competitive. Our inability to improve and expand our products and product offerings would have an adverse affect on our sales and results of operations.

Our competitive position could be weakened if we are unable to convince end users to specify that our products be used in the equipment sold by our customers.

     Semiconductor device and flat panel display manufacturers are end users of our products, but not necessarily our customers. In some cases, these end users may direct equipment manufacturers to use a specified supplier’s product in their equipment at a particular facility. This occurs with frequency in respect of mass flow controller products. Our success therefore, particularly in respect of our MFCs, depends in part on our ability to have end users specify that our products be used at their facilities. In addition, we may encounter difficulties in changing established relationships of competitors that already have a large installed base of products within such facilities.

Our products may suffer from defects or errors leading to damage or warranty claims

     Our products use complex system designs and components that may contain errors or defects, particularly when we incorporate new technology into our products or release new versions. While we have never recalled a product, if any of our products are defective, we might be required to redesign or recall those products or pay damages or warranty claims. Product defects could result in substantial product liability. We maintain product liability insurance, but cannot be certain that it is adequate or will remain available on acceptable terms. We accrue a warranty reserve for estimated costs to provide warranty services, including the cost of technical support, product repairs, and product replacement for units that cannot be repaired. Our estimate of costs to fulfill our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase, resulting in decreased gross profit.

We must achieve design wins to retain our existing customers and to obtain new customers, although design wins achieved do not necessarily result in substantial sales.

     The constantly changing nature of semiconductor fabrication and flat panel display technology causes equipment manufacturers to continually design new systems. We must work with these manufacturers early in their design cycles to modify our equipment or design new equipment to meet the requirements of their new systems. Manufacturers typically choose one or two vendors to provide the components for use with the early system shipments. Selection as one of these vendors is called a design win. It is critical that we achieve these design wins in order to retain existing customers and to obtain new customers.

     We believe that equipment manufacturers often select their suppliers based on factors such as long-term relationships. Accordingly, we may have difficulty achieving design wins from equipment manufacturers who are not currently our customers. In addition, we must compete for design wins for new systems and products of our existing customers, including those with whom we have had long-term relationships. Our efforts to achieve design

wins are time consuming and expensive, and may not be successful. If we are not successful in achieving design wins, our business, financial condition and operating results will be adversely impacted.

     Once a manufacturer chooses a component for use in a particular product, it is likely to retain that component for the life of that product. Our sales and growth could experience material and prolonged adverse effects if we fail to achieve design wins. However, design wins do not always result in substantial sales, as sales of our products are dependent upon our customers’ sales of their products.

We are subject to risks inherent in international operations.

     Sales to our customers outside the United States were approximately 46% in 2007, 42% in 2006 and 50% in 2005. Our success competing in international markets is subject to our ability to manage various risks and difficulties, including, but not limited to:

	•		Our ability to effectively manage our employees at remote locations who are operating in different business environments from the United States;
	•		Our ability to develop relationships with suppliers and other local businesses;
	•		Compliance with product safety requirements and standards that are different from those of the United States;
	•		Variations and changes in laws applicable to our operations in different jurisdictions, including enforceability of intellectual property and contract rights;
	•		Trade restrictions, political instability, disruptions in financial markets and deterioration of economic conditions;
	•		Customs regulations and the import and export of goods;
	•		The ability to provide sufficient levels of technical support in different locations;
	•		Our ability to obtain business licenses as may be needed in international locations to support expanded operations;
	•		Collecting past due accounts receivable from foreign customers; and
	•		Changes in tariffs, taxes and foreign currency exchange rates.

     Our ability to implement our business strategies, maintain market share and compete successfully in international markets will be compromised if we are unable to manage these and other international risks successfully.

Unfavorable currency exchange rate fluctuations may lead to lower operating margins, or may cause us to raise prices which could result in reduced sales.

     Currency exchange rate fluctuations could have an adverse effect on our sales and results of operations and we could experience losses with respect to our forward exchange contracts. Unfavorable currency fluctuations could require us to increase prices to foreign customers which could result in lower net sales by us to such customers. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our operating results could be adversely affected. In addition, most sales made by our foreign subsidiaries are denominated in the currency of the country in which these products are sold and the currency they receive in payment for such sales could be less valuable at the time of receipt as a result of exchange rate fluctuations. We enter into forward exchange contracts and local currency purchased options to reduce currency exposure arising from intercompany sales of inventory. However, we cannot be certain that our efforts will be adequate to protect us against significant currency fluctuations or that such efforts will not expose us to additional exchange rate risks which could adversely affect our operating results.

Changes in the value of the Chinese yuan could impact the cost of our operation in Shenzhen, China.

     The Chinese government is continually pressured by its trading partners to allow its currency to float in a manner similar to other major currencies. The 2005 revaluation of the yuan has not had a material impact on our operations. Any further change may impact our ability to control the cost of our products in the world market. Specifically, the decision by the Chinese government to allow the yuan to begin to float against the United States dollar could significantly increase the labor and other costs incurred in the operation of our Shenzhen facility and the cost of raw materials, parts, components and subassemblies that we source in China, thereby negatively affecting our financial condition and operating results.

We are highly dependent on our intellectual property.

     Our success depends significantly on our proprietary technology. We attempt to protect our intellectual property rights through patents and non-disclosure agreements; however, we might not be able to protect our technology, and competitors might be able to develop similar technology independently. In addition, the laws of some foreign countries might not afford our intellectual property the same protections as do the laws of the United States. Our intellectual property is not protected by patents in several countries in which we do business, and we have limited patent protection in other countries, including China. The cost of applying for patents in foreign countries and translating the applications into foreign languages requires us to select carefully the inventions for which we apply for patent protection and the countries in which we seek such protection. Generally, our efforts to obtain international patents have been concentrated in the European Union and certain industrialized countries in Asia, including, Korea, Japan and Taiwan. If we are unable to protect our intellectual property successfully, our business, financial condition and operating results could be adversely affected.

     China commercial law is relatively undeveloped compared to the commercial law in the United States. Limited protection of intellectual property is available under Chinese law. Consequently, manufacturing our products in China may subject us to an increased risk that unauthorized parties may attempt to copy our products or otherwise obtain or use our intellectual property. We cannot give assurance that we will be able to protect our intellectual property rights effectively or have adequate legal recourse in the event that we encounter infringements of our intellectual property in China.

We have been, and in the future may again be, involved in patent litigation. Patent litigation is costly and could result in further restrictions on our ability to sell certain products or an inability to prevent others from using technology we have developed.

     Litigation may be necessary to enforce patents issued to us, to protect our trade secrets or know-how, to defend ourselves against claimed infringement of the rights of others or to determine the scope and validity of our proprietary rights or the proprietary rights of others. This type of litigation often requires substantial management time and attention, as well as financial and other resources.

     We are and have been subject to patent litigation, which has required us to expend significant resources for legal fees and other costs, as well as management time and attention. Patent litigation can result in:

	•		substantial costs in the form of legal fees, fines and royalty payments;
	•		restrictions on our ability to sell certain products;
	•		our inability to prevent others from using technology we have developed; and
	•		us needing to redesign products or seek alternative technologies.

     Any of these events could have a significant adverse effect on our business, financial condition and results of operations.

     As of December 31, 2007, we held approximately $51 million in auction rate securities, classified as current assets on our balance sheet as management intends to continue to attempt to sell these securities. Our auction rate securities consist of investment grade municipal notes. In February 2008, liquidity issues in the global credit markets caused auctions with respect to $23.7 million of our auction rate securities to fail, because the amount of securities offered for sale exceeded the amount of bids. As a result, the liquidity of our auction-rate securities has diminished. As of March 12, 2008, we held approximately $40 million in auction rate securities. If the credit markets do not improve sufficiently, or auctions on such securities otherwise continue to fail, we may be required to record an impairment charge with respect to these investments. Management intends to attempt to sell these securities at amounts invested; however, it could take until the final maturity of the underlying municipal notes, 28 years in some cases, to realize the recorded value of these investments. If management determines that such sales cannot occur in 2008, without significant loss, we may classify these investments as long-term on our balance sheet.

     We are subject to federal, state, local and foreign regulations, including environmental regulations and regulations relating to the design and operation of our products and control systems. We might incur significant costs as we seek to ensure that our products meet safety and emissions standards, many of which vary across the states and countries in which our products are used. In the past, we have invested significant resources to redesign our products to comply with these directives. Compliance with future regulations, directives and standards could require us to modify or redesign some products, make capital expenditures or incur substantial costs. If we do not comply with current or future regulations, directives and standards:

	•		we could be subject to fines;
	•		our production or shipments could be suspended; or
	•		we could be prohibited from offering particular products in specified markets.

     Any inability to comply with current or future regulations, directives and standards could adversely affect our business, financial condition or operating results.

     The stock market has from time to time experienced, and is likely to continue to experience, extreme price and volume fluctuations. Prices of securities of technology companies have been especially volatile and have often fluctuated for reasons that are unrelated to their operating performance. In the past, companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. If we were the subject of securities class action litigation, it could result in substantial costs and a diversion of our management’s attention and resources.

     Douglas S. Schatz, our Chairman of the Board, beneficially owns approximately 21% of our outstanding common stock as of March 12, 2008. This stockholding gives Mr. Schatz significant voting power and influence. Depending on the number of shares that abstain or otherwise are not voted on a particular matter, Mr. Schatz may be able to elect all of the members of our board of directors and to control our business affairs for the foreseeable future in a manner with which our other stockholders may not agree. In addition, the sale of a substantial amount of the shares beneficially owned by him could negatively affect the market price of our common stock. The trust through which Mr. Schatz beneficially owns a significant number of shares has entered into a written trading plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, which provides for the sale of up to 900,000 shares of common stock if certain price targets and other conditions are met.

     ITEM 1B. UNRESOLVED STAFF COMMENTS

     None.

ITEM 2. PROPERTIES

     Information concerning our principal properties at December 31, 2007 is set forth below.

Location		Type		Principal Use		Sq. Footage				Ownership
San Jose, CA		Office		Distribution, Sales, Service			20,000			Leased
Fort Collins, CO		Office, plant		Headquarters, Research and development, Manufacturing, Distribution			205,000			Leased
Austin, TX		Office		Distribution, Service			8,000			Leased
Dallas, TX		Office		Distribution, Service			2,000			Leased
Vancouver, WA		Office, plant		Research and development, Manufacturing, Distribution			20,000			Leased
Shanghai, China		Office		Distribution			11,700			Leased
Shenzhen, China		Office, plant		Manufacturing, Distribution			131,000			Leased
Bicester, England		Office		Distribution, Sales			1,000			Leased
Filderstadt, Germany		Office		Distribution, Sales, Service			9,000			Leased
Hachioji, Japan		Office, plant		Research and development, Manufacturing, Distribution			46,000			Owned
Sungnam City, South Korea		Office		Distribution, Sales, Service			14,000			Owned
Hsinchu, Taiwan		Office		Distribution, Sales, Service			9,000			Leased
Taipei, Taiwan		Office		Distribution, Sales, Service			13,000			Leased
Sendai-shi Miyagi-ken, Japan		Office		Sales and Service			1,000			Leased
Osaka, Japan		Office		Sales			1,300			Leased
Hiroshima, Japan		Office		Service			300			Leased
Kumamoto-ken, Japan		Office		Service			800			Leased

ITEM 3. LEGAL PROCEEDINGS

          We are involved in disputes and legal actions from time to time in the ordinary course of our business. On November 5, 2007, a complaint was filed in the U.S. District Court for the District of Colorado by Xantrex Technology, Inc., alleging various breaches of confidence and interference with contractual duties in connection with the Company’s hiring of a former employee of Xantrex. The Company believes the allegations to be unfounded and will defend itself vigorously against the claims.

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

     None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock is listed on the NASDAQ Global Select Market under the symbol “AEIS.” At March 12, 2008, the number of common stockholders of record was 593, and the closing sale price of our common stock on the NASDAQ Global Select Market on that day was $13.38 per share.

     The table below shows the range of high and low closing sale prices for the common stock as quoted (without retail markup or markdown and without commissions) on the NASDAQ Global Select Market:

		2007								2006
		High				Low				High				Low
First Quarter		$	21.46			$	16.69			$	16.13			$	12.06
Second Quarter		$	25.68			$	21.3			$	17.08			$	12.39
Third Quarter		$	24.12			$	13.93			$	17.12			$	11.63
Fourth Quarter		$	17.31			$	12.56			$	18.87			$	14.89

     We have not declared or paid any cash dividends on our capital stock since we terminated our election to be treated as an S-corporation for tax purposes, effective January 1, 1994. We currently intend to retain all future earnings to finance our business and do not anticipate paying cash or other dividends on our common stock in the foreseeable future. Furthermore, our revolving credit facility prohibits the declaration or payment of any cash dividends on our common stock.

     On December 24, 2007, our Board of Directors authorized the repurchase of up to $75 million of the Company’s common stock. We may repurchase shares in the open market, through privately negotiated transactions, block trades, Rule 10b5-1 plans or other available means. In February 2008, we began repurchasing shares pursuant to a Rule 10b5-1 plan. There is no minimum number of shares to be repurchased, and we may discontinue repurchasing shares at any time. Our repurchases of shares may depend upon the availability of cash, general economic and stock market conditions and other considerations.

ITEM 6. SELECTED FINANCIAL DATA

     The selected consolidated statement of operations data and the related consolidated balance sheet data were derived from the audited consolidated financial statements. The information below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II of this Form 10-K in order to understand more fully the factors that may affect the comparability of the information presented below.

		Years Ended December 31,
(In thousands, except per share data)		2007				2006				2005				2004				2003
Statement of Operations Data:
Sales		$	384,699			$	410,742			$	325,482			$	380,537			$	253,536
Gross profit			162,809				175,218				117,081				114,626				84,319
Total operating expenses			116,869				107,829				101,107				118,093				108,746
Income (loss) from operations			45,940				67,389				15,974				(3,467	)			(24,427	)
Income (loss) from continuing operations			34,361				87,184				3,622				(14,670	)			(45,536	)
Net income (loss)			34,361				88,322				12,817				(12,747	)			(44,241	)
Income (loss) from continuing operations per share — diluted		$	0.75			$	1.93			$	0.10			$	(0.45	)		$	(1.41	)
Net income (loss) per share — diluted		$	0.75			$	1.95			$	0.34			$	(0.39	)		$	(1.37	)
Diluted weighted-average common shares outstanding			45,704				45,265				37,434				32,649				32,271
Balance Sheet Data:
Cash, cash equivalents and marketable securities		$	205,264			$	144,218			$	59,685			$	107,982			$	134,892
Working capital			305,955				247,798				143,633				206,915				205,835
Total assets			459,028				411,903				310,117				394,407				414,731
Total debt			243				329				4,190				196,123				202,468
Stockholders’ equity			407,061				355,790				257,430				144,978				151,834

     Certain statements set forth below under this caption constitute forward-looking statements. See “Business—Special Note Regarding Forward-Looking Statements” in Item 1 of this report for additional factors relating to such statements, and see “Risk Factors” beginning on page 8 for a discussion of certain risks applicable to our business, financial condition and results of operations.

     We develop, manufacture and sell innovative power and control technologies that enable high-growth, plasma-based thin-film manufacturing processes worldwide, including semiconductors, flat panel displays, data storage products, solar cells, architectural glass, and other advanced product applications. We also develop, manufacture and sell grid-connect inverters for the solar energy market.

     Our installed base generates recurring revenue opportunities as we sell spare parts, repair services and field upgrades worldwide through our customer service and technical support organization.

     We provide solutions to a diverse range of markets and geographic regions with the semiconductor capital market being our largest market. Sales to customers in the semiconductor capital equipment industry comprised 69% of our sales in both 2006 and 2007, and 63% of our sales in 2005. Other markets we sell to include flat panel display, data storage, architectural glass, solar inverter and other industrial thin-film manufacturing.

     Our analysis presented below is organized to provide the information we believe will be instructive for understanding the relevant trends going forward. However, this discussion should be read in conjunction with our consolidated financial statements in Item 8 of this report, including the notes thereto.

     The following table summarizes our results of operations for the years ended 2007, 2006 and 2005:

		Years ended December 31,												Increase/(decrease)								Percentage change
														2007 v				2006 v				2007 v				2006 v
		2007				2006				2005				2006				2005				2006				2005
		(in thousands)												(in thousands)
Sales		$	384,699			$	410,742			$	325,482			$	(26,043	)		$	85,260				(6	)%			26	%
Gross profit			162,809				175,218				117,081				(12,409	)			58,137				(7	)%			50	%
Operating expenses:
Research and development			50,393				44,848				39,720				5,545				5,128				12	%			13	%
Selling, general and administrative			63,189				62,870				55,681				319				7,189				1	%			13	%
Litigation settlement			—				—				3,000				—				(3,000	)		nm				nm
Restructuring charges			3,287				111				2,706				3,176				(2,595	)		nm				nm
Total operating expenses			116,869				107,829				101,107				9,040				6,722				8	%			7	%
Income from operations			45,940				67,389				15,974				(21,449	)			51,415				(32	)%		nm
Other income (expense), net			4,810				4,677				(7,479	)			133				12,156				3	%		nm
Income from continuing operations before income taxes			50,750				72,066				8,495				(21,316	)			63,571				30	%		nm

		Years ended December 31,												Increase/(decrease)								Percentage change
														2007 v				2006 v				2007 v				2006 v
		2007				2006				2005				2006				2005				2006				2005
		(in thousands)												(in thousands)
Benefit (Provision) for income taxes			(16,389	)			15,118				(4,873	)			(31,507)				19,991				nm			nm
Income from continuing operations			34,361				87,184				3,622				(52,823	)			83,562				(61	)%		nm
Income from discontinued operations, net of tax			—				1,138				9,195				(1,138	)			($8,057	)		nm				nm
Net income		$	34,361			$	88,322			$	12,817			$	(53,961	)		$	75,505				(61	)%		nm

SALES

     The following tables summarize annual net sales, and percentages of net sales, by customer type for each of the years ended 2007, 2006 and 2005:

		Years Ended December 31,												Increase/(decrease)								Percentage change
														2007 v				2006 v				2007 v				2006 v
		2007				2006				2005				2006				2005				2006				2005
		(In thousands)
Semiconductor capital equipment		$	262,740			$	283,470			$	205,322			$	(20,730	)		$	78,148				(7	)%			38	%
Non-semiconductor equipment			121,959				127,272				120,160				(5,313	)			7,112				(4	)%			6	%
Total sales		$	384,699			$	410,742			$	325,482			$	(26,043	)		$	85,260				(6	)%			26	%

		Years Ended December 31,
		2007				2006				2005
Semiconductor capital equipment			68	%			69	%			63	%
Non-semiconductor equipment			32	%			31	%			37	%
			100	%			100	%			100	%

     The following tables summarize annual net sales, and percentages of net sales, by geographic region for each of the years ended 2007, 2006 and 2005. The following amounts do not contemplate where our customers may subsequently transfer our products.

		Years Ended December 31,
		2007				2006				2005				2007 v				2006 v				2007 v				2006 v
														2006				2005				2006				2005
		(In thousands)
United States		$	207,265			$	238,468			$	163,657			$	(31,203	)		$	74,811				(13	)%			46	%
Europe			42,051				41,760				34,228				291				7,532				0	%			22	%
Asia			135,383				130,514				127,597				4,869				2,917				4	%			3	%
Total sales		$	384,699			$	410,742			$	325,482			$	(26,043	)		$	85,260				(6	)%			26	%

		Years Ended December 31,
		2007				2006				2005
United States			54	%			58	%			50	%
Europe			11	%			10				11
Asia			35	%			32				39
			100	%			100	%			100	%

     The decrease in total sales from 2006 to 2007 and the increase in total sales from 2005 to 2006 principally reflect fluctuations in demand in the semiconductor capital equipment industry. The semiconductor capital equipment industry is highly cyclical and is impacted by changes in the macroeconomic environment, changes in semiconductor supply and demand and rapid technological advances in both semiconductor devices and wafer fabrication processes. Our sales to our largest semiconductor capital equipment customers represented the majority of the fluctuating sales volume.

     Applied Materials Inc., our largest customer, accounted for 29% of our sales in 2007, 30% of our sales in 2006 and 23% of our sales in 2005. Ulvac, Inc., our largest customer in the flat panel display industry, accounted for 11% of our sales in 2005. With the exceptions of Applied Materials and Ulvac, no single customer accounted for more than 10% of our sales during 2007, 2006 or 2005.

GROSS PROFIT

     Our gross margin was 42.3% in 2007, 42.7% in 2006 and 36.0% in 2005. The decrease in our gross margin from 2006 to 2007 was primarily attributable to lower revenues and costs incurred in transitioning manufacturing from Stolberg, Germany to Shenzhen, China and an additional charge of $2.2 million to cost of goods sold related to a change in estimates of warranty expenses for two products. The improvement in our gross margin from 2005 to 2006 was attributable to increased volume of production and advanced manufacturing processes in our China manufacturing facility, lower freight costs, increased utilization of local Asian suppliers, design-led cost reductions and the increase in sales.

OPERATING EXPENSES

The following table summarizes our operating expenses as a percentage of sales for the years ended 2007, 2006 and 2005:

		Years Ended December 31,												% of Sales
		2007				2006				2005				2007				2006				2005
		(in thousands)
Research and development		$	50,393			$	44,848			$	39,720				13	%			11	%			12	%
Selling, general and administrative			63,189				62,870				55,681				16	%			15	%			17	%
Litigation settlement			—				—				3,000				—				—				1	%
Restructuring charges			3,287				111				2,706				1	%			—				1	%
Total operating expenses		$	116,869			$	107,829			$	101,107				30	%			26	%			31	%

RESEARCH AND DEVELOPMENT

     The market for our products is characterized by ongoing technological changes. We believe that continued and timely development of new, highly differentiated products and enhancements to our existing products in support of customer requirements is necessary for us to maintain a competitive position in the markets we serve. Accordingly, we devote a significant portion of our personnel and financial resources to research and development projects and seek to maintain close relationships with our customers and other industry leaders in order to remain responsive to their product requirements. We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets, and expect to continue to make significant investments in research and development activities. All of our research and development costs have been expensed as incurred.

     The increase in our research and development expenses from 2006 to 2007 was primarily due to increased compensation expense related to development of new and existing platforms to support business growth, such as the solar inverter, Solaron™. The increase in our research and development expenses from 2005 to 2006 was primarily due to increased compensation and non-cash, stock-based compensation expense of $1 million as a result of our adoption of SFAS No. 123(R), additional research projects in response to customer requests and costs incurred to support the development of new products and enhancement of existing products.

     SELLING, GENERAL AND ADMINISTRATIVE

     Our selling expenses support domestic and international sales and marketing activities that include personnel, trade shows, advertising, third-party sales representative commissions, and other selling and marketing activities.

Our general and administrative expenses support our worldwide corporate, legal, tax, financial, governance, administrative, information systems and human resource functions in addition to our general management.

     Selling, general and administrative (SG&A) expense from 2006 to 2007 remained flat as increases in audit, legal and compensation costs were offset by decreases in insurance expense, property tax expense and depreciation. The increase from 2005 to 2006 was primarily due to increased compensation expense, increased commissions, and non-cash stock-based compensation expense of $1.5 million as a result of the adoption of SFAS No. 123(R) on January 1, 2006.

     LITIGATION SETTLEMENT

     On October 3, 2005, we executed a settlement agreement with MKS Instruments, Inc. (“MKS”), resolving all pending claims worldwide relating to our Xstream™ With Active Matching Network™ reactive gas generator products. Pursuant to the settlement agreement, we paid MKS $3.0 million in cash. We also stipulated to a final judgment of infringement and an injunction prohibiting us from making, using, selling, offering to sell, or importing into the United States, or any country in which a counterpart patent exists, our Xstream products and all other toroidal plasma generator products, except as permitted under the settlement agreement. Sales of these products have accounted for less than 5% of our total sales each year since introduction of the products.

RESTRUCTURING CHARGES

     On March 2, 2007, we announced the closure of our manufacturing, distribution and research and development facility located in Stolberg, Germany. Related to this manufacturing transition, we recorded restructuring charges of $3.5 million in 2007, associated with employee separation costs and the write-down of certain real and personal property located at this facility to estimated fair value. On October 2, 2007, we completed the sale of assets related to our LPPA product line for $2.2 million and recorded the net gain on the sale of $200,000 as a credit to the restructuring charge.

     At the end of 2002, we announced major changes in our operations, which we began implementing in 2003. These included establishing the manufacturing location in China; consolidating worldwide sales forces; a move to lower-cost Asian suppliers; and the closure or sale of certain facilities. We recorded restructuring charges associated with these changes of $111,000 in 2006 and $2.7 million in 2005.

     In the first quarter of 2008, we restructured a portion of our general and administrative operations. In conjunction with this, we will record approximately $1.1 million in restructuring charges in the first quarter of 2008.

IMPAIRMENT OF INTANGIBLE ASSETS

     We perform an annual impairment test for goodwill as of the end of each fiscal year. Additionally, whenever events or circumstances indicate that the carrying value of our goodwill or other intangible assets may not be recoverable, we perform tests for impairment of these assets and record impairment charges, as necessary. Such events or circumstances include downturns or anticipated downturns in the industries in which we serve, changes in customer technology requirements, and other changes in circumstances affecting the underlying value of the recorded asset.

OTHER INCOME (EXPENSE)

     Other income (expense), net consists primarily of interest income and expense, foreign exchange gains and losses and other miscellaneous gains, losses, income and expense items.

     Income from investments and cash was approximately $6.3 million in 2007, $3.7 million in 2006 and $2.9 million in 2005. The increase in income from investments was primarily due to our higher level of cash, cash equivalents and marketable securities generated from operations and net proceeds from our public offering of 11.5 million shares in 2005. This was offset in 2005 by our use of those proceeds to redeem our convertible subordinated notes in September 2005.

     Interest expense was approximately $77,000 in 2007, $413,000 in 2006 and $8.2 million in 2005. In 2007 and 2006, interest expense consisted principally of borrowings under capital lease facilities and senior debt, and amortization of our deferred debt issuance costs. Interest expense for 2005 also includes our convertible subordinated notes, which were redeemed in September 2005.

     Our foreign subsidiaries’ sales are primarily denominated in currencies other than the United States dollar. We recorded net foreign currency loss of $1.8 million in 2007 and $206,000 in 2006, and a net foreign currency gain of $243,000 in 2005. The loss in 2007 is primarily due to a net charge of $1.4 million in the third quarter of 2007 related to a foreign exchange loss during the quarter, as the Japanese yen and euro strengthened relative to the U.S. dollar.

     Debt extinguishment expense of $3.2 million in 2005 resulted from the redemption of our convertible subordinated notes with a total principal balance of $187.7 million. The expense of $3.2 million is comprised of $2.1 million for redemption premium and $1.1 million for the write-off of deferred debt issuance costs.

PROVISION FOR INCOME TAXES

     We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires deferred tax assets and liabilities to be recognized for temporary differences between the tax basis and financial reporting basis of assets and liabilities, computed at the expected tax rates for the periods in which the assets or liabilities will be realized, as well as for the expected tax benefit of net operating loss and tax credit carryforwards. In 2003, we began recording valuation allowances against certain of our United States and foreign net deferred tax assets in jurisdictions where we had incurred significant losses. Given such experience, prior to December 31, 2006, management could not conclude that it was more likely than not that these net deferred tax assets would be realized. Based on our 2005 and 2006 operating results, our management, in accordance with SFAS No. 109, evaluated the recoverability of its net deferred tax assets and concluded that it was more likely than not that the majority of net deferred tax assets would be realized. The reduction in the valuation allowance was $39.3 million for the entire 2006 year. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those difference become deductible, the timing and amount of which is uncertain. We assess the recoverability of our net deferred tax assets on a quarterly basis. If we determine that it is more likely than not that we will realize a portion or all of our remaining net deferred tax assets, some portion or all of the valuation allowance will be reversed with a corresponding reduction in income tax expense in such period.

     The income tax expense of $16.4 million in 2007 represents an effective tax rate on income from continuing operations of 32%. The income tax benefit of $15.1 million in 2006 represents an effective tax rate on income from continuing operations of (21)%. This negative rate includes the impact of the reversal of the valuation allowance discussed above. The income tax provision of $4.9 million in 2005 represents an effective tax rate on income from continuing operations of 57%, due to taxable income earned in certain foreign jurisdictions. The Company’s income from discontinued operations earned in prior periods was earned in the United States. No provision for income taxes is attributed to these discontinued operations, due to the reversal of valuation allowances against certain deferred tax assets in the United States that existed in those periods, including those generated by net operating losses, that offset the income from discontinued operations.

     Approximately $5.3 million of net deferred tax assets at December 31, 2007 related to certain U.S. net operating losses that are subject to limitations under the US tax code. These assets continue to have a full valuation allowance as management could not conclude that it was more likely than not that these net deferred tax assets would be realized.

     When recording acquisitions, we have recorded valuation allowances due to the uncertainty related to the realization of certain deferred tax assets existing at the acquisition dates. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. At December 31, 2006, approximately $2.9 million of the valuation allowance related to deferred tax assets obtained through acquisition. Any reversals of valuation allowances recorded in purchase accounting will be reflected as a reduction of goodwill in the period of reversal. For the year ended December 31, 2006, $3.7 million of valuation allowances, representing 100% of the valuation allowances established in purchase accounting, were reversed with a corresponding reduction in goodwill. There are no further adjustments related to these items to be booked in the current or future periods. Please refer to Note 12 Income Taxes included in Part II, Item 8 of this Form 10-K for further discussion regarding income taxes.

     We adopted the provisions of FIN48 as of January 1, 2007. Upon adoption, the Company increased the long-term liability associated with uncertain tax positions by approximately $6 million and also increased the long-term receivable by approximately $5 million consisting of offsetting tax benefits. The balance of $1 million is an adjustment to the opening balance of retained earnings on January 1, 2007. If the tax position reverses, the net $1 million will affect our effective tax rate. There have been no significant changes to these amounts during the year ended December 31, 2007.

     The tax years 2003 through 2007 remain open to examination by the United States taxing jurisdictions to which we are subject. The foreign taxing jurisdictions have open tax years from 2001 through 2007. In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of the adoption of FIN 48. We did not have any accrued interest or penalties at December 31, 2007. We do not anticipate a material change to the amount of unrecognized tax positions within the next 12 months.

     While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex application of tax regulations. Additionally, the recognition and measurement of certain tax benefits includes estimates and judgment by management and inherently includes subjectivity. Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.

DISCONTINUED OPERATIONS

     Income from discontinued operations was $1.1 million in 2006 and $9.2 million in 2005. In 2005, we sold the assets of our EMCO product line and our IKOR product line, as they were not critical to our core operations. We recognized a gain on the sale of the EMCO product line of $2.9 million and a gain on the sale of the IKOR product line of $5.0 million. In the second quarter of 2006, $138,000 held in escrow relating to the EMCO product line was released and in the fourth quarter of 2006, $1.0 million held in escrow relating to the IKOR product line was released as various contingencies were resolved. These amounts were recorded as gains on the sale of discontinued assets.

Quarterly Results of Operations

     The following tables present unaudited quarterly results in dollars and as a percentage of sales for each of the

eight quarters in the period ended December 31, 2007. We believe that all necessary adjustments have been included in the amounts stated below to present fairly such quarterly information. Due to the volatility of the industries in which our customers operate the operating results for any quarter are not necessarily indicative of results for any subsequent period.

		Quarters Ended
		Mar. 31,				June 30,				Sept. 30,				Dec. 31,				Mar. 31,				June 30,				Sept. 30,				Dec. 31,
		2006				2006				2006				2006				2007				2007				2007				2007
Sales		$	93,950			$	104,571			$	107,688			$	104,533			$	107,323			$	103,049			$	90,491			$	83,836
Gross profit			38,550				44,760				47,014				44,894				48,309				44,955				36,726				32,819
Income from operations			13,180				19,231				18,329				16,649				17,940				16,270				7,495				4,235
Income from continuing operations			12,761				18,025				16,992				39,406				12,671				11,667				5,856				4,167
Income from discontinued operations			—				138				—				1,000				—				—				—				—
Net income		$	12,761			$	18,163			$	16,992			$	40,406			$	12,671			$	11,667			$	5,856			$	4,167
Diluted earnings per share		$	0.28			$	0.40			$	0.38			$	0.89			$	0.28			$	0.25			$	0.13			$	0.09

		Quarters Ended
		Mar. 31,				June 30,				Sept. 30,				Dec. 31,				Mar. 31,				June 30,				Sept. 30,				Dec. 31,
		2006				2006				2006				2006				2007				2007				2007				2007
Percentage of Sales:
Sales			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%
Gross profit			41.0	%			42.8	%			43.7	%			42.9	%			45.0	%			43.6	%			40.6	%			39.1	%
Income from operations			14.0	%			18.4	%			17.0	%			15.9	%			16.7	%			15.8	%			8.3	%			5.1	%
Income from continuing operations			13.6	%			17.2	%			15.8	%			37.7	%			11.8	%			11.3	%			6.5	%			5.0	%
Income from discontinued operations			—				0.1	%			—				1	%			—				—				—				—
Net income			13.6	%			17.4	%			15.8	%			38.7	%			11.8	%			11.3	%			6.5	%			5.0	%

     Liquidity and Capital Resources

     At December 31, 2007, our principal sources of liquidity consisted of cash, cash equivalents of $94.6 million and marketable securities of $110.7 million. Included in our marketable securities as of December 31, 2007 was approximately $51 million in auction rate securities. Subsequent to December 31, 2007, we sold approximately $11 million in municipal auction rate securities. However, beginning in February 2008, we experienced difficulty in selling additional securities due to the failure of the auction mechanism which provides liquidity to these securities. The securities for which auctions have failed will continue to accrue interest and be auctioned every 35 days until the auction succeeds, the issuer calls the securities, or they mature. Accordingly, there may be no effective mechanism for selling these securities and we may own long-term investments. As of March 12, 2008, the Company had approximately $40 million of auction rate securities and continued deterioration in the credit and equity markets, continued failed auctions or the lack of a developing secondary market may potentially cause impairment in the value of these securities or negatively impact our ability to liquidate these securities.

     During 2007, our cash, cash equivalents and marketable securities increased $61.1 million, or 42.3%, from $144.2 million at December 31, 2006, primarily due to cash generated from our operations.

     Operating activities provided cash of $61.8 million in 2007, $88.3 million in 2006, and $36.1 million in 2005. The increase in cash was primarily due to cash generated from operations partially offset by increased inventory.

     Investing activities used cash of $30.6 million in 2007 and $83.1 million in 2006, and provided cash of $67.0 million in 2005. In 2007, we purchased $112.4 million and sold $88.5 million in marketable securities, as compared to the purchase of $79.4 million of marketable securities in 2006, and the purchases of $87.2 million and sales of $151.7 million of marketable securities used to redeem a portion of the convertible subordinated notes in 2005. Capital expenditures were $8.9 million in 2007, $6.1 million in 2006, and $10.8 million in 2005. Cash provided by investing activities in 2005 also reflects $8.9 million received on the sale of our IKOR product line and $3.9 million on the sale of our EMCO product line.

     With the significant capital expenditures related to our investment in our manufacturing operations as well as our information technology infrastructure, we expect to increase our capital expenditures in 2008 to approximately $11.9 million. Our planned level of capital expenditures is subject to frequent revisions as our business experiences sudden changes. In addition, changes in foreign currency exchange rates may significantly impact our capital expenditures in a particular period.

     Investing cash flows experience significant fluctuations from year to year as we buy and sell marketable securities, which we convert to cash to fund strategic investments and our current operations, and as we transfer cash into marketable securities when we attain levels of cash that are greater than needed for current operations.

     Financing activities provided cash of $4.8 million in 2007, primarily due to proceeds from the exercise of stock options. Financing activities used cash of $741,000 in 2006, due primarily to $4.0 million in payments on our senior borrowings and capital lease obligations offset by the proceeds from the exercise of stock options of $2.9 million, as compared to $86.0 million in 2005, primarily due to the redemption of our convertible subordinated notes offset in part by our public offering of common stock. During the third quarter of 2005, we raised $105.5 million in net proceeds from a public offering of 11.5 million shares of common stock. With these proceeds we fully redeemed the 5.25% convertible subordinated notes due November 15, 2006. This redemption consisted of a $66.2 million principal payment, $883,000 for redemption premium, and $1.1 million for interest through the redemption dates. After the redemption of the 5.25% convertible subordinate notes, proceeds of approximately $37.3 million remained. These proceeds together with approximately $88.9 million of cash, cash equivalents and marketable securities were used to redeem the 5.0% convertible subordinated notes due September 1, 2006. This redemption consisted of a $121.5 million principal payment, $1.2 million for redemption premium, and $3.5 million for interest through the redemption dates.

     We expect our financing activities to continue to fluctuate in the future. Our financing payments may also increase in the future if we enter into additional capital lease obligations or utilize our line of credit. A significant portion of these obligations are held in countries other than the United States; therefore, future foreign currency fluctuations, especially between the U.S. dollar and the Japanese yen, could cause significant fluctuations in our estimated payment obligations.

     We currently have a $25 million secured revolving line of credit with a maturity date of July 5, 2008. Any advances under our amended credit facility will bear interest at the prime rate (6% at March 12, 2008) minus 1%. No amounts are currently outstanding under this credit facility.

     On December 24, 2007, our Board of Directors authorized the repurchase of up to $75 million of the Company’s common stock. Purchases under the program may be made from time-to-time in the open market, through privately negotiated transactions, through block trades, Rule 10b5-1 trading plans or other available means. There is no minimum number of shares to be repurchased under the program and the program may be discontinued at any time. Purchases under the program will depend upon the availability of cash, as well as prevailing general economic and stock market conditions.

     We believe that our working capital, together with cash anticipated to be generated by operations and our line of credit will be sufficient to satisfy our anticipated liquidity requirements for the next twelve months.

     Off Balance Sheet Arrangements and Contractual Obligations

     The following table sets forth our future payments due under contractual obligations as of December 31, 2007.

		Payments Due by Period (In thousands)
		2008				2009				2010				2011				2012				Thereafter				Total
Operating lease obligations		$	5,446			$	4,146			$	2,965			$	1,830			$	1,448			$	4,753			$	20,590
Non-cancelable purchase obligations			5,000				—				—				—				—				—				5,000
Severance obligation			350				—				—				—				—				—				350
Capital lease obligations			124				76				38				5				—				—				243

     As of December 31, 2007, we have $5.8 million in uncertain tax positions, net of federal benefit. Because of the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, these liabilities are not reflected in the contractual obligations table.

Critical Accounting Policies and Estimates

     The above discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing our consolidated financial statements, we must make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. We have evaluated the accounting policies used in the preparation of the consolidated financial statements and related notes under Part II, Item 8 of this Form 10-K and believe that our accounting policies are reasonable and appropriate. We believe that the following critical accounting policies, among others, are most critical as they relate to our more significant judgments and estimates used in the preparation of our consolidated financial statements.

     REVENUE RECOGNITION — Most of the Company’s product revenue is recognized upon shipment of the Company’s products, at which time title passes to the customer, the price is fixed and collectibility is reasonably assured. The remainder of the Company’s product revenue is recognized upon receipt of the products by the customer, at which time title passes to the customer, the price is fixed and collectibility is reasonably assured. Revenues from contracts that contain specific customer acceptance provisions are deferred until customer acceptance occurs. Generally, the Company does not have obligations to its customers after its products are shipped under standard shipping terms, after its products are received by customers under destination terms, and after the products are accepted by customers under contractual acceptance provisions, other than pursuant to warranty obligations. In limited instances, the Company provides installation of its products. In accordance with Emerging Issues Task Force Issue 00-21 “Accounting for Revenue Arrangements With Multiple Deliverables”, the Company allocates revenue based on the fair value of the delivered item, generally the product, and the undelivered item, installation, based on their respective fair values. Revenue related to the undelivered item is deferred until the services have been completed.

     In certain instances, the Company requires its customers to pay for a portion or all of their purchases prior to the Company building or shipping these products. Cash payments received prior to shipment are recorded as customer deposits and deferred revenue in the condensed consolidated balance sheets, and then recognized as revenue as

appropriate based upon the transfer of title of the products. The Company does not offer price protection to customers or allow returns, unless covered by our normal policy for repair of defective products.

     WARRANTY POLICY — We offer warranty coverage for our products for periods typically ranging from 12 to 24 months after shipment. We estimate the anticipated costs of repairing products under warranty based on the historical or expected cost of the repairs and expected failure rates. The assumptions used to estimate warranty accruals are reevaluated quarterly, at a minimum, in light of actual experience and, when appropriate, the accruals or the accrual percentage is adjusted based on specific estimates of project repair costs and quantity of product returns. Our determination of the appropriate level of warranty accrual is based on estimates of the percentage of units affected and the repair costs. Estimated warranty costs are recorded at the time of sale of the related product, and are recorded within cost of sales in the consolidated statements of operations.

     EXCESS AND OBSOLETE INVENTORY— Inventory is written down or written off when it becomes obsolete, generally due to engineering changes to a product or discontinuance of a product line, or when it is deemed excess. Judgment by management is necessary in estimating the net realizable value of inventory based primarily upon forecasts of product demand. Charges for excess and obsolete inventory are recorded, as necessary, within cost of sales in the consolidated statement of operations.

     STOCK-BASED COMPENSATION — On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R) to account for its stock plans and employee stock purchase plan, which requires the recognition of the fair value of stock-based compensation in the statement of income. The fair value of stock options and purchase rights pursuant to the employee stock purchase plan is estimated using the Black-Scholes valuation model. This model requires the input of highly subjective assumptions, including expected life of the award, forfeiture rate and expected stock price volatility. The fair value of restricted stock units is determined based upon the Company’s closing stock price on the grant date. The fair value of stock-based awards expected to vest is amortized over the requisite service period, typically the vesting period, of the award on a straight-line basis.

     COMMITMENTS AND CONTINGENCIES — From time to time we are involved in disputes and legal actions arising in the normal course of our business (see Item 3 within Part I and Note 14 within Part II, Item 8). While we currently believe that the amount of any ultimate loss would not be material to our financial position, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate loss could have a material adverse effect on our financial position or reported results of operations in a particular quarter. An unfavorable decision, particularly in patent litigation, could require material changes in production processes and products or result in our inability to ship products or components found to have violated third-party patent rights. We accrue loss contingencies in connection with our commitments and contingencies, including litigation, when it is probable that a loss has occurred or will occur and the amount of the loss can be reasonably estimated.

     INCOME TAXES — We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires deferred tax assets and liabilities to be recognized for temporary differences between the tax basis and financial reporting basis of assets and liabilities, computed at the tax rates expected in the period that the assets or liabilities are realized, as well as for the expected tax benefit of net operating loss and tax credit carryforwards. We assess the recoverability of our net deferred tax assets on a quarterly basis. Our assessment includes a number of factors, including historical results and income projections for each jurisdiction. If we determine that it is more likely than not that we will realize a portion or all of our remaining net deferred tax assets, some portion or all of the valuation allowance will be reversed with a corresponding reduction in income tax expense in such period. We adopted the provision of FIN 48 (FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109” (“FIN 48”)) as of January 1, 2007.

GOODWILL AND OTHER INTANGIBLE ASSETS — Goodwill represents the excess of the cost over the fair market value of net tangible and identifiable intangible assets of acquired businesses. Goodwill is not amortized. We use a two-step approach to assess our goodwill annually, or more frequently, if events or changes in circumstances indicate that goodwill might be impaired. In step 1 of the assessment the Company compares the fair value of the reporting unit to the carrying value of the reporting unit to determine if an impairment of goodwill is indicated. The estimated fair value is based on market capitalization, as complemented by a discounted cash flow analysis. If no impairment is indicated in Step 1 no additional analysis is performed. Should an impairment be indicated the Company would determine any loss in Step 2 by comparing the enterprise’s implied fair value of goodwill to the carrying amount of goodwill. Finite-lived intangible assets continue to be amortized using the straight-line method over their estimated useful lives and are reviewed for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable.

     See Note 1 — Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on our financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

     Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and long-term debt obligations. We generally place our investments with high-credit quality issuers and by policy are averse to principal loss and seek to protect and preserve our invested funds by limiting default risk, market risk and reinvestment risk. As of December 31, 2007, our investments in marketable securities consisted primarily of commercial paper, municipal bonds, auction rate securities and notes and institutional money markets. With the exception due to market conditions of the auction rate securities, these securities are highly liquid. Earnings on our marketable securities are typically invested into similar securities. We believe that a 10% decrease in average interest rates on these instruments would not have a material effect on our financial condition and results of operations.

Foreign Currency Exchange Rate Risk

     We transact business in various foreign countries. Our primary foreign currency cash flows are generated in countries in Asia and Europe. It is highly uncertain how currency exchange rates will fluctuate in the future. We enter into various foreign currency forward exchange contracts to mitigate risk of currency fluctuations in the British pound, European euro, Japanese yen, Taiwanese dollar, South Korean won and Chinese yuan. The notional amount of our foreign currency contracts at December 31, 2007 was $10.1 million. The potential fair value loss for a hypothetical 10% adverse change in foreign currency exchange rates at December 31, 2007, would be approximately $2.0 million, which would be essentially offset by corresponding gains related to the underlying assets. At December 31, 2007 we held foreign currency forward exchange contracts, maturing through January 2008, primarily

to purchase U.S. dollars and sell various foreign currencies. The following table summarizes our outstanding contracts as of December 31, 2007:

						Market
		Notional				Settlement				Unrealized
(in thousands)		Amounts				Amounts				Gain/(Loss)
		(In thousands)
Purchase contracts:
British pound contract		$	1,700			$	1,703			$	(3	)
South Korean won contract			1,500				1,517				(17	)
Taiwanese dollar contract			6,900				6,919				(19	)
										$	(39	)

Auction Rate Securities Risk

     We face market risk exposure associated with our investments in auction rate securities. As of December 31, 2007, we held approximately $51 million in auction rate securities. Subsequent to December 31, 2007, we sold approximately $11 million in municipal auction rate securities. However, starting in February 2008, we experienced difficulty in selling additional securities due to the failure of the auction mechanism which provides liquidity to these securities. The securities for which auctions have failed will continue to accrue interest and be auctioned every 35 days until the auction succeeds, the issuer calls the securities, or they mature. Accordingly, there may be no effective mechanism for selling these securities at face value, however, we intend to continue to attempt to sell our auction rate securities without a loss in principal and thus these securities are classified as short-term investments. As of March 12, 2008, the Company had approximately $40 million of auction rate securities and continued deterioration in the credit and equity markets, continued failed auctions or the lack of a developing secondary market may potentially cause impairment in the value of these securities or negatively impact our ability to liquidate these securities.

Reports of Grant Thornton LLP, Independent Registered Public Accounting Firm	30
Consolidated Balance Sheets as of December 31, 2007 and 2006	33
Consolidated Statements of Income for the Years Ended December 31, 2007, 2006 and 2005	35
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2007, 2006 and 2005	36
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005	37
Notes to Consolidated Financial Statements	38
Schedule II — Valuation and Qualifying Accounts	56

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
of Advanced Energy Industries, Inc.

We have audited the accompanying consolidated balance sheets of Advanced Energy Industries, Inc. (a Delaware corporation) and subsidiaries (together the “Company”) 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 three years in the period ended December 31, 2007. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 8. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanced Energy Industries, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the 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 financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company adopted the Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, on January 1, 2006. As discussed in Note 12 to the consolidated financial statements, the Company adopted the Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, on January 1, 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Advanced Energy Industries, Inc. and subsidiaries’ 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), and our report dated March 17, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ GRANT THORNTON LLP

Denver, Colorado
March 17, 2008

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
of Advanced Energy Industries, Inc.

We have audited Advanced Energy Industries, Inc. (a Delaware Corporation) and subsidiaries’ (together the “Company”) 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). Advanced Energy Industries, Inc.’s management is responsible 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 appearing under Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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, Advanced Energy Industries, 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 COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Advanced Energy Industries, Inc. and subsidiaries 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 three years in the period ended December 31, 2007, and our report dated March 17, 2008 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Denver, Colorado
March 17, 2008

		December 31,
		2007				2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	94,588			$	58,240
Marketable securities			110,676				85,978
Accounts receivable — trade, net			61,545				71,956
Inventories, net			50,532				52,778
Deferred income taxes			23,696				24,434
Other current assets			6,932				7,341
Total current assets			347,969				300,727
PROPERTY AND EQUIPMENT, net			30,912				33,571
OTHER ASSETS:
Deposits and other			7,045				2,640
Goodwill			61,406				58,679
Other intangible assets, net			6,362				6,905
Customer service equipment, net			1,236				832
Deferred income tax assets			4,098				8,549
Total assets		$	459,028			$	411,903

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.

ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

		December 31,
		2007				2006
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable		$	12,424			$	16,310
Income taxes payable			5,692				7,741
Accrued payroll and employee benefits			11,945				16,899
Accrued warranty expense			8,812				7,845
Other accrued expenses			2,251				3,252
Customer deposits and deferred revenue			759				751
Capital lease obligations, current portion			131				131
Total current liabilities			42,014				52,929
LONG-TERM LIABILITIES:
Capital leases, net of current portion			112				198
Deferred income tax liabilities			1,891				1,971
Uncertain tax positions			5,800				—
Other long-term liabilities			2,150				1,015
Total long-term liabilities			9,953				3,184
Total liabilities			51,967				56,113
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value, 1,000 shares authorized, none issued and outstanding			—				—
Common stock, $0.001 par value, 70,000 shares authorized; 45,288 and 44,855 shares issued and outstanding at December 31, 2007 and 2006, respectively			45				45
Additional paid-in capital			267,205				258,688
Retained earnings			121,745				88,344
Unrealized holding gains on available-for-sale securities, net			—				323
Cumulative translation adjustments, net			18,066				8,390
Total stockholders’ equity			407,061				355,790
Total liabilities and stockholders’ equity		$	459,028			$	411,903

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.

ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)

		2007				2006				2005
SALES		$	384,699			$	410,742			$	325,482
COST OF SALES			221,890				235,524				208,401
GROSS PROFIT			162,809				175,218				117,081
OPERATING EXPENSES:
Research and development			50,393				44,848				39,720
Selling, general and administrative			63,189				62,870				55,681
Litigation settlement			—				—				3,000
Restructuring charges			3,287				111				2,706
Total operating expenses			116,869				107,829				101,107
INCOME FROM OPERATIONS			45,940				67,389				15,974
OTHER INCOME (EXPENSE):
Interest income			6,329				3,659				2,866
Interest expense			(77	)			(412	)			(8,171	)
Foreign currency (loss) gain			(1,773	)			(206	)			243
Debt extinguishment expense			—				—				(3,180	)
Other income, net			331				1,636				763
Total other income (expense), net			4,810				4,677				(7,479	)
Income from continuing operations before income taxes			50,750				72,066				8,495
(PROVISION) BENEFIT FOR INCOME TAXES			(16,389	)			15,118				(4,873	)
INCOME FROM CONTINUING OPERATIONS			34,361				87,184				3,622
Gain on sale of discontinued assets			—				1,138				7,855
Results of discontinued operations			—				—				1,340
INCOME FROM DISCONTINUED OPERATIONS			—				1,138				9,195
NET INCOME		$	34,361			$	88,322			$	12,817
BASIC EARNINGS PER SHARE
Income from continuing operations		$	0.76			$	1.95			$	0.10
Income from discontinued operations			—			$	0.03			$	0.25
NET INCOME PER SHARE		$	0.76			$	1.98			$	0.35
DILUTED EARNINGS PER SHARE
Income from continuing operations		$	0.75			$	1.93			$	0.10
Income from discontinued operations			—			$	0.03			$	0.25
NET INCOME PER SHARE		$	0.75			$	1.95			$	0.34
BASIC WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING			45,156				44,721				37,084
DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING			45,704				45,265				37,434

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.

														Retained								Accumulated
										Additional				Earnings								Other				Total
		Common Stock								Paid-in				(Accumulated				Deferred				Comprehensive				Stockholders’
		Shares				Amount				Capital				Deficit)				Compensation				(Loss) Income				Equity
BALANCES, December 31, 2004			32,760			$	33			$	144,500			$	(12,795	)		$	—			$	13,240			$	144,978
Exercise of stock options for cash			195				—				1,659				—				—				—				1,659
Sale of common stock through public offering			11,500				12				105,533				—				—				—				105,545
Sale of common stock through employee stock purchase plan			45				—				348				—				—				—				348
Stock-based compensation and amortization			—				—				1,635				—				(1,290	)			—				345
Comprehensive income:
Equity adjustment from foreign currency translation			—				—				—				—				—				(8,539	)			(8,539	)
Unrealized holding gains			—				—				—				—				—				1,159				1,159
Reclassification adjustment for amounts included in net loss related to sales of securities			—				—				—				—				—				(882	)			(882	)
Net income			—				—				—				12,817				—				—				12,817
Total comprehensive income																											4,555
BALANCES, December 31, 2005			44,500			$	45			$	253,675			$	22			$	(1,290	)		$	4,978			$	257,430
Exercise of stock options for cash			304				—				2,913				—				—				—				2,913
Sale of common stock through employee stock purchase plan			32				—				379				—				—				—				379
Issuance of restricted stock and stock- based compensation and amortization			19				—				3,011				—				—				—				3,011
Removal of opening deferred stock compensation balance upon adoption of SFAS 123(R)			—				—				(1,290	)			—				1,290				—				—
Comprehensive income:
Equity adjustment from foreign currency translation			—				—				—				—				—				4,739				4,739
Unrealized holding gains			—				—				—				—				—				(40	)			(40	)
Reclassification adjustment for amounts included in net loss related to sales of securities			—				—				—				—				—				(964	)			(964	)
Net income			—				—				—				88,322				—				—				88,322
Total comprehensive income																											92,057
BALANCES, December 31, 2006			44,855			$	45			$	258,688			$	88,344			$	—			$	8,713			$	355,790
Adoption of FIN 48			—				—				—				(960	)			—				—				(960	)
Exercise of stock options for cash			339				—				4,518				—				—				—				4,518
Sale of common stock through employee stock purchase plan			28				—				403				—				—				—				403
Issuance of restricted stock and stock- based compensation and amortization, net			66				—				3,596				—				—				—				3,596
Comprehensive income:
Equity adjustment from foreign currency translation			—				—				—				—				—				9,676				9,676
Unrealized holding gains			—				—				—				—				—				(323	)			(323	)
Net income			—				—				—				34,361				—				—				34,361
Total comprehensive income																											43,714
BALANCES, December 31, 2007			45,288			$	45			$	267,205			$	121,745			$	—			$	18,066			$	407,061