UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended April 2, 2006

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

For the transition period from to

Commission File No. 0-22780

FEI COMPANY

(Exact name of registrant as specified in its charter)

Oregon		93-0621989
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)

5350 NE Dawson Creek Drive, Hillsboro, Oregon		97124-5793
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 503-726-7500

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer ý Non-accelerated filer o

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

The number of shares of common stock outstanding as of May 5, 2006 was 33,927,510.

FEI COMPANY

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets – April 2, 2006 and December 31, 2005

	Consolidated Statements of Operations – Thirteen Weeks Ended April 2, 2006 and April 3, 2005

	Consolidated Statements of Comprehensive Income (Loss) – Thirteen Weeks Ended April 2, 2006 and April 3, 2005

	Consolidated Statements of Cash Flows – Thirteen Weeks Ended April 2, 2006 and April 3, 2005

	Condensed Notes to the Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II - OTHER INFORMATION

Item 1A.	Risk Factors

Item 6.	Exhibits

Signatures

FEI Company and Subsidiaries

Consolidated Balance Sheets

(In thousands)

(Unaudited)

	April 2,			December 31,
	2006			2005

Assets
Current Assets:
Cash and cash equivalents	$	74,835		$	59,177
Short-term investments in marketable securities	113,066			156,049
Short-term restricted cash	31,103			20,138
Receivables, net of allowances for doubtful accounts of $3,356 and $3,340	110,655			98,330
Inventories	81,487			84,879
Deferred tax assets	4,849			5,157
Other current assets	33,362			32,328
Total Current Assets	449,357			456,058

Non-current investments in marketable securities	33,284			44,602
Long-term restricted cash	2,411			519
Property, plant and equipment, net of accumulated depreciation of $67,980 and $66,039	58,531			59,011
Purchased technology, net of accumulated amortization of $41,092 and $40,433	7,553			8,154
Goodwill	41,417			41,402
Deferred tax assets	1,343			1,095
Other assets, net	46,112			45,190
Total Assets	$	640,008		$	656,031

Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	25,074		$	26,186
Current account with Philips	1,512			1,964
Accrued payroll liabilities	13,539			9,205
Accrued warranty reserves	5,006			5,193
Deferred revenue	39,828			43,647
Income taxes payable	8,965			9,021
Accrued restructuring, reorganization, relocation and severance	6,995			5,274
Other current liabilities	29,234			31,072
Total Current Liabilities	130,153			131,562

Convertible debt	200,062			225,000
Deferred tax liabilities	2,101			1,947
Other liabilities	5,155			5,079

Commitments and contingencies

Shareholders’ Equity:
Preferred stock - 500 shares authorized; none issued and outstanding	—			—
Common stock - 70,000 shares authorized; 33,902 and 33,800 shares issued and outstanding, no par value	342,197			332,125
Retained deficit	(61,303		)	(56,081		)
Accumulated other comprehensive income	21,643			16,399
Total Shareholders’ Equity	302,537			292,443
Total Liabilities and Shareholders’ Equity	$	640,008		$	656,031

See accompanying Condensed Notes to the Consolidated Financial Statements.

FEI Company and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	For the Thirteen Weeks Ended
	April 2, 2006			April 3, 2005

Net Sales:
Products	$	86,602		$	93,224
Products - related party	22			569
Service and components	26,580			26,956
Service and components - related party	565			244
Total net sales	113,769			120,993

Cost of Sales:
Products	45,965			52,117
Service and components	20,851			19,939
Total cost of sales	66,816			72,056

Gross Profit	46,953			48,937

Operating Expenses:
Research and development	14,001			16,187
Selling, general and administrative	23,818			25,313
Merger costs	452			—
Amortization of purchased technology	641			1,342
Asset impairment	465			—
Restructuring, reorganization, relocation and severance	11,569			—
Total operating expenses	50,946			42,842

Operating (Loss) Income	(3,993		)	6,095

Other Income (Expense):
Interest income	2,244			1,814
Interest expense	(1,658		)	(2,507		)
Other, net	(383		)	(216		)
Total other income (expense), net	203			(909		)

(Loss) income before income taxes	(3,790		)	5,186
Income tax expense	1,431			1,763
Net (loss) income	$	(5,221	)	$	3,423

Basic net (loss) income per share	$	(0.15	)	$	0.10

Diluted net (loss) income per share	$	(0.15	)	$	0.09

Shares used in per share calculations:
Basic	33,867			33,456
Diluted	33,867			39,878

See accompanying Condensed Notes to the Consolidated Financial Statements.

FEI Company and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

	For the Thirteen Weeks Ended
	April 2, 2006			April 3, 2005

Net (loss) income	$	(5,221	)	$	3,423
Other comprehensive income (loss):
Change in cumulative translation adjustment, zero taxes provided	4,096			(8,338		)
Change in unrealized loss on available-for-sale securities	58			(396		)
Changes due to cash flow hedging instruments:
Net gain (loss) on hedge instruments	1,090			(1,493		)
Reclassification to net (loss) income of previously deferred gains relaterd to hedge derivatives instruments	—			(359		)
Comprehensive income (loss)	$	23		$	(7,163	)

See accompanying Condensed Notes to the Consolidated Financial Statements.

FEI Company and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	For the Thirteen Weeks Ended
	April 2, 2006			April 3, 2005

Cash flows from operating activities:
Net (loss) income	$	(5,221	)	$	3,423
Adjustments to reconcile net (loss) income to net cash (used by) provided by operating activities:
Depreciation	3,421			4,146
Amortization	1,236			3,143
Stock-based compensation expense	8,339			—
Asset impairment of property, plant and equipment and other assets	465			—
Gain on property, plant and equipment disposals	(49		)	(163		)
Write-off of deferred bond offering costs	361			—
Deferred income taxes	158			(5,160		)
Tax benefit of convertible hedge	—			875
Tax benefit for non-qualified stock options exercised	—			263
(Increase) decrease in:
Receivables	(11,283		)	23,041
Inventories	3,481			(9,841		)
Income taxes receivable	(589		)	—
Other assets	(1,031		)	4,321
Increase (decrease) in:
Accounts payable	(2,085		)	6,091
Current account with Philips	(505		)	1,097
Accrued payroll liabilities	4,141			(789		)
Accrued warranty reserves	(243		)	95
Deferred revenue	(4,444		)	2,865
Income taxes payable	(118		)	(2,757		)
Accrued restructuring and reorganization costs	2,263			(325		)
Other liabilities	(1,212		)	(3,954		)
Net cash (used by) provided by operating activities	(2,915		)	26,371

Cash flows from investing activities:
(Increase) decrease in restricted cash	(12,293		)	2,494
Acquisition of property, plant and equipment	(1,175		)	(4,415		)
Proceeds from disposal of property, plant and equipment	13			451
Purchase of investments in marketable securities	(24,397		)	(6,953		)
Redemption of investments in marketable securities	78,700			16,000
Investment in unconsolidated affiliate	(648		)	—
Other	(35		)	(34		)
Net cash provided by investing activities	40,165			7,543

Cash flows from financing activities:
Redemption of 5.5% convertible notes	(24,938		)	—
Proceeds from exercise of stock options and employee stock purchases	1,733			1,007
Net cash (used by) provided by financing activities	(23,205		)	1,007

Effect of exchange rate changes	1,613			(4,673		)
Increase in cash and cash equivalents	15,658			30,248

Cash and cash equivalents:
Beginning of period	59,177			112,602
End of period	$	74,835		$	142,850

Supplemental Cash Flow Information:
Cash paid for taxes	$	1,580		$	6,899
Cash paid for interest	2,206			4,086

See accompanying Condensed Notes to the Consolidated Financial Statements.

FEI COMPANY AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. NATURE OF BUSINESS

We are a leading supplier of products that enable the research, development and manufacturing of nanoscale features by helping our customers understand their three-dimensional structures. Beginning in 2006, we are reporting our revenue based on the market-focused organization that we put into place in 2005. Our semiconductor and data storage markets are being reported together as NanoElectronics and our Industry and Institute market is being broken down into NanoResearch and Industry and NanoBiology markets. See additional disclosure in Note 17.

Our products and systems include hardware and software for focused ion beams, or FIBs, scanning electron microscopes, or SEMs, transmission electron microscopes, or TEMs, and DualBeam systems, which combine a FIB and SEM on a single platform, as well as CAD navigation and yield management software.

Our DualBeam systems include models that have wafer handling capability that are purchased by semiconductor manufacturers (“wafer-level DualBeam systems”) and models that have small stages and are sold to customers in several markets (“small stage DualBeam systems”).

We have research, development and manufacturing operations in Hillsboro, Oregon; Sunnyvale, California; Mumbai, India; Eindhoven, The Netherlands; and Brno, Czech Republic.

Sales and service operations are conducted in the United States and approximately 50 other countries around the world. We also sell our products through independent agents, distributors and representatives in various additional countries.

2. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of FEI Company and all of our wholly-owned subsidiaries (“FEI”). All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements and condensed footnotes have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The results of operations for the thirteen weeks ended April 2, 2006 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the Securities and Exchange Commission (“SEC”) on March 10, 2006.

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. It is reasonably possible that the estimates we have made may change in the near future. Significant estimates underlying the accompanying consolidated financial statements include the allowance for doubtful accounts, reserves for excess or obsolete inventory, restructuring and reorganization costs, warranty liabilities, income tax related contingencies, tax valuation allowances, the valuation of businesses acquired and related in-process research and development and other intangibles, the valuation of minority debt and equity investments in non-public companies, the lives and recoverability of equipment and other long-lived assets such as existing technology intangibles, software development costs and goodwill and the timing of revenue recognition and the timing and valuation of stock-based compensation.

3. STOCK-BASED COMPENSATION

Adoption of SFAS No. 123R

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” We elected to use the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing stock-based compensation. Under this method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption is recognized in the net income in the periods after the date of adoption over the remainder the requisite service period. The cumulative effect of the change in accounting principle from Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” to SFAS No. 123R was not material.

Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method as prescribed by APB Opinion No. 25 and related interpretations. We provided disclosures of net income and earnings per share as prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied in measuring compensation expense as follows (in thousands, except per share amounts):

	Thirteen Weeks Ended
	April 3, 2005
Net income, as reported	$	3,423
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(2,901		)
Net income, pro forma	$	522
Basic net income per share:
As reported	$	0.10
Pro forma	$	0.02
Diluted net income per share:
As reported	$	0.09
Pro forma	$	0.01

Certain information regarding our stock-based compensation was as follows (in thousands):

	Thirteen Weeks Ended
	April 2, 2006		April 3, 2005
Weighted average grant-date fair value of share options granted	$	166	$	1,107
Total intrinsic value of share options exercised	598		819
Total intrinsic value of share-based liabilities paid	—		—
Stock-based compensation recognized in statement of operations	1,250		—
Tax benefit recognized in statement of operations	—		—
Stock-based compensation capitalized in fixed assets, inventory or other assets	—		—
Cash received from options exercised and shares purchased under all share-based arrangements	1,733		1,007
Tax deduction realized related to stock options exercised	—		263

Our stock-based compensation expense, excluding the CEO severance as described in Note 13, was included in our statements of operations as follows (in thousands):

	Thirteen Weeks Ended
	April 2, 2006		April 3, 2005
Cost of sales	$	197	$	—
Research and development	228		—
Selling, general and administrative	825		—
	$	1,250	$	—

Compensation expense related to restricted shares is based on the fair value of the underlying shares on the date of grant as if the shares were vested. Compensation expense related to options granted pursuant to our stock incentive plans and shares purchased pursuant to our employee share purchase plan was determined based on the estimated fair values using the Black-Scholes option pricing model and the following weighted average assumptions:

	Thirteen Weeks Ended
	April 2, 2006		April 3, 2005
Risk-free interest rates	2.8% - 4.8	%	1.2% - 4.3	%
Dividend yield	0.0	%	0.0	%
Expected lives:
Option plans	4.75 years		5.5 years
ESPP	6 months		6 months
Volatility	71% - 74	%	73% - 77	%
Discount for post vesting restrictions	0.0	%	0.0	%

The risk-free rate used is based on the U.S. Treasury yield over the estimated term of the options granted. Expected lives were estimated based on the average between the stock option awards’ vest date and their contractual life. The expected volatility is calculated based on the historical volatility of our common stock.

We amortize stock-based compensation on a ratable basis over the vesting period of the individual award with estimated forfeitures considered. Shares to be issued upon the exercise of stock options will come from newly issued shares.

Stock Incentive Plans

Our 1995 Stock Incentive Plan, as amended (the “1995 Plan”) allows for issuance of a maximum of 8,000,000 shares and our 1995 Supplemental Stock Incentive Plan (the “1995 Supplemental Plan”) allows for issuance of a maximum of 500,000 shares.

We maintain stock incentive plans for selected directors, officers, employees and certain other parties that allow the Board of Directors to grant options (incentive and nonqualified), stock and cash bonuses, stock appreciation rights and restricted stock units and restricted shares. The Board of Directors’ ability to grant options under either the 1995 Plan or the 1995 Supplemental Plan will terminate, if the plans are not amended, when all shares reserved for issuance have been issued and all restrictions on such shares have lapsed or earlier, at the discretion of the Board of Directors. At April 2, 2006, there were 1,612,114 shares available for grant under these plans and 6,839,310 shares of our common stock were reserved for issuance. Activity under these plans was as follows (share amounts in thousands):

	Shares Subject to Options		Weighted Average Exercise Price
Balances, December 31, 2005	5,419		$	20.84
Granted	8		20.72
Forfeited	(42	)	20.19
Expired	(56	)	25.69
Exercised	(102	)	17.26
Balances, April 2, 2006	5,227		20.87

	Restricted Shares		Weighted Average Grant Date Per Share Fair Value
Balances, December 31, 2005	20		$	21.62
Granted	3		20.05
Vested	—		—
Forfeited	—		—
Balances, April 2, 2006	23		21.42

Certain information regarding options outstanding as of April 2, 2006 was as follows:

	Options Outstanding		Options Exercisable
Number	5,227,196		4,432,670
Weighted average exercise price	$	20.87	$	21.40
Aggregate intrinsic value	$	12.6 million	$	10.5 million
Weighted average remaining contractual term	5.7 years		5.5 years

As of April 2, 2006, unrecognized stock-based compensation related to outstanding, but unvested stock options and restricted shares was $7.3 million, which will be recognized over the weighted average remaining vesting period of 1.3 years.

Employee Share Purchase Plan

In 1998, we implemented an Employee Share Purchase Plan (“ESPP”). A total of 1,950,000 shares of our common stock may be issued pursuant to the ESPP, as amended. Under the ESPP, employees may elect to have compensation withheld and placed in a designated stock subscription account for purchase of our common stock. Each ESPP offering period consists of one six-month purchase period. The purchase price in a purchase period is set at a 15% discount to the lower of the market price on either the first day of the applicable offering period or the purchase date. The ESPP allows a maximum purchase of 1,000 shares by each employee during any two consecutive offering periods. There were no shares purchased pursuant to the ESPP during the thirteen weeks ended April 2, 2006 as the quarter ended in the middle of the current purchase period. At April 2, 2006, 911,559 shares of our common stock remained available for purchase and were reserved for issuance under the ESPP.

4. RECLASSIFICATIONS

The following reclassifications were made to the prior period financial statements to conform to the current period presentation: other receivables and product-related liabilities were reclassified within line items in net cash (used by) provided by operating activities.

5. EARNINGS PER SHARE

Basic earnings per share (EPS) and diluted EPS are computed using the methods prescribed by SFAS No. 128, “Earnings per Share.” Following is a reconciliation of the shares used for basic EPS and diluted EPS (in thousands):

	Thirteen Weeks Ended
	April 2, 2006	April 3, 2005
Shares used for basic EPS	33,867	33,456
Dilutive effect of stock options calculated using the treasury stock method	—	708
Dilutive effect of shares issuable to Philips	—	185
Dilutive effect of convertible debt	—	5,529
Shares used for diluted EPS	33,867	39,878

Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Stock options	3,286	2,379
Convertible debt	6,539	2,928

6. CREDIT FACILITIES

We maintain a $10.0 million unsecured, committed bank borrowing facility in the United States, a $3.7 million unsecured and uncommitted bank borrowing facility in Japan and various limited facilities in select foreign countries. In addition, we maintain a $10.0 million unsecured and uncommitted bank facility in the United States. At April 2, 2006, a total of $20.0 million was available under these facilities. As part of our contracts with certain customers, we are required to provide letters of credit or bank guarantees which these customers can draw against in the event we do not perform in accordance with our contractual obligations. At April 2, 2006, we had $37.4 million of these guarantees and letters of credit outstanding, of which approximately $33.5 million were secured by restricted cash deposits. Restricted cash balances securing bank guarantees that expire within twelve months of the balance sheet date are recorded as a current asset on our consolidated balance sheets. Restricted cash balances securing bank guarantees that expire beyond twelve months from the balance sheet date are recorded as long-term restricted cash on our consolidated balance sheet.

7. FACTORING OF ACCOUNTS RECEIVABLE

In the first quarter of 2006 and 2005, we entered into agreements under which we sold $1.4 million and $0.8 million, respectively, of our accounts receivable at a discount to unrelated third party financiers without recourse. The transfers qualified for sales treatment under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Discounts related to the sale of the receivables, which were immaterial in the first quarter of 2006 and 2005, were recorded in our statement of operations as other expense.

8. INVENTORIES

Inventories are stated at the lower of cost or market, with cost determined by standard cost methods, which approximate the first-in, first-out method. Inventory costs include material, labor and manufacturing overhead. Service inventories that exceed the estimated requirements for the next twelve months based on recent usage levels are reported as other long-term assets.

Inventories consisted of the following (in thousands):

	April 2,		December 31,
	2006		2005
Raw materials and assembled parts	$	18,130	$	22,295
Service inventories, estimated current requirements	13,164		12,339
Work-in-process	37,698		36,954
Finished goods	12,495		13,291
Total inventories	$	81,487	$	84,879

Service inventories included in other long-term assets	$	35,248	$	33,869

Inventory valuation adjustments were insignificant during the thirteen weeks ended April 2, 2006 and April 3, 2005. Provision for service inventory valuation adjustments totaled $1.7 million and $0.6 million, respectively, during the thirteen weeks ended April 2, 2006 and April 3, 2005.

9. GOODWILL, PURCHASED TECHNOLOGY AND OTHER INTANGIBLE ASSETS

The roll-forward of our goodwill was as follows (in thousands):

	Thirteen Weeks Ended
	April 2, 2006		April 3, 2005
Balance, beginning of period	$	41,402	$	41,486
Adjustments to goodwill	15		(10		)
Balance, end of period	$	41,417	$	41,476

Adjustments to goodwill include translation adjustments resulting from a portion of our goodwill being recorded on the books of our foreign subsidiaries.

At April 2, 2006 and December 31, 2005, our other intangible assets included purchased technology, capitalized software, patents, trademarks and other and note issuance costs. The gross amount of our other intangible assets and the related accumulated amortization were as follows (in thousands):

	Amortization	April 2,			December 31,
	Period	2006			2005
Purchased technology	5 to 12 years	$	48,645		$	48,587
Accumulated amortization		(41,092		)	(40,433		)
		$	7,553		$	8,154

Capitalized software	3 years	$	10,854		$	11,517
Accumulated amortization		(10,816		)	(11,391		)
		38			126

Patents, trademarks and other	2 to 15 years	4,673			4,619
Accumulated amortization		(2,226		)	(2,045		)
		2,447			2,574

Note issuance costs	5 to 7 years	10,732			10,858
Accumulated amortization		(7,974		)	(7,353		)
		2,758			3,505
Total intangible assets included in other long-term assets		$	5,243		$	6,205

Amortization expense, excluding impairment charges and note issuance cost write-offs, was as follows (in thousands):

	Thirteen Weeks Ended
	April 2, 2006		April 3, 2005
Purchased technology	$	641	$	1,342
Capitalized software	91		910
Patents, trademarks and other	172		150
Note issuance costs	332		415
	$	1,236	$	2,817

Amortization is as follows over the next five years (in thousands):

	Purchased Technology		Capitalized Software		Patents, Trademarks and Other		Note Issuance Costs
Remainder of 2006	$	1,781	$	12	$	476	$	906
2007	2,130		13		535		1,208
2008	2,130		13		278		644
2009	756		—		191		—
2010	756		—		187		—
Thereafter	—		—		780		—
	$	7,553	$	38	$	2,447	$	2,758

10. INVESTMENTS

At December 31, 2005, we were committed to invest an additional $0.6 million in one of the non-public companies in which we have an equity interest in the event the related company could not find alternative financing. In February 2006, we made the additional investment in the company as they could not secure alternative financing. Such investments are included as a component of other assets, net on our consolidated

balance sheet. We have no further commitments to provide funding to any of the non-public companies of which we hold investments in.

11. WARRANTY RESERVES

Our products generally carry a one-year warranty. A reserve is established at the time of sale to cover estimated warranty costs as a component of cost of sales on our consolidated statements of operations. Our estimate of warranty cost is based on our history of warranty repairs and maintenance. While most new products are extensions of existing technology, the estimate could change if new products require a significantly different level of repair and maintenance than similar products have required in the past. Our estimated warranty costs are reviewed and updated on a quarterly basis. Historically, we have not made significant adjustments to our estimates.

The following is a summary of warranty reserve activity (in thousands):

	Thirteen Weeks Ended
	April 2, 2006			April 3, 2005
Balance, beginning of period	$	5,193		$	10,052
Reductions for warranty costs incurred	(2,959		)	(3,569		)
Warranties issued	2,772			3,597
Translation and changes in estimates	—			(296		)
Balance, end of period	$	5,006		$	9,784

12. CONVERTIBLE NOTE PURCHASES

In February 2006, we repurchased $24.9 million of our 5.5% Convertible Subordinated Notes at prices ranging from 100.375 to 100.45. The premium and commissions paid totaled $0.1 million and were included as a component of interest expense in the first quarter of 2006. Additionally, related deferred note issuance costs of $0.3 million were expensed as a component of interest expense in the first quarter of 2006.

13. RESTRUCTURING, REORGANIZATION, RELOCATION AND SEVERANCE

Effective April 1, 2006, Vahé A. Sarkissian’s services as our Chairman, President and Chief Executive Officer (“CEO”) were terminated. Mr. Sarkissian indicated that he will be resigning as a director effective immediately prior to the 2006 Annual Meeting of Shareholders, to be held on May 11, 2006. Mr. Sarkissian was a party to an existing Executive Severance Agreement dated February 1, 2002. Termination of his service was deemed a termination without cause under the agreement. Pursuant to the terms of this agreement, and following his execution and non-revocation of a standard release, Mr. Sarkissian is entitled to certain severance benefits. These include: (i) a lump sum payment equaling three years of base salary (approximately $1.59 million); (ii) a lump sum payment equal to 100% of Mr. Sarkissian’s target bonus for 2006 (approximately $583,000); (iii) acceleration of all of Mr. Sarkissian’s stock options and restricted stock awards; (iv) permitting Mr. Sarkissian to exercise his options until the earlier of three years after his departure date or the option expiration date as set forth in the applicable option agreement; (v) a lump sum payment equaling two times what Mr. Sarkissian’s reasonably expected health insurance coverage costs would be for 18 months; and (vi) life insurance premium payments not to exceed $5,000.

Accordingly, we recorded a charge of $9.3 million, of which $2.2 million related to the cash severance payments and $7.1 million related to the non-cash expense associated with the fair market value of the modified stock options, which modified the original awards to i) accelerate all unvested stock options; and ii) waive the cancellation clause upon termination of employment; and iii) extend their legal lives as discussed

above.

The following table summarizes the charges, expenditures and write-offs and adjustments in the thirteen weeks ended April 2, 2006 related to our accrual for restructuring, reorganization, relocation and severance charges (in thousands):

Thirteen Weeks Ended April 2, 2006	Beginning Accrued Liability		Charged to Expense		Expenditures			Write-Offs and Adjustments		Ending Accrued Liability
Severance, outplacement and related benefits for terminated employees	$	1,778	$	1,706	$	(2,342	)	$	29	$	1,171
Abandoned leases, leasehold improvements and facilities	3,496		539		(446		)	—		3,589
CEO severance, excluding stock-based compensation	—		2,235		—			—		2,235
	$	5,274	$	4,480	$	(2,788	)	$	29	$	6,995

The restructuring charges are based on estimates that are subject to change. Workforce related charges could change because of shifts in timing, redeployment or changes in amounts of severance and outplacement benefits. Facilities charges could change due to changes in sublease income. Our ability to generate sublease income is dependent upon lease market conditions at the time we negotiate the sublease arrangements. Variances from these estimates could alter our ability to achieve anticipated expense reductions in the planned timeframe and modify our expected cash outflows and working capital.

In addition to the charges in connection with our restructuring and reorganization plans, this line item includes costs related to relocating current employees.

14. INCOME TAXES

Deferred tax assets, net of valuation allowances of $37.3 million and $35.0 million, respectively, as of April 2, 2006 and December 31, 2005 were as follows (in thousands):

	April 2,			December 31,
	2006			2005
Deferred tax assets – current	$	4,020		$	5,157
Deferred tax assets – non-current	2,175			1,095
Other current liabilities	(279		)	(371		)
Deferred tax liabilities – non-current	(2,101		)	(1,947		)
Net deferred tax assets	$	3,815		$	3,934

We recorded a tax provision of approximately $1.4 million for the thirteen week period ending April 2, 2006. The provision consists entirely of taxes accrued in foreign jurisdictions and does not reflect a benefit for current period losses in the United States as we have a recorded a full valuation allowance against the United States deferred tax assets generated from the current period losses.

In assessing the realizability of deferred tax assets, SFAS No. 109, “Accounting for Income Taxes,” establishes a more likely than not standard. If it is determined that it is more likely than not that deferred tax assets will not be realized, a valuation allowance must be established against the deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, historical operating performance, projected future taxable income and tax planning strategies in making this assessment. Our more likely than not assessment was principally based upon our historical losses in the United States, the impact of the restructuring activities and our forecast of future profitability in certain tax jurisdictions, primarily the United States.

15. RELATED PARTY ACTIVITY

Philips

Philips Business Electronics International B.V. (“Philips”), a subsidiary of Koninklijke Philips Electronics NV, currently owns approximately 25% of our common stock. For sales to Philips, see “Sales to Related Parties” below. The following table summarizes our other transactions with Philips (in thousands):

	Thirteen Weeks Ended
Amounts Paid to Philips	April 2, 2006		April 3, 2005
Subassemblies and other materials purchased from Philips	$	4,498	$	3,543
Facilities leased from Philips	52		82
Various administrative, accounting, customs, export, human resources, import, information technology, logistics and other services provided by Philips	146		235
Research and development services provided by Philips	143		456
	$	4,839	$	4,316

Current accounts with Philips represent accounts receivable and accounts payable between us and other Philips units. Most of the current account transactions relate to deliveries of goods, materials and services. Current accounts with Philips consisted of the following (in thousands):

	April 2, 2006			December 31, 2005
Current accounts receivable	$	259		$	231
Current accounts payable	(1,771		)	(2,195		)
Net current accounts with Philips	$	(1,512	)	$	(1,964	)

Sales to Related Parties

In addition to Philips, we have sold products and services to LSI Logic Corporation, Applied Materials and Nanosys, Inc. A director of Applied Materials, the Chairman and Chief Executive Officer of LSI Logic, Inc. and the Executive Chairman of Nanosys are all members of our Board of Directors. Sales to Philips, Accurel (prior to being acquired), Applied Materials, LSI Logic and Nanosys, were as follows (in thousands):

	Thirteen Weeks Ended
	April 2, 2006		April 3, 2005
Product sales:
Philips	$	22	$	126
Applied Materials	—		439
LSI Logic	—		4
	$	22	$	569
Service sales:
Philips	$	447	$	37
Accurel	—		151
Applied Materials	80		38
LSI Logic	33		16
Nanosys	5		2
	$	565	$	244
Total sales to related parties	$	587	$	813

16. COMMITMENTS AND CONTINGENCIES

From time to time, we may be a party to litigation arising in the ordinary course of business. Currently, we are not a party to any litigation that we believe would have a material adverse effect on our financial position, results of operations or cash flows.

We participate in third party equipment lease financing programs with United States financial institutions for a small portion of products sold. In these circumstances, the financial institution purchases our equipment and then leases it to a third party. Under these arrangements, the financial institutions have limited recourse

against us on a portion of the outstanding lease portfolio if the lessee defaults on the lease. We did not add to such guarantees during the first quarter of 2006, and, as of April 2, 2006, we had outstanding guarantees totaling $1.1 million related to these lease transactions. Under certain circumstances, we are obligated to exercise best efforts to re-market the equipment should the financial institutions reacquire it. As of April 2, 2006, we did not have any guarantees that require us to re-market the equipment.

We have commitments under non-cancelable purchase orders, primarily relating to inventory, totaling $35.4 million at April 2, 2006. These commitments expire at various times through March 2007.

17. SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Operating Review Board, which consists of our Chief Operating Officer, our Chief Financial Officer, our Senior Vice Presidents and other senior management.

Beginning in 2006, we began reporting our segments based on the market-focused organization that we put into place at the end of 2005. The Microelectronics and Electronoptics segments were reallocated to NanoElectronics, NanoResearch and Industry and NanoBiology based on customer. Service and Components were combined into one segment. Prior period information has been reclassified to conform with the current period presentation.

The following table summarizes various financial amounts for each of our current business segments (in thousands):

	Nano- Electronics		Nano- Research and Industry		Nano- Biology		Service and Components		Corporate and Eliminations			Total
Thirteen Weeks Ended April 2, 2006
Sales to external customers	$	41,194	$	35,332	$	10,098	$	27,145	$	—		$	113,769
Gross profit	21,119		14,925		4,702		6,295		(88		)	46,953

Thirteen Weeks Ended April 3, 2005
Sales to external customers	$	53,879	$	29,942	$	9,972	$	27,200	$	—		$	120,993
Gross profit	26,083		12,359		2,980		7,261		254			48,937

April 2, 2006
Total assets	$	172,431	$	43,278	$	27,327	$	101,965	$	295,007		$	640,008

December 31, 2005
Total assets	$	121,660	$	85,756	$	28,819	$	99,513	$	320,283		$	656,031

Nano-market segment disclosures are presented to the gross margin level as this is the primary performance measure the segment general managers are responsible for. Selling, general and administrative, research and development and other operating expenses, are managed and reported at the corporate level and, given allocation to the nano-market segments would be arbitrary, have not been allocated to the market segments. See our Consolidated Statements of Operations for reconciliations from gross margin to income before income taxes. These reconciling items are not included in the measure of profit and loss for each reportable segment.

None of our customers represented 10% or more of our total sales in the thirteen week periods ended April 2, 2006 or April 3, 2005.

18. NEW ACCOUNTING PRONOUNCEMENTS

SFAS No. 156

In March 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140.” SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” with respect to accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for fiscal years that begin after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. We do not have any servicing assets or servicing liabilities and, accordingly, the adoption of SFAS No. 156 will not have any effect on our results of operations, financial condition or cash flows.

SFAS No. 155

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No 133 and 140.” SFAS No. 155 resolves implementation issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS No. 155 is effective for fiscal years that begin after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. We do not have any beneficial interests in securitized financial assets and, accordingly, the adoption of SFAS No. 155 will not have any effect on our results of operations, financial condition or cash flows.

SFAS No. 154

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which requires companies to apply most voluntary accounting changes retrospectively to prior financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No. 154 on January 1, 2006 and, accordingly, any future accounting changes made by us will be accounted for under SFAS No. 154 and will be applied retrospectively.

SFAS No. 123R

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” which requires companies to recognize in their income statement the grant-date fair value of stock options and other equity-based compensation issued to employees. We adopted SFAS No. 123R effective January 1, 2006. The impact of the adoption of SFAS No. 123R reduced our consolidated results of operations for stock-based compensation expense by approximately $1.3 million for the first quarter of 2006. However, it did not have any effect on our cash flows or liquidity as stock-based compensation is a non-cash expense. See also Note 3 above.

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

Forward Looking Statements

This quarterly report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectations of earnings, revenues, bookings and backlog or other financial items; prospects for growth in certain markets or segments; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our 2006 operating results; any statements concerning proposed new products, services or developments; any statements related to the needs or expected growth of our target markets; any statements regarding proposed market transactions; any statements regarding capital expenditures; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. You can identify these statements by the fact that they do not relate strictly to historical or current facts and use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. The risks, uncertainties and assumptions referred to above include, but are not limited to, those discussed here and the risks discussed from time to time in our other public filings. All forward-looking statements included in

this report are based on information available to us as of the date of this report, and we assume no obligation to update these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-K, 10-Q and 8-K filed with, or furnished to, the Securities and Exchange Commission (“SEC”). You also should read Item 1A. “Risk Factors” included in Part II of this report for factors that we believe could cause our actual results to differ materially from expected and historical results. Other factors also could adversely affect us.

Summary of Products and Segments

We are a leading supplier of products that enable the research, development and manufacturing of nanoscale features by helping our customers understand their three-dimensional structures. Beginning in 2006, we are reporting our revenue based on the market-focused organization that we put into place at the end of 2005. Our semiconductor and data storage markets are being reported together as NanoElectronics and our Industry and Institute market is being broken down into NanoResearch and Industry and NanoBiology markets.

Our DualBeam systems include models that have wafer handling capability that are purchased by NanoElectronics customers (“wafer-level DualBeam systems”) and models that have small stages and are sold to customers in several markets (“small stage DualBeam systems”).

The NanoResearch and Industry market includes universities, public and private research laboratories and a wide range of industrial customers, including automobiles, aerospace, metals, mining and petrochemicals. Growth in these markets is driven by corporate and government funding for research and development in materials science. Our solutions provide researchers and manufacturers with atomic level resolution images and permit development, analysis and production of advanced products. Our products are also used in root cause failure analysis and quality control applications.

The NanoElectronics market consists of customers in the semiconductor, data storage and related industries such as printers and MEMs. For the semiconductor market, our growth is driven by shrinking line widths and process nodes to 65 nanometers and below, the use of multiple layers of new materials such as copper and low-k dielectrics, the increase in wafer size to 300 millimeters in diameter and increasing device complexity. Our products are used throughout the development and manufacturing cycles for semiconductors to speed new product development and increase yields by enabling three-dimensional wafer metrology, defect analysis, root cause failure analysis and circuit edit for modifying device structures. In the data storage market, our growth is driven by rapidly increasing storage densities that require smaller recording heads, thinner geometries, materials that increase the complexity of device structures and the transition from longitudinal to perpendicular recording heads. Our products offer three-dimensional metrology for thin film head processing and root cause failure analysis.

The NanoBiology market includes universities and research institutes engaged in biotech and life sciences applications, as well as pharmaceutical, biotech, medical device and hospital companies. Our products’ ultra-high resolution imaging allows cell biologists and drug researchers to create detailed three dimensional reconstructions of complex biological structures, enabling them to map proteins within cells. Our products are also used in a range of pathology and quality control applications.

We have reclassified the first quarter of 2005 revenues and gross margin into the new market segments to provide comparability to our 2006 first quarter results in this management’s discussion and analysis of financial condition and results of operations.

Overview

Net sales increased in the first quarter of 2006 compared with the fourth quarter of 2005, driven by the upturn in orders in the last two quarters. Net sales in the first quarter of 2006 were down compared with the first quarter of 2005, due to a decline in the NanoElectronics market, as described in more detail below.

Our consolidated bookings increased in the first quarter of 2006 compared with both the fourth and first quarters of 2005 to the highest quarterly level in company history. Bookings increased in each of the three market segments. Demand was particularly strong from NanoResearch and Industry and NanoBiology customers. By product, the largest contributor to order growth was our TEM line, led by the Titan high-end system. We also saw increases in demand for laboratory and wafer-level DualBeam systems across all our markets.

We only recognize backlog for firm purchase orders for which the terms of the sale have been agreed upon, including price, configuration, options and payment terms. Product backlog consists of all open orders meeting these criteria. Service backlog consists of open orders for service, unearned revenue on service contracts and open orders for spare parts. United States government backlog is limited to contracted amounts. At April 2, 2006, our product and service backlog was $178.3 million and $44.4 million, respectively, compared to $149.5 million and $36.8 million, respectively, at December 31, 2005. Of our total backlog at April 2, 2006, approximately $7.0 million was scheduled for delivery beyond twelve months. Customers may cancel or delay delivery on previously placed orders, although our standard terms and conditions include penalties for cancellations made close to the scheduled delivery date. As a result, the timing of the receipt of orders or the shipment of products could have a significant impact on our backlog at any date. For this and other reasons, the amount of backlog at any date is not necessarily indicative of revenue to be recognized in future periods.

Compared with the first and fourth quarters of 2005, both research and development expenses and sales, general and administrative expenses decreased.

Financial results for the first quarter of 2006 were affected by restructuring, asset impairment, refinancing and related charges which totaled $12.9 million and included the following:

• $9.3 million of restructuring, reorganization, relocation and severance charges in connection with the termination without cause of our former CEO, including $2.2 million of cash payments and a non-cash charge of $7.1 for stock-based compensation, as a result of the modification of his existing stock options in accordance with his 2002 severance agreement;

• $2.2 million of additional restructuring, reorganization, relocation and severance charges for facilities and severance charges related to the closure of certain of our European field offices as well as residual costs related to the Peabody plant closure and the downsizing of the related semiconductor businesses;

• $0.5 million for legal and other costs in connection with potential merger negotiations which were terminated by us in February 2006;

• $0.5 million for asset impairments related to the previously-announced decision to discontinue implementation of a new enterprise resource planning system and pursue less costly alternatives; and

• $0.4 million related to the repurchase and retirement of $25 million face value of our 5.5% convertible notes (included in interest expense).

The first quarter of 2006 also included $1.3 million of stock-based compensation expense, included in cost of sales and operating expenses, in accordance with the implementation of SFAS No. 123(R) using the modified prospective transition method.

Prior to 2006, we accounted for stock-based compensation using Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” In 2006, we have continued to calculate compensation expense for restricted shares using the fair value of the underlying shares on the date of grant as if the shares were vested and are recording compensation expense based on fair value estimates using the Black-Scholes option pricing model for options granted under our stock incentive plans and employee share purchase plan. Based on existing grants as of April 2, 2006, stock-based compensation expense is expected

to be approximately $1.5 million in the second quarter of 2006 and a slightly higher amount for the last two quarters of 2006.

Outlook for the Remainder of 2006

For the remainder of 2006, we expect growth in quarterly revenue compared with the first quarter of 2006, although we have experienced quarterly seasonality, which could affect our results. This outlook is based on our existing backlog of unfilled orders, which is at the highest level in our history. Although second quarter orders are likely to be below the unusually high levels of the first quarter, we expect that they will be greater than sales for the quarter, further increasing the backlog.

We expect earnings to increase over last year, due to the absence of the charges recorded in the first quarter of 2006, revenue growth and further improvements in operations and manufacturing efficiency. Earnings improvement will be moderated by increases in operating expenses for programs such as additional research and development for new products and additions to our sales force. In addition, the trend of weakness in the U.S. dollar relative to the euro, which has happened early in the second quarter of 2006, will also reduce margins, but will be partially offset by the results of our hedging program.

Critical Accounting Policies and the Use of Estimates

We have no changes or updates to the critical accounting policies and estimates reported in our Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the SEC on March 10, 2006.

Results of Operations

The following table sets forth our statement of operations data, both in absolute dollars and as a percentage of net sales (dollars in thousands).

	Thirteen Weeks Ended(1) April 2, 2006					Thirteen Weeks Ended(1) April 3, 2005
Net sales	$	113,769		100.0	%	$	120,993		100.0	%
Cost of sales	66,816			58.7		72,056			59.6
Gross profit	46,953			41.3		48,937			40.4
Research and development	14,001			12.3		16,187			13.4
Selling, general and administrative	23,818			20.9		25,313			20.9
Merger costs	452			0.4		—			—
Amortization of purchased technology	641			0.6		1,342			1.1
Asset impairment	465			0.4		—			—
Restructuring, reorganization, relocation and severance costs	11,569			10.2		—			—
Operating (loss) income	(3,993		)	(3.5	)	6,095			5.0
Other income (expense), net	203			0.2		(909		)	(0.8	)
(Loss) income before income taxes	(3,790		)	(3.3	)	5,186			4.3
Income tax expense	1,431			1.3		1,763			1.5
Net (loss) income	$	(5,221	)	(4.6	)%	$	3,423		2.8	%

(1) Percentages may not add due to rounding.

Net Sales

Net sales decreased $7.2 million, or 6.0%, to $113.8 million in the thirteen weeks ended April 2, 2006 (the first quarter of 2006) compared to $121.0 million in the thirteen weeks ended April 3, 2005 (the first quarter of 2005). This decrease reflects the fact that we utilized significant backlog in the first quarter of 2005 as compared to the first quarter of 2006, when we built backlog. In addition, we deemphasized certain semiconductor products in the second half of 2005 and sold our SIMS product line in the second quarter of 2005. These decreases were partially offset by increases in sales of our TEM products, including the Titan, and an increase in data storage sales in the first quarter of 2006 compared to the first quarter of 2005 as more companies transitioned to perpendicular recording, for which new tools are required. These factors are

described more fully below.

Net Sales by Market Segment

Net sales include sales in the NanoElectronics market, the NanoResearch and Industry market and the NanoBiology market. Net sales by market segment (in thousands) and as a percentage of net sales were as follows:

	Thirteen Weeks Ended
	April 2, 2006					April 3, 2005
NanoElectronics	$	41,194		36.2	%	$	53,879		44.5	%
NanoResearch and Industry	35,332		31.0		%	29,942		24.8		%
NanoBiology	10,098		8.9		%	9,972		8.2		%
Service and Components	27,145		23.9		%	27,200		22.5		%
	$	113,769	100.0		%	$	120,993	100.0		%

NanoElectronics

The $12.7 million, or 23.5%, decrease in NanoElectronics sales in the first quarter of 2006 compared to the first quarter of 2005 was due to an approximately $9.0 million decrease in semiconductor related sales volumes, primarily related to our wafer-level DualBeam systems and small stage DualBeam systems. A significant portion of the volume decline in the first quarter of 2006 was related to products in our semiconductor businesses which were deemphasized during our restructuring activities in the second half of 2005. In addition, the semiconductor capital equipment market experienced a general decline in bookings in 2005 that affected shipment volumes in the first quarter of 2006 compared with the first quarter of 2005. Additionally, our TEM sales decreased approximately $3.4 million in the first quarter of 2006 compared to the first quarter of 2005 due to the timing of particular shipments. We believe the long-term potential for increasing TEM sales to customers in the NanoElectronics markets remains strong as customers move to narrower line widths for their products. These decreases were partially offset by an increase in data storage sales in the first quarter of 2006 compared to the first quarter of 2005 as more companies transitioned to perpendicular recording. .

NanoResearch and Industry

The $5.4 million, or 18.0%, increase in NanoResearch and Industry sales in the first quarter of 2006 compared to the first quarter of 2005 was due primarily to an approximately $11.5 million increase related to demand for our TEMs, including the Titan. Demand was also aided by continued worldwide nanotechnology research funding. These increases were partially offset by an approximately $6.2 million decrease related to a decrease in the volume of sales of our small stage DualBeam systems.

NanoBiology

Sales in the NanoBiology market were relatively flat. We realized modest improvement in demand for our TEMs for research applications. NanoBiology is an emerging application area for our equipment, and a significant portion of the tools we sell in this market have relatively high unit prices. As a result, quarter-to-quarter growth rates in this market are likely to be volatile, although we expect long-term growth.

Service and Components

Sales in the service segment were flat in the first quarter of 2006 compared to the first quarter of 2005 as increases due to a larger installed base were offset by decreases in service contract renewals. Component sales include sales of individual components as well as equipment refurbishment and were flat in the first quarter of 2006 compared to the first quarter of 2005.

Net Sales by Geographic Region

A significant portion of our revenue has been derived from customers outside of the United States, and we expect this to continue. The following table shows our net sales by geographic location (dollars in thousands):

	Thirteen Weeks Ended
	April 2, 2006					April 3, 2005
North America	$	44,295		38.9	%	$	33,658		27.8	%
Europe	38,706		34.0		%	45,236		37.4		%
Asia-Pacific Region	30,768		27.1		%	42,099		34.8		%
	$	113,769	100.0		%	$	120,993	100.0		%

North America

The $10.6 million, or 31.6%, increase in sales to North America was due primarily to increased data storage sales as the conversion to perpendicular recording accelerated, as well as increased TEM sales, including the Titan.

Europe

The $6.5 million, or 14.4%, decrease in sales to Europe was primarily due to unusually high volume sales of our small stage DualBeam systems in the first quarter of 2005. This decrease was partially offset by an increase in TEM sales, including the Titan.

Asia-Pacific Region

The $11.3 million, or 26.9%, decrease in sales to the Asia-Pacific region was primarily due to unusually high volume sales of our wafer-level DualBeam systems and small stage DualBeam systems in the first quarter of 2005. This decrease was partially offset by an increase in TEM sales, including the Titan, in the first quarter of 2006 compared to the first quarter of 2005.

Cost of Sales and Gross Margin

Cost of sales includes manufacturing costs, such as materials, labor (both direct and indirect) and factory overhead, as well as all of the costs of our customer service function such as labor, materials, travel and overhead. We see four primary drivers affecting gross margin: product mix (including the effect of price competition), volume, cost reduction efforts and currency fluctuations.

Cost of sales decreased $5.2 million, or 7.3%, to $66.8 million in the first quarter of 2006 compared to $72.1 million in the first quarter of 2005, primarily due to the decreased overall sales as discussed above, and the impact due to the closure of our Peabody, Massachusetts facility, as well as an increase in our overall gross margin as detailed below, partially offset by $0.2 million of stock-based compensation in the first quarter of 2006 compared to none for the first quarter of 2005.

Our gross margin (gross profit as a percentage of net sales) by current market segment was as follows:

	Thirteen Weeks Ended
	April 2, 2006		April 3, 2005
NanoElectronics	51.3	%	48.4	%
NanoResearch and Industry	42.2	%	41.3	%
NanoBiology	46.6	%	29.9	%
Service and Components	23.2	%	26.7	%
Overall	41.3	%	40.4	%

NanoElectronics

Although revenues were down across most product groups in NanoElectronics, gross margins improved in the first quarter of 2006 compared to the first quarter of 2005. This improvement was primarily due to lower volumes of our lower margin DualBeam systems and an improvement in our TEM product mix, from lower

margin TEM products to higher margin TEM products, including the Titan.

NanoResearch and Industry

The increase in NanoResearch and Industry margins in the first quarter of the 2006 compared to the first quarter of 2005 was primarily due to improvements in the TEM product mix.

NanoBiology

The increase in NanoBiology gross margin in the first quarter of 2006 compared to the first quarter of 2005 was mainly due to product mix. There was an increase in TEM sales, including the Titan, combined with a decrease in sales of our lower-margin small stage DualBeam systems.

Service and Components

The decrease in the Service and Components gross margin in the first quarter of 2006 compared to the first quarter of 2005 was primarily due to higher repair costs, material usage and inventory write-offs.

Research and Development Costs

Research and development (“R&D”) costs include labor, materials, overhead and payments to Philips and other third parties for research and development of new products and new software or enhancements to existing products and software and are presented net of subsidies received for such efforts.

R&D costs decreased $2.2 million to $14.0 million (12.3% of net sales) in the first quarter of 2006 compared to $16.2 million (13.4% of net sales) in the first quarter of 2005.

R&D costs are reported net of subsidies and capitalized software development costs as follows (in thousands):

	Thirteen Weeks Ended
	April 2, 2006			April 3, 2005
Gross spending	$	15,007		$	17,604
Less subsidies	(1,006		)	(1,417		)
Net expense	$	14,001		$	16,187

The decrease in research and development costs was due to approximately $1.6 million of savings related to our 2005 restructuring activities primarily related to the closing of our Peabody operations and $0.7 million in reduced material and external service costs. These cost reductions were partially offset by $0.2 million of stock-based compensation in the first quarter of 2006 compared to none in the first quarter of 2005 and $0.4 million in lower subsidies received.

We anticipate that we will continue to invest in R&D at a similar percentage of revenue for the foreseeable future. Accordingly, as revenues increase, we currently anticipate that R&D expenditures also will increase. Actual future spending, however, will depend on market conditions.

Selling, General and Administrative Costs

Selling, general and administrative (“SG&A”) costs include labor, travel, outside services and overhead incurred in our sales, marketing, management and administrative support functions. SG&A costs also include sales commissions paid to our employees as well as to our agents.

SG&A costs decreased $1.5 million to $23.8 million (20.9% of net sales) in the first quarter of 2006 compared to $25.3 million (20.9% of net sales) in the first quarter of 2005.

The decrease in SG&A costs was due primarily to approximately $1.0 million of savings related to our 2005 restructuring activities, a $0.5 million decrease in legal and audit fees, excluding the merger costs discussed below, and a $0.5 million decrease in selling and marketing costs. These cost reductions were partially offset

by $0.9 million of stock-based compensation in the first quarter of 2006 compared to none in the first quarter of 2005.

Merger Costs

Merger costs in the first quarter of 2006 related to legal and Board costs for reviewing a merger proposal. The proposed transaction is not being pursued and, accordingly, we do not expect additional costs related to this proposal in future quarters.

Amortization of Purchased Technology

Amortization of purchased technology was $0.6 million in the first quarter of 2006 compared to $1.3 million in the first quarter of 2005. Our purchased technology balance at April 2, 2006 was $7.6 million and current amortization of purchased technology is approximately $0.6 million per quarter, which could increase if we acquire additional technology.

The decrease in the first quarter of 2006 compared to the first quarter of 2005 was due primarily to the recording of an impairment charge of $9.3 million against our purchased technology balance in the second quarter of 2005.

Asset impairment

Asset impairment charges of $465,000 in the first quarter of 2006 were primarily for the write-off of the remaining costs related to the abandonment of our enterprise resource planning system, which were incurred during the current quarter.

Restructuring, Reorganization, Relocation and Severance

Restructuring, reorganization, relocation and severance in the first quarter of 2006 includes a charge of $2.2 million for facilities and severance charges related to the closure of certain of our European field offices as well as residual costs related to the Peabody plant closure and the downsizing of the related semiconductor businesses. Additionally, we recorded a charge of $9.3 million related to the termination of our Chief Executive Officer in accordance with his 2002 employment agreement as discussed in Note 13. Of the $9.3 million, $2.2 million was cash compensation and $7.1 million was non-cash stock-based compensation.

	Beginning Accrued Liability		Charged to Expense		Expenditures			Write-Offs and Adjustments		Ending Accrued Liability
Thirteen Weeks Ended April 2, 2006
Severance, outplacement and related benefits for terminated employees	$	1,778	$	1,706	$	(2,342	)	$	29	$	1,171
Abandoned leases, leasehold improvements and facilities	3,496		539		(446		)	—		3,589
CEO severance, excluding stock-based compensation	—		2,235		—			—		2,235
	$	5,274	$	4,480	$	(2,788	)	$	29	$	6,995

In addition to the charges in connection with our restructuring and reorganization plans, this line item includes costs related to relocating current employees.

Other Income (Expense), Net

Other income (expense) items include interest income, interest expense, foreign currency gains and losses and other miscellaneous items.

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities. Interest income was $2.2 million in the first quarter of 2006 and $1.8 million in the first quarter of 2005. The increase was primarily due to higher interest rates earned on our cash and marketable securities balances.

Interest expense for both the 2006 and 2005 periods primarily relates to our 5.5% convertible debt issued in August 2001. The amortization of capitalized note issuance costs related to both of our convertible note issuances is also included as a component of interest expense. Interest expense in the first quarter of 2006 also includes $0.1 million of premiums and commissions paid on the repurchase of $24.9 million of our 5.5% Convertible Subordinated Notes as well as the write-off of $0.3 million of related deferred note issuance costs. Assuming no additional note repurchases, amortization of our remaining convertible note issuance costs will total approximately $0.3 million per quarter through 2008.

Other, net primarily consists of foreign currency gains and losses on transactions and realized and unrealized gains and losses on the changes in fair value of derivative contracts entered into to hedge these transactions.

Income Tax Expense

Income tax expense in the first quarter of 2006 represents taxes on foreign earnings. We did not record a tax benefit for our United States losses in the first quarter of 2006 as we believe it is more likely than not that we will not be able to realize the benefit in future periods. Our assessment was principally based upon our historical losses in the United States.

Our effective income tax rate was 34.0% in the first quarter of 2005. Our effective tax rate may differ from the United States federal statutory tax rate primarily as a result of the effects of state and foreign taxes and our use of the foreign export benefit, research and experimentation tax credits earned in the United States, adjustments to our tax contingency reserves and other factors.

In addition to the factors mentioned above, our effective income tax rate can be affected by changes in statutory tax rates in the United States and foreign jurisdictions, our ability or inability to utilize various carry forward tax items, changes in tax laws in the United States governing research and experimentation credits and other factors.

For the balance of 2006, we may continue to record a high effective tax rate as we expect to have profits and related tax expense from our international operations, but losses in the United States for which we do not expect to record a tax benefit. We are currently taking actions to improve the profitability of the United States operations through tax planning strategies and cost reductions and anticipate reducing these losses and their impact on our effective tax rate during fiscal 2006. However, this situation could continue in 2006 and beyond if we do not improve the profitability of the United States operations or develop a tax strategy that will be able to utilize the benefit of our net operating losses for tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

Our sources of liquidity and capital resources as of April 2, 2006 consisted of $219.0 million of cash, cash equivalents, short-term restricted cash and short-term investments, $33.3 million in non-current investments, $2.4 million of long-term restricted cash, $20.0 million of available borrowings under our existing credit facilities, as well as potential future cash flows from operations. Restricted cash relates to deposits to back bank guarantees for customer prepayments that expire through 2013. We believe that these sources of liquidity and capital will be sufficient to meet our expected operational and capital needs for at least the next twelve-month period from April 2, 2006.

In the first quarter of 2006, cash and cash equivalents and short-term restricted cash increased $26.6 million to $105.9 million as of April 2, 2006 from $79.3 million as of December 31, 2005 primarily as a result of the net redemption of $54.3 million of marketable securities, $1.7 million of proceeds from the exercise of employee stock options and employee stock purchases and a $1.6 million favorable effect of exchange rate changes. These increases were partially offset by $2.9 million used in operations, the use of $24.9 million for the repurchase of a portion of our 5.5% subordinated notes, $1.2 million used for the purchase of property, plant and equipment and $0.6 million used for the purchase of cost-method investments.

Accounts receivable increased $12.4 million to $110.7 million as of April 2, 2006 from $98.3 million as of December 31, 2005, primarily due to increased sales compared with the fourth quarter of 2005. This balance was also affected by a $1.0 million decrease related to changes in currency exchange rates. Our days sales outstanding, calculated on a quarterly basis, was 89 days at April 2, 2006 compared to 88 days at December 31, 2005.

Inventories decreased $3.4 million to $81.5 million as of April 2, 2006 compared to $84.8 million as of December 31, 2005. The decrease primarily was due to currency movements of approximately $1.8 million and improved inventory management. Our annualized inventory turnover rate, calculated on a quarterly basis, was 3.2 times for the quarter ended April 2, 2006 and 3.1 times for the quarter ended April 3, 2005.

Expenditures for property, plant and equipment of $1.2 million in the first quarter of 2006 primarily consisted of expenditures for capitalized demonstration equipment. We expect to continue to invest in capital equipment, customer evaluation systems and research and development equipment for applications development. We estimate our total capital expenditures in 2006 to be approximately $15 million, primarily for the development and introduction of new products and upgrades and incremental improvements to our ERP systems.

Accrued payroll liabilities increased $4.3 million to $13.5 million as of April 2, 2006 compared to $9.2 million as of December 31, 2005. The increase resulted primarily from 2006 bonus accruals compared to no accruals at December 31, 2005, as well as the timing of payroll cycles at period end.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks and risk management policies since the filing of our 2005 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 10, 2006.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Controls

There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Part II - Other Information

Item 1A. Risk Factors

Our business is complex, and changes to the business may not achieve their desired benefits.

Our business is based on a myriad of technologies, encompassed in multiple different product lines, addressing various markets in different regions of the world. A business of our breadth and complexity requires significant management time, attention and resources. In addition, significant changes to our business, such as changes in manufacturing, operations, product lines, market focus or organizational structure or focus, can be distracting, time-consuming and expensive. These changes can have short-term adverse effects on our financial results, and may not provide their intended long-term benefits. Failure to achieve these benefits would have a material adverse impact on our business and financial results.

We operate in highly competitive industries and we cannot be certain that we will be able to compete successfully in such industries.

The industries in which we operate are intensely competitive. Established companies, both domestic and foreign, compete with each of our product lines. Many of our competitors have greater financial, engineering, manufacturing and marketing resources than we do, and may price their products very aggressively. Our significant competitors include: JEOL Ltd., Hitachi Ltd., Seiko Instruments Inc., Carl Zeiss SMT A.G., Applied Materials, Orsay Physics S.A. and Credence Systems Corporation. In addition, some of our competitors may cooperate with each other, as in the case of the recently announced distribution arrangement between Seiko Instruments, Inc. and Carl Zeiss SMT A.G. in Japan.

A substantial investment is required by customers to install and integrate capital equipment into their laboratories and process applications. As a result, once a manufacturer has selected a particular vendor’s capital equipment, the manufacturer generally relies on that equipment for a specific production line or process control application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, if a particular customer selects a competitor’s capital equipment, we expect to experience difficulty selling to that customer for a significant period of time.

Our ability to compete successfully depends on a number of factors both within and outside of our control, including:

• price;

• product quality;

• breadth of product line;

• system performance;

• ease of use;

• cost of ownership;

• global technical service and support;

• success in developing or otherwise introducing new products; and

• foreign currency movements.

We cannot be certain that we will be able to compete successfully on these or other factors, which could negatively impact our revenues, gross margins and net income in the future.

The loss of one or more of our key customers would result in the loss of significant net revenues.

Although no single customer makes up more than 10% of our net revenues, a relatively small number of customers account for a large percentage of our net revenues. Our business will be seriously harmed if we do not generate as much revenue as we expect from these key customers, if we experience a loss of any of our key customers or if we suffer a substantial reduction in orders from these customers. Our ability to continue to generate revenues from our key customers will depend on our ability to introduce new products that are desirable to these customers.

Because we do not have long-term contracts with our customers, our customers may stop purchasing our products at any time, which makes it difficult to forecast our results of operations and to plan expenditures accordingly.

We do not have long-term contracts with our customers. Accordingly:

• customers can stop purchasing our products at any time without penalty;

• customers are free to purchase products from our competitors;

• we are exposed to competitive pricing pressure on each order; and

• customers are not required to make minimum purchases.

If we do not succeed in obtaining new sales orders from existing customers, our results of operations will be negatively impacted.

Because many of our shipments occur in the last month of a quarter, we are at risk of one or more transactions not being delivered according to forecast.

We have historically shipped approximately 75% of our products in the last month of each quarter. As any one shipment may be significant to meet our quarterly sales projection, any slippage of shipments into a subsequent quarter may result in our not meeting our quarterly sales projection, which may adversely impact our results of operations for the quarter.

We rely on a limited number of parts, components and equipment manufacturers. Failure of any of these suppliers to provide us with quality products in a timely manner could negatively affect our revenues and results of operations.

Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient quantities to us in a timely and cost-effective manner could negatively affect our business. We currently use numerous vendors to supply parts, components and subassemblies for the manufacture and support of our products. Some key parts, however, may only be obtained from a single supplier or a limited group of suppliers. In particular, we rely on Philips Enabling Technologies Group, B.V., or Philips ETG, and Frencken Mechatronics B.V. for our supply of mechanical parts and subassemblies; Gatan, Inc. for critical accessory products; and Neways

Electronics, N.V. and Benchmark Electronics for some of our electronic subassemblies. In addition, some of our suppliers rely on sole suppliers. As a result of this concentration of key suppliers, our results of operations may be materially and adversely affected if we do not timely and cost-effectively receive a sufficient quantity of quality parts to meet our production requirements or if we are required to find alternative suppliers for these supplies. We may not be able to expand our supplier group or to reduce our dependence on single suppliers. From time to time, we have experienced supply constraints with respect to the mechanical parts and subassemblies produced by Philips ETG. If Philips ETG is not able to meet our supply requirements, these constraints may affect our ability to deliver products to customers in a timely manner, which could have an adverse effect on our results of operations. In addition, because we only have a few equipment suppliers, we may be more exposed to future cost increases for this equipment.

The industries in which we sell our products are cyclical, which may cause our results of operations to fluctuate.

Our business depends in large part on the capital expenditures of customers within our NanoElectronics, NanoResearch and Industry and NanoBiology market segments, which, along with Service and Components sales, accounted for the following percentages of our net sales for the periods indicated:

	Thirteen Weeks Ended
	April 2, 2006		April 3, 2005
NanoElectronics	36	%	45	%
NanoResearch and Industry	31	%	25	%
NanoBiology	9	%	8	%
Service and Components	24	%	22	%

The largest sub-parts of the NanoElectronics market are the data storage and semiconductor industries. These industries are cyclical and have experienced significant economic downturns at various times in the last decade. Such downturns have been characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity. A downturn in one or more of these industries, or the businesses of one or more of our customers, could have a material adverse effect on our business, prospects, financial condition and results of operations. For example, in 2005, the semiconductor equipment market experienced weakness. Global economic conditions continue to be volatile and slower growth or reduced demand for our customers’ products in the future would cause our business to decline. During downturns, our sales or margins may decline.

The NanoResearch and Industry market also is affected by overall economic conditions, but is not as cyclical as the NanoElectronics market. However, NanoResearch and Industry customer spending is highly dependent on governmental and private funding levels and timing, which can vary depending on budgetary and/or economic constraints.

The NanoBiology market is a smaller and emerging market, and the tools we sell into that market often have average selling prices of over $1 million. As a result, movement of a small number of sales from one quarter to the next could cause significant variability in quarter-to-quarter growth rates, even as we believe that this market has the potential for long-term growth.

As a capital equipment provider, our revenues depend in large part on the spending patterns of our customers, who often delay expenditures or cancel orders in reaction to variations in their businesses or general economic conditions. Because a high proportion of our costs are fixed, we have a limited ability to reduce expenses quickly in response to revenue shortfalls. In an industry of prolonged economic downturn, we may not be able to reduce our significant fixed costs, such as manufacturing overhead, capital equipment or research and development costs, which may cause our gross margins to erode and our net loss to increase or earnings to decline.

If our customers cancel or reschedule orders or if an anticipated order for even one of our systems is not received in time to permit shipping during a certain fiscal period, our operating results for that fiscal period may fluctuate and our business and financial results for such period could be materially and adversely affected.

Our customers are able to cancel or reschedule orders, generally with limited or no penalties, depending on the product’s stage of completion. The amount of purchase orders at any particular date, therefore, is not necessarily indicative of sales to be made in any given period. Our build cycle, or the time it takes us to build a product to customer specifications, typically ranges from one to six months. During this period, the customer may cancel the order, although generally we will receive a cancellation fee based on the agreed-upon shipment schedule. In addition, we derive a substantial portion of our net sales in any fiscal period from the sale of a relatively small number of high-priced systems, with a large portion in the last month of the quarter. As a result, the timing of revenue recognition for a single transaction could have a material effect on our revenue and results of operations for a particular fiscal period.

Due to these and other factors, our net revenues and results of operations have fluctuated in the past and are likely to fluctuate significantly in the future on a quarterly and annual basis. It is possible that in some future quarter or quarters our results of operations will be below the expectations of public market analysts or investors. In such event, the market price of our common stock may decline significantly.

Many of our projects are funded under federal, state and local government contracts and if we are found to have violated the terms of the government contracts or applicable statutes and regulations, we are subject to the risk of suspension or debarment from government contracting activities, which could have a material adverse effect on our business and results of operations.

Many of our projects are funded under federal, state and local government contracts. Government contracts are subject to specific procurement regulations, contract provisions, and requirements relating to the formation, administration, performance, and accounting of these contracts. Many of these contracts include express or implied certifications of compliance with applicable laws and contract provisions. As a result of our government contracting, claims for civil or criminal fraud may be brought by the government for violations of these regulations, requirements or statutes. Further, if we fail to comply with any of these regulations, requirements or statutes, our existing governmentcontracts could be terminated, we could be suspended or debarred from government contracting or subcontracting, including federally funded projects at the state level. If one or more of our government contracts are terminated for any reason, or if we are suspended from government work, we could suffer the loss of the contracts, which could have a material adverse effect on our business and results of operations.

Changes and fluctuations in government’s spending priorities could adversely affect our revenue expectations.

Because a substantial part of our overall business is generated either directly or indirectly as a result of federal and local government regulatory and infrastructure priorities, shifts in these priorities due to changes in policy imperatives or economic conditions, which are often unpredictable, may affect our revenues.

Political instability in key regions around the world coupled with the United States government’s commitment to the war on terror put at risk federal discretionary spending, including spending on nanotechnology research programs and projects that are of particular importance to our business. At the state and local levels, the need to compensate for reductions in the federal matching funds, as well as financing of federal unfunded mandates, creates strong pressures to cut back on research expenditures as well. There can be no assurances that potential reduction of federal funding would not adversely affect our business.

We have long sales cycles for our systems, which may cause our results of operations to fluctuate and could negatively impact our stock price.

Our sales cycle can be 12 months or longer and is unpredictable. Variations in the length of our sales cycle could cause our net sales and, therefore, our business, financial condition, results of operations, operating margins and cash flows, to fluctuate widely from period to period. These variations could be based on factors partially or completely outside of our control.

The factors that could affect the length of time it takes us to complete a sale depend on many elements, including:

• the efforts of our sales force and our independent sales representatives;

• changes in the composition of our sales force, including the departure of senior sales personnel;

• the history of previous sales to a customer;

• the complexity of the customer’s manufacturing processes;

• the economic environment;

• the internal technical capabilities and sophistication of the customer; and

• the capital expenditure budget cycle of the customer.

Our sales cycle also extends in situations where the sale involves developing new applications for a system or technology. As a result of these and a number of other factors that could influence sales cycles with particular customers, the period between initial contact with a potential customer and the time when we recognize revenue from that customer, if ever, may vary widely.

The loss of key management or our inability to attract and retain managerial, engineering and other technical personnel could have a material adverse effect on our business, prospects, financial condition and results of operations.

Attracting qualified personnel is difficult and our recruiting efforts may not be successful. Specifically, our product generation efforts depend on hiring and retaining qualified engineers. The market for qualified engineers is very competitive. In addition, experienced management and technical, marketing and support personnel in the information technology industry are in high demand, and competition for such talent is intense. Currently, our chief financial officer is also functioning as our chief executive officer due to the departure of our former chief executive officer. We are presently conducting a search with the intention of retaining a new chief executive officer either from within our current management team or from outside of our company. The loss of key personnel, or our inability to attract key personnel, could have a material adverse effect on our business, prospects, financial condition or results of operations.

Philips Business Electronics International B.V. has significant influence on all company shareholder votes and may have different interests than our other shareholders.

As of April 2, 2006, Philips Business Electronics International B.V., or PBE, a subsidiary of Koninklijke Philips Electronics N.V., owned approximately 25% of our outstanding common stock. In addition, Jan C. Lobbezoo, Executive Vice President, Philips International B.V., an affiliate of Philips, serves on our Board of Directors. As a result, PBE has significant influence on matters submitted to our shareholders for approval, including proposals regarding:

• any merger, consolidation or sale of all or substantially all of our assets; and

• the election of members to our board of directors.

In addition to its significant influence, PBE’s interests may be significantly different from the interests of other owners of our common stock, holders of our options to purchase common stock and holders of our debt securities.

Our customers experience rapid technological changes, with which we must keep pace, but we may be unable to introduce new products on a timely and cost-effective basis to meet such changes.

The NanoElectronics and NanoResearch and Industry markets experience rapid technological change and new product introductions and enhancements. Our ability to remain competitive depends in large part on our ability to develop, in a timely and cost-effective manner, new and enhanced systems at competitive prices and to accurately predict technology transitions. In addition, new product introductions or enhancements by competitors could cause a decline in our sales or a loss of market acceptance of our existing products. Increased competitive pressure also could lead to intensified price competition, resulting in lower margins, which could materially adversely affect our business, prospects, financial condition and results of operations.

Our success in developing, introducing and selling new and enhanced systems depends on a variety of factors, including:

• selection and development of product offerings;

• timely and efficient completion of product design and development;

• timely and efficient implementation of manufacturing processes;

• effective sales, service and marketing functions; and

• product performance.

Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both the future demand for products under development and the equipment required to produce such products. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products.

The process of developing new high technology capital equipment products and services is complex and uncertain, and failure to accurately anticipate customers’ changing needs and emerging technological trends, to complete engineering and development projects in a timely manner and to develop or obtain appropriate intellectual property could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our predictions will result in products that the market will accept. For example, we have invested significant resources in the development of three-dimensional metrology products for semiconductor wafer manufacturing and sales have been modest. If three-dimensional metrology is not widely accepted, or if we fail to develop products that are accepted by the marketplace, our long-term growth could be harmed. In addition, we have invested substantial resources in our new Titan S/TEM electron microscope, and further engineering and development will be required to take full advantage of this new S/TEM platform. If the completion of further development is delayed, potential revenue growth could be deferred.

To the extent that a market does not develop for a new product, we may decide to discontinue or modify the product. These actions could involve significant costs and/or require us to take charges in future periods. If these products are accepted by the marketplace, sales of our new products may cannibalize sales of our existing products. Further, after a product is developed, we must be able to manufacture sufficient volume quickly and at low cost. To accomplish this objective, we must accurately forecast production volumes, mix of products and configurations that meet customer requirements. If we are not successful in making accurate forecasts, our business and results of operations could be significantly harmed.

Any failure by us to execute planned cost reductions successfully could result in total costs and expenses that are greater than expected.

We have undertaken restructuring plans to bring operational expenses to appropriate levels for our business. In 2005, we took significant restructuring charges in connection with the closing of our Peabody, Massachusetts plant and otherwise. We may have further workforce reductions or rebalancing actions in the future. Significant risks associated with these actions and other workforce management issues that may impair our ability to achieve anticipated cost reductions or that may otherwise harm our business include delays in implementation of anticipated workforce reductions in highly regulated locations outside of the United States, particularly in Europe and Asia, redundancies among restructuring programs, decreases in employee morale and the failure to meet operational targets due to the loss of employees, particularly sales employees and engineers.

Because we have significant operations outside of the United States, we are subject to political, economic and other international conditions that could result in increased operating expenses and regulation of our products and increased difficulty in maintaining operating and financial controls.

Since a significant portion of our operations occur outside of the United States, our revenues and expenses are impacted by foreign economic and regulatory conditions. In the thirteen weeks ended April 2, 2006 and the year ended December 31, 2005, approximately 65% and 69%, respectively, of our revenues came from outside of the United States. We have manufacturing facilities in Brno, Czech Republic and Eindhoven, the Netherlands and sales offices in many other countries. In addition, approximately 27% and 31%, respectively, of our sales in the thirteen weeks ended April 2, 2006 and the year ended December 31, 2005 were derived from sales in Asia. In recent years, Asian economies have been highly volatile and recessionary, resulting in significant fluctuations in local currencies and other instabilities. Instabilities in Asian economies may continue and recur in the future or instability could occur in other foreign economies, any of which could have a material adverse effect on our business, prospects, financial condition, margins and results of operations.

Moreover, we operate in approximately 50 countries; 29 with a direct presence and an additional 21 via sales agents. Some of our global operations are geographically isolated, are distant from corporate headquarters and /or have little infrastructure support. Therefore maintaining and enforcing operating and financial controls can be difficult. Failure to maintain or enforce controls could have a material adverse effect on our control over service inventories, quality of service, customer relationships and financial reporting.

Our exposure to the business risks presented by Asian economies and other foreign economies will increase to the extent we continue to expand our global operations. International operations will continue to subject us to a number of risks, including:

• longer sales cycles;

• multiple, conflicting and changing governmental laws and regulations;

• protectionist laws and business practices that favor local companies;

• price and currency exchange rates and controls;

• difficulties in collecting accounts receivable;

• travel and transportation difficulties resulting from actual or perceived health risks (e.g. SARS and Avian Influenza); and

• political and economic instability.

If third parties assert that we violate their intellectual property rights, our business and results of operations may be materially adversely affected.

Several of our competitors hold patents covering a variety of technologies that may be included in some of our products. In addition, some of our customers may use our products for applications that are similar to those covered by these patents. From time to time, we and our respective customers have received correspondence from our competitors claiming that some of our products, as used by our customers, may be infringing one or more of these patents. To date, none of these allegations has resulted in litigation. Our competitors or other entities may, however, assert infringement claims against us or our customers in the future with respect to current or future products or uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. Additionally, if claims of infringement are asserted against our customers, those customers may seek indemnification from us for damages or expenses they incur.

As a result of PBE’s reduction of ownership of our common stock in 2001, we no longer receive the benefit of many of the Philips patent cross-licenses that we previously received.

If we become subject to infringement claims, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question or defending our position. These licenses, however, may not be available on satisfactory terms or at all. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, these potential infringement claims could have a material adverse effect on our business, prospects, financial condition and results of operations.

We may not be able to enforce our intellectual property rights, especially in foreign countries, which could materially adversely affect our business.

Our success depends in large part on the protection of our proprietary rights. We incur significant costs to obtain and maintain patents and defend our intellectual property. We also rely on the laws of the United States and other countries where we develop, manufacture or sell products to protect our proprietary rights. We may not be successful in protecting these proprietary rights, these rights may not provide the competitive advantages that we expect, or other parties may challenge, invalidate or circumvent these rights.

Further, our efforts to protect our intellectual property may be less effective in some countries where intellectual property rights are not as well protected as they are in the United States. Many United States companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. We derived approximately 65% and 69% of our sales from foreign countries in the thirteen weeks ended April 2, 2006 and the year ended December 31, 2005, respectively. If we fail to adequately protect our intellectual property rights in these countries, our business may be materially adversely affected.

Infringement of our proprietary rights could result in weakened capacity to compete for sales and increased litigation costs, both of which could have a material adverse effect on our business, prospects, financial condition and results of operations.

We are substantially leveraged, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future manufacturing capacity and research and development needs.

We have significant indebtedness. As of April 2, 2006, we had total convertible long-term debt of approximately $200.1 million due in 2008 including $50.1 million of 5.5% Subordinated Convertible Notes due 2008. The degree to which we are leveraged could have important consequences, including, but not limited to, the following:

• our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited;

• the dilutive effects on our shareholders as a result of the up to 5,528,527 shares of common stock that would be issued in the event we elect to settle all or a portion of the Zero Coupon Convertible Notes in shares upon the bondholders’ election to convert the notes once certain stock price metrics are met;

• the dilutive effects on our shareholders as a result of up to 1,010,945 shares of our common stock that would be issued in the event all or a portion of the 5.5% Subordinated Convertible Note holders elect to convert their notes;

• a substantial portion of our cash flow from operations will be dedicated to the payment of the principal of, and interest on, our indebtedness; and

• we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions.

Our ability to pay interest and principal on our debt securities, to satisfy our other debt obligations and to make planned expenditures will be dependent on our future operating performance, which could be affected by changes in economic conditions and other factors, some of which are beyond our control. A failure to comply with the covenants and other provisions of our debt instruments could result in events of default under such instruments, which could permit acceleration of the debt under such instruments and in some cases acceleration of debt under other instruments that contain cross-default or cross-acceleration provisions. We believe that cash flow from operations will be sufficient to cover our debt service and other requirements. If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness, however, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.

We may have exposure to income tax rate fluctuations as well as to additional tax liabilities, which would impact our financial position.

As a corporation with operations both in the United States and abroad, we are subject to income taxes in both the United States and various foreign jurisdictions. Our effective tax rate is subject to fluctuation as the income tax rates for each year are a function of the following factors, among others:

• the effects of a mix of profits or losses earned by us and our subsidiaries in numerous foreign tax jurisdictions with a broad range of income tax rates;

• our ability to utilize recorded deferred tax assets;

• changes in contingencies related to taxes, interest or penalties resulting from tax audits; and

• changes in tax laws or the interpretation of such laws.

Changes in the mix of these items and other items may cause our effective tax rate to fluctuate between periods, which could have a material adverse effect on our financial position.

We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the United States and various foreign jurisdictions.

We are regularly under audit by tax authorities with respect to both income and non-income taxes and may have exposure to additional tax liabilities as a result of these audits.

Significant judgment is required in determining our provision for income taxes and other tax liabilities. Although we believe that our tax estimates are reasonable, we cannot assure you that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals.

We may have underestimated past restructuring charges or we may incur future restructuring and asset impairment charges, either of which may adversely impact our results of operations.

In the first quarter of 2006, we recorded restructuring, reorganization, relocation and severance charges of $11.6 million, of which $2.5 million was for facilities and severance charges related to the closure of certain of our European field offices, as well as residual costs related to the Peabody plant closure and the downsizing of the related semiconductor businesses, and $9.3 million was related to the termination of our Chief Executive Officer in accordance with his 2002 employment agreement. Of the $9.3 million charge, $2.2 million was cash compensation and $7.1 million was non-cash stock-based compensation. In addition, in 2005 and over the last few years, we initiated a series of restructurings of our operations involving, among other things, the reduction of our workforce and the consolidation of excess facilities. Restructuring charges for 2005 totaled $8.5 million. We anticipate having further reductions to our workforce and will continue to consolidate additional facilities in the first half of fiscal 2006. We may incur additional restructuring and related expenses, which may have a material adverse effect on our business, financial condition or results of operations. The charges in connection with these restructurings are only estimates and may not be accurate. As part of these restructurings, we ceased to use certain of our leased facilities and, accordingly, we have negotiated, and are continuing to negotiate, certain lease terminations and/or subleases of our facilities. We cannot predict when or if we will be successful in negotiating lease termination agreements or subleases of our facilities on terms acceptable to us. If we are not successful in negotiating terms acceptable to us, or at all, we may be required to materially increase our restructuring and related expenses in future periods. Further, if we have further reductions to our workforce or consolidate additional facilities in the future we may incur additional restructuring and related expenses, which could have a material adverse effect on our business, financial condition or results of operations.

In addition, we test our goodwill and other intangible assets for impairment annually or when an event occurs indicating the potential for impairment. If we record an impairment charge as a result of this analysis, it could have a material impact on our results of operations. We could also incur material charges as a result of write-downs of inventories or other tangible assets.

FASB’s adoption of Statement 123(R) will affect our reported results of operations and may affect how we compensate our employees and conduct our business.

On October 13, 2004, the FASB adopted Statement 123(R), “Share-Based Payment,” which requires us, effective January 1, 2006, to measure compensation costs for all stock-based compensation (including stock options and our employee stock purchase plan, as currently constructed) at fair value and take a compensation charge equal to that value. If the FASB’s Statement 123(R) was in effect for 2005, 2004 and 2003, we would have had to reduce net income by approximately $34.4 million, $12.4 million and $9.5 million, net of tax, respectively, for those years.

In October 2005, we announced the acceleration of vesting of certain unvested, underwater stock options. The effect of this acceleration will be to reduce the aggregate compensation expense in 2006 and future years as a result of implementing SFAS No. 123(R). However, this acceleration did not eliminate all of the additional compensation charges that we will incur due to the adoption of the new rule.

Changes in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results. Other new accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practices have occurred and may occur in the future. This change to existing rules, future changes, if any, or the questioning of current practices may adversely affect our reported financial results, change the mix of compensation we pay to our employees or change the way we conduct our business.

Due to our extensive international operations and sales, we are exposed to foreign currency exchange rate risks that could adversely affect our revenues, gross margins and results of operations.

A significant portion of our sales and expenses are denominated in currencies other than the United States dollar, principally the euro. Approximately 15% to 25% of our revenue in a given year is denominated in euros, while more than half of our expenses are denominated in euro or other foreign currencies. Particularly as a result of this imbalance, changes in the exchange rate between the United States dollar and foreign currencies, especially the euro, can impact our revenues, gross margins, results of operations and cash flows.

We enter into foreign forward exchange contracts to partially mitigate the impact of specific cash, receivables or payables positions denominated in foreign currencies. We also enter into various forward extra contracts (a combination of a foreign forward exchange contract and an option), as well as standard option contracts, to partially mitigate the impact of changes in the euro against the dollar on our European operating results. These contracts are considered derivatives. We are required to carry all open derivative contracts on our balance sheet at fair value. When specific accounting criteria have been met, derivative contracts can be designated as hedging instruments and changes in fair value related to these derivative contracts are recorded in other comprehensive income, rather than net income, until the underlying hedged transaction affects net income. When the designated hedges mature, they are recorded in cost of goods sold. We are required to record changes in fair value for derivatives not designated as hedges in net income in the current period. Prior to the second quarter of fiscal 2004, none of our derivative contracts were designated as hedges and all realized and unrealized gains and losses were recognized in net income in the current period. Our ability to designate derivative contracts as hedges significantly reduces the volatility in our operating results due to changes in the fair value of the derivative contracts.

Achieving hedge designation is based on evaluating the effectiveness of the derivative contracts’ ability to mitigate the foreign currency exposure of the linked transaction. We are required to monitor the effectiveness of all new and open derivative contracts designated as hedges on a quarterly basis. Based on our evaluation in 2005, we recorded charges totaling $0.5 million in other income/expense related to hedge dedesignations and ineffectiveness. We did not record any charges for hedge dedesignations or ineffectiveness in the first quarter of 2006. Failure to meet the hedge accounting requirements could result in the requirement to record deferred and current realized and unrealized gains and losses into net income in the current period. This failure could result in significant fluctuations in operating results. In addition, we will continue to recognize unrealized gains and losses related to the changes in fair value of derivative contracts not designated as hedges in the current period net income. Accordingly, the related impact to operating results may be recognized in a different period than the

foreign currency impact of the linked asset, liability or transaction.

The hedging transactions we undertake limit our exposure to changes in the dollar/euro exchange rate. The hedges are designed to protect us as the dollar weakens, but also provide us with some flexibility if the dollar strengthens. Foreign currency losses recorded in other income/expense, inclusive of the impact of derivatives, totaled $0.4 million and $1.5 million, respectively, in the first quarter of 2006 and during all of 2005.

Our acquisition and investment strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.

In addition to our efforts to develop new technologies from internal sources, we also may seek to acquire new technologies from external sources. As part of this effort, we may make acquisitions of, or make significant debt and equity investments in, businesses with complementary products, services and/or technologies. Acquisitions can involve numerous risks, including management issues and costs in connection with the integration of the operations and personnel, technologies and products of the acquired companies, the possible write-downs of impaired assets, and the potential loss of key employees of the acquired companies. The inability to effectively manage any of these risks could seriously harm our business. Additionally, difficulties in integrating any potential acquisitions into our internal control structure could result in a failure of our internal control over financial reporting, which, in turn, could create a material weakness.

Our debt and equity investments in unconsolidated subsidiaries, which totaled $4.0 million at April 2, 2006, may not prove to be successful and we could lose all or a portion of our investments and/or could be required to take write-offs related to these investments. In 2005, we recorded impairment charges and realized losses totaling $6.4 million related to these investments and may be required to record additional impairment charges related to these investments in the future. No such charges were incurred in the first quarter of 2006. To the extent we make investments in entities that we control, or have significant influence in, our financial results will reflect our proportionate share of the financial results of the entity.

Issues arising from our enterprise resource planning system could affect our operating results and ability to manage our business effectively.

Our ability to design, manufacture, market and service products and systems is dependent on information technology systems that encompass all of our major business functions. During 2005, we embarked upon a new enterprise resource planning (“ERP”) software system to enable us to fully integrate our diverse locations and processes. In total, $7.6 million was spent in 2005 with another $0.4 million spent in the first quarter of 2006. After a review of the projected costs and time to complete the project, we abandoned this project and expensed these costs in the respective periods discussed above.

Updating our existing system presents the potential for additional difficulties. Moreover, if the existing system, as updated, is not sufficient to meet our needs, it could adversely affect our ability to do the following in a timely manner: manage and replenish inventory, fulfill and process orders, manufacture and ship products in a timely manner, invoice and collect receivables, place purchase orders and pay invoices, coordinate sales and marketing activities, prepare our financial statements, manage our accounting systems and controls and otherwise carry on our business in the ordinary course. Any such disruption could adversely affect our business, prospects, financial condition and results of operations. Moreover, difficulties arising from the ERP system could result in a failure of our internal control over financial reporting, which, in turn, could result in a material weakness and a qualified report from our independent registered public accounting firm.

Terrorist acts or acts of war and natural disasters may seriously harm our business and revenues, costs and expenses and financial condition.

Terrorist acts, acts of war and natural disasters (wherever located around the world) may cause damage or disruption to us, our employees, facilities, partners, suppliers, distributors and customers, any and all of which could significantly impact our revenues, expenses and financial condition. This impact could be disproportionately greater on us than on other companies as a result of our significant international presence. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or

hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that cannot presently be predicted. We are largely uninsured for losses and interruptions caused by terrorist acts, acts of war and natural disasters, including at our headquarters located in Oregon, which is in a region subject to earthquakes.

Unforeseen health, safety or environmental costs could impact our future net earnings.

Some of our operations use substances that are regulated by various federal, state and international laws governing health, safety and the environment. We could be subject to liability if we do not handle these substances in compliance with safety standards for storage and transportation and applicable laws. It is our policy to apply strict standards for environmental protection to sites inside and outside the United States, even when not subject to local government regulations. We will record a liability for any costs related to health, safety or environmental remediation when we consider the costs to be probable and the amount of the costs can be reasonably estimated.

Provisions of our charter documents could make it more difficult for a third party to acquire us even if the offer may be considered beneficial by our shareholders.

Our articles of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our Board of Directors. Among other things, our Board of Directors has adopted a shareholder rights plan, or “poison pill,” which would significantly dilute the ownership of a hostile acquirer. These provisions make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by our shareholders.

Many of our current and planned products are highly complex and may contain defects or errors that can only be detected after installation, which may harm our reputation.

Our products are highly complex, and our extensive product development, manufacturing and testing processes may not be adequate to detect all defects, errors, failures and quality issues that could impact customer satisfaction or result in claims against us. As a result, we could have to replace certain components and/or provide remediation in response to the discovery of defects in products that are shipped. The occurrence of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by our customers and other losses to us or to our customers. These occurrences could also result in the loss of, or delay in, market acceptance of our products and loss of sales, which would harm our business and adversely affect our revenues and profitability.

Some of our systems use hazardous gases and emit x-rays, which, if not properly contained, could result in property damage, bodily injury and death.

A hazardous gas or x-ray leak could result in substantial liability and could also significantly damage customer relationships and disrupt future sales. Moreover, remediation could require redesign of the tools involved, creating additional expense, increasing tool costs and damaging sales. In addition, the matter could involve significant litigation that would divert management time and resources and cause unanticipated legal expense. Further, if such a leak involved violation of health and safety laws, we may suffer substantial fines and penalties in addition to the other damage suffered.

We may not be successful in obtaining the necessary export licenses to conduct operations abroad, and the United States Congress may prevent proposed sales to foreign customers.

We are subject to export control laws that limit who we sell to, what we sell and where. Moreover, export licenses are required from government agencies for some of our products in accordance with various statutory authorities, including the Export Administration Act of 1979, the International Emergency Economic Powers Act of 1977, the Trading with the Enemy Act of 1917 and the Arms Export Control Act of 1976. We may not be successful in obtaining these necessary licenses in order to conduct business abroad. Failure to comply with applicable export controls or the termination or significant limitation on our ability to export certain of our products would have an adverse effect on our business, results of operations and financial condition.

Item 6. Exhibits

The following exhibits are filed herewith or incorporated by reference hereto and this list is intended to constitute the exhibit index:

3.1		Third Amended and Restated Articles of Incorporation. (1)
3.2		Articles of Amendment to the Third Amended and Restated Articles of Incorporation. (2)
3.3		Amended and Restated Bylaws, as amended on April 17, 2003. (3)
31		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

(1) Incorporated by reference to the registrant’s quarterly report on Form 10-Q for the quarter ended September 28, 2003.

(2) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 27, 2005.

(3) Incorporated by reference to the registrant’s quarterly report on Form 10-Q for the quarter ended March 30, 2003.

SIGNATURES

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

	FEI COMPANY


Dated: May 10, 2006	/s/ RAYMOND A. LINK
	Raymond A. Link
	Chief Executive Officer and
	Chief Financial Officer
	(Principal Executive and Financial Officer)


	/s/ STEPHEN F. LOUGHLIN
	Stephen F. Loughlin
	Vice President of Finance
	(Principal Accounting Officer)

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Readability	H.S. freshman Good

Fei (FEIC) Inactive 10-Q2006 Q1 Quarterly report

Content analysis

FEI COMPANY

INDEX TO FORM 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 1A. Risk Factors

Item 6. Exhibits