Fei (FEIC) 10-Q 2006 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended October 1, 2006

OR

oTRANSITION 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 or organization)	(I.R.S. Employer Identification No.)
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  x   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 x   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 x

The number of shares of common stock outstanding as of October 26, 2006 was 33,801,402.

FEI COMPANY
INDEX TO FORM 10-Q

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets – October 1, 2006 and December 31, 2005	2
	Consolidated Statements of Operations – Thirteen and Thirty-Nine Weeks Ended October 1, 2006 and October 2, 2005	3
	Consolidated Statements of Comprehensive Income (Loss) – Thirteen and Thirty-Nine Weeks Ended October 1, 2006 and October 2, 2005	4
	Consolidated Statements of Cash Flows – Thirty-Nine Weeks Ended October 1, 2006 and October 2, 2005	5
	Condensed Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II - OTHER INFORMATION
Item 1A.	Risk Factors	31
Item 6.	Exhibits	43
Signatures		44

1

FEI Company and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(Unaudited)

	October 1,			December 31,
	2006			2005
Assets
Current Assets:
Cash and cash equivalents	$	92,323		$	59,177
Short-term investments in marketable securities	210,936			156,049
Short-term restricted cash	26,645			20,138
Receivables, net of allowances for doubtful accounts of $4,012 and $3,340	135,680			98,330
Inventories	88,830			84,879
Deferred tax assets	3,911			5,157
Other current assets	31,608			32,328
Total Current Assets	589,933			456,058
Non-current investments in marketable securities	31,236			44,602
Long-term restricted cash	4,607			519
Property, plant and equipment, net of accumulated depreciation of $69,034 and $66,039	58,982			59,011
Purchased technology, net of accumulated amortization of $42,387 and $40,433	6,377			8,154
Goodwill	41,359			41,402
Deferred tax assets	1,440			1,095
Non-current service inventories	37,204			33,869
Other assets, net	9,104			11,321
Total Assets	$	780,242		$	656,031
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	32,590		$	26,186
Current account with Philips	1,508			1,964
Accrued payroll liabilities	18,194			9,205
Accrued warranty reserves	5,087			5,193
Accrued agent commissions	6,396			8,485
Deferred revenue	37,086			43,647
Income taxes payable	12,359			9,021
Accrued restructuring, reorganization, relocation and severance	3,019			5,274
Other current liabilities	25,180			22,587
Total Current Liabilities	141,419			131,562
Convertible debt	310,882			225,000
Deferred tax liabilities	2,219			1,947
Other liabilities	5,877			5,079
Commitments and contingencies
Shareholders’ Equity:
Preferred stock - 500 shares authorized; none issued and outstanding	—			—
Common stock - 70,000 shares authorized; 33,792 and 33,800 shares issued and outstanding, no par value	340,315			332,125
Accumulated deficit	(50,695		)	(56,081		)
Accumulated other comprehensive income	30,225			16,399
Total Shareholders’ Equity	319,845			292,443
Total Liabilities and Shareholders’ Equity	$	780,242		$	656,031

See accompanying Condensed Notes to Consolidated Financial Statements.

2

FEI Company and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)

	For the Thirteen Weeks Ended						For the Thirty-Nine Weeks Ended
	October 1, 2006			October 2, 2005			October 1, 2006			October 2, 2005
Net Sales:
Products	$	85,771		$	66,766		$	256,660		$	240,534
Products - related party	221			2,145			811			2,816
Service and components	30,407			27,859			84,671			81,390
Service and components - related party	541			352			1,715			868
Total net sales	116,940			97,122			343,857			325,608
Cost of Sales:
Products	47,428			41,500			140,186			145,400
Service and components	21,582			19,188			62,424			58,176
Total cost of sales	69,010			60,688			202,610			203,576
Gross Profit	47,930			36,434			141,247			122,032
Operating Expenses:
Research and development	14,679			13,429			43,525			45,483
Selling, general and administrative	24,970			25,251			73,352			75,738
Merger costs	—			—			484			—
Amortization of purchased technology	610			720			1,896			3,579
Asset impairment	—			801			465			16,745
Restructuring, reorganization, relocation and severance	249			2,804			12,642			3,928
Total operating expenses	40,508			43,005			132,364			145,473
Operating Income (Loss)	7,422			(6,571		)	8,883			(23,441		)
Other Income (Expense):
Interest income	3,663			1,866			8,996			5,585
Interest expense	(2,018		)	(1,392		)	(5,245		)	(7,881		)
Other, net	704			(399		)	(205		)	(1,608		)
Total other income (expense), net	2,349			75			3,546			(3,904		)
Income (loss) before income taxes	9,771			(6,496		)	12,429			(27,345		)
Income tax expense (benefit)	3,263			(1,393		)	7,043			20,120
Net income (loss)	$	6,508		$	(5,103	)	$	5,386		$	(47,465	)
Basic net income (loss) per share	$	0.19		$	(0.15	)	$	0.16		$	(1.41	)
Diluted net income (loss) per share	$	0.17		$	(0.15	)	$	0.15		$	(1.41	)
Shares used in per share calculations:
Basic	33,752			33,644			33,796			33,555
Diluted	39,572			33,644			39,614			33,555

See accompanying Condensed Notes to Consolidated Financial Statements.

3

FEI Company and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)

	For the Thirteen Weeks Ended						For the Thirty-Nine Weeks Ended
	October 1, 2006			October 2, 2005			October 1, 2006			October 2, 2005
Net income (loss)	$	6,508		$	(5,103	)	$	5,386		$	(47,465	)
Other comprehensive income (loss):
Change in cumulative translation adjustment, zero taxes provided	(1,118		)	1,476			11,891			(19,081		)
Change in unrealized loss on available-for-sale securities	442			(1,067		)	635			(1,658		)
Changes due to cash flow hedging instruments:
Net gain (loss) on hedge instruments	(1,198		)	65			2,160			(5,165		)
Reclassification to net income (loss) of previously deferred gains related to hedge derivatives instruments	(477		)	1,004			(860		)	1,890
Comprehensive income (loss)	$	4,157		$	(3,625	)	$	19,212		$	(71,479	)

See accompanying Condensed Notes to Consolidated Financial Statements.

4

FEI Company and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

	For the Thirty-Nine Weeks Ended
	October 1, 2006			October 2, 2005
Cash flows from operating activities:
Net income (loss)	$	5,386		$	(47,465	)
Adjustments to reconcile net income (loss) to net cash (used by) provided by operating activities:
Depreciation	10,036			11,655
Amortization	3,533			7,847
Stock-based compensation	11,058			—
Asset impairments and write-offs of property, plant and equipment and other assets	4,311			20,738
Gain on disposal of investments, property, plant and equipment and intangible assets	(6,730		)	(837		)
Write-off of deferred bond offering costs	404			—
Premium on bond redemption	—			1,108
Deferred income taxes	1,096			16,121
Tax reversal for non-qualified stock options exercised	—			(400		)
(Increase) decrease in:
Receivables	(34,228		)	44,694
Current account with Accurel	—			515
Inventories	(2,667		)	(26,702		)
Income taxes receivable	1,351			2,721
Other assets	66			6,769
Increase (decrease) in:
Accounts payable	4,629			(2,970		)
Current account with Philips	(592		)	(1,550		)
Accrued payroll liabilities	8,399			(1,926		)
Accrued warranty reserves	(233		)	(2,837		)
Deferred revenue	(8,584		)	2,396
Income taxes payable	3,111			(10,837		)
Accrued restructuring, reorganization, relocation and severance costs	(1,772		)	1,587
Other liabilities	65			(6,090		)
Net cash (used by) provided by operating activities	(1,361		)	14,537
Cash flows from investing activities:
(Increase) decrease in restricted cash	(10,925		)	1,468
Acquisition of property, plant and equipment	(4,427		)	(11,649		)
Proceeds from disposal of property, plant and equipment and intangible assets	1,520			3,021
Purchase of investments in marketable securities	(209,032		)	(98,344		)
Redemption of investments in marketable securities	168,173			113,432
Proceeds from disposal of (investment in) unconsolidated subsidiary	4,829			(2,558		)
Other	(206		)	(34		)
Net cash (used by) provided by investing activities	(50,068		)	5,336
Cash flows from financing activities:
Redemption of 5.5% convertible notes	(29,118		)	(70,000		)
Issuance of 2.875% convertible notes, net of offering costs	111,868			—
Repurchase of common stock	(11,075		)	—
Proceeds from exercise of stock options and employee stock purchases	8,207			3,835
Net cash provided by (used by) financing activities	79,882			(66,165		)
Effect of exchange rate changes	4,693			(7,651		)
Increase (decrease) in cash and cash equivalents	33,146			(53,943		)
Cash and cash equivalents:
Beginning of period	59,177			112,602
End of period	$	92,323		$	58,659
Supplemental Cash Flow Information:
Cash paid for income taxes	$	1,563		$	8,216
Cash paid for interest	2,372			8,679

See accompanying Condensed Notes to Consolidated Financial Statements.

5

FEI COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO 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 the NanoElectronics market and our Industry and Institute market is being broken down into the NanoResearch and Industry market and the NanoBiology market. See additional disclosure in Note 19.

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 and thirty-nine weeks ended October 1, 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 valuation of stock-based compensation.

6

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 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 loss and net loss per share as prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” as if it had been applied in measuring compensation expense as follows (in thousands, except per share amounts):

	Thirteen Weeks Ended October 2, 2005			Thirty-Nine Weeks Ended October 2, 2005
Net loss, as reported	$	(5,103	)	$	(47,465	)
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(4,264		)	(12,238		)
Net loss, pro forma	$	(9,367	)	$	(59,703	)
Basic net loss per share:
As reported	$	(0.15	)	$	(1.41	)
Pro forma	$	(0.28	)	$	(1.78	)
Diluted net loss per share:
As reported	$	(0.15	)	$	(1.41	)
Pro forma	$	(0.28	)	$	(1.78	)

We did not record any tax benefit for United States losses generated in the thirteen and thirty-nine week periods ended October 2, 2005. Accordingly, the only tax benefit reflected in the pro forma stock-based employee compensation expense for such periods is for non-United States based awards.

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

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 1, 2006		October 2, 2005		October 1, 2006		October 2, 2005
Weighted average grant-date fair value of share options granted	$	5,814	$	1,143	$	6,136	$	18,183
Total intrinsic value of share options exercised	768		197		2,502		1,519
Stock-based compensation recognized in statement of operations	1,475		—		3,969		—
Cash received from options exercised and shares purchased under all share-based arrangements	1,547		298		8,207		3,835
Tax deduction realized for stock options exercised	—		—		—		438

7

Our stock-based compensation expense, excluding the CEO severance which was reported separately as described in Note 15, was included in our statements of operations as follows (in thousands):

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 1, 2006		October 2, 2005		October 1, 2006		October 2, 2005
Cost of sales	$	205	$	—	$	604	$	—
Research and development	197		—		646		—
Selling, general and administrative	1,073		—		2,719		—
	$	1,475	$	—	$	3,969	$	—

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 and Thirty-Nine Weeks Ended
	October 1, 2006		October 2, 2005
Risk-free interest rate	2.8% - 5.1	%	2.8% - 4.3	%
Dividend yield	0.0	%	0.0	%
Expected lives:
Option plans	4.75 years		5.5 years
Employee share purchase plan	6 months		6 months
Volatility	69% - 74	%	71% - 74	%
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 expense related to options granted prior to the adoption of SFAS No. 123R on a ratable basis and related to options granted after the adoption of SFAS No. 123R and restricted stock/shares on a straight-line basis over the vesting period of the individual award with estimated forfeitures considered. Vesting periods are generally four years. Shares to be issued upon the exercise of stock options will come from newly issued shares. The exercise price of issued options equals the grant date fair value of the underlying shares and the options generally have a legal life of seven years. Stock-based compensation costs related to inventory or fixed assets were not significant in either the thirteen or thirty-nine week periods ended October 1, 2006.

Stock Incentive Plans

Our 1995 Stock Incentive Plan, as amended (the “1995 Plan”) allows for issuance of a maximum of 9,000,000 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 October 1, 2006, there were 2,301,301 shares available for grant under these plans and 7,554,576 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		$	20.85
Granted	209		19.53
Forfeited	(87	)	18.28
Expired	(262	)	25.28
Exercised	(384	)	16.68
Balances, October 1, 2006	4,895		20.92

8

	Restricted Shares and Restricted Stock Units		Weighted Average Grant Date Per Share Fair Value
Balances, December 31, 2005	20		$	21.62
Granted	259		22.08
Vested	(3	)	22.73
Forfeited	(18	)	22.09
Balances, October 1, 2006	258		22.03

Share-Based Awards Issued Outside of Plans

In the third quarter of 2006, we issued to our President and Chief Executive Officer, outside of our plans, options to purchase 100,000 shares of our common stock at an exercise price of $19.38 per share and 75,000 restricted stock units with a per share fair value at grant date of $19.38. The stock options and 50,000 of the restricted stock units vest over four years and 25,000 of the restricted stock units vest over a one-year period.

Summary

Certain information regarding all options outstanding as of October 1, 2006 was as follows:

	Options Outstanding			Options Exercisable
Number	4,995,275			4,102,975
Weighted average exercise price	$	20.89		$	21.43
Aggregate intrinsic value	$	14.2	million	$	11.6	million
Weighted average remaining contractual term	5.3 years			5.1 years

As of October 1, 2006, unrecognized stock-based compensation related to outstanding, but unvested stock options, restricted shares and restricted stock units was $11.2 million, which will be recognized over the weighted average remaining vesting period of 2 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. A total of 105,123 shares were purchased pursuant to the ESPP during the thirty-nine week period ended October 1, 2006 at a purchase price of $17.36 per share, which represented a discount of $6.04 per share compared to the fair market value of our common stock on the date of purchase. At October 1, 2006, 806,436 shares of our common stock remained available for purchase and were reserved for issuance under the ESPP.

4.AMENDMENT OF 1995 STOCK INCENTIVE PLAN

At our annual meeting, which was held on May 11, 2006, our shareholders approved an amendment to our 1995 Stock Incentive Plan to (i) increase the number of shares of our common stock reserved for issuance under the plan from 8,000,000 to 9,000,000; (ii) change the terms of the automatic awards for non-employee members of our board of directors; and (iii) permit awards granted thereunder to qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code.

5. 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 provided by operating activities.

9

6.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 basic EPS and diluted EPS (in thousands, except per share amounts):

	Thirteen Weeks Ended October 1, 2006						Thirteen Weeks Ended October 2, 2005
	Net Income		Shares	Per Share Amount			Net Loss			Shares	Per Share Amount
Basic EPS	$	6,508	33,752	$	0.19		$	(5,103	)	33,644	$	(0.15	)
Dilutive effect of zero coupon convertible subordinated notes	242		5,529	(0.02		)	—			—	—
Dilutive effect of stock options calculated using the treasury stock method	—		—	—			—			—	—
Dilutive effect of restricted shares	—		106	—			—			—	—
Dilutive effect of shares issuable to Philips	—		185				—			—	—
Diluted EPS	$	6,750	39,572	$	0.17		$	(5,103	)	33,644	$	(0.15	)
Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Stock options, restricted shares and restricted stock units			4,995							3,386
Convertible Debt			4,845							7,043

	Thirty-Nine Weeks Ended October 1, 2006						Thirty-Nine Weeks Ended October 2, 2005
	Net Income		Shares	Per Share Amount			Net Loss			Shares	Per Share Amount
Basic EPS	$	5,386	33,796	$	0.16		$	(47,465	)	33,555	$	(1.41	)
Dilutive effect of zero coupon convertible subordinated notes	726		5,529	(0.01		)	—			—	—
Dilutive effect of stock options calculated using the treasury stock method	—		39	—			—			—	—
Dilutive effect of restricted shares	—		65	—			—			—	—
Dilutive effect of shares issuable to Philips	—		185	—			—			—	—
Diluted EPS	$	6,112	39,614	$	0.15		$	(47,465	)	33,555	$	(1.41	)
Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Stock options, restricted shares and restricted stock units			—							3,378
Convertible Debt			4,845							7,043

7.CREDIT FACILITIES

We maintain a $30.0 million uncommitted bank borrowing facility in the United States (and outside the United States for our international subsidiaries under the guarantee of the parent company), of which $5.0 million is available on an unsecured basis. We also have a $3.7 million unsecured and uncommitted bank borrowing facility in Japan and various limited facilities in select foreign countries. At October 1, 2006, a total of $30.0 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 October 1, 2006, we had $33.0 million of these guarantees and letters of credit outstanding, of which approximately $31.3 million were secured by restricted cash deposits. Restricted cash balances securing bank guarantees that expire within twelve months of the

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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.

8. FACTORING OF ACCOUNTS RECEIVABLE

In the third quarter of 2006 and 2005, we entered into agreements under which we sold $1.6 million and $0.3 million, respectively, of our accounts receivable at a discount to unrelated third party financiers without recourse. The transfers qualify 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 third quarter of 2006 and 2005, were recorded in our statement of operations as other expense.

9.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):

	October 1,		December 31,
	2006		2005
Raw materials and assembled parts	$	21,936	$	22,295
Service inventories, estimated current requirements	14,298		12,339
Work-in-process	36,100		36,954
Finished goods	16,496		13,291
Total inventories	$	88,830	$	84,879
Service inventories included in other long-term assets	$	37,204	$	33,869

Inventory valuation adjustments were insignificant during the thirteen and thirty-nine week periods ended October 1, 2006 and $2.0 million and $5.5 million, respectively, in the comparable periods of 2005. Provision for service inventory valuation adjustments totaled $0.7 million and $3.1 million, respectively, during the thirteen and thirty-nine weeks ended October 1, 2006 and $0.6 million and $1.6 million, respectively, during the comparable periods of 2005.

10.GOODWILL, PURCHASED TECHNOLOGY AND OTHER INTANGIBLE ASSETS

Goodwill

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

	Thirty-Nine Weeks Ended
(In thousands)	October 1, 2006			October 2, 2005
Balance, beginning of period	$	41,402		$	41,486
Adjustments to goodwill	(43		)	(27		)
Balance, end of period	$	41,359		$	41,459

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

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At October 1, 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	October 1,			December 31,
	Period	2006			2005
Purchased technology	5 to 12 years	$	48,764		$	48,587
Accumulated amortization		(42,387		)	(40,433		)
		$	6,377		$	8,154
Capitalized software	3 years	$	9,916		$	11,517
Accumulated amortization		(9,903		)	(11,391		)
		13			126
Patents, trademarks and other	2 to 15 years	4,883			4,619
Accumulated amortization		(2,572		)	(2,045		)
		2,311			2,574
Note issuance costs	5 to 7 years	13,869			10,858
Accumulated amortization		(8,765		)	(7,353		)
		5,104			3,505
Total intangible assets included in other long-term assets		$	7,428		$	6,205

During the third quarter of 2006, we sold certain intellectual property rights, which were included on our balance sheet as a component of other assets, net, to a privately-held company for a cash payment and gain of $1.5 million, which was included as an offset to selling, general and administrative expense in the thirteen and thirty-nine week periods ended October 1, 2006.

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

	Thirty-Nine Weeks Ended
	October 1, 2006		October 2, 2005
Purchased technology	$	1,896	$	3,579
Capitalized software	117		1,952
Patents, trademarks and other	495		518
Note issuance costs	1,515		1,123
	$	4,023	$	7,172

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

	Purchased Technology		Capitalized Software		Patents, Trademarks and Other		Note Issuance Costs
Remainder of 2006	$	537	$	13	$	153	$	409
2007	2,148		—		561		1,636
2008	2,148		—		304		1,079
2009	1,002		—		217		448
2010	542		—		213		448
Thereafter	—		—		863		1,084
	$	6,377	$	13	$	2,311	$	5,104

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11.INVESTMENTS

We held certain cost method investments in privately-held companies totaling $2.1 million at December 31, 2005 and, additionally, held convertible debentures with one of these privately-held companies totaling $1.2 million at December 31, 2005.  During the third quarter of 2006, we sold one cost method investment and wrote off our last remaining cost method and debt investments. Accordingly, at October 1, 2006, there were no cost method or convertible debt investments carried on our balance sheet.

We review investments in debt and equity securities for “other-than-temporary” impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. In the evaluation of whether impairment is “other-than-temporary,” we consider our ability and intent to hold the investment until the market price recovers, the reasons for the impairment, compliance with our investment policy, the severity and duration of the impairment and expected future performance, among other things

For investments in small privately-held companies, which are recorded at cost, it is often not practical to estimate fair value. In order to assess if impairments exist that are “other-than-temporary,” we reviewed recent interim financial statements and held discussions with these entities’ management about their current financial conditions and future economic outlooks. We also considered our willingness to support future funding requirements as well as our intention and/or ability to hold these investments long-term.

As discussed above, part of our debt and equity investments were in one privately-held company which totaled $3.9 million. This company has historically, and in 2006, generated negative cash flows from operations with limited progress in its product offerings, resulting in significant liquidity problems. Negotiations are currently being held to secure additional financing, however, if unsuccessful, the company will most likely be liquidated. Given the uncertainty in obtaining future financing, the expected dilution impact to our investment and subordination of our investment to the new investors, if the additional financing is obtained, we have concluded that the investment is essentially worthless. Accordingly, in the third quarter of 2006, we wrote off our remaining investment in this company and the related convertible debentures, which resulted in a loss of $3.9 million recorded as a component of other, net.

Additionally, on July 19, 2006 we sold all of our minority interest in a privately-held company, for a cash payment of $5.5 million, which resulted in a gain of $5.2 million recorded as a component of other, net in the third quarter of 2006. An additional $0.6 million is being held in escrow and will be released to us once all contingencies surrounding the transaction are resolved. We have deferred recognition of this $0.6 million gain until such time as the amount held in escrow is released.

12.2.875% CONVERTIBLE SUBORDINATED NOTE ISSUANCE

On May 19, 2006, we issued $115.0 million aggregate principal amount of convertible subordinated notes. The interest rate on the notes is 2.875%, payable semi-annually. The notes are due on June 1, 2013, are subordinated to all previously existing and future senior indebtedness, are effectively subordinated to all indebtedness and other liabilities of our subsidiaries, and rank pari passu in right of payment with our zero coupon convertible subordinated notes and our 5.5% convertible subordinated notes. The cost of this transaction, including underwriting discounts and commissions and offering expenses, totaled $3.1 million and is recorded on our balance sheet in other long-term assets and is being amortized over the life of the notes. The amortization of these costs totals $0.1 million per quarter and is reflected as additional interest expense in our statements of operations. The notes are convertible into shares of our common stock, at the note holder’s option, at a price of $29.35 per share.

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13.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.

In June 2006, we repurchased $4.2 million of our 5.5% Convertible Subordinated Notes at prices ranging from 100.4 to 100.5. The premium and commissions paid, as well as the write-off of the related deferred note issuance costs were included as a component of interest expense in the second quarter of 2006 and totaled approximately $0.1 million.

14.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):

	Thirty-Nine Weeks Ended
	October 1, 2006			October 2, 2005
Balance, beginning of period	$	5,193		$	9,073
Reductions for warranty costs incurred	(9,325		)	(8,732		)
Warranties issued	9,261			6,795
Release of warranty reserves	—			(1,000		)
Translation and other items	(42		)	(669		)
Balance, end of period	$	5,087		$	5,467

15.RESTRUCTURING, REORGANIZATION, RELOCATION AND SEVERANCE

Restructuring, reorganization, relocation and severance in the thirteen and thirty-nine weeks ended October 1, 2006 included charges of $0.2 million and $3.3 million, respectively, for facilities and severance charges related to the closure of certain of our European field offices, closure of a research and development facility in Tempe, Arizona, as well as residual costs related to the Peabody plant closure and the downsizing of the related semiconductor businesses.

Effective April 1, 2006, our Chairman, President and Chief Executive Officer (“CEO”) was terminated. Our CEO 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, our CEO was entitled to certain severance benefits. These included: (i) a lump sum payment equaling three years of base salary (approximately $1.59 million); (ii) a lump sum payment equal to 100% of his target bonus for 2006 (approximately $583,000); (iii) acceleration of all of his stock options and restricted stock awards; (iv) permitting him 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 his reasonably expected health insurance coverage costs would be for 18 months; and (vi) life insurance premium payments not to exceed $5,000.

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Accordingly, in the first quarter of 2006, 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; (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 thirty-nine weeks ended October 1, 2006 related to our accrual for restructuring, reorganization, relocation and severance charges (in thousands):

Thirty-Nine Weeks Ended October 1, 2006	Beginning Accrued Liability		Charged to Expense		Expend- itures			Write-Offs and Adjustments		Ending Accrued Liability
Severance, outplacement and related benefits for terminated employees	$	1,778	$	2,646	$	(4,138	)	$	63	$	349
Abandoned leases, leasehold improvements and facilities	3,496		671		(1,497		)	—		2,670
CEO severance, excluding stock-based compensation	—		2,235		(2,235		)	—		—
	$	5,274	$	5,552	$	(7,870	)	$	63	$	3,019

The restructuring charges were 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.

16. INCOME TAXES

Deferred tax assets, net of valuation allowances, which totaled $35.1 million and $35.0 million, respectively, as of October 1, 2006 and December 31, 2005 were as follows (in thousands):

	October 1,			December 31,
	2006			2005
Deferred tax assets – current	$	3,911		$	5,157
Deferred tax assets – non-current	1,440			1,095
Other current liabilities	(330		)	(371		)
Deferred tax liabilities – non-current	(2,219		)	(1,947		)
Net deferred tax assets	$	2,802		$	3,934	��

We recorded a tax provision of approximately $3.3 million and $7.0 million, respectively, for the thirteen and thirty-nine week periods ended October 1, 2006. The provisions consisted primarily of taxes accrued in foreign jurisdictions and do not reflect benefits for current period losses in the United States as we have 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 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.

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17.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 “Other Transactions” below. The following table summarizes our other transactions with Philips (in thousands):

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
Amounts Paid to Philips	Oct. 1, 2006		Oct. 2, 2005		Oct. 1, 2006		Oct. 2, 2005
Subassemblies and other materials purchased from Philips	$	3,573	$	4,813	$	12,574	$	14,266
Facilities leased from Philips	—		50		52		191
Various administrative, accounting, customs, export, human resources, import, information technology, logistics and other services provided by Philips	48		185		278		601
Research and development services provided by Philips	907		1,130		2,291		2,894
	$	4,528	$	6,178	$	15,195	$	17,952

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):

	October 1, 2006			December 31, 2005
Current accounts receivable	$	23		$	231
Current accounts payable	(1,531		)	(2,195		)
Net current accounts with Philips	$	(1,508	)	$	(1,964	)

Other Transactions

In addition to Philips, we have sold products and services to LSI Logic Corporation, Applied Materials, Nanosys, Inc., Cascade Microtech, Inc. and Accurel. A director of Applied Materials, the Former Chairman and Chief Executive Officer of LSI Logic, Inc. and the Executive Chairman of Nanosys are all members of our Board of Directors. In addition, Mr. Raymond A. Link, our Executive Vice President and Chief Financial Officer, is a member of the Board of Directors of Cascade Microtech, Inc. In addition, our former President and Chief Executive Officer previously had an ownership interest in Accurel.

Sales to Philips, Accurel (prior to being acquired), Applied Materials, LSI Logic, Nanosys and Cascade Microtech were as follows (in thousands):

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 1, 2006		October 2, 2005		October 1, 2006		October 2, 2005
Product sales:
Philips	$	2	$	1,870	$	592	$	2,098
Applied Materials	—		—		—		439
LSI Logic	—		—		—		4
Nanosys	—		275		—		275
Cascade Microtech	219		—		219		—
Total product sales	221		2,145		811		2,816
Service sales:
Philips	$	415	$	205	$	1,341	$	391
Accurel	—		—		—		151
Applied Materials	75		88		231		196
LSI Logic	46		54		128		118
Nanosys	5		5		15		12
Total service sales	541		352		1,715		868
Total sales to related parties	$	762	$	2,497	$	2,526	$	3,684

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18.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 three quarters of 2006, and, as of October 1, 2006, we had outstanding guarantees totaling $0.7 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 October 1, 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 $52.5 million at October 1, 2006. These commitments expire at various times through June 2007.

19.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 Executive 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 Electron Optics segments were reallocated to NanoElectronics, NanoResearch and Industry and NanoBiology based on customer markets. 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 Com- ponents		Corporate and Eliminations		Total
Thirteen Weeks Ended October 1, 2006
Sales to external customers	$	35,042	$	37,606	$	13,344	$	30,948	$	—	$	116,940
Gross profit	17,188		15,455		5,921		9,366		—		47,930
Thirteen Weeks Ended October 2, 2005
Sales to external customers	$	29,722	$	30,884	$	8,305	$	28,211	$	—	$	97,122
Gross profit	11,267		12,700		3,444		9,023		—		36,434
Thirty-Nine Weeks Ended October 1, 2006
Sales to external customers	$	116,895	$	109,741	$	30,835	$	86,386	$	—	$	343,857
Gross profit	58,322		45,624		13,339		23,962		—		141,247
Thirty-Nine Weeks Ended October 2, 2005
Sales to external customers	$	126,637	$	89,228	$	27,485	$	82,258	$	—	$	325,608
Gross profit	52,614		35,559		9,777		24,082		—		122,032
October 1, 2006
Total assets	$	92,555	$	84,633	$	28,148	$	109,975	$	464,931	$	780,242
December 31, 2005
Total assets	$	103,258	$	108,048	$	24,930	$	99,513	$	320,282	$	656,031

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Nano-market segment disclosures are presented to the gross profit level as this is the primary performance measure for which the segment general managers are responsible. 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 profit to income before income taxes. These reconciling items are not included in the measure of profit and loss for each reportable segment. Segment assets as of December 31, 2005 have been reclassified for consistent presentation with the allocation of segment assets as of October 1, 2006.

None of our customers represented 10% or more of our total sales in the thirteen or thirty-nine week periods ended October 1, 2006 or October 2, 2005.

20.          STOCK REPURCHASE PROGRAM

In May 2006, our Board of Directors approved the repurchase of up to $20.0 million of our common stock. Share repurchases under this program may be made through open market and privately negotiated transactions, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. The stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.

On May 19, 2006, pursuant to this program, we repurchased 500,000 shares of our common stock for approximately $11.1 million, utilizing proceeds from our issuance of $115.0 million principal amount of 2.875% Convertible Subordinated Notes (see also Note 12).

21.          NEW ACCOUNTING PRONOUNCEMENTS

SFAS No. 158

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires employers to recognize on their balance sheets the funded status of pension and other postretirement benefit plans, effective December 31, 2006 for calendar year-end companies. In addition SFAS No. 158 requires fiscal year-end measurement of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently permissible, effective for fiscal years ending after December 15, 2008. While we are still analyzing the effects of applying SFAS No. 158, we believe that the adoption of SFAS No. 158 will not have a material effect on our financial position or results of operations.

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.  While we are still analyzing the effects of applying SFAS No. 157, we believe that the adoption of SFAS No. 157 will not have a material effect on our financial position or results of operations.

Staff Accounting Bulletin No. 108

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 requires companies to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. We are currently analyzing the effects of adopting SAB No. 108.

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FASB Interpretation No. 48

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. Interpretation No. 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” Interpretation No. 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006. Upon adoption, we will adjust our financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any adjustment will be recorded directly to our beginning retained earnings balance in the period of adoption and reported as a change in accounting principle. We are currently analyzing the effects of adopting Interpretation No. 48.

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 statement regarding the use of proceeds from the sale of our convertible notes; 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 the NanoElectronics market and our Industry and Institute market is being broken down into the NanoResearch and Industry market and the NanoBiology market.

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

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The NanoElectronics market consists of customers in the semiconductor, data storage and related industries such as printers and microelectromechanical systems (“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 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 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 thirteen and thirty-nine week periods ended October 2, 2005 revenues and gross margin into the new market segments to provide comparability to the thirteen and thirty-nine week periods ended October 1, 2006 in this management’s discussion and analysis of financial condition and results of operations.

Overview

Net sales increased to $116.9 million in the third quarter of 2006 compared to $113.1 million in the second quarter of 2006 and $97.1 million in the third quarter of 2005. Demand was particularly strong for our TEM line, led by the Titan high-end system, and for our small stage DualBeam systems.

At October 1, 2006, our product and service backlog were $233.1 million and $44.3 million, respectively, compared to $197.0 million and $45.7 million, respectively, at July 2, 2006 and $149.5 million and $36.8 million, respectively, at December 31, 2005. Orders received in a particular period that cannot be built and shipped to the customer in that period represent backlog. 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.

The increase in backlog from December 31, 2005 to October 1, 2006 reflects increases in all of our segments and was driven by increases in orders for TEMs, including the Titan, and small stage DualBeam systems.

Of our total backlog at October 1, 2006, approximately 90% is shippable by the end of 2007 and approximately 5% - 10% requires some incremental development. 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. Recently, our ability to ship product from backlog has been negatively affected by single-sourcing issues and problems in securing electronic components from a certain vendor.  In addition, product shipments have been delayed due to delays in completing certain application development. For these and other reasons, the amount of backlog at any date is not necessarily

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indicative of revenue to be recognized in future periods.

Financial results for the thirty-nine week period ended October 1, 2006 were affected by the following charges and gains, which netted to an aggregate of $11.3 million loss as follows:

·$9.3 million of restructuring, reorganization, relocation and severance charges in connection with the termination of our former CEO, including $2.2 million of cash payments and a non-cash charge of $7.1 million for stock-based compensation, as a result of the acceleration and extended exercisability of his existing stock options in accordance with his 2002 severance agreement;

·$3.3 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, a research and development center in Tempe, Arizona, as well as residual costs related to the Peabody, Massachusetts 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;

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

·a $0.5 million charge related to the repurchase and retirement of $29 million face value of our 5.5% convertible notes (included as a component of interest expense);

·a $3.9 million charge related to the write-off of our equity and debt investment in a privately-held company (included as a component of other income, net);

·a $5.2 million gain related to the sale of our entire ownership interest in a privately-held company (included as a component of other income); and

·a $1.5 million gain related to the  sale of certain intellectual property rights to a privately-held company (included as a reduction to selling, general and administrative expense).

The thirteen and thirty-nine week periods ended October 1, 2006 also included $1.5 million and $4.0 million, respectively, 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 October 1, 2006, stock-based compensation expense is expected to be approximately $1.8 million in the fourth quarter of 2006.

Outlook for the Remainder of 2006

For the fourth quarter of 2006, we expect growth in revenue compared with the third quarter of 2006 and the fourth quarter of 2005.  This outlook is based primarily on our existing backlog of unfilled orders, which has increased by $91.1 million (49%) to $277.4 million from the end of the fourth quarter a year ago, and on increased production schedules at our factories. Over 40% of the backlog is scheduled for shipment to customers in the fourth quarter of 2006. In addition, we expect continued strong bookings during the fourth quarter of 2006, and a small portion of those are also expected to be shipped during the fourth quarter of 2006.

We expect earnings in the fourth quarter of 2006 will increase compared with the third quarter of 2006 and will be well above the loss recorded in the fourth quarter of 2005. Increased revenue growth, better absorption of manufacturing overhead and a higher proportion of higher-margin product shipments are expected to increase gross profit. In addition, we do not anticipate further restructuring or asset impairment charges such as those that we incurred in the fourth quarter of 2005.  Improved gross profit is expected to be partially offset by increased operating expenses for research and development of new products, additional marketing programs and additional profit-sharing, commissions and bonus expense.

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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 tables set forth our statement of operations data, both in absolute dollars and as a percentage of net sales (dollars in thousands).

	Thirteen Weeks Ended(1)				Thirteen Weeks Ended(1)
	October 1, 2006				October 2, 2005
Net sales	$	116,940	100.0	%	$	97,122		100.0	%
Cost of sales	69,010		59.0		60,688			62.5
Gross profit	47,930		41.0		36,434			37.5
Research and development	14,679		12.6		13,429			13.8
Selling, general and administrative	24,970		21.4		25,251			26.0
Amortization of purchased technology	610		0.5		720			0.7
Asset impairment	—		—		801			0.8
Restructuring, reorganization, relocation and severance	249		0.2		2,804			2.9
Operating income (loss)	7,422		6.3		(6,571		)	(6.8	)
Other income (expense), net	2,349		2.0		75			0.1
Income (loss) before income taxes	9,771		8.4		(6,496		)	(6.7	)
Income tax expense (benefit)	3,263		2.8		(1,393		)	(1.4	)
Net income (loss)	$	6,508	5.6	%	$	(5,103	)	(5.3	)%

	Thirty-Nine Weeks Ended(1)				Thirty-Nine Weeks Ended(1)
	October 1, 2006				October 2, 2005
Net sales	$	343,857	100.0	%	$	325,608		100.0	%
Cost of sales	202,610		58.9		203,576			62.5
Gross profit	141,247		41.1		122,032			37.5
Research and development	43,525		12.7		45,483			14.0
Selling, general and administrative	73,352		21.3		75,738			23.3
Merger costs	484		0.1		—			—
Amortization of purchased technology	1,896		0.6		3,579			1.1
Asset impairment	465		0.1		16,745			5.1
Restructuring, reorganization, relocation and severance	12,642		3.7		3,928			1.2
Operating income (loss)	8,883		2.6		(23,441		)	(7.2	)
Other income (expense), net	3,546		1.0		(3,904		)	(1.2	)
Income (loss) before income taxes	12,429		3.6		(27,345		)	(8.4	)
Income tax expense (benefit)	7,043		2.0		20,120			6.2
Net income (loss)	$	5,386	1.6	%	$	(47,465	)	(14.6	)%

(1)  Percentages may not add due to rounding.

Net sales increased $19.8 million, or 20.4%, to $116.9 million, in the thirteen weeks ended October 1, 2006 (the third quarter of 2006) compared to $97.1 million in the thirteen weeks ended October 2, 2005 (the third quarter of 2005). Net sales increased $18.3 million, or 5.6%, to $343.9 million in the thirty-nine week period ended October 1, 2006 compared to $325.6 million in the thirty-nine week period ended October 2, 2005.

Our thirteen and thirty-nine week periods ended October 1, 2006 revenues reflected improvements in the NanoResearch and Industry, NanoBiology and Service and Components segments as compared to the same periods of 2005. The thirteen week period also reflected an improvement in the NanoElectronics segment. By product, our TEM line, including the Titan high-end system, and our DualBeam systems had the greatest growth.

Offsetting the increases for the 2006 periods compared to the same 2005 periods was the fact that we deemphasized marketing and sales of certain semiconductor products in the second half of 2005 and sold our SIMS product line in the second quarter of 2005.

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Net Sales by Segment

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

	Thirteen Weeks Ended
	October 1, 2006				October 2, 2005
NanoElectronics	$	35,042	30.0	%	$	29,722	30.6	%
NanoResearch and Industry	37,606		32.1	%	30,884		31.8	%
NanoBiology	13,344		11.4	%	8,305		8.6	%
Service and Components	30,948		26.5	%	28,211		29.0	%
	$	116,940	100.0	%	$	97,122	100.0	%

	Thirty-Nine Weeks Ended
	October 1, 2006				October 2, 2005
NanoElectronics	$	116,895	34.0	%	$	126,637	38.9	%
NanoResearch and Industry	109,741		31.9	%	89,228		27.4	%
NanoBiology	30,835		9.0	%	27,485		8.4	%
Service and Components	86,386		25.1	%	82,258		25.3	%
	$	343,857	100.0	%	$	325,608	100.0	%

The $5.3 million, or 17.9%, increase in NanoElectronics sales in the thirteen week period ended October 1, 2006 compared to the same period of 2005 was due to strength in our TEM and DualBeam system unit sales, which resulted primarily from general demand in the semiconductor capital equipment market in the current period, partially offset by a shift in mix to lower-priced TEM units.

The $9.7 million, or 7.7%, decrease in NanoElectronics sales in the thirty-nine week period ended October 1, 2006 compared to the same period of 2005, was primarily due to the volume decline related to products in our semiconductor businesses that were deemphasized during our restructuring activities in the second half of 2005. These declines were partially offset by the improvements realized in the thirteen-week period ended October 1, 2006, as discussed above.

Our backlog in NanoElectronics increased in the third quarter of 2006, primarily for our TEM products, small DualBeam systems and data storage products, partially offset by a decrease in our backlog for our SEM products.

NanoResearch and Industry

The $6.7 million, or 21.8%, increase and the $20.5 million, or 23.0%, increase, respectively, in NanoResearch and Industry sales in the thirteen and thirty-nine week periods ended October 1, 2006 compared to the same periods of 2005 were due primarily to an approximately $3.0 million and a $21.3 million increase, respectively, related to a shift in mix to our higher-priced TEMs, including the Titan. Worldwide nanotechnology research funding remains strong. In addition, sales of our small stage DualBeam systems increased by $3.0 million in the thirteen week period ended October 1, 2006 compared to the same period of 2005 as a result of increased unit sales.

We built backlog in this segment in the third quarter of 2006, primarily for our small DualBeam systems, due in part to new product introductions, as well as increased market penetration of our low-end DualBeam systems.

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NanoBiology

The $5.0 million, or 60.7%, increase and the $3.4 million, or 12.2%, increase, respectively, in NanoBiology sales in the thirteen and thirty-nine week periods ended October 1, 2006 compared to the same periods of 2005 were due primarily to a shift in mix to higher-priced TEMs and DualBeam systems. The thirteen week period ended October 1, 2006 also realized an increase in the number of TEMs sold compared to the same period of 2005. 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.

We built backlog in this segment in the third quarter of 2006, primarily for our TEMs.

Service and Components

The $2.7 million, or 9.7%, increase and the $4.1 million, or 5.0%, increase, respectively, in Service and Component sales in the thirteen and thirty-nine week periods ended October 1, 2006 compared to the same periods of 2005 were due primarily to a larger installed base and strong service contract renewals in the third quarter of 2006. Component sales include sales of individual components as well as equipment refurbishment and contributed $0.1 million and $0.5 million, respectively, to the increases in the thirteen and thirty-nine week periods ended October 1, 2006 compared to the same periods of 2005.

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								Thirty-Nine Weeks Ended
	October 1, 2006				October 2, 2005				October 1, 2006				October 2, 2005
North America	$	45,168	38.6	%	$	31,738	32.7	%	$	122,187	35.5	%	$	99,208	30.5	%
Europe	49,300		42.2	%	36,830		37.9	%	135,051		39.3	%	129,424		39.7	%
Asia-Pacific Region	22,472		19.2	%	28,554		29.4	%	86,619		25.2	%	96,976		29.8	%
	$	116,940	100.0	%	$	97,122	100.0	%	$	343,857	100.0	%	$	325,608	100.0	%

North America

Sales in North America increased $13.4 million, or 42.3%, and $23.0 million, or 23.2%, respectively, in the thirteen and thirty-nine week periods ended October 1, 2006, compared to the same periods of 2005. These increases were primarily due to increased data storage sales as the conversion to perpendicular recording accelerated, as well as increased TEM sales, including the Titan, and increased small DualBeam sales. These improvements were partially driven by an improvement in the semiconductor capital equipment market in the 2006 periods compared to the 2005 periods.

Europe

Sales in Europe increased $12.5 million, or 33.9%, and $5.6 million, or 4.3%, respectively, in the thirteen and thirty-nine week periods ended October 1, 2006, compared to the same periods of 2005. These increases were primarily due to increases in TEM sales, including the Titan, partially offset by unusually high volume sales of our small stage DualBeam systems in the first half of 2005.  In the thirteen week period ended October 1, 2006, sales of our small DualBeam systems increased compared to the same period of 2005.

Asia-Pacific Region

Sales in the Asia-Pacific Region decreased $6.1 million, or 21.3%, and $10.4 million, or 10.7%, respectively, in the thirteen and thirty-nine week periods ended October 1, 2006, compared to the same periods of 2005. These decreases resulted from lower volume sales of our wafer-level DualBeam systems and small stage DualBeam systems in the 2006 periods due to unusually high volumes in the comparable 2005 periods and decreases in SEM sales, partially offset by an increase in TEM sales, including the Titan.

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

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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 increased $8.3 million, or 13.7%, to $69.0 million in the thirteen weeks ended October 1, 2006 compared to $60.7 million in the thirteen weeks ended October 2, 2005 and decreased $1.0 million, or 0.5%, to $202.6 million in the thirty-nine weeks ended October 1, 2006 compared to $203.6 million in the thirty-nine weeks ended October 2, 2005.

The increase in the thirteen week period was primarily due to the increased sales as discussed above, partially offset by improved gross margins in the 2006 period compared to the 2005 period as detailed below and the closure of our Peabody, Massachusetts facility in the third quarter of 2005.

The decrease in the thirty-nine week period of 2006 was primarily due to the charges incurred to write-off inventory and capitalized software related to the closure of our Peabody, Massachusetts facility in 2005, as well as an increase in our overall gross margin as detailed below, partially offset by the increase in sales.

Cost of sales in the thirteen and thirty-nine week periods ended October 1, 2006 were also affected by $0.2 million and $0.6 million, respectively, of stock-based compensation compared to none for the comparable periods of 2005. Cost of sales in the thirteen and thirty-nine week periods ended October 2, 2005 included charges of $2.4 million and $5.6 million, respectively, related to the write-down of inventory and the thirty-nine week period ended October 2, 2005 included a $3.2 million charge related to capitalized software.

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

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 1,  2006		October 2,  2005		October 1,  2006		October 2,  2005
NanoElectronics	49.0	%	37.9	%	49.9	%	41.5	%
NanoResearch and Industry	41.1	%	41.1	%	41.6	%	39.9	%
NanoBiology	44.4	%	41.5	%	43.3	%	35.6	%
Service and Components	30.3	%	32.0	%	27.7	%	29.3	%
Overall	41.0	%	37.5	%	41.1	%	37.5	%

The charges discussed above, which totaled $2.4 million and $8.8 million, respectively, in the thirteen and thirty-nine week periods ended October 2, 2005, reduced our overall gross margin for those periods by 2.5 percentage points and 2.7 percentage points, respectively, and the NanoElectronics gross profit margin by 8.4 percentage points and 6.7 percentage points, respectively.

NanoElectronics

The NanoElectronics gross margin improved in the thirteen and thirty-nine week periods ended October 1, 2006 compared to the same periods of 2005, primarily due to the impact in 2005 of the inventory and capitalized software write-offs discussed above. Additionally, gross margins in the 2006 periods increased due to improvements in our product mix for both DualBeam systems and TEM products, including the Titan.

NanoResearch and Industry

The decrease in NanoResearch and Industry gross margins in the thirteen week period ended October 1, 2006 compared to the same period of 2005 was primarily due to a shift in mix to lower-margin small DualBeam systems. The increase in NanoResearch and Industry gross margins in the thirty-nine week period ended October 1, 2006 compared to the same period of 2005 was primarily due to improvements in the TEM product mix, partially offset by the shift to the lower-margin small DualBeam systems.

NanoBiology

Gross margins in the NanoBiology segment increased in both the thirteen and thirty-nine week periods ended October 1, 2006 compared to the same periods of 2005 due to a shift to higher-margin small DualBeam systems. In addition, in the thirty-nine week period ended October 1, 2006, we recognized improvements in margins achieved on our TEMs, due in part to sales of the Titan, and SEMs as well.

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Service and Components

The decreases in the Service and Components gross margins in the thirteen and thirty-nine week periods ended October 1, 2006 compared to the same periods of 2005 were primarily due to higher repair costs, material usage and inventory write-offs, which occurred in the first quarter of 2006.

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 increased $1.3 million to $14.7 million (12.6% of net sales) in the thirteen weeks ended October 1, 2006 compared to $13.4 million (13.8% of net sales) in the thirteen weeks ended October 2, 2005 and decreased $2.0 million to $43.5 million (12.7% of net sales) in the thirty-nine week period ended October 1, 2006 compared to $45.5 million (14.0% of net sales) in the thirty-nine week period ended October 2, 2005.

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

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 1,  2006			October 2,  2005			October 1,  2006			October 2,  2005
Gross spending	$	15,386		$	14,486		$	46,325		$	49,035
Less subsidies	(707		)	(1,057		)	(2,800		)	(3,552		)
Net expense	$	14,679		$	13,429		$	43,525		$	45,483

The $1.3 million increase in R&D costs in the thirteen week period ended October 1, 2006 compared to the same period of 2005 was due to a $0.2 million increase in stock-based compensation and a $0.8 million increase in product costs and headcount related to new product development, as well as a $0.4 million decrease in subsidies.

The $2.0 million decrease in R&D costs in the thirty-nine week period ended October 1, 2006 compared to the same period of 2005 was due to $2.6 million in savings from restructuring activities, mainly due to the closing of our Peabody, Massachusetts operations and $0.7 million in material cost savings, offset by a $0.6 million increase in stock-based compensation and a $0.8 million decrease in 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 $0.3 million to $25.0 million (21.4% of net sales) in the thirteen week period ended October 2, 2005 compared to $25.3 million (26.0% of net sales) in the comparable period of 2005 and decreased $2.3 million to $73.4 million (21.3% of net sales) in the thirty-nine week period ended October 1, 2006 compared to $75.7 million (23.3% of net sales) in the comparable period of 2005.

The decrease in SG&A costs in the thirteen week period ended October 1, 2006 compared to the same period of 2005 was due primarily to a $1.5 million gain related to the sale of certain intellectual property rights to a privately-held company, offset by $1.1 million of stock-based compensation. In the thirty-nine week period ended October 1, 2006, the decrease in SG&A costs was due to the $1.5 million gain discussed above, approximately $1.9 million of savings related to our 2005 restructuring activities, a $1.1 million

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decrease in legal and audit fees, excluding the merger costs discussed below, and a $0.6 million decrease in labor and related costs due primarily to lower headcount. These cost reductions were partially offset by $2.7 million of stock-based compensation.

Merger Costs

Merger costs of $0.5 million in the thirty-nine week period ended October 1, 2006 related to legal and other costs incurred primarily in the first quarter of 2006 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 and $1.9 million, respectively, in the thirteen and thirty-nine week periods ended October 1, 2006 compared to $0.7 million and $3.6 million, respectively, in the comparable periods of 2005. Our purchased technology balance at October 1, 2006 was $6.4 million and current amortization of purchased technology is approximately $0.5 million per quarter, which could increase if we acquire additional technology.

The decrease in the thirty-nine week period ended October 1, 2006 compared to the same period 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 $0.5 million in the thirty-nine week period ended October 1, 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 first quarter of 2006.

In the second quarter of 2005, we took certain actions to align our cost structure with the current prevailing market conditions, primarily in the semiconductor markets. The actions taken, which were necessary as a result of reduced business volumes, resulted in decreases in our global workforce and also required us to evaluate our goodwill and long-lived assets for impairment.

These charges are summarized as follows (in thousands):

	Thirteen  Weeks Ended October 2,  2005		Thirty-Nine  Weeks Ended October 2,  2005
Purchased technology	$	—	$	9,328
Property, plant and equipment	801		6,506
Patents and other intangible assets	—		911
	$	801	$	16,745

Restructuring, Reorganization, Relocation and Severance

Restructuring, reorganization, relocation and severance in the thirteen and thirty-nine weeks ended October 1, 2006 included charges of $0.2 million and $3.3 million, respectively, for facilities and severance charges related to the closure of certain of our European field offices, closure of a research and development facility in Tempe, Arizona, as well as residual costs related to the Peabody plant closure and the downsizing of the related semiconductor businesses.

Effective April 1, 2006, our Chairman, President and Chief Executive Officer (“CEO”) was terminated. Our CEO 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, our CEO was entitled to

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certain severance benefits. These included: (i) a lump sum payment equaling three years of base salary (approximately $1.59 million); (ii) a lump sum payment equal to 100% of his target bonus for 2006 (approximately $583,000); (iii) acceleration of all of his stock options and restricted stock awards; (iv) permitting him 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 his reasonably expected health insurance coverage costs would be for 18 months; and (vi) life insurance premium payments not to exceed $5,000.

Accordingly, in the first quarter of 2006, 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 thirty-nine weeks ended October 1, 2006 related to our accrual for restructuring, reorganization, relocation and severance charges (in thousands):

Thirty-Nine Weeks Ended October 1, 2006	Beginning  Accrued  Liability		Charged  to  Expense		Expend- itures			Write-Offs  and Adjustments		Ending Accrued  Liability
Severance, outplacement and related benefits for terminated employees	$	1,778	$	2,646	$	(4,138	)	$	63	$	349
Abandoned leases, leasehold improvements and facilities	3,496		671		(1,497		)	—		2,670
CEO severance, excluding stock-based compensation	—		2,235		(2,235		)	—		—
	$	5,274	$	5,552	$	(7,870	)	$	63	$	3,019

The restructuring charges were 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.

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 $3.7 million and $9.0 million in the thirteen and thirty-nine week periods ended October 1, 2006, respectively, compared to $1.9 million and $5.6 million, respectively, in the comparable periods of 2005. These increases were the result of higher interest rates earned on our cash and marketable securities balances, as well as an increase in our invested balances. The increase in our invested balances was primarily due to net proceeds from our sale of $115.0 million principal amount of 2.875% convertible debt in May 2006.

Interest expense for both the 2006 and 2005 periods primarily relates to our 5.5% convertible debt issued in August 2001. In addition, the 2006 periods include interest related to our 2.875% convertible debt that was issued in May 2006. The amortization of capitalized note issuance costs related to our convertible note issuances is also included as a component of interest expense.

Interest expense in the thirty-nine week period ended October 1, 2006 included premiums and commissions paid on the repurchase of a portion of our 5.5% Convertible Subordinated Notes as well as the write-off of

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deferred note issuance costs totaling $0.5 million.

In connection with our repurchase of $70.0 million of our 5.5% Convertible Subordinated Notes during the second quarter of 2005, interest expense for the thirty-nine week period ended October 2, 2005 included the write-off of $1.1 million of deferred note issuance costs.

Assuming no additional note repurchases, amortization of our remaining convertible note issuance costs, including those related to our 2.875% convertible notes, will total approximately $0.4 million per quarter through 2008 and $0.1 million per quarter thereafter through the second quarter of 2013.

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.  Other, net in the thirteen and thirty-nine week periods ended October 1, 2006 included a $3.9 million charge related to the write-off of an investment in a privately-held company and a $5.2 million gain related to the sale of our entire ownership interest in another privately-held company. The thirty-nine week period ended October 2, 2005 included a charge of $0.8 million related to the write-down of one of our cost method investments recorded in the second quarter of 2005.

Income Tax Expense

We recorded a tax provision of approximately $3.3 million and $7.0 million, respectively, for the thirteen and thirty-nine week periods ended October 1, 2006. The provisions consisted primarily of taxes accrued in foreign jurisdictions and do not reflect benefits for current period losses in the United States as we have recorded a full valuation allowance against the United States deferred tax assets generated from the current period losses.

We recorded a tax benefit of $1.4 million and tax expense of $20.1 million, respectively, for the thirteen and thirty-nine week periods ended October 2, 2005. The tax benefit in the thirteen week period reflects the tax benefit of foreign losses incurred in the thirteen weeks ended October 2, 2005. The tax expense in the thirty-nine week period does not reflect a benefit for current period losses in the United States as we have recorded a full valuation allowance against the United States deferred tax assets generated from the current year losses. An additional $14.3 million in tax expense was recorded in the thirty-nine weeks ended October 2, 2005 to record a valuation allowance for our existing United States deferred tax assets.

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

We expect our annual effective tax rate to approximate our blended domestic and foreign statutory rate of 36% as we reduce our U.S. generated losses and continue to have profits and related tax expense from international operations.  We continue to take actions to improve the profitability of the U.S. operations through tax planning strategies and cost reductions and anticipate generating U.S. taxable profits in the fourth quarter of 2006 which would offset a portion of our U.S. net operating losses generated in the first three quarters of 2006. However, if we do not improve the profitability of the U.S. operations or develop a tax strategy that will enable us to utilize the benefit of our net operating losses for tax purposes, our effective tax rate could remain unusually high.

LIQUIDITY AND CAPITAL RESOURCES

Our sources of liquidity and capital resources as of October 1, 2006 consisted of $329.9 million of cash, cash equivalents, short-term restricted cash and short-term investments, $31.2 million in non-current investments, $4.6 million of long-term restricted cash, $30.0 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

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twelve-month period from October 1, 2006.

In the first three quarters of 2006, cash and cash equivalents and short-term restricted cash increased $39.7 million to $119.0 million as of October 1, 2006 from $79.3 million as of December 31, 2005 primarily as a result of net proceeds of $111.9 million from the issuance of $115.0 million principal amount of 2.875% convertible subordinated notes, $8.2 million of proceeds from the exercise of employee stock options and employee stock purchases, $4.8 million of net proceeds related to investments in and disposals of our cost-based investments and a $4.7 million favorable effect of exchange rate changes. These increases were partially offset by the use of $1.4 million for operations, $29.1 million for the repurchase of a portion of our 5.5% subordinated notes, $11.1 million used for the repurchase of 500,000 shares of our common stock, $40.9 million used for the net purchase of investments in marketable securities and $4.4 million used for the purchase of property, plant and equipment.

Accounts receivable increased $37.4 million to $135.7 million as of October 1, 2006 from $98.3 million as of December 31, 2005, primarily due to increased sales in the third quarter of 2006 compared with the fourth quarter of 2005. This balance was also affected by a $0.8 million increase related to changes in currency exchange rates. Our days sales outstanding, calculated on a quarterly basis, was 106 days at October 1, 2006 compared to 88 days at December 31, 2005.

Inventories increased $3.9 million to $88.8 million as of October 1, 2006 compared to $84.9 million as of December 31, 2005. The increase primarily was due to increases in finished goods and increases in our current service inventory requirements, partially offset by currency movements of approximately $0.6 million. Our annualized inventory turnover rate, calculated on a quarterly basis, was 3.1 times for the quarter ended October 1, 2006 and 2.6 times for the quarter ended October 2, 2005.

Expenditures for property, plant and equipment of $4.4 million in the first three quarters of 2006 primarily consisted of expenditures for machinery and 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 $6.5 million, primarily for the development and introduction of new products and upgrades and incremental improvements to our ERP systems.

Accrued payroll liabilities increased $9.0 million to $18.2 million as of October 1, 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.

On May 19, 2006, we sold $115.0 million principal amount of 2.875% Convertible Subordinated Notes due June 1, 2013. Net proceeds from the issuance were $111.9 million. We used approximately $11.1 million of the proceeds to repurchase 500,000 shares of our common stock. The remaining proceeds will be used for general corporate purposes, including capital expenditures, research and development, repurchase of our existing convertible subordinated notes, other stock buybacks and potential investments in and acquisitions of complementary businesses, partnerships, minority investments, products or technologies, to fund further enhancements of our operating infrastructure and for working capital.

We maintain a $30.0 million uncommitted bank borrowing facility in the United States (and outside the United States for our international subsidiaries under the guarantee of the parent company), of which $5.0 million is available on an unsecured basis. We also have a $3.7 million unsecured and uncommitted bank borrowing facility in Japan and various limited facilities in select foreign countries. At October 1, 2006, a total of $30.0 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 October 1, 2006, we had $33.0 million of these guarantees and letters of credit outstanding, of which approximately $31.3 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.

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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

A description of the risks and uncertainties associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risks and uncertainties associated with our business previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. You should carefully consider such risks and uncertainties, together with the other information contained in this report, our Annual Report of Form 10-K for the fiscal year ended December 31, 2005 and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.

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 financial position, results of operations or cash flow.

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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.

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 may cancel orders that they previously placed;

·customers have the alternative 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.

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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 and electronic components manufactured by Benchmark Electronics, which in turn have delayed our product shipments. In the future, if Philips ETG or Benchmark Electronics 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.  Further, both Philips ETG and Benchmark Electronics have recently been acquired by new owners. Integration issues, strategic redirection or other business changes from the acquisitions could add to our supplier constraints and adversely affect our operating results. 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:

	Thirty-Nine Weeks Ended
	October 1,  2006		October 2,  2005
NanoElectronics	$	116,895	$	126,637
NanoResearch and Industry	109,741		89,228
NanoBiology	30,835		27,485
Service and Components	86,386		82,258
	$	343,857	$	325,608

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.

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The NanoResearch and Industry market is also 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 a 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. Further, in some cases, our customers have to make changes to their facilities to accommodate the site requirements for our tools. This is particularly true of the high-performance TEMs, including our Titan tool. 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.

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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.  In July 2006, we announced that we hired a new President and Chief Executive Officer; he began his employment with us on August 14, 2006. 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 October 1, 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

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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. On occasion, certain product and application development has taken longer than expected.  These delays can have an adverse affect on product shipments and results of operations.

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.

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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 and service 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 thirty-nine weeks ended October 1, 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 25% and 31%, respectively, of our sales in the thirty-nine weeks ended October 1, 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

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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 thirty-nine weeks ended October 1, 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 October 1, 2006, we had total convertible long-term debt of approximately $195.9 million due in 2008 and $115.0 million due in 2013. 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 the up to 926,534 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;

·the dilutive effects on our shareholders as a result of the up to 3,918,395 shares of our common stock that would be issued in the event all or a portion of the 2.875% 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.

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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 three quarters of 2006, we recorded restructuring, reorganization, relocation and severance charges of $12.6 million, of which $3.3 million was for facilities and severance charges related to the closure of certain of our European field offices, the closure of our Tempe, Arizona research and development facility, 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. 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 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

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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, our net income would have been reduced 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.

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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 three quarters 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 $1.4 million and $1.5 million, respectively, in the thirty-nine week period ended October 1, 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.

During the third quarter of 2006, we sold one such investment for a gain of $5.2 million and wrote-off the remaining such investments, incurring a charge of $3.9 million. In 2005, we recorded impairment charges and realized losses totaling $6.4 million related to these investments. We may have such investments in the future.

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

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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.

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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 August 17, 2006. (3)
31	Certifications 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	Certifications 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 Exhibit A to Exhibit 4.1 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 current report on Form 8-K filed with the Securities and Exchange Commission on August 22, 2006.

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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: November 3, 2006	/s/ DON R. KANIA
	Don R. Kania
	President and Chief Executive Officer
	(Principal Executive Officer)
	/s/ RAYMOND A. LINK
	Raymond A. Link
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)

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