Fei (FEIC) 10-Q 2009 Q2 Quarterly report

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 July 5, 2009

OR

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

For the transition period from             to             

Commission File No. 000-22780

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

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

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

The number of shares of common stock outstanding as of August 5, 2009 was 37,570,936.

FEI COMPANY

INDEX TO FORM 10-Q

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets – July 5, 2009 and December 31, 2008	2
	Consolidated Statements of Operations – Thirteen and Twenty-Six Weeks Ended July 5, 2009 and June 29, 2008	3
	Consolidated Statements of Comprehensive Income – Thirteen and Twenty-Six Weeks Ended July 5, 2009 and June 29, 2008	4
	Consolidated Statements of Cash Flows –Twenty-Six Weeks Ended July 5, 2009 and June 29, 2008	5
	Condensed Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 4.	Submission of Matters to a Vote of Security Holders	50
Item 6.	Exhibits	51
Signatures		52

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FEI Company and Subsidiaries

Consolidated Balance Sheets

(In thousands)

(Unaudited)

	July 5, 2009		December 31, 2008(1)
Assets
Current Assets:
Cash and cash equivalents	$	178,879	$	146,521
Short-term investments in marketable securities		145,739		32,901
Short-term restricted cash		10,783		10,994
Receivables, net of allowances for doubtful accounts of $3,705 and $3,139		162,771		139,733
Inventories		147,798		141,609
Deferred tax assets		2,651		2,884
Other current assets		52,921		32,926
Total Current Assets		701,542		507,568
Non-current investments in marketable securities		6,300		94,098
Long-term restricted cash		42,344		34,833
Property, plant and equipment, net of accumulated depreciation of $82,872 and $85,391		76,860		76,991
Goodwill		44,600		40,964
Deferred tax assets		1,618		2,188
Non-current inventories		41,468		41,072
Other assets, net		18,667		34,458
Total Assets	$	933,399	$	832,172
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	36,108	$	34,964
Accrued payroll liabilities		19,498		19,219
Accrued warranty reserves		6,683		6,439
Accrued agent commissions		10,957		9,882
Deferred revenue		69,341		44,135
Income taxes payable		3,318		3,040
Accrued restructuring, reorganization, relocation and severance		86		240
Short-term line of credit		70,800		—
Other current liabilities		40,600		33,732
Total Current Liabilities		257,391		151,651
Convertible debt		100,000		115,000
Deferred tax liabilities		4,100		4,164
Other liabilities		28,446		42,268
Commitments and contingencies
Shareholders’ Equity:
Preferred stock - 500 shares authorized; none issued and outstanding		—		—
Common stock - 70,000 shares authorized; 37,553 and 37,286 shares issued and outstanding, no par value		478,075		469,893
Retained earnings (deficit)		8,830		(1,168	)
Accumulated other comprehensive income		56,557		50,364
Total Shareholders’ Equity		543,462		519,089
Total Liabilities and Shareholders’ Equity	$	933,399	$	832,172

(1) Restated for the effects of the adoption of FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 20 of the Condensed Notes to the Consolidated Financial Statements.

See accompanying Condensed Notes to Consolidated Financial Statements.

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FEI Company and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	For the Thirteen Weeks Ended						For the Twenty-Six Weeks Ended
	July 5, 2009			June 29, 2008(1)			July 5, 2009			June 29, 2008(1)
Net Sales:
Products	$	107,109		$	119,487		$	215,344		$	236,469
Products - related party		53			271			380			503
Service and components		33,030			34,199			66,266			68,527
Service and components - related party		71			82			106			186
Total net sales		140,263			154,039			282,096			305,685
Cost of Sales:
Products		61,127			70,384			121,014			137,367
Service and components		22,975			25,035			46,229			50,473
Total cost of sales		84,102			95,419			167,243			187,840
Gross Profit		56,161			58,620			114,853			117,845
Operating Expenses:
Research and development		16,657			18,496			33,437			36,303
Selling, general and administrative		31,825			32,919			64,651			65,531
Restructuring, reorganization, relocation and severance		1,067			2,271			2,029			2,271
Total operating expenses		49,549			53,686			100,117			104,105
Operating Income		6,612			4,934			14,736			13,740
Other Income (Expense):
Interest income		668			4,118			1,801			9,117
Interest expense		(1,195	)		(5,443	)		(3,107	)		(10,795	)
Other, net		(974	)		(373	)		(515	)		(1,240	)
Total other income (expense), net		(1,501	)		(1,698	)		(1,821	)		(2,918	)
Income before income taxes		5,111			3,236			12,915			10,822
Income tax expense		1,451			1,578			2,917			4,131
Net income	$	3,660		$	1,658		$	9,998		$	6,691
Basic net income per share	$	0.10		$	0.05		$	0.27		$	0.18
Diluted net income per share	$	0.10		$	0.04		$	0.27		$	0.18
Shares used in per share calculations:
Basic		37,450			36,499			37,386			36,467
Diluted		37,745			36,895			37,681			36,868

(1) Restated for the effects of the adoption of FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 20 of the Condensed Notes to the Consolidated Financial Statements.

See accompanying Condensed Notes to Consolidated Financial Statements.

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FEI Company and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	For the Thirteen Weeks Ended					For the Twenty-Six Weeks Ended
	July 5, 2009		June 29, 2008(1)			July 5, 2009			June 29, 2008(1)
Net income	$	3,660	$	1,658		$	9,998		$	6,691
Other comprehensive income:
Change in cumulative translation adjustment, zero taxes provided		12,116		2,124			3,608			22,378
Change in unrealized loss on available-for-sale securities		40		383			(23	)		(6,402	)
Change in minimum pension liability, net of taxes		2		14			—			(7	)
Changes due to cash flow hedging instruments:
Net gain on hedge instruments		912		73			611			5,025
Reclassification to net income of previously deferred losses (gains) related to hedge derivatives instruments		521		(2,428	)		1,997			(5,908	)
Comprehensive income	$	17,251	$	1,824		$	16,191		$	21,777

(1) Restated for the effects of the adoption of FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 20 of the Condensed Notes to the Consolidated Financial Statements.

See accompanying Condensed Notes to Consolidated Financial Statements.

4

FEI Company and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	For the Twenty-Six Weeks Ended
	July 5, 2009			June 29, 2008(1)
Cash flows from operating activities:
Net income	$	9,998		$	6,691
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		8,191			8,374
Amortization		1,642			8,665
Stock-based compensation		5,630			3,864
Gain on trading securities and UBS Put Right		(371	)		—
Loss on disposal of investments, property, plant and equipment and intangible assets		71			270
Write-off of deferred note issuance costs on redemption		250			226
Gain on redemption of 2.875% convertible note		(2,025	)		—
Income taxes receivable (payable), net		(1,161	)		2,695
Deferred income taxes		5,497			1,646
(Increase) decrease in:
Receivables		(22,049	)		(9,548	)
Inventories		(6,446	)		(7,897	)
Other assets		(4,792	)		(4,323	)
Increase (decrease) in:
Accounts payable		1,274			1,298
Accrued payroll liabilities		(97	)		(8,518	)
Accrued warranty reserves		170			359
Deferred revenue		24,162			(10,421	)
Accrued restructuring, reorganization, relocation and severance costs		(148	)		1,525
Other liabilities		(7,220	)		2,590
Net cash provided by (used in) operating activities		12,576			(2,504	)
Cash flows from investing activities:
(Increase) decrease in restricted cash		(6,531	)		6,029
Acquisition of property, plant and equipment		(5,492	)		(7,547	)
Proceeds from disposal of property, plant and equipment		25			1
Purchase of investments in marketable securities		(42,685	)		(93,857	)
Redemption of investments in marketable securities		22,776			88,488
Other		(4,360	)		(270	)
Net cash used in investing activities		(36,267	)		(7,156	)
Cash flows from financing activities:
Redemption of 5.5% convertible notes		—			(45,882	)
Redemption of zero coupon convertible notes		—			(148,907	)
Redemption of 2.875% convertible note		(13,077	)		—
Witholding taxes paid on issuance of vested restricted stock units		(536	)		(970	)
Proceeds from line of credit		70,800			—
Proceeds from exercise of stock options and employee stock purchases		3,066			3,060
Net cash provided by (used in) financing activities		60,253			(192,699	)
Effect of exchange rate changes		(4,204	)		6,233
Increase (decrease) in cash and cash equivalents		32,358			(196,126	)
Cash and cash equivalents:
Beginning of period		146,521			280,593
End of period	$	178,879		$	84,467
Supplemental Cash Flow Information:
Cash paid for income taxes, net	$	2,643		$	462
Cash paid for interest		2,571			4,699
Inventories transferred to fixed assets		1,954			1,699

(1) Restated for the effects of the adoption of FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 20 of the Condensed Notes to the Consolidated Financial Statements.

See accompanying Condensed Notes to Consolidated Financial Statements.

5

FEI COMPANY AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. NATURE OF BUSINESS

We are a leading supplier of 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 Electronics market, the Research and Industry market, the Life Sciences market and the Service and Components market.

Our products include focused ion beam systems, or FIBs; scanning electron microscopes, or SEMs; transmission electron microscopes, or TEMs; andDualBeam systems, which combine a FIB and SEM on a single platform.

OurDualBeam systems include models that have wafer handling capability and are purchased by semiconductor and data storage manufacturers (“wafer-levelDualBeamsystems”) and models that have small stages and are sold to customers in several markets (“small-stageDualBeamsystems”).

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 twenty-six weeks ended July 5, 2009 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, 2008, which was filed with the Securities and Exchange Commission (“SEC”) on February 20, 2009.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 investments in auction rate securities (“ARS”), the valuation of the UBS AG (together with its affiliates, “UBS”) put right (the “Put Right”), the lives and recoverability of equipment and other long-lived assets such as existing technology intangibles and goodwill and the timing of revenue recognition and the timing and valuation of stock-based compensation.

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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 10,000,000 shares of our common stock and our 1995 Supplemental Stock Incentive Plan (the “1995 Supplemental Plan”) allows for the issuance of a maximum of 500,000 shares of our common stock. At July 5, 2009, there were 3,240,545 shares available for grant under these plans and 5,470,281 shares of our common stock were reserved for issuance.

Certain information regarding all options outstanding as of July 5, 2009 was as follows:

	Options Outstanding		Options Exercisable
Number		1,486,843		1,332,843
Weighted average exercise price	$	23.53	$	24.01
Aggregate intrinsic value	$	2,438,535	$	2,002,423
Weighted average remaining contractual term		3.0 years		2.9 years

Restricted shares and restricted stock units (“RSUs”) outstanding, including awards issued within and outside of the 1995 Plan, totaled 742,893 at July 5, 2009.

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

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 5, 2009		June 29, 2008		July 5, 2009		June 29, 2008
Cost of sales	$	360	$	221	$	707	$	513
Research and development		324		258		659		492
Selling, general and administrative		2,044		1,350		4,265		2,859
	$	2,728	$	1,829	$	5,631	$	3,864

As of July 5, 2009, unrecognized stock-based compensation related to outstanding, but unvested stock options, restricted shares and RSUs was $15.9 million, which will be recognized over the weighted average remaining vesting period of 1.6 years.

4. AMENDMENT OF 1995 STOCK INCENTIVE PLAN

At our annual meeting, which was held on May 14, 2009, 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 9,750,000 to 10,000,000.

5. AMENDMENT OF EMPLOYEE SHARE PURCHASE PLAN

At our annual meeting, which was held on May 14, 2009, 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 2,700,000 to 2,950,000.

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6. EARNINGS PER SHARE

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

	Thirteen Weeks Ended July 5, 2009					Thirteen Weeks Ended June 29, 2008
	Net Income		Shares	Per Share Amount		Net Income		Shares	Per Share Amount(1)
Basic EPS	$	3,660	37,450	$	0.10	$	1,658	36,499	$	0.05
Dilutive effect of stock options calculated using the treasury stock method		—	55		—		—	184		(0.01	)
Dilutive effect of restricted shares		—	75		—		—	27		—
Dilutive effect of shares issuable to Philips		—	165		—		—	185		—
Diluted EPS	$	3,660	37,745	$	0.10	$	1,658	36,895	$	0.04
Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Convertible debt			3,407					8,532
Stock options			1,007					1,099

	��	Twenty-Six Weeks Ended July 5, 2009					Twenty-Six Weeks Ended June 29, 2008
		Net Income		Shares	Per Share Amount		Net Income		Shares	Per Share Amount(1)
Basic EPS		$	9,998	37,386	$	0.27	$	6,691	36,467	$	0.18
Dilutive effect of stock options calculated using the treasury stock method			—	51		—		—	173		—
Dilutive effect of restricted shares			—	69		—		—	43		—
Dilutive effect of shares issuable to Philips			—	175		—		—	185		—
Diluted EPS		$	9,998	37,681	$	0.27	$	6,691	36,868	$	0.18
Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Convertible Debt				3,407					8,532
Stock options				1,777					1,528

(1) Restated for the effects of the adoption of FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 20 for additional information.

7. CREDIT FACILITIES AND RESTRICTED CASH

We have a multibank credit agreement (the “Credit Agreement”), which provides for a $100.0 million secured revolving credit facility, including a $50.0 million subfacility for the issuance of letters of credit. We may, upon notice to JPMorgan Chase Bank, N.A. (the “Agent”), request to increase the revolving loan commitments by an aggregate amount of up to $50.0 million with new or additional commitments subject only to the consent of the lender(s) providing the new or additional commitments, for a total secured credit facility of up to $150.0 million. As of July 5, 2009, there were no revolving loans or letters of credit outstanding under the Credit Agreement, we were in compliance with all covenants and we were not in default under the Credit Agreement.

8

We also have a 50.0 million yen unsecured and uncommitted bank borrowing facility in Japan and various limited facilities in select foreign countries. No amounts were outstanding under any of these facilities as of July 5, 2009.

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 July 5, 2009, we had $53.7 million of these guarantees and letters of credit outstanding, of which approximately $53.1 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.

See also Note 8.

8. AUCTION RATE SECURITIES, PUT RIGHT AND RELATED LINE OF CREDIT

On November 6, 2008, we accepted an offer by UBS of certain auction rate securities rights (the “Put Right”). The Put Right permits us to cause UBS to repurchase, at par value, our ARS during the period beginning on June 30, 2010 and ending on July 2, 2012. The fair value of the ARS and the Put Right was approximately $96.8 million and $13.2 million, respectively, as of July 5, 2009, as discussed in more detail below. As of July 5, 2009, both the ARS and the Put Right were classified as current on our consolidated balance sheet based on our intent to exercise the Put Right within the next 12 months. The par value of the ARS was $110.1 million at July 5, 2009. The Put Right was offered in connection with UBS’s obligations under settlement agreements with the SEC and other federal and state regulatory authorities.

In addition, UBS offered us the ability to borrow no-net cost loans secured by the ARS. On March 25, 2009, we entered into an uncommitted secured demand revolving credit facility (the “UBS Credit Facility”) with UBS Bank USA (the “Lender”), providing for a line of credit in an amount of up to $70.8 million, or approximately 75% of the market value of the ARS. The obligations under the UBS Credit Facility are secured by substantially all of our collateral accounts, money, investment property and other property maintained with UBS, including the ARS (the “UBS Collateral”), subject to certain exceptions. In connection with entering into the UBS Credit Facility agreement, we amended our $100.0 million secured revolving credit facility with JPMorgan Chase Bank, N.A. to permit the incurrence of indebtedness secured by the UBS Collateral and the transactions contemplated under the UBS Credit Facility.

During the first quarter of 2009, we drew down $70.8 million, the full amount available under the UBS Credit Facility and, at July 5, 2009, $70.8 million remained outstanding. The proceeds derived from any sales of the ARS we hold in accounts with UBS will be applied to repay any outstanding obligations under the UBS Credit Facility.

The UBS Credit Facility contains affirmative and negative covenants, including, among other things, (i) a covenant that, if at any time there are amounts owing under the UBS Credit Facility and the ARS can be sold or otherwise conveyed by us for gross proceeds that are at least equal to the par value of the ARS, then we will sell or convey the ARS to the extent necessary to pay off any amounts owing under the UBS Credit Facility and will use the proceeds to pay those amounts, and (ii) a covenant that limits our ability to grant liens on the collateral.

The UBS Credit Facility includes customary events of default that include, among other things, non-payment defaults, the failure to maintain sufficient collateral, covenant defaults, inaccuracy of representations and warranties, the failure to provide financial and other information in a timely manner, bankruptcy and insolvency defaults, cross-defaults to other indebtedness and judgment defaults. The occurrence of an event of default will result in the acceleration of the obligations under the UBS Credit Facility and any amounts due and not paid following an event of default will bear interest at a rate per annum equal to 2.00% above the applicable interest rate. As of July 5, 2009, we were in compliance with all of the terms of the UBS Credit Facility.

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We estimate the fair value of our ARS quarterly using a discounted cash flow model, comparing the expected rate of interest to be received on the ARS to similar securities. We then discount the securities over a three to ten year term, depending on the collateral underlying each ARS. The amounts derived through the discounted cash flow model were generally consistent with the quoted price indicated by the bank which holds our ARS at July 5, 2009. The increase in the fair value of the ARS in the thirteen and twenty-six week periods ended July 5, 2009 totaled $1.4 million and $5.1 million, respectively, and was recorded as a component of other income, net.

We also calculate the fair value of the Put Right on a quarterly basis based on the net present value of the difference between the par value and the fair market value of the ARS at the end of each quarter, using a twelve month option period through the settlement date discounted by the credit default rate of UBS, the issuer. We also consider several other factors, including continued failure of auctions, failure of investments to be redeemed, deterioration of credit ratings of investments, overall market risk and other factors. The decrease in the fair value of the Put Right in the thirteen and twenty-six week periods ended July 5, 2009 totaled $1.1 million and $4.7 million, respectively, and was recorded as a component of other income, net.

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):

	July 5, 2009		December 31, 2008
Raw materials and assembled parts	$	44,200	$	44,458
Service inventories, estimated current requirements		19,479		18,588
Work-in-process		55,909		56,777
Finished goods		28,210		21,786
Total inventories	$	147,798	$	141,609
Non-current inventories	$	41,468	$	41,072

Non-service inventory valuation adjustments totaled $0.6 million and $1.8 million, respectively, during the thirteen and twenty-six week periods ended July 5, 2009 and totaled $0.1 million and $0.5 million, respectively, during the thirteen and twenty-six week periods ended June 29, 2008. Service inventory valuation adjustments totaled $1.3 million and $2.5 million, respectively, during the thirteen and twenty-six week periods ended July 5, 2009 and $1.5 million and $2.2 million, respectively, during the thirteen and twenty-six week periods ended June 29, 2008.

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10. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

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

	Twenty-Six Weeks Ended
	July 5, 2009		June 29, 2008
Balance, beginning of period	$	40,964	$	40,864
Additions		3,631		—
Adjustments to goodwill		5		(25	)
Balance, end of period	$	44,600	$	40,839

Additions represent the goodwill from our acquisition of certain assets of a division of an Australian software company that provides software for our mineral liberation analysis products in the second quarter of 2009. The total purchase price was $4.1 million. Pro forma operating results and the remaining asset allocation were immaterial.

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

Other Intangible Assets

The gross amount of our other intangible assets and the related accumulated amortization were as follows (in thousands):

	Amortization Period	July 5, 2009			December 31, 2008
Purchased technology	5 to 12 years	$	46,232		$	46,492
Accumulated amortization			(45,649	)		(45,197	)
			583			1,295
Patents, trademarks and other	2 to 15 years		8,292			7,569
Accumulated amortization			(3,612	)		(3,612	)
			4,680			3,957
Note issuance costs	5 to 7 years		2,747			3,159
Accumulated amortization			(1,209	)		(1,165	)
			1,538			1,994
Total intangible assets included in other long-term assets		$	6,801		$	7,246

Amortization expense was as follows (in thousands):

	Twenty-Six Weeks Ended
	July 5, 2009		June 29, 2008
Purchased technology	$	425	$	912
Patents, trademarks and other		559		563
Note issuance costs		456		632
	$	1,440	$	2,107

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

	Purchased Technology		Patents, Trademarks and Other		Note Issuance Costs
Remainder of 2009	$	206	$	477	$	196
2010		377		972		393
2011		—		905		393
2012		—		861		393
2013		—		803		163
Thereafter		—		662		—
	$	583	$	4,680	$	1,538

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):

	Twenty-Six Weeks Ended
	July 5, 2009			June 29, 2008
Balance, beginning of period	$	6,439		$	6,585
Reductions for warranty costs incurred		(5,190	)		(6,571	)
Warranties issued		5,420			7,076
Translation and changes in estimates		14			69
Balance, end of period	$	6,683		$	7,159

12. INCOME TAXES

We recorded a tax provision of approximately $1.5 million and $2.9 million for the thirteen and twenty-six week periods ended July 5, 2009. 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.

Deferred Taxes

Deferred tax assets, net of a valuation allowance of $42.8 million as of July 5, 2009 and December 31, 2008 were classified on the balance sheet as follows (in thousands):

	July 5, 2009			December 31, 2008
Deferred tax assets – current	$	2,651		$	2,884
Deferred tax assets – non-current		1,618			2,188
Other current liabilities		(231	)		(274	)
Deferred tax liabilities – non-current		(4,100	)		(4,164	)
Net deferred tax (liabilities) assets	$	(62	)	$	634

Unrecognized Tax Benefits

During the thirteen and twenty-six week periods ended July 5, 2009, unrecognized tax benefits increased $0.4 million and $1.6 million, respectively. These amounts were net of reductions related to the lapse of applicable statutes of limitations of $0.4 million. There were no increases or decreases in prior unrecognized tax benefits

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resulting from settlements with taxing authorities. We classify interest and penalties associated with unrecognized tax benefits as a component of tax expense in the statement of operations.

Current and non-current liability components of unrecognized tax benefits at July 5, 2009 and December 31, 2008 were classified on the balance sheet as follows (in thousands):

	July 5, 2009		December 31, 2008
Other current liabilities	$	16,888	$	445
Other liabilities		3,091		17,922
Unrecognized tax benefits	$	19,979	$	18,367

During the first quarter of 2009, we reclassified $15.4 million of unrecognized tax benefits from long-term to current based on the estimated timing of settlement.

For our major tax jurisdictions, the following years were open for examination by the tax authorities as of July 5, 2009:

Jurisdiction	Open Tax Years
U.S.	2005 and forward
The Netherlands	2006 and forward
Czech Republic	2006 and forward

13. RELATED PARTY AND OTHER ACTIVITY

During the thirteen and twenty-six week periods ended July 5, 2009 and the comparable periods of 2008, we sold products and services to Applied Materials, Inc. A director of Applied Materials is a member of our Board of Directors. We also sold services to Cascade Microtech, Inc. Our Chief Financial Officer is on the Board of Directors of Cascade Microtech. Sales to Applied Materials and Cascade Microtech were as follows (in thousands):

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 5, 2009		June 29, 2008		July 5, 2009		June 29, 2008
Product sales:
Applied Materials	$	53	$	271	$	380	$	503
Total product sales		53		271		380		503
Service and component sales:
Applied Materials	$	70	$	74	$	104	$	178
Cascade Microtech		1		8		2		8
Total service and component sales		71		82		106		186
Total sales to related parties	$	124	$	353	$	486	$	689

As of July 5, 2009, Applied Materials and Cascade Microtech owed us $107,000 and $1,000, respectively, related to their purchases.

During the thirteen and twenty-six week periods ended July 5, 2009, we purchased $0.3 million and $2.1 million, respectively, worth of goods from Schneeberger, Inc. During the thirteen and twenty-six week periods ended June 29, 2008, we purchased $0.1 million and $0.4 million, respectively, worth of goods from Schneeberger. One of our executive officers serves on the Board of Directors of Schneeberger. As of July 5, 2009, we owed Schneeberger $0.1 million for these purchases.

During the thirteen and twenty-six week periods ended July 5, 2009, we purchased $22,000 and $46,000, respectively, worth of services from Fidelity Investments. During the thirteen and twenty-six week periods ended June 29, 2008, we purchased $46,000 worth of services from Fidelity Investments. FMR LLC, the parent company of Fidelity Investments, is a greater than 5% shareholder of our common stock. At July 5, 2009, we did not owe Fidelity Investments any amounts for these purchases.

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During the thirteen and twenty-six week periods ended July 5, 2009, we purchased $50,000 and $132,000, respectively, worth of services from TMC BV. During the thirteen and twenty-six week periods ended June 29, 2008, we purchased $113,000 and $243,000, respectively, worth of services from TMC BV. One of the members of our Board of Directors also serves on the Supervisory Board of TMC BV. At July 5, 2009, we did not owe TMC BV any amounts for these purchases.

During the thirteen and twenty-six week periods ended July 5, 2009, we purchased $32,000 and $78,000, respectively, worth of services from EasyStreet Online Services. During the thirteen and twenty-six week periods ended June 29, 2008, we purchased $21,000 and $48,000, respectively, worth of services from EasyStreet Online Services. One of the members of our Board of Directors also serves on the Board of Directors of EasyStreet Online Services. As of July 5, 2009, we did not owe EasyStreet Online Services any amounts for these purchased services.

14. REDEMPTION OF 2.875% CONVERTIBLE SUBORDINATED NOTES

We redeemed the following amounts of our 2.875% Convertible Subordinated Notes in the thirteen week period ended April 5, 2009:

Date	Amount Redeemed	Redemption Price	Redemption Discount	Related Note Issuance Costs Written Off
February 2009	$15.0 million	86.5%	$2.0 million	$0.3 million

There were no additional redemptions in the thirteen week period ended July 5, 2009.

15. COMMITMENTS AND CONTINGENCIES

From time to time, we are involved in various legal proceedings and we receive claims arising in the normal course of our business activities, including claims for alleged infringement or violation of intellectual property rights. We have been in discussions with another company that believes we infringe on certain of its patents. No litigation or formal claim has been filed to date. We are currently analyzing the potential merits of the other company’s claims and the potential defenses to such claims. We intend to vigorously defend our interests in this matter. Currently, we are not a party to any other 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 $51.4 million at July 5, 2009. These commitments expire at various times through the first quarter of 2010.

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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: Electronics, Research and Industry, Life Sciences and Service and Components. The following table summarizes various financial amounts for each of our business segments (in thousands):

Thirteen Weeks Ended July 5, 2009	Electronics		Research and Industry		Life Sciences		Service and Components		Corporate and Eliminations			Total
Sales to external customers	$	32,329	$	55,221	$	19,612	$	33,101	$	—		$	140,263
Gross profit		15,631		22,006		8,398		10,126		—			56,161
Thirteen Weeks Ended June 29, 2008
Sales to external customers	$	37,729	$	62,493	$	19,536	$	34,281	$	—		$	154,039
Gross profit		19,088		22,765		7,521		9,246		—			58,620
Twenty-Six Weeks Ended July 5, 2009
Sales to external customers	$	61,688	$	113,559	$	40,477	$	66,372	$	—		$	282,096
Gross profit		30,260		48,406		16,044		20,143		—			114,853
Twenty-Six Weeks Ended June 29, 2008
Sales to external customers	$	84,250	$	123,590	$	29,132	$	68,713	$	—		$	305,685
Gross profit		39,335		49,584		10,686		18,240		—			117,845
July 5, 2009
Total assets	$	103,631	$	151,410	$	45,498	$	141,510	$	491,350		$	933,399
Goodwill		18,134		17,780		3,627		5,062		(3	)		44,600
December 31, 2008
Total assets	$	90,100	$	142,390	$	35,560	$	137,186	$	426,936		$	832,172
Goodwill		18,132		14,148		3,626		5,061		(3	)		40,964

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 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.

One customer accounted for 10% or more of our total sales in the thirteen and twenty-six week periods ended July 5, 2009. No customer represented 10% or more of our total sales in the thirteen or twenty-six week periods ended June 29, 2008.

17. RESTRUCTURING, REORGANIZATION, RELOCATION AND SEVERANCE

In the thirteen and twenty-six week periods ended July 5, 2009, we incurred $1.1 million and $2.0 million, respectively, of costs related to our April 2008 restructuring plan related to improving the efficiency of our operations and improving the currency balance in our supply chain so that more of our costs are denominated in dollar or dollar-linked currencies. We incurred a total of $6.3 million of costs in 2008 and through the first half of 2009 related to this plan and expect to incur between approximately $1.7 million and $1.9 million in the remainder of 2009 related to the implementation of this plan. These actions are expected to reduce operating expenses, improve our factory utilization and help offset the effect of currency fluctuations on our cost of

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goods sold. The main activities, approximate range of associated costs and expected timing are described in the table below. Presently, all of the costs described are expected to result in cash expenditures and we currently expect the approximate total cost of the restructuring to range from $8.0 million to $9.0 million.

A summary of the anticipated restructuring expenses is as follows:

Type of Expense	Approximate Range of Expected Costs	Amount Incurred and Expected Timing for Remainder of Charges
Severance costs related to work force reduction of 3% (approximately 60 employees)	$3.0 million	$2.9 million incurred. Remainder in the second half of 2009.
Transfer of manufacturing and other activities	$1.5 million - $2.0 million	$0.3 million incurred. Remainder in the second half of 2009.
Shift of supply chain	$3.5 million - $4.0 million	$3.1 million incurred. Remainder in the second half of 2009.

The following table summarizes the charges, expenditures and write-offs and adjustments in the twenty-six week period ended July 5, 2009 related to our restructuring, reorganization, relocation and severance accruals (in thousands):

Twenty-Six Weeks Ended July 5, 2009	Beginning Accrued Liability		Charged to Expense, Net		Expenditures			Write-Offs and Adjustments			Ending Accrued Liability
Severance, outplacement and related benefits for terminated employees	$	221	$	94	$	(241	)	$	(24	)	$	50
Transfer of manufacturing and related activities and shift of supply chain		—		1,919		(1,922	)		3			—
Abandoned leases, leasehold improvements and facilities		19		16		—			1			36
	$	240	$	2,029	$	(2,163	)	$	(20	)	$	86

18. FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES

Effective January 1, 2009, we adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for our non-financial assets and liabilities. The adoption of these provisions of SFAS No. 157 did not have any effect on our results of operations, financial position or cash flows.

Effective July 5, 2009, we adopted the provisions of FASB Staff Position (“FSP”) No. FAS157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157 and emphasizes that, even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques used, the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This FSP amends SFAS No. 157 to require disclosure in interim and annual periods regarding the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. It also requires that entities define major categories for equity and debt securities in accordance with paragraph 19 of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Disclosures related to this FSP are included below.

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Pursuant to SFAS No. 157, factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:

• Level 1 – quoted prices in active markets for identical securities as of the reporting date;

• Level 2 – other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; and

• Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.

The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

Following are the disclosures related to our financial assets as of July 5, 2009 pursuant to SFAS No. 157 (in thousands):

	Level 1		Level 2		Level 3
Available for sale marketable securities:
Corporate notes and bonds	$	9,994	$	—	$	—
U.S. Government-backed securities		35,841		—		—
Certificates of deposit and commercial paper		6,834		—		—
Trading securities:
Equity securities – mutual funds		2,600		—		—
ARS		—		—		96,771
Derivative contracts, net		—		2,678		—
Put Right		—		—		13,198
	$	55,269	$	2,678	$	109,969

A roll-forward of our Level 3 securities was as follows (in thousands):

	Auction Rate Securities		Put Right
Balance, December 31, 2008	$	91,680	$	17,917
Increase in fair value of ARS included as a component of other income, net		3,686		—
Decrease in fair value of put right included as a component of other income, net		—		(3,577	)
Balance, April 5, 2009		95,366		14,340
Increase in fair value of ARS included as a component of other income, net		1,405		—
Decrease in fair value of put right included as a component of other income, net		—		(1,142	)
Balance, July 5, 2009	$	96,771	$	13,198

The fair value of our available for sale and trading marketable securities is based on quoted market prices.

We use an income approach to value the assets and liabilities for outstanding derivative contracts using current market information as of the reporting date, such as spot rates, interest rate differentials and implied volatility. We mitigate derivative credit risk by transacting with highly rated counterparties. We have evaluated the credit and non-performance risks associated with our derivative counterparties and believe them to be insignificant and not warranting a credit adjustment at July 5, 2009.

We estimated the fair value of our ARS using a discounted cash flow model where we compared the expected rate of interest received on the ARS to similar securities. We discounted the securities over a three to ten year term depending on the collateral underlying each ARS. The amounts derived through the discounted cash flow model were generally consistent with the quoted price indicated by the bank which holds our ARS at July 5, 2009.

We calculated the fair value of the Put Right based on the net present value of the difference between the par value and the fair market value of the ARS on July 5, 2009, using a twelve month option period through the settlement date discounted by the credit default rate of UBS, the issuer. We will reassess the fair values in future reporting periods based on several factors, including continued failure of auctions, failure of investments to be redeemed, deterioration of credit ratings of investments, overall market risk, and other factors.

There were no changes to our valuation techniques during the thirteen or twenty-six week periods ended July 5, 2009.

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Effective July 5, 2009, we adopted FSP No. FAS107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP is applicable to the disclosure of fair value of our fixed rate convertible debt. At July 5, 2009, we had $100.0 million of fixed rate convertible debt outstanding. Based on open market trades, we have determined that the fair value of our fixed rate convertible debt was approximately $95.5 million at July 5, 2009.

19. DERIVATIVE INSTRUMENTS

In the normal course of business, we are exposed to foreign currency risk and we use derivatives to mitigate financial exposure from fluctuations in foreign currency exchange rates. As of July 5, 2009 and December 31, 2008, the aggregate notional amount of our outstanding derivative contracts designated as cash flow hedges was $31.1 million and $34.5 million, respectively. As of July 5, 2009 and December 31, 2008, the aggregate notional amount of our outstanding derivative contracts for our balance sheet positions was $87.7 million and $80.4 million, respectively. The outstanding contracts at July 5, 2009 have varying maturities through the second quarter of 2010. We do not enter into derivative financial instruments for speculative purposes.

We mitigate derivative credit risk by transacting with highly rated counterparties. We have evaluated the credit and nonperformance risks associated with our derivative counterparties and believe them to be insignificant and not warranting a credit adjustment at July 5, 2009. In addition, there are no contingent features in our derivative instruments.

Balance Sheet Related

In countries outside of the U.S., we transact business in U.S. dollars and in various other currencies. We attempt to mitigate our currency exposures for recorded transactions by using forward exchange contracts to reduce the risk that our future cash flows will be adversely affected by changes in exchange rates. We enter into forward sale or purchase contracts for foreign currencies to hedge specific cash, receivables or payables positions denominated in foreign currencies. Changes in fair value of derivatives entered into to mitigate the foreign exchange risks related to these balance sheet items are recorded in other income (expense) currently together with the transaction gain or loss from the respective balance sheet position.

Foreign currency losses recorded in other income (expense), inclusive of the impact of derivatives, totaled $1.3 million and $2.7 million, respectively, in the thirteen and twenty-six week periods ended July 5, 2009 and $0.4 million and $1.9 million, respectively, in the comparable periods of 2008.

Cash Flow Hedges

We use zero cost collar contracts and option contracts to hedge certain anticipated foreign currency exchange transactions. The foreign exchange hedging structure is set up generally on a twelve-month time horizon. The hedging transactions we undertake primarily limit our exposure to changes in the U.S. dollar/euro and the U.S. dollar/Czech koruna exchange rate. The zero cost collar contract hedges are designed to protect us as the U.S. dollar weakens, but also provide us with some flexibility if the dollar strengthens.

These derivatives meet the criteria to be designated as hedges and, accordingly, we record the change in fair value of the effective portion of these hedge contracts relating to anticipated transactions in other comprehensive income rather than net income until the underlying hedged transaction affects net income. Gains and losses resulting from the ineffective portion of the hedge contracts are recognized currently in net income.

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Summary

The following tables provide summary disclosure information pursuant to SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which was adopted January 1, 2009.

At July 5, 2009 and December 31, 2008 the fair value carrying amount of our derivative instruments were included in our balance sheet as follows:

	Location in Balance Sheet
Derivatives Designated as Hedging Instruments
Foreign Exchange Contracts in Asset Position	Other Current Assets
Foreign Exchange Contracts in Liability Position	Other Current Liabilities
Derivatives Not Designated as Hedging Instruments
Foreign Exchange Contracts in Asset Position	Other Current Assets
Foreign Exchange Contracts in Liability Position	Other Current Liabilities

Balance Sheet Information (in thousands)	Fair Value of Asset Derivatives				Fair Value of Liability Derivatives
	July 5, 2009		December 31, 2008		July 5, 2009		December 31, 2008
Derivatives Designated as Hedging Instruments
Foreign Exchange Contracts	$	998	$	—	$	—	$	2,015
Derivatives Not Designated as Hedging Instruments
Foreign Exchange Contracts	$	2,276	$	1,938	$	596	$	5,775

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The effect of derivative instruments on our Consolidated Statements of Operations for the thirteen and twenty-six week periods ended July 5, 2009 and June 29, 2008 were as follows (in thousands):

Derivatives in SFAS No. 133 Cash Flow Hedging Relationships	Amount of Gain/(Loss) Recognized in OCI (Effective Portion)			Location of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Thirteen Weeks Ended July 5, 2009
Foreign Exchange Contracts	$	1,103		Cost of Goods Sold	$	(18	)	Other, net	$	(503	)
Thirteen Weeks Ended June 29, 2008
Foreign Exchange Contracts	$	(72	)	Cost of Goods Sold	$	2,428		—	$	—
Twenty-Six Weeks Ended July 5, 2009
Foreign Exchange Contracts	$	802		Cost of Goods Sold	$	(268	)	Other, net	$	(1,729	)
Twenty-Six Weeks Ended June 29, 2008
Foreign Exchange Contracts	$	5,432		Cost of Goods Sold	$	5,908		—	$	—

Derivatives Not Designated as Hedging Instruments under SFAS No. 133	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
Thirteen Weeks Ended July 5, 2009
Foreign Exchange Contracts	Other, net	$	(544	)
Thirteen Weeks Ended June 29, 2008
Foreign Exchange Contracts	Other, net	$	2,299
Twenty-Six Weeks Ended July 5, 2009
Foreign Exchange Contracts	Other, net	$	(460	)
Twenty-Six Weeks Ended June 29, 2008
Foreign Exchange Contracts	Other, net	$	1,955

The unrealized gains at July 5, 2009 are expected to be reclassified to net income during the next 12 months as a result of the underlying hedged transactions also being recorded in net income.

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20. ADOPTION OF FSP NO. APB 14-1

Effective January 1, 2009, we adopted FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This FSP specifies that such instruments should separately account for the liability and equity components in a manner that reflects the entity’s non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. Upon adoption, this FSP was retrospectively applied to our $150.0 million principal amount of zero coupon subordinated convertible notes. In accordance with the FSP, we recognized both the liability and equity component of our notes at fair value. The liability component is recognized as the fair value of a similar instrument that does not have a conversion feature at issuance. The equity component, which is the conversion feature at issuance, is recognized as the difference between the proceeds from the issuance of the notes and the fair value of the liability component. We recognize an effective interest rate of 8.874% on the carrying value of the debt.

The effect of adoption of this FSP increased interest expense and reduced net income and earnings per share in the thirteen and twenty-six week periods ended June 29, 2008 as indicated in the following tables (in thousands, except per share amounts).

	Thirteen Weeks Ended June 29, 2008
	Interest Expense		Net Income			Basic Net Income Per Share			Diluted Net Income Per Share
Reported	$	2,250	$	4,851		$	0.13		$	0.12
Adjustment		3,193		(3,193	)		(0.08	)		(0.08	)
Revised	$	5,443	$	1,658		$	0.05		$	0.04

	Twenty-Six Weeks Ended June 29, 2008
	Interest Expense		Net Income			Basic Net Income Per Share			Diluted Net Income Per Share
Reported	$	4,481	$	13,005		$	0.36		$	0.32
Adjustment		6,314		(6,314	)		(0.18	)		(0.14	)
Revised	$	10,795	$	6,691		$	0.18		$	0.18

Amortization of the debt discount during the thirteen and twenty-six weeks ended June 29, 2008 was $3.3 million and $6.5 million, respectively.

Given that these notes were repaid in 2008, there will be no impact of this pronouncement in 2009 or future years.

21. RECLASSIFICATIONS

Certain immaterial reclassifications were made to the prior period financial statements to conform with the current period presentation. On the consolidated balance sheet, we reclassified purchased intangibles, net into other assets, net and on the consolidated statement of operations, we reclassified amortization of purchased intangibles into selling, general and administrative expense.

22. NEW ACCOUNTING PRONOUNCEMENTS

SFAS No. 168

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168 “FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” SFAS No. 168 will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting

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literature not included in the Codification will become non-authoritative. As we believe that our accounting practices are consistent with the Codification, we do not believe that the adoption of SFAS No. 168 will have a material effect on our financial position, results of operations or cash flows.

SFAS No. 167

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS No. 167 improves financial reporting by enterprises involved with variable interest entities. SFAS No. 167 is effective as of the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We do not have any entities that fall under the guidance of SFAS No. 167 and, accordingly, the adoption of SFAS No. 167 will not have any effect on our financial position, results of operations or cash flows.

SFAS No. 166

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140.” SFAS No. 166 improves the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. SFAS No. 166 also amends certain provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 166 is effective as of the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. SFAS No. 166 must be applied to transfers occurring on or after the effective date. While we are still analyzing the effects of the adoption of SFAS No. 166, we do not believe that the adoption of SFAS No. 166 will have a material effect on our financial position, results of operations or cash flows.

SFAS No. 165

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165 defines subsequent events as transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 defines two types of subsequent events: (i) events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events); and (ii) events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events). In addition, SFAS No. 165 requires an entity to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. SFAS No. 165 is effective for periods ending after June 15, 2009. The adoption of SFAS No. 165 effective July 5, 2009 did not have any effect on our financial position, results of operations or cash flows.

FSP No. 142-3

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This FSP also adds certain disclosure requirements for intangible assets with definite useful lives. The adoption of this FSP on January 1, 2009 did not have any effect on our financial position, cash flows and results of operations.

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which requires certain disclosures related to derivative instruments. We adopted SFAS No. 161 effective January 1, 2009. Given that SFAS No. 161 pertains primarily to footnote disclosures, the adoption of this standard did not have a material impact on our financial position, results of operations or cash flows. See Note 19 for the disclosure required pursuant to SFAS No. 161.

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SFAS No. 141R and SFAS No. 160

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS Nos. 141R and 160 require most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. We adopted both statements effective January 1, 2009. The adoption of SFAS Nos. 141R and 160 did not have a material effect on our financial position, results of operations or cash flows.

23. SUBSEQUENT EVENTS

We have considered all events that have occurred subsequent to July 5, 2009 and through August 6, 2009, the date the financial statements as of and for the periods ended July 5, 2009 were issued.

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

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, gross margins, non-operating expense, income tax expense, tax rates, net income, inventory turnover rates or other financial items, as well as backlog, order levels and activity of our company as a whole or our particular markets; any statements of the plans, strategies and objectives of management for future operations, restructuring and outsourcing initiatives; factors that may affect our 2009 operating results; any statements concerning proposed new products, services, developments, changes to our restructuring reserves, our competitive position, hiring levels, sales and bookings 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 statement related to our ability to recognize value from the auction rate securities we hold; any statements relating to the credit worthiness of our derivative counterparties; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing; and statements made under the heading “Outlook for the Remainder of 2009.” 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,” “appear” 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

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 Electronics market, the Research and Industry market, the Life Sciences market and the Service and Components market.

Our products include focused ion beam systems, or FIBs; scanning electron microscopes, or SEMs; transmission electron microscopes, or TEMs; andDualBeam systems, which combine a FIB and SEM on a single platform.

OurDualBeam systems include models that have wafer handling capability and are purchased by semiconductor and data storage manufacturers (“wafer-levelDualBeamsystems”) and models that have small

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stages and are sold to customers in several markets (“small-stageDualBeamsystems”).

The Electronics 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 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 products offer 3D metrology for thin film head processing and root cause failure analysis. Factors affecting our business include the transition from longitudinal to perpendicular recording heads, rapidly increasing storage densities that require smaller recording heads, thinner geometries and materials that increase the complexity of device structures.

The Research and Industry market includes universities, public and private research laboratories and customers in a wide range of industries, including automobiles, aerospace, forensics, metals, mining and petrochemicals. Growth in these markets is driven by global corporate and government funding for research and development in materials science and by development of new products and processes 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 Life Sciences market includes universities and research institutes engaged in biotech and life sciences applications, as well as pharmaceutical, biotech and medical device companies and hospitals. 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 decreased to $140.3 million in the second quarter of 2009 compared to $141.8 million in the first quarter of 2009 and $154.0 million in the second quarter of 2008. Net sales for the second quarter of 2009 increased $3.6 million compared to the first quarter of 2009 as a result of the fluctuations of the U.S. dollar against foreign currencies, primarily the euro. Foreign currency fluctuations reduced net sales in the second quarter of 2009 by $8.6 million when compared to the second quarter of 2008. Declines in the second quarter of 2009 compared to the first quarter of 2009 also resulted from lower sales in each of our market segments, except Electronics, as the global economy continued to struggle.

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. In addition, some of the U.S. government backlog represents uncommitted funds. At July 5, 2009, our total backlog was $336.9 million, compared to $330.5 million at December 31, 2008. At July 5, 2009, our backlog consisted of product and service and components unfilled orders of $272.8 million and $64.1 million, respectively, compared to $273.5 million and $57.0 million, respectively, at December 31, 2008.

Of our total backlog at July 5, 2009, approximately 90% is expected to be shippable within 12 months and approximately 10% requires some incremental development. Customers may cancel or delay delivery on previously placed orders, although our standard terms and conditions include penalties for cancellations made close to the scheduled delivery date. As a result, the timing of the receipt of orders or the shipment of products could have a significant impact on our backlog at any date. Historically, cancellations have been minor. However, the global markets are in a period of extraordinary financial uncertainty and historic cancellation rates may increase in the future. During 2008, we experienced cancellations of $7.6 million. We have not experienced any significant cancellations in the first two quarters of 2009. From time to time, we have experienced difficulty in shipping our product from backlog due to single-sourcing issues and problems in

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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. A significant portion of our backlog is denominated in currencies other than the U.S. dollar and, therefore, our reported backlog fluctuates, to an extent, as a result of foreign currency exchange rate fluctuations. For these 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 2009

The ongoing difficult global economic environment, including volatility in foreign exchange markets, continues to make forecasting for the remainder of 2009 challenging. However, we are seeing some increase in visibility in some of our markets, particularly in Research and Life Sciences.

Our backlog of unfilled orders returned to record levels at the end of the second quarter of 2009, and, historically we have not experienced significant volumes of order cancellations. As a result of the backlog and our near-term outlook for new bookings, we expect revenues in the second half of 2009 to likely be in the range of the first two quarters of the year, subject to normal seasonal factors. Our third quarter usually shows some slowdown in revenue because many of our customers are universities which are closed in the summer months, as well as due to seasonal vacation in Europe. By contrast, we generally see higher revenue and bookings in the fourth quarter. For the second half of 2009, we expect an increase in bookings as a result of economic stimulus programs being implemented in the U.S. and because of our recent new product introductions. Assuming we do receive additional orders as a result of the stimulus and new products, we expect some possible increase in fourth quarter revenue with most of the revenue from those orders occuring in 2010.

The percentage of our expenses denominated in euros or Czech koruna (which tends to move generally in line with the euro on foreign exchange markets) is greater than the percentage of revenue denominated in euro and koruna. As a result, when the U.S. dollar strengthens in foreign exchange markets, our reported revenue declines or grows more slowly, while our expenses decline even more rapidly, improving operating income. Conversely, if the euro and the koruna strengthen against the U.S. dollar (as in the second quarter of 2009), revenue increases more slowly, while our expenses increase more rapidly, reducing operating income. We are taking steps to create more naturally hedged positions, but, for the remainder 2009, the impact of currency movements is expected to generally be as described above.

Historically, our Research and Industry business has generally remained fairly stable in economic downturns, resulting in flat revenue or even modest growth, as governments, institutions and corporations globally invest in research and product development. While the current economic downturn may limit the R&D and capital spending budgets of some corporations and government entities, the long lead-times of many of our customers’ projects and the potential positive impact of government economic stimulus spending will likely provide offsetting growth opportunities for the remainder of 2009.

Presently, we expect continued growth in our Life Sciences business in 2009, although it will vary from quarter to quarter. This is an emerging, research-oriented market for us, and we expect our revenue to continue to be positively affected by increased penetration of electron microscopy into this market and U.S. economic stimulus funding in this area.

The Electronics segment, which includes semiconductor and data storage customers, is in the midst of a severe industry-wide downturn, although there are potential signs of the beginning of an industry recovery. Revenue for this segment is expected to remain at approximately the same levels as the first two quarters of 2009 for the remainder of the year, although there could be significant variation from quarter to quarter. Despite the difficult environment, we believe that we have the potential to demonstrate better performance than the semiconductor capital equipment industry as a whole because of increased demand for our higher-resolution images as manufacturers move to smaller line widths and new processes, among other factors.

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Demand for service of our products is not expected to keep pace with the growth of our installed base of products, as some of our customers may decide to reduce or not renew service contracts due to the current economic environment.

We believe we hold leadership positions, both technologically and competitively, in markets in which we compete. We plan to maintain that leadership, even as competitors introduce new products that attempt to match our earlier advances. In July 2009, we introduced several new products to build on our technology leadership.

We expect gross margins to be slightly lower in the third quarter of 2009 compared to the second quarter of 2009, but to increase in the fourth quarter of 2009. Factors that are expected to affect gross margins are configuration, pricing and timing of high-end TEM shipments, overall product mix, relative foreign currency rates and the beneficial impact of the restructuring program begun in 2008. That includes lower costs from our suppliers, new outsourcing initiatives, more natural currency exposures, headcount reductions and improved systems.

Operating expenses in the second half of 2009 are expected to remain generally flat to down slightly compared with the first and second quarters of 2009. We plan to continue to limit discretionary spending and hiring in light of the overall revenue outlook.

Non-operating expense is expected to decrease in the third and fourth quarters of 2009 compared with the second quarter, due to somewhat smaller losses on foreign exchange hedges.

Our tax rate is expected to remain at approximately 28% for the remaining quarters of 2009.

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 2008 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. Other than additional detail added regarding the valuation of excess and obsolete inventory as discussed below, during the first two quarters of 2009, there were 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, 2008, filed with the SEC on February 20, 2009.

Valuation of Excess and Obsolete Inventory

Inventory is 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.

Manufacturing inventory is reviewed for obsolescence and excess quantities on a quarterly basis, based on estimated future use of quantities on hand, which is determined based on past usage, planned changes to products and known trends in markets and technology. Changes in support plans or technology could have a significant impact on obsolescence.

To support our world-wide service operations, we maintain service spare parts inventory, which consists of both consumable and repairable spare parts. Consumable service spare parts are used within our service business to replace worn or damaged parts in a system during a service call and are generally classified in current inventory as our stock of this inventory turns relatively quickly. However, if there has been no recent usage for a consumable service spare part, but the part is still necessary to support systems under service contracts, the part is considered to be non-current and included within non-current inventories within our consolidated balance sheet. Consumables are charged to cost of goods sold when issued during the service

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call.

We also maintain a substantial supply of repairable and reusable spare parts for possible use in future repairs and customer field service of our install base. We have classified this inventory as a long-term asset given these parts can be repaired and reused in the service business over many years. As these service parts age over the related product group’s post-production service life, we ratably reduce the net carrying value of our repairable spare part inventory on the consolidated balance sheet to account for the excess that builds over the service life. The post-production service life of our systems is generally seven years and, at the end of seven years, the carrying value for these parts in our consolidated balance sheet is reduced to zero. We also perform periodic monitoring of our installed base for premature end of service life events and expense, through cost of sales, the remaining net carrying value of any related spare parts inventory in the period incurred.

Provision for manufacturing inventory valuation adjustments totaled $0.6 million and $1.8 million, respectively, in the thirteen and twenty-six week periods ended July 5, 2009 and $0.1 million and $0.5 million, respectively, in the comparable periods of 2008. Provision for service spare parts inventory valuation adjustments totaled $1.3 million and $2.5 million, respectively, in the thirteen and twenty-six week periods ended July 5, 2009 and $1.5 million and $2.2 million, respectively, in the comparable periods of 2008.

Results of Operations

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

	Thirteen Weeks Ended(1) July 5, 2009					Thirteen Weeks Ended(1) (2) June 29, 2008
Net sales	$	140,263		100.0	%	$	154,039		100.0	%
Cost of sales		84,102		60.0			95,419		61.9
Gross profit		56,161		40.0			58,620		38.1
Research and development		16,657		11.9			18,496		12.0
Selling, general and administrative		31,825		22.7			32,919		21.3
Restructuring, reorganization, relocation and severance costs		1,067		0.8			2,271		1.5
Operating income		6,612		4.7			4,934		3.2
Other income (expense), net		(1,501	)	(1.1	)		(1,698	)	(1.1	)
Income before income taxes		5,111		3.6			3,236		2.1
Income tax expense		1,451		1.0			1,578		1.0
Net income	$	3,660		2.6	%	$	1,658		1.1	%
	Twenty-Six Weeks Ended(1) July 5, 2009					Twenty-Six Weeks Ended(1) (2) June 29, 2008
Net sales	$	282,096		100.0	%	$	305,685		100.0	%
Cost of sales		167,243		59.3			187,840		61.4
Gross profit		114,853		40.7			117,845		38.6
Research and development		33,437		11.9			36,303		11.9
Selling, general and administrative		64,651		22.9			65,531		21.4
Restructuring, reorganization, relocation and severance costs		2,029		0.7			2,271		0.7
Operating income		14,736		5.2			13,740		4.5
Other income (expense), net		(1,821	)	(0.6	)		(2,918	)	(1.0	)
Income before income taxes		12,915		4.6			10,822		3.5
Income tax expense		2,917		1.0			4,131		1.4
Net income	$	9,998		3.5	%	$	6,691		2.2	%

(1) Percentages may not add due to rounding.

(2) Restated for the effects of the adoption of FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 20 of the Condensed Notes to the Consolidated Financial Statements.

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Net sales decreased $13.7 million, or 8.9%, to $140.3 million, in the thirteen weeks ended July 5, 2009 (the second quarter of 2009) compared to $154.0 million in the thirteen weeks ended June 29, 2008 (the second quarter of 2008). Net sales decreased $23.6 million, or 7.7%, to $282.1 million in the twenty-six week period ended July 5, 2009 compared to $305.7 million in the twenty-six week period ended June 29, 2008. These decreases reflect decreases in Electronics, Research and Industry and Service and Components, partially offset by increases in Life Sciences as described more fully below.

As compared to 2008 exchange rates, currency fluctuations decreased net sales by approximately $8.6 million and $15.8 million during the thirteen and twenty-six week periods ended July 5, 2009 as approximately 29.0% and 31.8%, respectively, of our net sales were denominated in foreign currencies that declined in strength against the U.S. dollar during the periods. A significant portion of our revenue is denominated in foreign currencies, especially the euro. As the U.S. dollar strengthens against the euro, this generally has the effect of reducing net sales and backlog.

Net Sales by Market Segment

Net sales by market segment (in thousands) and as a percentage of net sales were as follows:

	Thirteen Weeks Ended
	July 5, 2009				June 29, 2008
Electronics	$	32,329	23.0	%	$	37,729	24.5	%
Research and Industry		55,221	39.4	%		62,493	40.6	%
Life Sciences		19,612	14.0	%		19,536	12.7	%
Service and Components		33,101	23.6	%		34,281	22.2	%
	$	140,263	100.0	%	$	154,039	100.0	%

	Twenty-Six Weeks Ended
	July 5, 2009				June 29, 2008
Electronics	$	61,688	21.9	%	$	84,250	27.6	%
Research and Industry		113,559	40.3	%		123,590	40.4	%
Life Sciences		40,477	14.3	%		29,132	9.5	%
Service and Components		66,372	23.5	%		68,713	22.5	%
	$	282,096	100.0	%	$	305,685	100.0	%

Electronics

The $5.4 million, or 14.3%, decrease and the $22.6 million, or 26.8%, decrease, respectively, in Electronics sales in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008 were primarily due to decreases in volume as a result of the continuing cyclical downturn in the semiconductor industry. In addition currency fluctuations decreased Electronics net sales by $0.7 million and $1.4 million, respectively, in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008. These factors were partially offset by purchases from some of the larger semiconductor and data storage companies for development of their next generation devices.

Research and Industry

The $7.3 million, or 11.6%, decrease and the $10.0 million, or 8.1%, decrease, respectively, in Research and Industry sales in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008 were due primarily to a $4.9 million and an $8.6 million decrease, respectively, related to currency fluctuations. In addition, total system sales were down in the 2009 periods compared to the 2008 periods, especially for our lower-end TEMs and SEMs, partially offset by an increase in the number of smallDualBeam units sold. We believe that Research and Industry unit sales were down in the U.S. in the second quarter of 2009 as customers delayed purchases in anticipation of the receipt of federal stimulus money. Offsetting these factors was an increase in the average price per unit sold for our TEMs and SEMs due to shifts in product mix.

Life Sciences

The $0.1 million, or 0.4%, increase and the $11.3 million, or 38.9%, increase, respectively, in Life Sciences sales in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008 were due primarily to the sale of more high-end TEMs, partially offset by a $1.3 million and a $2.8 million

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decrease, respectively, related to currency fluctuations. The increases in the sale of high-end TEMs were a result of growth in world-wide funding of Life Sciences research and a greater acceptance of our TEM systems by these customers due to our industry leadership in 3-D tomography and automation.

Service and Components

The $1.2 million, or 3.4%, decrease and the $2.3 million, or 3.4%, decrease, respectively, in Service and Components sales in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008 were due primarily to a $1.7 million and a $3.0 million decrease, respectively, related to currency fluctuations and decreased sales of our components as a result of industry-wide reductions in semiconductor capital equipment spending. These factors were partially offset by an increase in service due to a larger install base. Some customers, however, have deferred renewing certain service contracts due to idle machinery as a result of overcapacity in the semiconductor industry.

Net Sales by Geographic Region

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

	Thirteen Weeks Ended								Twenty-Six Weeks Ended
	July 5, 2009				June 29, 2008				July 5, 2009				June 29, 2008
U.S. and Canada	$	40,410	28.8	%	$	54,343	35.3	%	$	95,892	34.0	%	$	108,526	35.5	%
Europe		40,741	29.0	%		56,106	36.4	%		89,665	31.8	%		95,903	31.4	%
Asia-Pacific Region and Rest of World		59,112	42.2	%		43,590	28.3	%		96,539	34.2	%		101,256	33.1	%
	$	140,263	100.0	%	$	154,039	100.0	%	$	282,096	100.0	%	$	305,685	100.0	%

U.S. and Canada

The $13.9 million, or 25.6%, decrease and the $12.6 million, or 11.6%, decrease, respectively, in sales to the U.S. and Canada in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008 were primarily due to lower Electronics and Research and Industry sales. We believe that Research and Industry sales were down in the second quarter of 2009 as customers delayed purchases in anticipation of the receipt of federal stimulus money.

Europe

Our European region also includes Central America, South America, Africa (excluding South Africa), the Middle East, eastern Europe and Russia. The $15.4 million, or 27.4%, decrease and the $6.2 million, or 6.5%, decrease, respectively, in sales to Europe in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008 were primarily due to an $8.1 million and a $12.6 million negative effect, respectively, related to currency fluctuations. In addition, these decreases were due to decreases in sales of TEM products in our Research and Industry segment. These factors were partially offset in the thirteen and twenty-six week periods ended July 5, 2009 by a large sale to a Middle Eastern university customer.

Asia-Pacific Region and Rest of World

The $15.5 million, or 35.6%, increase and the $4.7 million, or 4.7%, decrease, respectively, in sales to the Asia-Pacific Region and Rest of World in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008 were primarily due to an increase in China as a result of increased sales of TEM products to universities and research institutions in the thirteen week period, offset by decreased sales from our Electronics segment, as semiconductor capital spending has declined, in both the thirteen and twenty-six week periods ended July 5, 2009.

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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				Twenty-Six Weeks Ended
	July 5, 2009		June 29, 2008		July 5, 2009		June 29, 2008
Electronics	48.3	%	50.6	%	49.1	%	46.7	%
Research and Industry	39.9	%	36.4	%	42.6	%	40.1	%
Life Sciences	42.8	%	38.5	%	39.6	%	36.7	%
Service and Components	30.6	%	27.0	%	30.3	%	26.6	%
Overall	40.0	%	38.1	%	40.7	%	38.6	%

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 decreased $11.3 million, or 11.9%, to $84.1 million in the thirteen week period ended July 5, 2009 compared to $95.4 million in the thirteen week period ended June 29, 2008 and decreased $20.6 million, or 11.0%, to $167.2 million in the twenty-six week period ended July 5, 2009 compared to $187.8 million in the twenty-six week period ended June 29, 2008. These decreases were primarily due to a $10.9 million and a $21.8 million decrease, respectively, related to currency fluctuations and lower sales, partially offset by an increase in costs due to increased sales of our higher-end TEM products.

The net effect on our gross margin from the change in currency exchange rates during the thirteen and twenty-six week periods ended July 5, 2009 on our net sales and cost of sales was an approximately $2.3 million increase, or a 3.8 percentage point increase, and a $6.0 million, or a 4.2 percentage point increase, respectively. Offsetting the currency effects were approximately $18,000 and $0.3 million, respectively, of cash flow hedge losses recorded in cost of sales.

Electronics

The decrease in Electronics gross margin in the second quarter of 2009 compared to the second quarter of 2008 was primarily due to a shift in mix away from the higher-margin data storage and other wafer-level products in the 2009 period. For the twenty-six week period ended July 5, 2009, these factors were offset by significant pricing pressure on certain transactions in the first quarter of 2008, which lowered gross margins during that period.

Research and Industry

The increases in Research and Industry gross margin in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008 were primarily due favorable currency fluctuations and a shift in product mix to fewer lower-end TEM sales.

Life Sciences

The increases in the Life Sciences gross margins in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008 were primarily due to favorable currency fluctuations, a shift to more higher-end TEMs during the first quarter of 2009 and pricing pressures on our low-end TEMs in the first quarter of 2008.

Service and Components

The increases in the Service and Components gross margin in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008 were primarily due to favorable currency fluctuations and improvements in part usage and lower repair and distribution costs.

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Research and Development Costs

Research and development (“R&D”) costs include labor, materials, overhead and payments to third parties for research and development of new products and new software or enhancements to existing products and software. These costs are presented net of subsidies received for such efforts. During the 2009 and 2008 periods, we received subsidies from European governments for technology developments specifically in the areas of semiconductor and life science equipment.

R&D costs decreased $1.8 million to $16.7 million (11.9% of net sales) in the thirteen week period ended July 5, 2009 compared to $18.5 million (12.0% of net sales) in the thirteen week period ended June 29, 2008 and decreased $2.9 million to $33.4 million (11.9% of net sales) in the twenty-six week period ended July 5, 2009 compared to $36.3 million (11.9% of net sales) in the twenty-six week period ended June 29, 2008.

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

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 5, 2009			June 29, 2008			July 5, 2009			June 29, 2008
Gross spending	$	18,463		$	19,507		$	36,416		$	38,086
Less subsidies		(1,806	)		(1,011	)		(2,979	)		(1,783	)
Net expense	$	16,657		$	18,496		$	33,437		$	36,303

The decreases in R&D costs in the thirteen and twenty-six week periods ended July 5, 2009 compared to the same periods of 2008 were primarily due to a $1.4 million and a $2.4 million decrease, respectively, related to lower labor and related costs as a result of favorable currency movements.

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

Selling, General and Administrative Costs

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

SG&A costs decreased $1.1 million to $31.8 million (22.7% of net sales) in the thirteen week period ended July 5, 2009 compared to $32.9 million (21.4% of net sales) in the thirteen week period ended June 29, 2008 and decreased $0.8 million to $64.7 million (22.9% of net sales) in the twenty-six week period ended July 5, 2009 compared to $65.5 million (21.4% of net sales) in the twenty-six week period ended June 29, 2008.

The decreases in SG&A costs were due primarily to a $1.8 million and a $3.2 million decrease, respectively, related to currency fluctuations and a decrease in amortization of purchased intangibles of $0.4 million and $0.5 million, respectively. In addition, lower legal, accounting, consulting and travel and entertainment costs contributed to the decreases. Offsetting these decreases were an increase in agent commissions and labor and related costs.

Restructuring, Reorganization, Relocation and Severance

In the thirteen and twenty-six week periods ended July 5, 2009, we incurred $1.1 million and $2.0 million, respectively, of costs related to our April 2008 restructuring plan related to improving the efficiency of our operations and improving the currency balance in our supply chain so that more of our costs are denominated in dollar or dollar-linked currencies. We incurred a total of $6.3 million of costs in 2008 and through the first half of 2009 related to this plan and expect to incur between approximately $1.7 million and $1.9 million in the remainder of 2009 related to the implementation of this plan. These actions are expected to reduce operating expenses, improve our factory utilization and help offset the effect of currency fluctuations on our cost of

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goods sold. The main activities, approximate range of associated costs and expected timing are described in the table below. Presently, all of the costs described are expected to result in cash expenditures and we currently expect the approximate total cost of the restructuring to range from $8.0 million to $9.0 million.

We anticipate that the actions related to our 2008 restructuring plan will reduce annualized manufacturing costs and operating expenses and increase cash flow by approximately $6.0 million in 2009 and $12.0 million annually thereafter. A portion of these expense reductions were realized in the first two quarters of 2009 with the majority of the benefit anticipated to be realized in the second half of 2009.

A summary of the anticipated restructuring expenses is as follows:

Type of Expense	Approximate Range of Expected Costs	Amount Incurred and Expected Timing for Remainder of Charges
Severance costs related to work force reduction of 3% (approximately 60 employees)	$3.0 million	$2.9 million incurred. Remainder in the second half of 2009.
Transfer of manufacturing and other activities	$1.5 million - $2.0 million	$0.3 million incurred. Remainder in the second half of 2009.
Shift of supply chain	$3.5 million - $4.0 million	$3.1 million incurred. Remainder in the second half of 2009.

The following table summarizes the charges, expenditures and write-offs and adjustments in the twenty-six week period ended July 5, 2009 related to our restructuring, reorganization, relocation and severance accruals (in thousands):

Twenty-Six Weeks Ended July 5, 2009	Beginning Accrued Liability		Charged to Expense, Net		Expenditures			Write-Offs and Adjustments			Ending Accrued Liability
Severance, outplacement and related benefits for terminated employees	$	221	$	94	$	(241	)	$	(24	)	$	50
Transfer of manufacturing and related activities and shift of supply chain		—		1,919		(1,922	)		3			—
Abandoned leases, leasehold improvements and facilities		19		16		—			1			36
	$	240	$	2,029	$	(2,163	)	$	(20	)	$	86

The $2.3 million restructuring, reorganization, relocation and severance expense in the thirteen and twenty-six week periods ended June 29, 2008 also related to our April 2008 restructuring plan.

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 $0.7 million and $1.8 million in the thirteen and twenty-six week periods ended July 5, 2009, respectively, compared to $4.1 million and $9.1 million, respectively, in the comparable periods of 2008. These decreases were primarily due to lower interest rates and a decrease in our invested balances, primarily due to the repayment of debt.

Interest expense for both the 2009 and 2008 periods included interest expense related to our 2.875% convertible notes. Interest expense in the twenty-six week period ended June 29, 2008 also included some interest related to our 5.5% convertible notes, which were repaid in full in January 2008. Interest expense in the thirteen and twenty-six week periods ended June 29, 2008 also included $3.2 million and $6.3 million, respectively, of non-cash interest related to the effects of the adoption of FSP No. APB 14-1. See Note 20 of

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the Condensed Notes to the Consolidated Financial Statements.

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 twenty-six week period ended July 5, 2009 included a $0.3 million expense related to the write-off of note issuance costs in connection with the early redemption of a total of $15.0 million of our 2.875% convertible notes. Interest expense in the twenty-six week period ended June 29, 2008 included $0.2 million of premiums and commissions paid on the repurchase of the remaining $45.9 million of our 5.5% convertible notes as well as the write-off of $0.1 million of related deferred note issuance costs and $0.4 million of premiums and commissions paid on the repurchase of $148.9 million principal amount of our $150 million zero coupon convertible notes as well as the write-off of $0.2 million of related deferred note issuance costs.

Assuming no additional note repurchases, amortization of our remaining convertible note issuance costs will total approximately $0.1 million per quarter through the second quarter of 2013.

For the twenty-six week period ended July 5, 2009, Other, net included a $2.0 million gain on the early redemption of our 2.875% notes. The thirteen and twenty-six week periods ended July 5, 2009 included a $0.5 million and a $1.7 million charge, respectively, for cash flow hedge ineffectiveness, 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.

For the 2008 periods, Other, net primarily consisted of foreign currency gains and losses on transaction and realized and unrealized gains and losses on the changes in fair value of derivative contracts entered into to hedge these transactions.

Income Tax Expense

Our effective income tax rate of 28.4% and 38.2% for the thirteen week periods ended July 5, 2009 and June 29, 2008, respectively, and 22.6% and 48.8% for the twenty-six week periods July 5, 2009 and June 29, 2008, respectively reflect taxes accrued in foreign jurisdictions, reduced by tax benefits related to the release of valuation allowances recorded against deferred tax assets utilized to offset income earned in the U.S. Our tax expense for the twenty-six weeks ended July 5, 2009 also reflects the release of certain tax contingencies due to the lapse of statutes of limitation in the first quarter of 2009.

Our effective income tax rates for the thirteen and twenty-six week periods ended June 29, 2008 reflect higher tax expense due to the effects of the non-deductible, non-cash interest expense recorded upon adoption of FSP No. APB 14-1, offset by valuation allowance released against deferred tax assets utilized to offset income earned in the U.S. See Note 20 of the Condensed Notes to the Consolidated Financial Statements for more information regarding the adoption of FSP No. APB 14-1.

During the thirteen week period ended April 5, 2009, we reclassified approximately $15.4 million of non-current tax liabilities to current in expectation that a settlement could be reached within the next 12 months. We still anticipate resolution of the tax positions within the next 12 months and, if resolved favorably, the reversal of the current tax liabilities could provide a tax benefit up to approximately $16.4 million, including accruals through July 5, 2009, in the thirteen week period we determine the positions are more likely than not to be sustained.

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.

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Liquidity and Capital Resources

Auction Rate Securities and UBS Credit Facility

On November 6, 2008, we accepted an offer by UBS AG (together with its affiliates, “UBS”) of certain auction rate securities rights (the “Put Right”). The Put Right permits us to cause UBS to repurchase, at par value, our ARS during the period beginning on June 30, 2010 and ending on July 2, 2012. The fair value of the ARS and the Put Right was approximately $96.8 million and $13.2 million, respectively, as of July 5, 2009, as discussed in more detail below. The par value of the ARS was $110.1 million at July 5, 2009. The Put Right was offered in connection with settlement agreements entered into by UBS with the U.S. SEC and other federal and state regulatory authorities.

In addition, UBS offered us the ability to borrow no-net cost loans secured by the ARS. On March 25, 2009, we entered into an uncommitted secured demand revolving credit facility with UBS Bank USA, providing for a line of credit in an amount of up to $70.8 million, or approximately 75% of the market value of the ARS. The obligations under the UBS Credit Facility are secured by substantially all of our collateral accounts, money, investment property and other property maintained with UBS, including the ARS, subject to certain exceptions.

During the first quarter of 2009, we drew down $70.8 million, the full amount available under the UBS Credit Facility and, as of July 5, 2009, the full $70.8 million remained outstanding. The proceeds derived from any sales of the ARS we hold in accounts with UBS will be applied to repay any outstanding obligations under the UBS Credit Facility.

The UBS Credit Facility includes customary events of default that include, among other things, non-payment defaults, the failure to maintain sufficient collateral, covenant defaults, inaccuracy of representations and warranties, the failure to provide financial and other information in a timely manner, bankruptcy and insolvency defaults, cross-defaults to other indebtedness and judgment defaults. The occurrence of an event of default will result in the acceleration of the obligations under the UBS Credit Facility and any amounts due and not paid following an event of default will bear interest at a rate per annum equal to 2.00% above the applicable interest rate. As of July 5, 2009, we were in compliance with all of the terms of the UBS Credit Facility.

See Note 8 of the Condensed Notes to the Consolidated Financial Statements for additional information.

Other Credit Facilities and Letters of Credit

We have a $100.0 million secured revolving credit facility, including a $50.0 million subfacility for the issuance of letters of credit. We may, upon notice to JPMorgan Chase Bank, N.A., request to increase the revolving loan commitments by an aggregate amount of up to $50.0 million with new or additional commitments subject only to the consent of the lender(s) providing the new or additional commitments, for a total secured credit facility of up to $150.0 million. We also have a 50.0 million yen unsecured and uncommitted bank borrowing facility in Japan and various limited facilities in select foreign countries. We mitigate credit risk by transacting with highly rated counterparties. We have evaluated the credit and non-performance risks associated with our lenders and believe them to be insignificant. No amounts were outstanding under any of these facilities as of July 5, 2009.

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 July 5, 2009, we had $53.7 million of these guarantees and letters of credit outstanding, of which approximately $53.1 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.

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Sources of Liquidity and Capital Resources

Our sources of liquidity and capital resources as of July 5, 2009 consisted of $335.4 million of cash, cash equivalents, short-term restricted cash and short-term investments, $6.3 million in non-current investments, $42.3 million of long-term restricted cash, $100.0 million available under revolving credit facilities (including the UBS Credit Facility), as well as potential future cash flows from operations. Restricted cash relates to deposits to secure bank guarantees for customer prepayments that expire through 2013.

We believe that we have sufficient cash resources and available credit lines to meet our expected operational and capital needs for at least the next twelve months from July 5, 2009.

In twenty-six week period ended July 5, 2009, cash and cash equivalents and short-term restricted cash increased $32.2 million to $189.7 million as of July 5, 2009 from $157.5 million as of December 31, 2008 primarily as a result of $12.6 million provided by operations, $70.8 million of proceeds from our UBS line of credit and $3.1 million of proceeds from the exercise of employee stock options. These proceeds were partially offset by $13.1 million used for the repayment of $15.0 million face amount of our 2.875% convertible notes, $5.5 million used for the purchase of property, plant and equipment, the net purchase of $19.9 million of marketable securities, $4.1 million used for the purchase of certain assets of a division of an Australian software company and a $4.2 million unfavorable effect of exchange rate changes.

Accounts receivable increased $23.1 million to $162.8 million as of July 5, 2009 from $139.7 million as of December 31, 2008, primarily due to increased frequency of extended payment terms as a result of geographic sales mix and customer requests. The July 5, 2009 balance also included a $4.0 million increase related to changes in currency exchange rates. Our days sales outstanding, calculated on a quarterly basis, was 106 days at July 5, 2009 compared to 84 days at December 31, 2008.

Inventories increased $6.2 million to $147.8 million as of July 5, 2009 compared to $141.6 million as of December 31, 2008. The July 5, 2009 balance includes a $6.4 million increase related to changes in currency exchange rates. Our annualized inventory turnover rate, calculated on a quarterly basis, was 2.3 times for the quarter ended July 5, 2009 and 2.4 times for the quarter ended June 29, 2008.

Other current assets increased $20.0 million to $52.9 million as of July 5, 2009 compared to $32.9 million as of December 31, 2008, primarily due to the transfer of our Put Right from other assets, net to other current assets, as well as normal seasonal increases in prepaid insurance and our receivable for subsidies for research and development projects. Other current assets at July 5, 2009 included $13.2 million for the value of the Put Right related to our ARS.

Expenditures for property, plant and equipment of $5.5 million in the twenty-six week period ended July 5, 2009 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, demonstration systems and R&D equipment for applications development. We estimate our total capital expenditures in 2009 to be approximately $20 to $25 million, primarily for the development and introduction of new products, demonstration equipment and upgrades and incremental improvements to our enterprise resource planning (“ERP”) system.

Other assets, net decreased $15.8 million to $18.7 million as of July 5, 2009 compared to $34.5 million as of December 31, 2008, primarily due to the transfer of the Put Right to other current assets and a decrease in other intangible assets.

Other current liabilities increased $6.9 million to $40.6 million as of July 5, 2009 compared to $33.7 million as of December 31, 2008. The increase resulted primarily from a reclassification of $15.4 million of unrecognized tax benefits from long-term to current during the first quarter of 2009, partially offset by a decrease in our value added tax liability and our derivative liabilities.

Other liabilities decreased $13.9 million to $28.4 million as of July 5, 2009 compared to $42.3 million as of December 31, 2008. The decrease resulted primarily from the reclassification of $15.4 million of unrecognized tax benefits from long-term to current during the first quarter of 2009.

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New Accounting Pronouncements

See Note 22 of the Condensed Notes to the Consolidated Financial Statements for a discussion of new accounting pronouncements.

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 2008 Annual Report on Form 10-K, which was filed with the SEC on February 20, 2009.

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 provide reasonable assurance 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 SEC 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 1. Legal Proceedings

We are involved in various legal proceedings and receive claims from time to time, arising in the normal course of our business activities, including claims for alleged infringement or violation of intellectual property rights. We have been in discussions with another company that believes that we infringe on certain of its patents. No litigation or formal claim has been filed to date. We are analyzing the potential merits of the other company’s claims and the potential defenses to such claims. We intend to vigorously defend our interests in this matter. In management’s opinion, the resolution of this dispute, as well as other matters, is not expected to have a material adverse effect on our financial condition, but it could be material to the net income or cash flows of a particular quarter. This claim, or any claim of infringement or violation of intellectual property rights, with or without merit, could require us to change our technology, change our business practices, pay damages, enter into a licensing arrangement or take other actions that may result in additional costs or other actions that are detrimental to our business.

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

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Report on Form 10-K for the fiscal year ended December 31, 2008. 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.

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. Some 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, among others: JEOL Ltd., Hitachi High-Technologies Corporation and Carl Zeiss SMT A.G. 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.

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 66% of our revenues in the first two quarters of 2009 and in the year ended December 31, 2008 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 over 50 countries, 23 with a direct presence. Some of our global operations are geographically isolated, are distant from corporate headquarters and/or have little infrastructure support.

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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 Restrictions on Hazardous Substances (“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.

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 Electronics, Research and Industry and Life Sciences 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:

	Twenty-Six Weeks Ended
	July 5, 2009				June 29, 2008
Electronics	$	61,688	21.9	%	$	84,250	27.6	%
Research and Industry		113,559	40.3	%		123,590	40.4	%
Life Sciences		40,477	14.3	%		29,132	9.5	%
Service and Components		66,372	23.5	%		68,713	22.5	%
	$	282,096	100.0	%	$	305,685	100.0	%

The largest sub-parts of the Electronics market are the semiconductor and data storage 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. Since the second half of 2007, we have experienced a significant decline in bookings and revenue in our Electronics segment due to a general decline in semiconductor and data storage capital equipment spending. Global economic conditions continue to be volatile and appear to be weakening. Continued economic weakness is expected to reduce demand for our customers’ products and cause our business to suffer as a result. During downturns, our sales and gross profit margins generally decline.

The Research and Industry market is also affected by overall economic conditions, but is not as cyclical as the Electronics market. However, Research and Industry customer spending is highly dependent on governmental and private funding levels and timing, which can vary depending on budgetary or economic constraints and changes in administration. The current global financial crisis may result in cutbacks in funding by various governments and institutions, which could eventually result in reduced orders for our products. In addition, institutional endowments and philanthropy, which are a source of funding of some customer purchases, are

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threatened by the recent significant declines in capital markets world-wide. Recently, both philanthropic giving and endowments have declined.

The Life Sciences market is a smaller and still emerging market, and the tools we sell into that market often have average selling prices of over $1.0 million. Consequently, loss of demand among a relatively small group of potential customers can have a material impact on the overall demand for our products. 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.

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. Cancellation risks rise in periods of economic downturn.

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. The risks of cancellation are higher during times of economic downturn, such as the U.S. and global economies are presently experiencing. 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.

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 first two quarters of 2009 and the year ended December 31, 2008, approximately 30% to 45% 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.

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We use option contracts and zero cost collars in an effort to reduce the exposure of our cash flows to exchange rate fluctuations. 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, which is at the time the gains or losses related to the derivatives 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. 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 evaluations, we did not record any charges related to hedge dedesignations in the first two quarters of 2009 or in the year ended December 31, 2008. However, we recorded a $1.7 million and a $1.3 million charge, respectively, for hedge ineffectiveness related to our cash flow hedges in the first two quarters of 2009 and in all of 2008 as a result of currency fluctuations. 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 hedged transaction.

We also enter into foreign forward exchange contracts that are designed 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 $2.7 million in the first two quarters of 2009 and $4.9 million in the year ended December 31, 2008.

We seek to mitigate derivative credit risk by transacting with highly rated counterparties. We have evaluated the credit and non-performance risks associated with our derivative counterparties and believe them to be insignificant and not warranting a credit adjustment at July 5, 2009.

The recent extreme volatility of dollar-euro exchange rates has also made it more difficult for us to deploy our hedging program and create effective hedges.

In addition, the significant recent improvement of the value of the dollar from the end of the third quarter of 2008 will result in lower expected revenue and bookings for us, which could affect the comparability of our period over period financial results.

Current economic conditions may adversely affect our industry, business and results of operations.

The global economy is undergoing a period of slowdown and the future economic climate may continue to be less favorable than that of recent years. This slowdown has, and could further lead to, reduced consumer and business spending in the foreseeable future, including by our customers, and the purchasers of their products and services. If such spending continues to slow down or decrease, our industry, business and results of operations may be adversely impacted. Also, in times of severe economic distress, hardship, bankruptcy and insolvency among our customers will increase. This may make it more difficult to collect on receivables.

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Gross margins on our products vary between product lines and markets and, accordingly, changes in product mix will affect our results of operations.

If a higher portion of our net sales in any given period have lower gross margins, our overall gross margins and earnings would be negatively affected. For example, during 2008, our net sales contained a smaller portion of sales from our relatively higher margin products within the Electronics segment, which contributed to a decrease in our overall gross margins in 2008 compared to 2007. Our Electronics business, which ultimately depends on consumers who buy electronic devices, has been particularly hard hit by the downturn. To the extent that this market segment continues to suffer, our overall margins will continue to be under pressure.

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.

Restructuring activities may be disruptive to our business and financial performance. Any delay or failure by us to execute planned cost reductions could also be disruptive and could result in total costs and expenses that are greater than expected.

At various times, we have restructured our business. In 2006, we undertook a restructuring that caused us to record restructuring, reorganization, relocation and severance charges of approximately $12.6 million.

In 2008, we announced a restructuring that will involve estimated cash charges ranging from $8.0 million to $9.0 million, $6.3 million of which has been incurred through July 5, 2009. The plan includes relocating part of our supply chain and relocating and outsourcing some manufacturing to reduce cost of goods sold and improve imbalances in our foreign currency exposures. In addition, we will be severing some employees and aiming to lower operating expenses. The expense of the restructuring adversely affected our financial performance for 2008 and the first two quarters of 2009. Moreover, the cash charges for the 2008 restructuring is only an estimate and actual results may differ. If we have additional activities beyond what is currently planned, we may incur additional restructuring and related expenses.

Restructuring could adversely affect our business, financial condition and results of operations in other respects as well. This includes potential disruption of manufacturing operations, our supply chain and other aspects of our business. Employee morale and productivity could also suffer and result in unintended employee attrition. Loss of sales, service and engineering talent, in particular, could damage our business. The restructuring will require substantial management time and attention and may divert management from other important work. Moreover, we could encounter delays in executing our plans, which could cause further disruption and additional unanticipated expense. Some of our employees work in areas, such as Europe and Asia, where workforce reductions are highly regulated, and this could slow the implementation of planned workforce reductions.

It is also the case that our 2008 restructuring plan may fail to achieve the stated aims for reasons similar to those described in the prior paragraph.

During the course of executing the restructuring, we could incur material non-cash charges such as write-downs of inventories or other tangible assets. 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.

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A portion of our manufacturing operations are going to be relocated between existing facilities or outsourced to third-parties, which will involve significant costs and the risk of operational interruption.

In the second quarter of 2008, we began implementing a plan to shift manufacturing for certain products to other of our factories and third parties in Asia and the U.S. Moving product manufacturing includes, among others, the following risks:

• failing to transfer product knowledge from one site to another or to a third party;

• unanticipated additional costs connected to such moves;

• delay or failure in being able to build the transferred product at the new sites;

• unanticipated additional labor and materials costs related to such moves;

• logistical issues arising from the moves; and

• potential vendor problems.

Any of these factors could cause us to miss product orders, cause a decline in product quality and completeness, damage our reputation, increase costs of goods sold or decrease revenue and gross margins.

Dependence on contract manufacturing and outsourcing other portions of our supply chain may adversely affect our ability to bring products to market and damage our reputation. Dependence on outsourced information technology and other administrative functions may impair our ability to operate effectively.

As part of our efforts to streamline operations and cut costs, we have been outsourcing aspects of our manufacturing processes and other functions and we continue to evaluate additional outsourcing. If our contract manufacturers or other outsourcers fail to perform their obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, and replacement manufacturers may be unavailable, which may preclude us from fulfilling our customer orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control. Moreover, delays could cause us to suffer penalties with our customers, which could also impact our profitability. In addition, we are moving towards outsourcing significant portions of our information technology (“IT”) function and other administrative functions. Since IT is critical to our operations, any failure to perform on the part of the IT providers could impair our ability to operate effectively. Beyond the risks outlined above, problems with manufacturing or IT outsourcing could result in lower revenues and otherwise negatively impact our results of operations and our stock price.

A significant percentage of our current investments in marketable securities consist of auction rate securities. If a liquid market for these securities is not maintained, we may be unable to dispose of these securities, which could negatively impact our liquidity, cash on hand and results of operations.

At July 5, 2009, we held auction rate securities (“ARS”) having a fair value of $96.8 million, which have short-term stated maturities for which the interest rates are reset through a Dutch auction, which generally occurs every 28 days. The auctions have historically provided a liquid market for these securities as investors could readily sell their investments at auction. With the liquidity issues experienced in global credit and capital markets, the ARS held by us have experienced multiple failed auctions, beginning on February 19, 2008, as the amount of securities submitted for sale has exceeded the amount of purchase orders. We expect that the market for these securities will remain illiquid until the securities are either redeemed or mature. During the fourth quarter of 2008, we entered into a settlement agreement with UBS Financial Services Inc. (“UBS”), the issuer of the ARS, pursuant to which UBS would repurchase all of our ARS at par on or before June 30, 2010. As a result of this settlement, we reclassified our ARS from available for sale securities and into trading securities. In connection with the reclassification into trading securities, we reclassified the temporary impairment related to these securities of $18.4 million from accumulated other comprehensive income and into other income, net during 2008. Offsetting this loss within other income, net was a $17.9 million gain related to the put right we obtained pursuant to the agreement. Our inability to dispose of our ARS prior to June 30, 2010 could negatively impact our liquidity and cash on hand, which, in turn, could cause us to forego potentially beneficial operational and strategic transactions or to incur additional indebtedness. During the first

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quarter of 2009, we pledged our ARS as collateral against the UBS Credit Facility and drew down $70.8 million, or approximately 75% of the value of the ARS. As of July 5, 2009, $70.8 million was outstanding on the UBS Credit Facility. The proceeds derived from any sales of the ARS we hold in accounts with UBS will be applied to repay any outstanding obligations under the UBS Credit Facility. We expect to exercise our Put Right in June 2010. Additionally, we could be adversely impacted if UBS is unable to meet its obligations under the repurchase agreement in 2010. Changes in the fair value of the ARS and the Put Right, which were an increase of $5.1 million and a decrease of $4.7 million, respectively, in the twenty-six week period ended July 5, 2009, are recognized currently as a component of other income, net.

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, AP Tech, Frencken Mechatronics B.V. and AZD Praha STR 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 (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.

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Our sales contracts often require delivery of multiple elements with complex terms and conditions that may cause our quarterly results to fluctuate.

Our system sales contracts are complex and often include multiple elements such as delivery of more than one system, installation obligations (sometimes for multiple tools), accessories and/or service contracts, as well as provisions for customer acceptance. Typically, we recognize revenue as the various elements are delivered to the customer or the related services are provided. However, certain of these contracts have complex terms and conditions or technical specifications that require us to deliver most, or sometimes all, elements under the contract before revenue can be recognized. This could result in a significant delay between production and delivery of products and when revenue is recognized, which may cause volatility in, or adversely impact, our quarterly results of operations and cash flows.

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, although no customer has accounted for more than 10% of total annual net revenues in the recent past. 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.

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 sold by us or used by our customers, may be infringing one or more of these patents. Recently, we have been in negotiations with one of our competitors in connection with such a claim. 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 have fixed debt obligations, 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 July 5, 2009, we had total convertible long-term debt of $100.0 million due in 2013. We also had $70.8 million outstanding under our short-term UBS Credit Facility. In addition, we have a secured credit line for $100.0 million and also have access to a $50.0 million yen unsecured uncommitted bank borrowing facility in Japan. However, no amounts were outstanding on these credit facilities at July 5, 2009. 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 credit line, which was established in June 2008, contains numerous restrictive covenants, which, if not adhered to, could result in the cancellation of the entire line;

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• our shareholders may be diluted if holders of all or a portion of our outstanding 2.875% subordinated convertible notes elect to convert their notes, up to a maximum aggregate of 3,407,155 shares of our common stock. These shares were not included in our diluted share count for the thirteen or twenty-six week periods ended July 5, 2009 or June 29, 2008, because they were antidilutive; 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.

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 or government administration, which are often unpredictable, may affect our revenues.

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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. Moreover, due to the world-wide economic downturn, many state and national governments are seeing significant declines in tax revenue, while also seeing increased demand for services. This could reduce the money available to our potential customers from government funding sources that could be used to purchase our products and services.

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 length of time it takes us to complete a sale depend on many factors, 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 introduction, or announced introduction, of new products by our competitors;

• 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.

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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 developments have 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 newPhenomdesktop imaging tool and theTitanscanning transmission 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.

We may not be able to enforce our intellectual property rights, especially in foreign countries, which could have a material adverse affect on 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 66% of our sales from foreign countries in the first two quarters of 2009 and in the year ended December 31, 2008. 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.

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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 significant fluctuation from one period to the next 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 results.

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.

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

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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 product safety failure, such as a hazardous gas or x-ray leak or extreme pressure release, 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 or release 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. 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.

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Item 4. Submission of Matters to a Vote of Security Holders

The following actions were taken at our annual meeting of shareholders, which was held on May 14, 2009:

1. The shareholders elected the nine nominees recommended for director to our Board of Directors. The nine directors elected, along with the voting results were as follows:

Name	No. of Shares Voting For	No. of Shares Withheld
Lawrence A. Bock	35,267,238	563,468
Wilfred J. Corrigan	35,147,675	683,031
Don R. Kania	35,569,148	261,558
Thomas F. Kelly	35,019,307	811,399
William W. Lattin	35,136,219	694,487
Jan C. Lobbezoo	29,243,464	6,587,242
Gerhard H. Parker	35,143,609	687,097
James T. Richardson	35,415,868	414,838
Richard H. Willis	35,244,894	585,812

2. The shareholders approved the amendment to the 1995 Stock Incentive Plan to increase the number of shares of our common stock reserved for issuance under the plan from 9,750,000 to 10,000,000 as follows:

No. of Shares Voting For:	No. of Shares Voting Against:	No. of Shares Abstaining:	No. of Broker Non-Votes:
27,110,229	5,180,428	48,706	3,491,343

3. The shareholders approved the amendment to the FEI Employee Share Purchase Plan to increase the number of shares of our common stock reserved for issuance under the plan from 2,700,000 to 2,950,000 as follows:

No. of Shares Voting For:	No. of Shares Voting Against:	No. of Shares Abstaining:	No. of Broker Non-Votes:
32,143,649	153,519	42,195	3,491,343

4. The shareholders approved the ratification of the Audit Committee’s appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2009 as follows:

No. of Shares Voting For:	No. of Shares Voting Against:	No. of Shares Abstaining:	No. of Broker Non-Votes:
34,954,950	851,367	24,387	—

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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 February 18, 2009.(3)
10.1	1995 Stock Incentive Plan, as amended. (4)
10.2	Employee Share Purchase Plan, as amended.(4)
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 February 20, 2009.

(4) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 15, 2009.

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SIGNATURES

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

	FEI COMPANY
Dated: August 6, 2009	/s/    DON R. KANIA
	Don R. Kania
	President and Chief Executive Officer
	(Principal Executive Officer)
	/s/    RAYMOND A. LINK
	Raymond A. Link
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

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