UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

		For the quarterly period ended September 30, 2007

		OR

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

		For the transition period from to

Commission File 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 31, 2007 was 36,288,448.

FEI COMPANY

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

	Consolidated Balance Sheets – September 30, 2007 and December 31, 2006

	Consolidated Statements of Operations – Thirteen and Thirty-Nine Weeks Ended September 30, 2007 and October 1, 2006

	Consolidated Statements of Comprehensive Income – Thirteen and Thirty-Nine Weeks Ended September 30, 2007 and October 1, 2006

	Consolidated Statements of Cash Flows – Thirty-Nine Weeks Ended September 30, 2007 and October 1, 2006

	Condensed Notes to Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II - OTHER INFORMATION

Item 1A.	Risk Factors

Item 6.	Exhibits

Signatures

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FEI Company and Subsidiaries

Consolidated Balance Sheets

(In thousands)

(Unaudited)

	September 30,		December 31,
	2007		2006

Assets
Current Assets:
Cash and cash equivalents	$	222,419	$	110,656
Short-term investments in marketable securities	198,362		234,202
Short-term restricted cash	12,973		20,172
Receivables, net of allowances for doubtful accounts of $3,549 and $4,181	176,468		144,955
Inventories	137,243		97,470
Deferred tax assets	4,996		4,386
Other current assets	40,941		33,474
Total Current Assets	793,402		645,315

Non-current investments in marketable securities	12,708		34,900
Long-term restricted cash	9,298		6,131
Property, plant and equipment, net of accumulated depreciation of $73,721 and $68,420	68,083		60,394
Purchased technology, net of accumulated amortization of $43,004 and $41,568	3,268		4,494
Goodwill	40,875		40,900
Deferred tax assets	9,479		542
Non-current service inventories	41,134		37,920
Other assets, net	19,141		7,483
Total Assets	$	997,388	$	838,079

Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	50,083	$	45,118
Accrued payroll liabilities	26,212		20,736
Accrued warranty reserves	6,902		5,716
Accrued agent commissions	6,871		6,175
Deferred revenue	61,564		48,992
Income taxes payable	6,987		9,203
Accrued restructuring, reorganization, relocation and severance	598		2,439
Current portion of convertible debt	45,882		—
Other current liabilities	31,241		29,276
Total Current Liabilities	236,340		167,655

Convertible debt	265,000		310,882
Deferred tax liabilities	4,204		4,062
Other liabilities	35,119		5,572

Commitments and contingencies

Shareholders’ Equity:
Preferred stock - 500 shares authorized; none issued and outstanding	—		—
Common stock - 70,000 shares authorized; 36,252 and 34,052 shares issued and outstanding, no par value	390,168		348,479
Retained earnings (accumulated deficit)	10,533		(36,041		)
Accumulated other comprehensive income	56,024		37,470
Total Shareholders’ Equity	456,725		349,908
Total Liabilities and Shareholders’ Equity	$	997,388	$	838,079

See accompanying Condensed Notes to Consolidated Financial Statements.

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
	September 30, 2007			October 1, 2006			September 30, 2007			October 1, 2006

Net Sales:
Products	$	113,436		$	84,432		$	346,431		$	252,010
Products - related party	129			221			719			811
Service and components	32,168			30,408			94,906			84,671
Service and components - related party	55			541			246			1,715
Total net sales	145,788			115,602			442,302			339,207

Cost of Sales:
Products	61,249			47,085			186,552			139,243
Service and components	23,307			21,582			69,018			62,423
Total cost of sales	84,556			68,667			255,570			201,666

Gross Profit	61,232			46,935			186,732			137,541

Operating Expenses:
Research and development	16,414			13,907			47,883			41,416
Selling, general and administrative	30,915			24,434			90,661			71,771
Merger costs	—			—			—			484
Amortization of purchased technology	444			510			1,327			1,596
Asset impairment	—			—			—			465
Restructuring, reorganization, relocation and severance	—			249			(404		)	12,636
Total operating expenses	47,773			39,100			139,467			128,368

Operating Income	13,459			7,835			47,265			9,173

Other Income (Expense):
Interest income	5,902			3,663			15,874			8,996
Interest expense	(2,218		)	(2,018		)	(6,291		)	(5,245		)
Other, net	(523		)	724			(2,095		)	(185		)
Total other income, net	3,161			2,369			7,488			3,566

Income from continuing operations before income taxes	16,620			10,204			54,753			12,739
Income tax expense	3,236			3,284			12,408			6,986
Income from continuing operations	13,384			6,920			42,345			5,753
(Loss) income from discontinued operations, net of tax	—			(412		)	127			(367		)
Net income	$	13,384		$	6,508		$	42,472		$	5,386

Basic income per share from continuing operations	$	0.37		$	0.20		$	1.19		$	0.17
Basic (loss) income per share from discontinued operations	—			(0.01		)	0.01			(0.01		)
Basic net income per share	$	0.37		$	0.19		$	1.20		$	0.16

Diluted income per share from continuing operations	$	0.31		$	0.18		$	0.99		$	0.16
Diluted (loss) income per share from discontinued operations	—			(0.01		)	0.01			(0.01		)
Diluted net income per share	$	0.31		$	0.17		$	1.00		$	0.15

Shares used in per share calculations:
Basic	36,216			33,752			35,505			33,796
Diluted	46,419			39,572			46,066			39,614

See accompanying Condensed Notes to Consolidated Financial Statements.

FEI Company and Subsidiaries

Consolidated Statements of Comprehensive income

(In thousands)

(Unaudited)

	For the Thirteen Weeks Ended						For the Thirty-Nine Weeks Ended
	September 30, 2007			October 1, 2006			September 30, 2007			October 1, 2006

Net income	$	13,384		$	6,508		$	42,472		$	5,386
Other comprehensive income:
Change in cumulative translation adjustment, zero taxes provided	13,030			(1,118		)	16,936			11,891
Change in unrealized loss on available-for-sale securities	162			442			415			635
Change in minimum pension liability, net of taxes	(6		)	—			232			—
Changes due to cash flow hedging instruments:
Net gain (loss) on hedge instruments	3,547			(1,198		)	3,390			2,160
Reclassification to net income of previously deferred gains related to hedge derivatives instruments	(1,321		)	(477		)	(2,419		)	(860		)
Comprehensive income	$	28,796		$	4,157		$	61,026		$	19,212

See accompanying Condensed Notes to Consolidated Financial Statements.

FEI Company and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	For the Thirty-Nine Weeks Ended
	September 30, 2007			October 1, 2006

Cash flows from operating activities:
Net income	$	42,472		$	5,386
Adjustments to reconcile net income to net cash provided by (used by) operating activities:
Depreciation	9,892			10,036
Amortization	2,347			3,533
Stock-based compensation	5,160			11,058
Asset impairments and write-offs of property, plant and equipment and other assets	—			4,311
Gain on disposal of investments, property, plant and equipment and intangible assets	(4		)	(6,730		)
Write-off of deferred bond offering costs	—			404
Income taxes receivable (payable), net	16,581			4,462
Deferred income taxes	(8,982		)	1,096
Gain from disposal of discontinued operations	(127		)	—
(Increase) decrease in:
Receivables	(24,844		)	(34,228		)
Inventories	(36,460		)	(2,667		)
Other assets	(4,960		)	66
Increase (decrease) in:
Accounts payable	2,016			4,037
Accrued payroll liabilities	4,079			8,399
Accrued warranty reserves	975			(233		)
Deferred revenue	9,438			(8,584		)
Accrued restructuring, reorganization, relocation and severance costs	(1,889		)	(1,772		)
Other liabilities	1,043			350
Net cash provided by (used by) operating activities	16,737			(1,076		)

Cash flows from investing activities:
(Increase) decrease in restricted cash	5,238			(10,925		)
Acquisition of property, plant and equipment	(11,196		)	(4,427		)
Proceeds from disposal of property, plant and equipment and intangible asssets	4			1,520
Purchase of investments in marketable securities	(181,558		)	(209,032		)
Redemption of investments in marketable securities	240,750			168,173
Proceeds from disposal of unconsolidated subsidiary	—			4,829
Other	(236		)	(206		)
Net cash provided by (used by) investing activities	53,002			(50,068		)

Cash flows from financing activities:
Redemption of 5.5% convertible notes	—			(29,118		)
Issuance of 2.875% convertible notes, net of offering costs	—			111,868
Repurchase of common stock	—			(11,075		)
Witholding taxes paid by Company on issuance of vested restricted stock units	(1,151		)	—
Proceeds from exercise of stock options and employee stock purchases	37,281			8,207
Net cash provided by financing activities	36,130			79,882

Effect of exchange rate changes	5,894			4,693
Increase in cash and cash equivalents	111,763			33,431

Cash and cash equivalents:
Beginning of period	110,656			58,766
End of period	$	222,419		$	92,197

Supplemental Cash Flow Information:
(Refunds received) cash paid for income taxes, net	$	(6,939	)	$	1,563
Cash paid for interest	4,854			2,372
Notes payable issued to acquire intangible assets	4,014			—

See accompanying Condensed Notes to Consolidated Financial Statements.

FEI COMPANY AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. NATURE OF BUSINESS

We are a leading supplier of instruments for nanoscale imaging, analysis and prototyping to enable research, development and manufacturing in a range of industrial, academic and research institutional applications. We report our revenue based on a market-focused organization: the NanoElectronics market, the NanoResearch and Industry market, the NanoBiology market and the Service and Components market.

Our products and systems include hardware and software for focused ion beam systems, 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.

Our DualBeam systems include models that have wafer handling capability and are purchased by semiconductor and data storage 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; Eindhoven, the Netherlands; and Brno, Czech Republic.

Our sales and service operations are conducted in the U.S. and approximately 50 other countries around the world. We also sell our products through independent agents, distributors and representatives in additional countries.

2. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of FEI Company and our majority-controlled 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 U.S. 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 September 30, 2007 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, 2006, which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2007.

The preparation of financial statements in conformity with U.S. 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, unrecognized tax benefits, tax valuation allowances, the valuation of businesses acquired and related in-process research and development and other intangibles, the valuation of minority debt and equity investments in non-public companies, the lives and recoverability of equipment and other long-lived assets such as existing technology intangibles, software development costs and goodwill and the timing of revenue recognition and the timing and valuation of stock-based compensation.

3. STOCK-BASED COMPENSATION

1995 Stock Incentive Plan and 1995 Supplemental Stock Incentive Plan

Our 1995 Stock Incentive Plan, as amended (the “1995 Plan”) allows for the issuance of a maximum of 9,500,000 shares and our 1995 Supplemental Stock Incentive Plan (the “1995 Supplemental Plan”) allows for the issuance of a maximum of 500,000 shares. At September 30, 2007, there were 2,513,578 shares available for grant under these plans and 5,821,544 shares of our common stock were reserved for issuance. Total shares available for grant under the 1995 Plan have been reduced by 175,000 for grants of 75,000 restricted stock units (“RSUs”) and 100,000 options that were made outside the 1995 Plan in connection with the hiring of our new President and Chief Executive Officer in 2006. No new stock-based awards were issued outside of our plans during the thirteen or thirty-nine week periods ended September 30, 2007.

Certain information regarding all options outstanding as of September 30, 2007 was as follows:

	Options Outstanding		Options Exercisable
Number	2,609,074		2,334,724
Weighted average exercise price	$	23.20	$	23.64
Aggregate intrinsic value	$	22.5 million	$	19.2 million
Weighted average remaining contractual term	4.2 years		4.0 years

Restricted shares and RSUs outstanding, including awards issued within and outside of the 1995 Plan, totaled 607,371 at September 30, 2007.

Our stock-based compensation expense was included in our statements of operations as follows (in thousands):

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 30, 2007		October 1, 2006		September 30, 2007		October 1, 2006
Cost of sales	$	250	$	205	$	627	$	604
Research and development	255		197		660		646
Selling, general and administrative	669		1,073		3,873		2,719
	$	1,174	$	1,475	$	5,160	$	3,969

As of September 30, 2007, unrecognized stock-based compensation related to outstanding but unvested stock options, restricted shares and RSUs was $19.0 million, which will be recognized over the weighted average remaining vesting period of 2.2 years.

4. AMENDMENT OF 1995 STOCK INCENTIVE PLAN

At our annual meeting, which was held on May 17, 2007, our shareholders approved an amendment to our 1995 Stock Incentive Plan to increase the number of shares of our common stock reserved for issuance under the plan from 9,000,000 to 9,500,000.

5. AMENDMENT OF EMPLOYEE SHARE PURCHASE PLAN

At our annual meeting, which was held on May 17, 2007, our shareholders approved an amendment to our Employee Share Purchase Plan to increase the number of shares of our common stock reserved for issuance under the plan from 1,950,000 to 2,450,000.

6. RECLASSIFICATIONS

Reclassifications related to our discontinued operations were made to the prior period financial statements to conform to the current period presentation.

7. EARNINGS PER SHARE

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

	Thirteen Weeks Ended September 30, 2007						Thirteen Weeks Ended October 1, 2006
	Net Income		Shares	Per Share Amount(1)			Net Income		Shares	Per Share Amount(1)
Basic EPS	$	13,384	36,216	$	0.37		$	6,508	33,752	$	0.19
Dilutive effect of zero coupon convertible subordinated notes	242		5,529	(0.04		)	242		5,529	(0.02		)
Dilutive effect of 2.875% convertible subordinated notes	939		3,918	(0.01		)	—		—	—
Dilutive effect of stock options calculated using the treasury stock method	—		503				—		—	—
Dilutive effect of restricted shares	—		68	—			—		106	—
Dilutive effect of shares issuable to Philips	—		185	—			—		185
Diluted EPS	$	14,565	46,419	$	0.31		$	6,750	39,572	$	0.17

Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Stock options, restricted shares and restricted stock units			455						4,995
Convertible Debt			927						4,845

	Thirty-Nine Weeks Ended September 30, 2007						Thirty-Nine Weeks Ended October 1, 2006
	Net Income		Shares	Per Share Amount(1)			Net Income		Shares	Per Share Amount(1)
Basic EPS	$	42,472	35,505	$	1.20		$	5,386	33,796	$	0.16
Dilutive effect of zero coupon convertible subordinated notes	726		5,529	(0.14		)	726		5,529	(0.01		)
Dilutive effect of 2.875% convertible subordinated notes	2,817		3,918	(0.04		)	—		—	—
Dilutive effect of stock options calculated using the treasury stock method	—		712	(0.02		)	—		39	—
Dilutive effect of restricted shares	—		217	—			—		65	—
Dilutive effect of shares issuable to Philips	—		185	—			—		185	—
Diluted EPS	$	46,015	46,066	$	1.00		$	6,112	39,614	$	0.15

Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Stock options, restricted shares and restricted stock units			455						—
Convertible Debt			927						4,845

(1) Amounts may not add due to rounding.

8. CREDIT FACILITIES

on an unsecured basis. The facility contains certain financial covenants requiring us to maintain a minimum cash and investment balance, which we were in compliance with at September 30, 2007. We also have a 50.0 million yen unsecured and uncommitted bank borrowing facility in Japan and various limited facilities in select foreign countries. At September 30, 2007, a total of $25.0 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 September 30, 2007, we had $28.9 million of these guarantees and letters of credit outstanding, of which approximately $22.3 million were secured by restricted cash deposits. Restricted cash balances securing bank guarantees that expire within 12 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 12 months from the balance sheet date are recorded as long-term restricted cash on our consolidated balance sheet.

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 12 months based on recent usage levels are reported as other long-term assets. Management has established inventory reserves based on estimates of excess and/or obsolete current and non-current inventory.

Inventories consisted of the following (in thousands):

	September 30,		December 31,
	2007		2006
Raw materials and assembled parts	$	52,148	$	28,475
Service inventories, estimated current requirements	17,924		15,237
Work-in-process	48,865		35,459
Finished goods	18,306		18,299
Total inventories	$	137,243	$	97,470

Non-current service inventories	$	41,134	$	37,920

Non-service inventory valuation adjustments totaled $0.1 million and $0.8 million, respectively, during the thirteen and thirty-nine week periods ended September 30, 2007 and were insignificant during the comparable periods ended October 1, 2006. Provision for service inventory valuation adjustments totaled $1.1 million and $3.2 million, respectively, during the thirteen and thirty-nine week periods ended September 30, 2007 and $0.7 million and $3.1 million, respectively, during the comparable periods of 2006.

10. GOODWILL, PURCHASED TECHNOLOGY AND OTHER INTANGIBLE ASSETS

Goodwill

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

	Thirty-Nine Weeks Ended
	September 30, 2007			October 1, 2006
Balance, beginning of period	$	40,900		$	40,902
Adjustments to goodwill	(25		)	(43		)
Balance, end of period	$	40,875		$	40,859

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

At September 30, 2007 and December 31, 2006, our other intangible assets included purchased technology, 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	September 30,			December 31,
	Period	2007			2006
Purchased technology	5 to 12 years	$	46,273		$	46,062
Accumulated amortization		(43,005		)	(41,568		)
		$	3,268		$	4,494

Patents, trademarks and other	2 to 15 years	$	7,113		$	3,118
Accumulated amortization		(2,250		)	(2,034		)
		4,863			1,084

Note issuance costs	5 to 7 years	13,891			13,887
Accumulated amortization		(10,404		)	(9,175		)
		3,487			4,712

Total intangible assets included in other long-term assets		$	8,350		$	5,796

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

	Thirty-Nine Weeks Ended
	September 30, 2007		October 1, 2006
Purchased technology	$	1,327	$	1,596
Capitalized software	—		117
Patents, trademarks and other	484		387
Note issuance costs	1,230		1,515
	$	3,041	$	3,615

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

	Purchased Technology		Patents, Trademarks and Other		Note Issuance Costs
Remainder of 2007	$	448	$	298	$	410
2008	1,792		837		1,083
2009	647		743		452
2010	381		739		452
2011	—		676		452
Thereafter	—		1,570		638
	$	3,268	$	4,863	$	3,487

11. WARRANTY RESERVES

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

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

	Thirty-Nine Weeks Ended
	September 30, 2007			October 1, 2006
Balance, beginning of period	$	5,716		$	5,193
Reductions for warranty costs incurred	(10,372		)	(9,325		)
Warranties issued	11,531			9,261
Translation and other items	27			(42		)
Balance, end of period	$	6,902		$	5,087

12. RESTRUCTURING, REORGANIZATION, RELOCATION AND SEVERANCE

The $0.4 million net reversal of restructuring, reorganization, relocation and severance costs in the thirty-nine week period ended September 30, 2007 related to changes in estimates related to our ability to sublease certain facilities we are no longer utilizing.

The following table summarizes the charges, expenditures and write-offs and adjustments in the thirty-nine week period ended September 30, 2007 related to our accrual for restructuring, reorganization, relocation and severance charges (in thousands):

Thirty-Nine Weeks Ended September 30, 2007	Beginning Accrued Liability		Credited to Expense, Net			Expenditures			Write-Offs and Adjustments		Ending Accrued Liability
Severance, outplacement and related benefits for terminated employees	$	178	$	(38	)	$	(141	)	$	1	$	—
Abandoned leases, leasehold improvements and facilities	2,261		(365		)	(1,343		)	45		598
	$	2,439	$	(403	)	$	(1,484	)	$	46	$	598

The restructuring charges are based on estimates that are subject to change. Workforce related charges could change because of shifts in timing, redeployment or changes in amounts of severance and outplacement benefits. Facilities charges could change due to changes in expected 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.

13. INCOME TAXES

We recorded a tax provision of approximately $3.2 million and $12.4 million for the thirteen and thirty-nine week periods ended September 30, 2007. The provision consisted primarily of taxes accrued in foreign jurisdictions reduced by a tax benefit for valuation allowance released against deferred tax assets utilized to offset income earned in the U.S. We continue to record a valuation allowance against remaining U.S. deferred tax assets as we do not believe it is more likely than not that we will be able to utilize the deferred tax assets in future periods.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109.” This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. Interpretation No. 48 prescribes a recognition threshold of more likely than not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, we adopted the provisions of Interpretation No. 48 and recorded a $4.1 million increase to the opening balance of retained earnings to account for the cumulative effect of applying the new standard to previously unrecognized tax benefits. The increase to retained earnings was attributable to the resolution of a U.S.

federal tax audit where the result was considered more likely than not under the recognition and measurement standards of Interpretation No. 48.

On January 1, 2007, total unrecognized tax benefits were $17.6 million, of which $9.1 million would have an impact on the effective tax rate. Interest and penalties accrued on unrecognized tax benefits were $1.5 million and were treated as tax expense in the consolidated statement of operations. Unrecognized tax benefits relate mainly to uncertainty surrounding intercompany pricing, permanent establishment and the capitalization of certain costs.

During the thirteen and thirty-nine week periods ended September 30, 2007, unrecognized tax benefits increased $5.1 million and $8.9 million, respectively, including $0.4 million and $0.8 million, respectively, of interest and penalties, as a result of tax positions taken in current and prior periods. Unrecognized tax benefits did not change as a result of the lapse of applicable statutes of limitations in the thirteen week period ended September 30, 2007. During the thirty-nine week period ended September 30, 2007, unrecognized tax benefits decreased by approximately $0.3 million as a result of the lapse of applicable statutes of limitations. We anticipate no significant changes in unrecognized tax benefits in the next 12 months as the result of examinations or lapse of statutes of limitation.

Current and non-current liability components of unrecognized tax benefits at September 30, 2007 were classified on the balance sheet as follows (in thousands):

	September 30,
	2007
Other current liabilities	$	326
Other liabilities	26,149
Unrecognized tax benefits	$	26,475

For our major tax jurisdictions, the following years were open for examination by the tax authorities as of September 30, 2007:

Jurisdiction		Open Tax Years
U.S.		2000 and forward
The Netherlands		2002 and forward
Czech Republic		2004 and forward

Deferred tax assets, net of valuation allowances for U.S. deferred tax assets, of $9.9 million and $0.5 million, respectively, as of September 30, 2007 and December 31, 2006 were as follows (in thousands):

	September 30,			December 31,
	2007			2006
Deferred tax assets – current	$	4,996		$	4,386
Deferred tax assets – non-current	9,479			542
Other current liabilities	(421		)	(351		)
Deferred tax liabilities – non-current	(4,204		)	(4,062		)
Net deferred tax assets	$	9,850		$	515

In assessing the realizability of deferred tax assets, SFAS No. 109, “Accounting for Income Taxes,” establishes a more-likely-than-not standard. If determined 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 U.S. and our forecast of future profitability in certain tax jurisdictions, primarily the U.S.

14. RELATED PARTY AND OTHER ACTIVITY

Until December 2006, Philips Business Electronics International B.V. (“Philips”), a subsidiary of Koninklijke Philips Electronics N.V., owned approximately 25% of our common stock and was considered a related party. In addition to sales to Philips, we have sold products and services to LSI Corporation, Applied Materials, Inc. and Nanosys, Inc. A director of Applied Materials, the former Chairman and Chief Executive Officer of LSI and the former Executive Chairman of Nanosys are all members of our Board of Directors. In addition, our Chief Financial Officer is currently on the board of directors of another customer of ours, Cascade Microtech, Inc.

Sales to Philips (while they were a related party in 2006), Applied Materials, LSI, Nanosys and Cascade Microtech, Inc. were as follows (in thousands):

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 30, 2007		October 1, 2006		September 30, 2007		October 1, 2006
Product sales:
Philips	$	—	$	2	$	—	$	592
Applied Materials	129				719		—
LSI Corporation	—				—		—
Cascade Microtech	—		219		—		219
Total product sales	$	129	$	221	$	719	$	811

Service and component sales:
Philips	$	—	$	415	$	—	$	1,341
Applied Materials	49		75		234		231
LSI Corporation	—		46		—		128
Nanosys	—		5		—		15
Cascade Microtech	6		—		12		—
Total service and component sales	55		541		246		1,715
Total sales to related parties	$	184	$	762	$	965	$	2,526

As of September 30, 2007, Applied Materials owed us $0.1 million related to its purchases.

15. 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 have commitments under non-cancelable purchase orders, primarily relating to inventory, totaling $57.5 million at September 30, 2007. These commitments expire at various times through the second quarter of 2008.

16. 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 Chief Executive Officer.

We report our segments based on a market-focused organization. Our segments are: NanoElectronics, NanoResearch and Industry, NanoBiology and Service and Components.

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

Thirteen Weeks Ended September 30, 2007	Nano-Electronics		Nano- Research and Industry		Nano-Biology		Service and Components		Corporate and Eliminations		Total
Sales to external customers	$	48,051	$	51,590	$	13,924	$	32,223	$	—	$	145,788
Gross profit	24,130		21,851		6,335		8,916		—		61,232

Thirteen Weeks Ended October 1, 2006
Sales to external customers	$	33,704	$	37,605	$	13,344	$	30,949	$	—	$	115,602
Gross profit	16,193		15,454		5,921		9,367		—		46,935

Thirty-Nine Weeks Ended September 30, 2007
Sales to external customers	$	165,654	$	146,752	$	34,744	$	95,152	$	—	$	442,302
Gross profit	85,739		60,005		14,854		26,134		—		186,732

Thirty-Nine Weeks Ended October 1, 2006
Sales to external customers	$	112,247	$	109,739	$	30,835	$	86,386	$	—	$	339,207
Gross profit	54,599		45,637		13,342		23,963		—		137,541

September 30, 2007
Total assets	$	120,325	$	129,428	$	35,922	$	141,430	$	570,283	$	997,388

December 31, 2006
Total assets	$	93,987	$	105,329	$	20,198	$	111,677	$	506,888	$	838,079

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.

No customer represented 10% or more of our total sales in the thirteen or thirty-nine week periods ended September 30, 2007 or October 1, 2006.

17. NEW ACCOUNTING PRONOUNCEMENTS

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.

SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We are currently analyzing the effects of adopting SFAS No. 159.

EITF 07-3

In June 2007, the Emerging Issues Task Force (“EITF”) issued EITF 07-3, “Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” which states that non-refundable advance payments for services that will be consumed or performed in a future

period in conducting research and development activities on behalf of the company should be recorded as an asset when the advance payment is made and then recognized as an expense when the research and development activities are performed. EITF 07-3 is applicable prospectively to new contractual arrangement entered into in fiscal years beginning after December 15, 2007. We are currently analyzing the effects of adopting EITF 07-3.

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

Forward Looking Statements

This Quarterly Report on Form 10-Q 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 or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our 2007 operating results; any statements concerning proposed new products, services, developments, changes to our restructuring reserves or anticipated performance of products or services; any statements related to future capital expenditures; any statements related to the needs or expected growth of our target markets; 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 Quarterly Report on Form 10-Q 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 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

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 of 65 nanometers and smaller, 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 primarily in laboratories to speed new product development and increase yields by enabling 3D 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 the transition from longitudinal to perpendicular recording heads as well as by rapidly increasing storage densities that require smaller recording heads, thinner geometries and materials that increase the complexity of device structures. Our products offer 3D metrology for thin film head processing and root cause failure analysis.

The NanoResearch and Industry market includes universities, public and private research laboratories and customers in a wide range of industries, 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 and by development of new products based on innovations in materials at the nanoscale. 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 3D reconstructions of complex biological structures. Our products are also used in particle analysis and a range of pathology and quality control applications.

Overview

Net sales were $145.8 million in the third quarter of 2007 compared to $148.6 million in the second quarter of 2007 and $115.6 million in the third quarter of 2006. Revenue growth in the third quarter of 2007 compared to the third quarter of 2006 was led by our data storage products, our TEM line and our small-stage DualBeam systems. By market, our revenue growth in the thirteen and thirty-nine week periods ended September 30, 2007, when compared with the same periods of the prior year, came from our NanoElectronics and NanoResearch and Industry segments.

Bookings in the third quarter of 2007 were $153.3 million, compared with $136.2 million in the second quarter of 2007 and $148.3 million in the third quarter of 2006. Growth in bookings compared with the third quarter of 2006 came from our NanoResearch and Industry and Service and Components segments, partially offset by declines in our NanoElectronics and NanoBiology segments. Compared with the second quarter of 2007, we saw significant growth in our NanoResearch and Industry segment offset in part by declines in NanoElectronics and NanoBiology.

As of September 30, 2007, our product and Service and Components backlog were $247.2 million and $58.5 million, respectively, compared to $259.1 million and $46.8 million at December 31, 2006. 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 purchase commitments 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 and Components backlog consists of open orders for service, unearned revenue on service contracts and open orders for spare parts. U.S. government backlog is limited to contracted amounts.

Of our total backlog at September 30, 2007, approximately 90% is expected to be shippable within 12 months and approximately 10% - 15% 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. Historically, cancellations have been minor. From time to time, we have experienced difficulty in shipping our product from backlog due to 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, by our customers pushing out shipments because their facilities are not ready to install our systems and by our own manufacturing delays due to the technical complexity of our products and supply chain issues. For example, a large order from a Canadian university that was announced in 2006, and was planned to ship in the first quarter of 2007, is now expected to ship in the

fourth quarter of 2007. For these and other reasons, the amount of backlog at any date is not necessarily indicative of revenue to be recognized in future periods.

Outlook for the Remainder of 2007

Our outlook for the last quarter of 2007 is for increases in bookings and revenue compared with the recent quarters, due to strength in the NanoResearch and Industry and NanoBiology markets. NanoElectronics revenue is expected to decline from recent quarterly levels due primarily to a cyclical decline in the semiconductor and data storage capital equipment markets. Because of expected increased marketing spending and the smaller share of revenues from the higher-margin NanoElectronics products, overall gross margins and operating income margins in the fourth quarter of 2007 are expected to be below the levels of the first three quarters of 2007. These factors are also expected to impact our earnings for the fourth quarter of 2007. Additionally, total operating expenses will be higher due to increased agent commissions, further investment in sales and research and development, increased expenses as we roll out the Phenom product and the impact of the weaker dollar.

Critical Accounting Policies and the Use of Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain.

Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in our 2006 Annual Report on Form 10-K describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. As discussed below and in Note 13 to the Consolidated Financial Statements included herein, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. Other than this change, which occurred during the first quarter of 2007, there have been no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 1, 2007.

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. When applicable, associated interest and penalties have been recognized as a component of income tax expense.

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)
	September 30, 2007				October 1, 2006
Net sales	$	145,788	100.0	%	$	115,602		100.0	%
Cost of sales	84,556		58.0		68,667			59.4
Gross profit	61,232		42.0		46,935			40.6
Research and development	16,414		11.3		13,907			12.0
Selling, general and administrative	30,915		21.2		24,434			21.1
Amortization of purchased technology	444		0.3		510			0.4
Restructuring, reorganization, relocation and severance	—		—		249			0.2
Operating income	13,459		9.2		7,835			6.8
Other income, net	3,161		2.2		2,369			2.0
Income from continuing operations before income taxes	16,620		11.4		10,204			8.8
Income tax expense	3,236		2.2		3,284			2.8
Income from continuing operations	13,384		9.2		6,920			6.0
Income (loss) from discontinued operations, net of tax	—		—		(412		)	(0.4	)
Net income (loss)	$	13,384	9.2	%	$	6,508		5.6	%

	Thirty-Nine Weeks Ended(1)					Thirty-Nine Weeks Ended(1)
	September 30, 2007					October 1, 2006
Net sales	$	442,302		100.0	%	$	339,207		100.0	%
Cost of sales	255,570			57.8		201,666			59.5
Gross profit	186,732			42.2		137,541			40.5
Research and development	47,883			10.8		41,416			12.2
Selling, general and administrative	90,661			20.5		71,771			21.2
Merger costs	—			—		484			0.1
Amortization of purchased technology	1,327			0.3		1,596			0.5
Asset impairment	—			—		465			0.1
Restructuring, reorganization, relocation and severance	(404		)	(0.1	)	12,636			3.7
Operating income	47,265			10.7		9,173			2.7
Other income, net	7,488			1.7		3,566			1.1
Income from continuing operations before income taxes	54,753			12.4		12,739			3.8
Income tax expense	12,408			2.8		6,986			2.1
Income from continuing operations	42,345			9.6		5,753			1.7
Income (loss) from discontinued operations, net of tax	127			—		(367		)	(0.1	)
Net income	$	42,472		9.6	%	$	5,386		1.6	%

(1) Percentages may not add due to rounding.

Net sales increased $30.2 million, or 26.1%, to $145.8 million, in the thirteen weeks ended September 30, 2007 (the third quarter of 2007) compared to $115.6 million in the thirteen weeks ended October 1, 2006 (the third quarter of 2006). Net sales increased $103.1 million, or 30.4%, to $442.3 million in the thirty-nine week period ended September 30, 2007 compared to $339.2 million in the thirty-nine week period ended October 1, 2006. These increases reflect increases in all of our segments, especially NanoElectronics and NanoResearch and Industry, as described more fully below.

Net Sales by Segment

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

	Thirteen Weeks Ended
	September 30, 2007				October 1, 2006
NanoElectronics	$	48,051	33.0	%	$	33,704	29.2	%
NanoResearch and Industry	51,590		35.4	%	37,605		32.5	%
NanoBiology	13,924		9.5	%	13,344		11.5	%
Service and Components	32,223		22.1	%	30,949		26.8	%
	$	145,788	100.0	%	$	115,602	100.0	%

	Thirty-Nine Weeks Ended
	September 30, 2007				October 1, 2006
NanoElectronics	$	165,654	37.4	%	$	112,247	33.1	%
NanoResearch and Industry	146,752		33.2	%	109,739		32.3	%
NanoBiology	34,744		7.9	%	30,835		9.1	%
Service and Components	95,152		21.5	%	86,386		25.5	%
	$	442,302	100.0	%	$	339,207	100.0	%

NanoElectronics

The $14.3 million, or 42.6%, increase and the $53.4 million, or 47.6%, increase, respectively, in NanoElectronics sales in the thirteen and thirty-nine week periods ended September 30, 2007 compared to the same periods of 2006 were due to increases in the number of data storage, TEM and small-stage DualBeam system units sold. Sales in the NanoElectronics segment moderated in the third quarter of 2007 as compared to the first two quarters of 2007 due to a cyclical decline in semiconductor capital spending. We expect this trend to continue in the fourth quarter of 2007.

NanoResearch and Industry

The $14.0 million, or 37.2%, increase and the $37.0 million, or 33.7%, increase, respectively, in NanoResearch and Industry sales in the thirteen and thirty-nine week periods ended September 30, 2007 compared to the same periods of 2006 were due primarily to increases in the number of SEM and small-stage DualBeam system units sold as nanotechnology research strengthens. In addition, we have seen strong customer demand in this market for our high-end TEMs, including the Titan, other new SEM products and small-stage DualBeam products introduced in the last two years.

NanoBiology

The $0.6 million, or 4.3%, increase and the $3.9 million, or 12.7%, increase, respectively, in NanoBiology sales in the thirteen and thirty-nine week periods ended September 30, 2007 compared to the same periods of 2006 were due primarily to an increase in the number of TEM units sold. NanoBiology is an emerging market for our equipment, and a significant portion of the tools we sell in this market have relatively high per unit prices. As a result, quarter-to-quarter growth rates in this market are likely to fluctuate, although we expect long-term growth.

Service and Components

The $1.3 million, or 4.1%, increase and the $8.8 million, or 10.1%, increase, respectively, in Service and Component sales in the thirteen and thirty-nine week periods ended September 30, 2007 compared to the same periods of 2006 were due primarily to a larger installed base and the fact that the installed base has newer, higher-priced tools, which typically carry higher-priced service contracts. Component sales include sales of individual components as well as refurbished equipment and decreased $0.6 million, or 29.0%, and $0.9 million, or 14.6%, respectively, in the thirteen and thirty-nine week periods ended September 30, 2007 compared to the same periods of 2006. These decreases were primarily due to weakness in NanoElectronics and the timing of orders and shipments.

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
	September 30, 2007				October 1, 2006				September 30, 2007				October 1, 2006
North America	$	46,510	31.9	%	$	43,830	37.9	%	$	167,294	37.8	%	$	117,537	34.7	%
Europe	61,470		42.2	%	49,300		42.7	%	154,191		34.9	%	135,051		39.8	%
Asia-Pacific Region	37,808		25.9	%	22,472		19.4	%	120,817		27.3	%	86,619		25.5	%
	$	145,788	100.0	%	$	115,602	100.0	%	$	442,302	100.0	%	$	339,207	100.0	%

North America

Sales in North America increased $2.7 million, or 6.1%, and $49.8 million, or 42.3%, respectively, in the thirteen and thirty-nine week periods ended September 30, 2007, compared to the same periods of 2006. These increases were primarily due to improved sales efforts in North America in 2007 following the reorganization of our sales management team in North America in 2005, as well as a generally strong market for our tools. Revenue in North America decreased in the third quarter of 2007 compared to the first two quarters of 2007 as a result of the cyclical slow-down, primarily within our NanoElectronics segment.

Europe

Sales in Europe increased $12.2 million, or 24.7%, and $19.1 million, or 14.2%, respectively, in the thirteen and thirty-nine week periods ended September 30, 2007, compared to the same periods of 2006. These increases were primarily due to the timing and the mix of shipments, primarily to NanoResearch and Industry and NanoBiology customers that we have supplied parts to. Several nanoresearch centers are being developed in the European region. We are also focusing on increasing the number of indirect sales agents and distributors, which has contributed to the increases in sales.

Asia-Pacific Region

Sales in the Asia-Pacific Region increased $15.3 million, or 68.2%, and $34.2 million, or 39.5%, respectively, in the thirteen and thirty-nine week periods ended September 30, 2007, compared to the same periods of 2006. These increases were primarily due to higher unit sales, primarily in Japan and China. We are also realizing initial benefits from our investment in additional sales and service resources in 2007 in the Asia-Pacific region.

Cost of Sales and Gross Margin

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

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 30, 2007		October 1, 2006		September 30, 2007		October 1, 2006
NanoElectronics	50.2	%	48.0	%	51.8	%	48.6	%
NanoResearch and Industry	42.4	%	41.1	%	40.9	%	41.6	%
NanoBiology	45.5	%	44.4	%	42.8	%	43.3	%
Service and Components	27.7	%	30.3	%	27.5	%	27.7	%
Overall	42.0	%	40.6	%	42.2	%	40.5	%

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

Cost of sales increased $15.9 million, or 23.1%, to $84.6 million in the thirteen week period ended September 30, 2007 compared to $68.7 million in the thirteen week period ended October 1, 2006 and increased $53.9 million, or 26.7%, to $255.6 million in the thirty-nine week period ended September 30, 2007 compared to $201.7 million in the thirty-nine week period ended October 1, 2006. These increases were primarily due to the increases in revenue discussed above, although cost of sales as a percentage of revenue decreased, partially offsetting these increases.

NanoElectronics

The increases in NanoElectronics gross margins in the thirteen and thirty-nine week periods ended September 30, 2007 compared to the same periods of 2006 were due primarily to the sale of more high-end systems, such as the data storage Certus DualBeam product and high-end TEM units.

NanoResearch and Industry

The increase in the NanoResearch and Industry gross margin in the thirteen-week period ended September 30, 2007 compared to the same period of the prior year was primarily due to a shift in product mix to more high-end TEM and small-stage DualBeam units. These factors were offset in the thirty-nine

week period ended September 30, 2007 compared to the same period of 2006 by pricing pressure on our SEM and lower-end TEM systems and additional expense of $0.7 million to resolve two customer issues relating to older products.

NanoBiology

The increase in the NanoBiology gross margin in the thirteen week period ended September 30, 2007 compared to the same period of 2006 was primarily due to the sale of more high-end TEM products, which have higher gross margins than other products within this segment. These factors were offset in the thirty-nine week period ended September 30, 2007 compared to the same period of 2006 by pricing pressures on our lower-end TEM and SEM systems.

Service and Components

The decreases in the Service and Components gross margins in the thirteen and thirty-nine week periods ended September 30, 2007 compared to the same periods of 2006 were primarily due to increased headcount and travel costs. The increased headcount is in anticipation of increased service needs due to increased sales. These factors were partially offset by higher revenues from a larger installed base.

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 $2.5 million to $16.4 million (11.3% of net sales) in the thirteen week period ended September 30, 2007 compared to $13.9 million (12.0% of net sales) in the thirteen week period ended October 1, 2006 and increased $6.5 million to $47.9 million (10.8% of net sales) in the thirty-nine week period ended September 30, 2007 compared to $41.4 million (12.2% of net sales) in the thirty-nine week period ended October 1, 2006.

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

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 30, 2007			October 1, 2006			September 30, 2007			October 1, 2006
Gross spending	$	17,056		$	14,614		$	50,410		$	44,216
Less subsidies	(642		)	(707		)	(2,527		)	(2,800		)
Net expense	$	16,414		$	13,907		$	47,883		$	41,416

The increases in R&D costs were due to a $0.4 million and $2.0 million increase, respectively, in project spending in North America and Europe in the thirteen and thirty-nine week periods ended September 30, 2007 compared to the same periods of 2006. The increase in the thirty-nine week period included a charge of $0.6 million related to the cancellation of a certain project. In addition, labor and related costs increased $2.3 million and $4.5 million, respectively, over the prior year’s comparable periods due to headcount additions, increased contractors, annual pay raises and increased bonus accruals.

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 increased $6.5 million to $30.9 million (21.2% of net sales) in the thirteen week period ended September 30, 2007 compared to $24.4 million (21.1% of net sales) in the comparable period of 2006 and increased $18.9 million to $90.7 million (20.5% of net sales) in the thirty-nine week period ended September 30, 2007 compared to $71.8 million (21.2% of net sales) in the comparable period of 2006.

The increases in SG&A costs were due primarily to a $3.1 million and a $13.1 million increase, respectively, in labor and related costs, which includes stock-based compensation expense, due to increased headcount and increased commissions as a result of higher sales in the thirteen and thirty-nine week periods ended September 30, 2007 compared to the same periods of 2006. For the thirteen week period ended September 30, 2007, as compared to the same period in 2006, travel and entertainment expense increased $0.6 million, agent commissions increased $1.1 million and other selling expenses increased $0.2 million. For the thirty-nine week period ended September 30, 2007 as compared to the same thirty-nine week period in 2006, travel and entertainment expense increased $1.7 million, advertising and trade show expenses increased $0.7 million, primarily related to our new Phenom desktop imaging system, agent commissions increased $2.0 million, other selling expenses increased $0.9 million and information technology spending increased $0.5 million, primarily related to the implementation of a new customer relationship management system and various licensing costs. Additionally, SG&A in the thirteen and thirty-nine week periods ended September 30, 2006 included a gain on the sale of intellectual property of $1.5 million that did not reoccur in the comparable 2007 periods.

Merger Costs

Merger costs of $0.5 million in the thirty-nine week period ended October 1, 2006 related to legal expenses and Board of Directors’ costs incurred for activities related to a merger proposal. The discussions related to the proposed transaction were terminated in the first quarter of 2006.

Amortization of Purchased Technology

Amortization of purchased technology was $0.4 million and $1.3 million, respectively, in the thirteen and thirty-nine week periods ended September 30, 2007 compared to $0.5 million and $1.6 million, respectively, in the comparable periods of 2006. Our purchased technology balance at September 30, 2007 was $3.3 million and current amortization of purchased technology is approximately $0.4 million per quarter, which could increase if we acquire additional technology.

Restructuring, Reorganization, Relocation and Severance

The $0.4 million expense reversal of restructuring, reorganization, relocation and severance costs in the thirty-nine week period ended September 30, 2007 related to changes in estimates related to our ability to sublease certain facilities we are no longer utilizing.

Restructuring, reorganization, relocation and severance in the thirteen and thirty-nine week periods 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. In accordance with this agreement, 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 modified stock options.

For information regarding the related accrued liability, see Note 12 of Condensed Notes to Consolidated Financial Statements.

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 $5.9 million and $15.9 million in the thirteen and thirty-nine week periods ended September 30, 2007, respectively, compared to $3.7 million and $9.0 million, respectively, in the comparable periods of 2006. These increases resulted from increases in our invested balances, primarily due to cash generated by operations, as well as from the net proceeds from our sale of $115.0 million principal amount of 2.875% convertible debt in May 2006.

Interest expense for both the 2007 and 2006 periods included interest expense related to our 5.5% convertible debt issued in August 2001. Interest expense also includes interest related to our $115.0 million principal amount of 2.875% convertible debt, which 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 deferred note issuance costs totaling $0.5 million.

Assuming no additional note repurchases, amortization of our remaining convertible note issuance costs 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 week period ended September 30, 2007 included a $0.5 million gain related to the disposal of one of our cost-based investments. In addition, other, net in the thirty-nine week period ended September 30, 2007 included a $0.5 million gain on the sale of a minority interest in a small technology company.

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.

Income Tax Expense

Our effective income tax rate in the thirteen and thirty-nine week periods ended September 30, 2007 was 19.5% and 22.7%, respectively, and reflected taxes on foreign earnings plus accruals for unrecognized tax benefits and associated interest and penalties. This was offset by valuation allowance released against deferred tax assets utilized to offset income earned in the U.S. during the periods.

We adopted the provisions of Interpretation No. 48 in the first quarter of 2007 and, accordingly, increased the opening balance of retained earnings by $4.1 million to reflect those tax positions that are more likely than not to be sustained. As of September 30, 2007, unrecognized tax benefits were $26.5 million and related primarily to uncertainty surrounding intercompany pricing, permanent establishment and the capitalization of certain costs. Approximately $17.9 million of the unrecognized tax benefits would impact the effective tax rate if recognized.

Income tax expense in the thirteen and thirty-nine week periods ended October 1, 2006 represented taxes on foreign earnings. We did not record a tax benefit for our U.S. losses during the periods as we believed it was more likely than not that we would not be able to realize the benefit in future periods. Our

assessment was principally based upon our historical losses in the U.S.

Our effective tax rate may differ from the U.S. federal statutory tax rate primarily as a result of the effects of state and foreign income taxes, research and experimentation tax credits earned in the U.S. and foreign jurisdictions, adjustments to our unrecognized tax benefits and our ability or inability to utilize various carry forward tax items. In addition, our effective income tax rate may be affected by changes in statutory tax rates and laws in the U.S. and foreign jurisdictions and other factors.

Discontinued Operations

In the fourth quarter of 2006, we sold the assets and operations related to Knights Technology, which was a consolidated subsidiary, and recognized a gain on the disposal of the discontinued operations of $3.3 million and received cash proceeds of $7.8 million. In the first quarter of 2007, we recognized an additional $0.1 million gain related to post-closing adjustments for working capital items. An additional $0.2 million has been held in escrow and will be released when all contingencies surrounding the transaction are resolved. All historical statement of operations data has been restated to reflect the discontinued operations.

Certain financial information related to discontinued operations was as follows (in thousands):

	Thirteen Weeks Ended			Thirty-Nine Weeks Ended
	October 1, 2006			October 1, 2006
Revenue	$	1,338		$	4,650
Pre-tax loss	(432		)	(300		)
Income tax expense	24			57

LIQUIDITY AND CAPITAL RESOURCES

Our sources of liquidity and capital resources as of September 30, 2007 consisted of $433.8 million of cash, cash equivalents, short-term restricted cash and short-term investments, $12.7 million in non-current investments, $9.3 million of long-term restricted cash, $25 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 12 months.

In the first three quarters of 2007, cash and cash equivalents and short-term restricted cash increased $104.6 million to $235.4 million as of September 30, 2007 from $130.8 million as of December 31, 2006 primarily as a result of $16.7 million provided by operations, $37.3 million of proceeds from the exercise of employee stock options and employee stock purchases, $59.2 million of net maturities of marketable securities and a $5.9 million favorable effect of exchange rate changes. These increases were partially offset by $11.2 million used for the purchase of property, plant and equipment.

Accounts receivable increased $31.5 million to $176.5 million as of September 30, 2007 from $145.0 million as of December 31, 2006, primarily due to increased sales in the third quarter of 2007 compared with the fourth quarter of 2006. The September 30, 2007 balance was also affected by a $6.7 million increase related to changes in currency exchange rates. Our days sales outstanding, calculated on a quarterly basis, was 110 days at September 30, 2007 compared to 94 days at December 31, 2006.

Inventories increased $39.7 million to $137.2 million as of September 30, 2007 compared to $97.5 million as of December 31, 2006. The increase primarily was due to purchasing of raw materials as sales continue to increase, as well as an increase related to currency movements of approximately $8.8 million. Our annualized inventory turnover rate, calculated on a quarterly basis, was 2.5 times for the quarter ended September 30, 2007 and 3.1 times for the quarter ended October 1, 2006.

Other assets, net increased $11.6 million to $19.1 million as of September 30, 2007 compared to $7.5 million as of December 31, 2006 primarily due to increased lease receivables, increased taxes receivable and approximately $0.2 million of intangible asset additions.

Expenditures for property, plant and equipment of $11.2 million in the first three quarters of 2007 primarily consisted of expenditures for machinery and equipment, including instruments used for demonstration as part of our marketing programs. We expect to continue to invest in capital equipment, customer evaluation systems and R&D equipment for applications development. We estimate our total capital expenditures in 2007 to be approximately $25.0 million, primarily for the development and introduction of new products, demonstration equipment and upgrades and incremental improvements to our enterprise resource planning (“ERP”) system.

Accounts payable increased $5.0 million to $50.1 million as of September 30, 2007 compared to $45.1 million as of December 31, 2006. The increase resulted primarily from increased inventory purchases.

Accrued payroll liabilities increased $5.5 million to $26.2 million as of September 30, 2007 compared to $20.7 million as of December 31, 2006. The increase resulted primarily from profit sharing and variable compensation programs for management personnel for 2007 being partially offset by the payment of amounts earned in 2006 in the first quarter of 2007.

Other liabilities increased $29.5 million to $35.1 million as of September 30, 2007 compared to $5.6 million as of December 31, 2006. The increase resulted primarily from the adoption of Interpretation No. 48. Pursuant to Interpretation No. 48, previously unrecognized tax benefits of $9.1 million were reclassified from income taxes payable to other liabilities. Further, we increased deferred tax assets, taxes receivable and income tax expense with an offset to other liabilities in the amount of $17.3 million in the first three quarters of 2007.

We maintain a $30.0 million uncommitted bank borrowing facility in the U.S. (and outside the U.S. 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 50.0 million yen unsecured and uncommitted bank borrowing facility in Japan and various limited facilities in select foreign countries. At September 30, 2007, a total of $25 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 September 30, 2007, we had $28.9 million of these guarantees and letters of credit outstanding, of which approximately $22.3 million were secured by restricted cash deposits. Restricted cash balances securing bank guarantees that expire within 12 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 12 months from the balance sheet date are recorded as long-term restricted cash on our consolidated balance sheet.

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 2006 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 1, 2007.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation and under the supervision of our President and 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 President and 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 President and 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 Control Over Financial Reporting

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 restated description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations and financial condition.

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.

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 us in 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, Inc., Credence Systems Corporation and Orsay Physics S.A. In addition, some of our competitors have formed collaborative relationships and otherwise may cooperate with each other.

A substantial investment by customers is required for them 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.

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 meeting 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.

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 be entitled to 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 systems and may reschedule their orders because of the time required to complete these facility changes. This is particularly true of the high-performance TEMs. 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.

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, including our

ability to convert backlog into revenue. 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: VDL Enabling Technologies Group, or 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. 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. If our suppliers are not able to meet our supply requirements, constraints may affect our ability to deliver products to customers in a timely manner, which could have an adverse effect on our results of operations. In addition, world wide restrictions governing the use of certain hazardous substances in electrical and electronic equipment (Restrictions on Hazardous Substances, or “RoHS,” regulations) may impact parts and component availability or our electronics suppliers’ ability to source parts and components in a timely and cost-effective manner. Overall, because we only have a few equipment suppliers, we may be more exposed to future cost increases for this equipment.

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 or operations 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 fourth quarter of 2006, we sold one such investment, Knights Technology. During the third quarter of 2006, we sold a cost-method investment for a gain of $5.2 million and wrote-off the remaining such investments, incurring an aggregate charge of $3.9 million.

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.

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 amounts (in thousands) and percentages of our net sales for the periods indicated:

	Thirty-Nine Weeks Ended
	September 30, 2007				October 1, 2006
NanoElectronics	$	165,654	37.4	%	$	112,247	33.1	%
NanoResearch and Industry	146,752		33.2	%	109,739		32.3	%
NanoBiology	34,744		7.9	%	30,835		9.1	%
Service and Components	95,152		21.5	%	86,386		25.5	%
	$	442,302	100.0	%	$	339,207	100.0	%

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 both 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 the third quarter of 2007, we experienced a significant decline in bookings and revenue in our NanoElectronics segment due to a general decline in semiconductor and data storage capital equipment spending. Global economic conditions continue to be volatile and slower growth or reduced demand for our customers’ products in the future would cause our business to decline. During downturns, our sales or margins may decline.

The NanoResearch and Industry market 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 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 $1.0 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.

Our history shows that our revenues and bookings normally peak in the fourth quarter. Bookings are normally the lowest in the second quarter and revenues are normally lowest in the third quarter.

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 may 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.

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 worldwide. 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 government contracts could be terminated, we could be suspended or debarred from government contracting or subcontracting, including federally funded projects at the state level. If one or more of our government contracts are terminated for any reason, or if we are suspended from government work, we could suffer the loss of the contracts, which could have a material adverse effect on our business and results of operations.

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

Because a significant part of our overall business is generated either directly or indirectly as a result of worldwide 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 U.S. government’s commitment to military related expenditures put at risk federal discretionary spending, including spending on nanotechnology research programs and projects that are of particular importance to our business. Also, changes in U.S. Congressional appropriations practices could result in decreased funding for some of our customers. At the state and local levels, the need to compensate for reductions in federal matching funds, as well as financing of federal unfunded mandates, creates strong pressures to cut back on research expenditures as well. A potential reduction of federal funding may 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 we ever do, 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, 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 technology industry are in high demand, and competition for such talent is intense. The loss of key personnel, or our inability to attract key personnel, could have an adverse effect on our business, financial condition or results of operations.

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.

Customers in each of our market segments 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 substantial resources in our new Phenom desk top imaging tool and the Titan scanning electron microscope (“S/TEM”), and further development may be required to take full advantage of these products. If the completion of further development is delayed, potential revenue growth could be deferred or may not happen at all.

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.

Because we have significant operations outside of the U.S., 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 U.S., our revenues and expenses are impacted by foreign economic and regulatory conditions. Approximately 68% and 65%, respectively, of our revenues in the thirty-nine week period ended September 30, 2007 and the year ended December 31, 2006 came from outside of the U.S. We have manufacturing facilities in Brno, Czech Republic and Eindhoven, the Netherlands and sales offices in many other countries.

Moreover, we operate in 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 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;

• taxes and tariffs;

• export restrictions;

• difficulties in collecting accounts receivable;

• travel and transportation difficulties resulting from actual or perceived health risks (e.g., SARS and avian influenza);

• changes in the regulatory environment in countries where we do business could lead to delays in the importation of products into those countries;

• the implementation of China RoHS regulations could lead to delays in the importation of products into China;

• political and economic instability; and

• Risk of failure of internal controls and failure to detect unauthorized transactions.

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

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

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 U.S. 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 U.S. Many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. We derived approximately 68% and 65%, respectively, of our sales from foreign countries in the thirty-nine week period ended September 30, 2007 and the year ended December 31, 2006. 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 September 30, 2007, 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;

• our shareholders would be diluted if we elect to settle all or a portion of our zero coupon convertible notes in shares, up to a maximum aggregate of 5,528,527 shares of our common stock, upon the bondholders’ election to convert the notes once certain stock price metrics are met. These shares were included in our diluted share count for the thirteen and thirty-nine week periods ended September 30, 2007 and October 1, 2006;

• our shareholders would be diluted if holders of all or a portion of our 5.5% subordinated convertible notes elect to convert their notes, up to a maximum aggregate of 926,534 shares of our common stock;

• our shareholders would be diluted if holders of all or a portion of our 2.875% subordinated convertible notes elect to convert their notes, up to a maximum aggregate of 3,918,395 shares of our common stock. These shares were included in our diluted share count for the thirteen and thirty-nine week periods ended September 30, 2007;

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

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

Our ability to pay interest and principal on our debt securities, to satisfy our other debt obligations and to make planned expenditures will be dependent on our future operating performance, which could be affected by changes in economic conditions and other factors, some of which are beyond our control. A failure to comply with the covenants and other provisions of our debt instruments could result in events of default under such instruments, which could permit acceleration of the debt under such instruments and in some cases acceleration of debt under other instruments that contain cross-default or cross-acceleration

provisions. If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness, 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. We cannot assure you 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.

As of September 30, 2007, we had cash, cash equivalents and short-term investments of $420.8 million. Some of those amounts are required for ongoing operations. In addition, if the convertible debt securities do not convert to common stock, we would expect to use a portion of those funds to repay debt maturities in 2008.

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 U.S. dollar, principally the euro. For the thirty-nine week period ended September 30, 2007 and the year ended December 31, 2006, approximately 35 to 40% of our revenue was denominated in euros, while more than half of our expenses were denominated in euros or other foreign currencies. Particularly as a result of this imbalance, changes in the exchange rate between the U.S. dollar and foreign currencies, especially the euro, can impact our revenues, gross margins, results of operations and cash flows. We undertake hedging transactions to 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.

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

Achieving hedge designation is based on evaluating the effectiveness of the derivative contracts’ ability to mitigate the foreign currency exposure of the linked transaction. We are required to monitor the effectiveness of all new and open derivative contracts designated as hedges on a quarterly basis. Based on our evaluation in 2005, we recorded charges totaling $0.5 million in other income (expense) related to hedge dedesignations and ineffectiveness. We did not record any charges for hedge dedesignations or ineffectiveness in the first three quarters of 2007 or in 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.

We also enter into foreign forward exchange contracts to partially mitigate the impact of specific cash, receivables or payables positions denominated in foreign currencies. Foreign currency losses recorded in other income (expense), inclusive of the impact of derivatives which are not designated as hedges,

totaled $2.8 million in the thirty-nine week period ended September 30, 2007 and $1.9 million for the year ended December 31, 2006.

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 U.S. and abroad, we are subject to income taxes in both the U.S. 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 uncertain tax positions, 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 U.S. 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.

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 after they 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.

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. In 2005, we abandoned the implementation of an Oracle-based ERP software system.

In lieu of the abandoned project, we have undertaken to update and upgrade certain components of our existing system and to add additional functionality. 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 and manage our accounting systems and controls; and otherwise carry on our

business in the ordinary course. Any such disruption could adversely affect our business, prospects, financial condition and results of operations. Moreover, difficulties arising from the ERP system could result in a failure of our internal control over financial reporting, which, in turn, could result in a material weakness and a qualified report from our independent registered public accounting firm.

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 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, Massachusetts plant closure and the downsizing of the related semiconductor businesses, and $9.3 million was related to the termination of our former 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. We may incur additional restructuring and related expenses, which may have a material adverse effect on our business, financial condition or results of operations. The charges in connection with these restructurings are only estimates and may not be accurate. As part of these restructurings, we ceased to use certain of our leased facilities and, accordingly, we have negotiated, and are continuing to negotiate, certain lease terminations and/or subleases of our facilities. We cannot predict when or if we will be successful in negotiating lease termination agreements or subleases of our facilities on terms acceptable to us. If we are not successful in negotiating terms acceptable to us, or at all, we may be required to materially increase our restructuring and related expenses in future periods. Further, if we have additional 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.

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 U.S., 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.

Changes in accounting pronouncements or taxation rules or practices may affect how we conduct our business.

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. New rules, changes to existing rules, if any, or the questioning of current practices may adversely affect our reported financial results or change the way we conduct our business.

Terrorist acts, 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 or 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.

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.

Unforeseen health, safety and 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 U.S., 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.

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

We are subject to export control laws that limit which products we sell and where and to whom we sell our products. 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.

Provisions of our charter documents, our shareholder rights plan and Oregon law 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. Our board of directors has also adopted a shareholder rights plan, or “poison pill,” which would significantly dilute the ownership of a hostile acquirer. In addition, the Oregon Control Share Act and the Oregon Business Combination Act limit the ability of parties who acquire a significant amount of voting stock to exercise control over us. These provisions may have the effect of lengthening the time required for a person to acquire control of us through a proxy contest or the election of a majority of our board of directors, may deter efforts to obtain

control of us and may 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.

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)
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive 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 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2		Certification of 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 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

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

(3) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 22, 2006.

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 2, 2007	/s/ DON R. KANIA
	Don R. Kania
	President and Chief Executive Officer


	/s/ RAYMOND A. LINK
	Raymond A. Link
	Executive Vice President and
	Chief Financial Officer

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Fei (FEIC) Inactive 10-Q2007 Q3 Quarterly report

Content analysis

FEI COMPANY

INDEX TO FORM 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 1A. Risk Factors