Fei (FEIC) 10-Q 2010 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 4, 2010

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  x    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 4, 2010 was 38,146,220.

FEI COMPANY

INDEX TO FORM 10-Q

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets – July 4, 2010 and December 31, 2009	2
	Consolidated Statements of Operations – Thirteen and Twenty-Six Weeks Ended July 4, 2010 and July 5, 2009	3
	Consolidated Statements of Comprehensive Income – Thirteen and Twenty-Six Weeks Ended July 4, 2010 and July 5, 2009	4
	Consolidated Statements of Cash Flows –Twenty-Six Weeks Ended July 4, 2010 and July 5, 2009	5
	Condensed Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	36
Item 6.	Exhibits	49
Signatures		50

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FEI Company and Subsidiaries

Consolidated Balance Sheets

(In thousands)

(Unaudited)

	July 4, 2010		December 31, 2009
Assets
Current Assets:
Cash and cash equivalents	$	207,904	$	124,199
Short-term investments in marketable securities		110,846		212,119
Short-term restricted cash		11,899		17,141
Receivables, net of allowances for doubtful accounts of $5,684 and $3,306		153,239		152,601
Inventories		131,928		138,242
Deferred tax assets		15,402		2,734
Other current assets		41,337		39,470
Total Current Assets		672,555		686,506
Non-current investments in marketable securities		12,244		39,662
Long-term restricted cash		32,596		35,901
Property, plant and equipment, net of accumulated depreciation of $87,808 and $86,942		74,899		81,893
Goodwill		44,764		44,615
Deferred tax assets		6,938		3,369
Non-current inventories		41,713		44,385
Other assets, net		13,764		17,638
Total Assets	$	899,473	$	953,969
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	41,089	$	40,587
Accrued payroll liabilities		20,101		18,911
Accrued warranty reserves		7,609		7,477
Accrued agent commissions		9,266		10,046
Deferred revenue		68,795		65,805
Income taxes payable		6,112		1,321
Accrued restructuring, reorganization, relocation and severance		7,337		32
Short-term line of credit		—		59,600
Other current liabilities		30,261		47,693
Total Current Liabilities		190,570		251,472
Convertible debt		90,860		100,000
Deferred tax liabilities		8,989		4,298
Other liabilities		31,088		30,675
Commitments and contingencies
Shareholders’ Equity:
Preferred stock - 500 shares authorized; none issued and outstanding		—		—
Common stock - 70,000 shares authorized; 38,142 and 37,859 shares issued and outstanding, no par value		506,846		485,557
Retained earnings		41,761		21,476
Accumulated other comprehensive income		29,359		60,491
Total Shareholders’ Equity		577,966		567,524
Total Liabilities and Shareholders’ Equity	$	899,473	$	953,969

See accompanying Condensed Notes to Consolidated Financial Statements.

2

FEI Company and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	For the Thirteen Weeks Ended						For the Twenty-Six Weeks Ended
	July 4, 2010			July 5, 2009			July 4, 2010			July 5, 2009
Net Sales:
Products	$	108,839		$	107,109		$	220,645		$	215,344
Products - related party		92			53			163			380
Service and components		37,028			33,030			74,150			66,266
Service and components - related party		89			71			189			106
Total net sales		146,048			140,263			295,147			282,096
Cost of Sales:
Products		62,068			61,127			126,756			121,014
Service and components		24,172			22,975			49,378			46,229
Total cost of sales		86,240			84,102			176,134			167,243
Gross Profit		59,808			56,161			119,013			114,853
Operating Expenses:
Research and development		15,616			16,657			32,748			33,437
Selling, general and administrative		31,604			31,825			67,179			64,651
Restructuring, reorganization, relocation and severance		9,055			1,067			9,969			2,029
Total operating expenses		56,275			49,549			109,896			100,117
Operating Income		3,533			6,612			9,117			14,736
Other Income (Expense):
Interest income		733			668			1,724			1,801
Interest expense		(1,303	)		(1,195	)		(2,521	)		(3,107	)
Other, net		(330	)		(974	)		(739	)		(515	)
Total other income (expense), net		(900	)		(1,501	)		(1,536	)		(1,821	)
Income before income taxes		2,633			5,111			7,581			12,915
Income tax (benefit) expense		(13,547	)		1,451			(12,703	)		2,917
Net income	$	16,180		$	3,660		$	20,284		$	9,998
Basic net income per share	$	0.43		$	0.10		$	0.53		$	0.27
Diluted net income per share	$	0.40		$	0.10		$	0.51		$	0.27
Shares used in per share calculations:
Basic		38,046			37,450			37,968			37,386
Diluted		41,813			37,745			41,775			37,681

See accompanying Condensed Notes to Consolidated Financial Statements.

3

FEI Company and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

	For the Thirteen Weeks Ended					For the Twenty-Six Weeks Ended
	July 4, 2010			July 5, 2009		July 4, 2010			July 5, 2009
Net income	$	16,180		$	3,660	$	20,284		$	9,998
Other comprehensive income, net of taxes:
Change in cumulative translation adjustment		(18,637	)		12,116		(29,437	)		3,608
Change in unrealized gain (loss) on available-for-sale securities		17			40		62			(23	)
Change in minimum pension liability		—			2		—			—
Changes due to cash flow hedging instruments:
Net gain (loss) on hedge instruments		(2,072	)		912		(3,054	)		611
Reclassification to net income of previously deferred losses (gains) related to hedge derivatives instruments		1,192			521		1,297			1,997
Comprehensive (loss) income	$	(3,320	)	$	17,251	$	(10,848	)	$	16,191

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 4, 2010			July 5, 2009
Cash flows from operating activities:
Net income	$	20,284		$	9,998
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		8,548			8,191
Amortization		1,550			1,642
Stock-based compensation		5,549			5,630
Gain on trading securities and UBS Put Right		(26	)		(371	)
Loss on disposal of investments, property, plant and equipment and intangible assets		(40	)		71
Write-off of deferred note issuance costs on redemption		105			250
Gain on redemption of 2.875% convertible note		(101	)		(2,025	)
Income taxes receivable (payable), net		(22,581	)		(1,161	)
Deferred income taxes		5,748			571
(Increase) decrease in:
Receivables		(4,597	)		(22,049	)
Inventories		(10,144	)		(6,446	)
Other assets		809			(4,792	)
Increase (decrease) in:
Accounts payable		3,618			1,274
Accrued payroll liabilities		2,662			(97	)
Accrued warranty reserves		458			170
Deferred revenue		9,157			24,162
Accrued restructuring, reorganization, relocation and severance costs		7,434			(148	)
Other liabilities		(2,292	)		(7,220	)
Net cash provided by operating activities	$	26,141			7,650
Cash flows from investing activities:
(Increase) decrease in restricted cash		2,392			(6,531	)
Acquisition of property, plant and equipment		(4,435	)		(5,492	)
Proceeds from disposal of property, plant and equipment		—			25
Purchase of investments in marketable securities		(69,978	)		(42,685	)
Redemption of investments in marketable securities		110,929			22,776
Proceeds from the sale of auction rate securities		98,925			—
Other		(204	)		(4,360	)
Net cash provided by (used in) investing activities		137,629			(36,267	)
Cash flows from financing activities:
Redemption of 2.875% convertible note		(9,059	)		(13,077	)
Witholding taxes paid on issuance of vested restricted stock units		(680	)		(536	)
Proceeds from line of credit		—			70,800
Repayments on line of credit		(59,600	)		—
Proceeds from exercise of stock options and employee stock purchases		3,853			3,066
Net cash (used in) provided by financing activities		(65,486	)		60,253
Effect of exchange rate changes		(14,579	)		722
Increase in cash and cash equivalents		83,705			32,358
Cash and cash equivalents:
Beginning of period		124,199			146,521
End of period	$	207,904		$	178,879
Supplemental Cash Flow Information:
Cash paid for income taxes, net	$	3,439		$	2,643
Cash paid for interest		2,122			2,571
Inventories transferred from (to) fixed assets		1,761			(1,954	)

See accompanying Condensed Notes to Consolidated Financial Statements.

5

FEI COMPANY AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 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 segment, the Research and Industry market segment, the Life Sciences market segment and the Service and Components market segment.

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.

NOTE 2. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of FEI Company and our majority-controlled subsidiaries (collectively, “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 4, 2010 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, 2009, which was filed with the Securities and Exchange Commission (“SEC”) on February 19, 2010.

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 those related to:

• the timing of revenue recognition;

• the allowance for doubtful accounts;

• valuations of excess and obsolete inventory;

• the lives and recoverability of equipment and other long-lived assets such as goodwill;

• restructuring, reorganization, relocation and severance costs;

• warranty liabilities;

• unrecognized tax benefits;

• tax valuation allowances; and

• stock-based compensation.

6

NOTE 3. STOCK-BASED COMPENSATION

Employee Share Purchase Plan

At our 2010 annual meeting of shareholders, which was held on May 13, 2010, 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 2,950,000 to 3,200,000.

1995 Stock Incentive Plan and 1995 Supplemental Stock Incentive Plan

Also at our 2010 annual meeting of shareholders, our shareholders approved an amendment to our 1995 Stock Incentive Plan (the “1995 Plan”) to increase the number of shares of our common stock reserved for issuance under the plan from 10,000,000 to 10,250,000. 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 4, 2010, there were 3,086,645 shares available for grant under these plans and 5,265,188 shares of our common stock were reserved for issuance.

Certain information regarding all options outstanding as of July 4, 2010 was as follows:

	Options Outstanding		Options Exercisable
Number		1,436,130		1,083,198
Weighted average exercise price	$	23.85	$	23.84
Aggregate intrinsic value	$	0.3 million	$	0.3 million
Weighted average remaining contractual term		3.0 years		2.2 years

Restricted stock units (“RSUs”) outstanding, including awards issued within and outside of the 1995 Plan, totaled 742,413 at July 4, 2010.

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

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 4, 2010		July 5, 2009		July 4, 2010		July 5, 2009
Cost of sales	$	290	$	360	$	615	$	707
Research and development		364		324		749		659
Selling, general and administrative		2,053		2,044		4,185		4,265
	$	2,707	$	2,728	$	5,549	$	5,631

As of July 4, 2010, unrecognized stock-based compensation related to outstanding, but unvested stock options and RSUs was $16.6 million, which will be recognized over the weighted average remaining vesting period of 1.8 years.

7

NOTE 4. EARNINGS PER SHARE

Following is a reconciliation of basic earnings per share (“EPS”) and diluted EPS (in thousands, except per share amounts):

	Thirteen Weeks Ended July 4, 2010						Thirteen Weeks Ended July 5, 2009
	Net Income		Shares	Per  Share Amount(1)			Net Income		Shares	Per  Share Amount(1)
Basic EPS	$	16,180	38,046	$	0.43		$	3,660	37,450	$	0.10
Dilutive effect of stock options calculated using the treasury stock method		—	107		—			—	55		—
Dilutive effect of restricted stock units		—	112		—			—	75		—
Dilutive effect of 2.875% convertible debt		572	3,383		(0.03	)		—	—		—
Dilutive effect of shares issuable to Philips		—	165		—			—	165		—
Diluted EPS	$	16,752	41,813	$	0.40		$	3,660	37,745	$	0.10
Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Convertible debt			—						3,407
Stock options and restricted stock units			931						1,007

	Twenty-Six Weeks Ended July 4, 2010						Twenty-Six Weeks Ended July 5, 2009
	Net Income		Shares	Per  Share Amount(1)			Net Income		Shares	Per  Share Amount(1)
Basic EPS	$	20,284	37,968	$	0.53		$	9,998	37,386	$	0.27
Dilutive effect of stock options calculated using the treasury stock method		—	124		—			—	51		—
Dilutive effect of restricted stock units		—	112		—			—	69		—
Dilutive effect of 2.875% convertible debt		1,078	3,406		(0.02	)		—	—		—
Dilutive effect of shares issuable to Philips		—	165		—			—	175		—
Diluted EPS	$	21,362	41,775	$	0.51		$	9,998	37,681	$	0.27
Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Convertible debt			—						3,407
Stock options and restricted stock units			1,090						1,777

(1) Per share amounts may not add due to rounding.

NOTE 5. 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 4, 2010, 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 4, 2010.

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 4, 2010, we had $45.1 million of these guarantees and letters of credit outstanding, of which approximately $44.5 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.

NOTE 6. ARS CALL AND REDEMPTION, SETTLEMENT OF THE PUT RIGHT AND UBS CREDIT FACILITY REPAYMENT

During the thirteen and twenty-six weeks ended July 4, 2010, $25.4 million and $37.2 million, respectively, of our auction rate securities (“ARS”) were called at par. The remaining total of $61.7 million of our ARS were put to UBS AG (together with its affiliates, “UBS”) on June 30, 2010 in accordance with our put right (the “Put Right”). As of July 4, 2010 we no longer held any investments in ARS. Additionally, in conjunction with the redemption of the ARS, we no longer have a value assigned to the UBS Put Right. We recorded a gain on the settlement of the ARS of $12.4 million and $11.7 million, respectively, in the thirteen and twenty-six weeks ended July 4, 2010. These gains were included as a component of other income, net. Offsetting these gains in other income, net were charges due to the write off of our Put Right of $12.4 and $11.7 million, respectively, in the thirteen and twenty-six week periods ended July 4, 2010.

The cash proceeds from the calls and redemption of the ARS were first used to repay the amount outstanding under the UBS Credit Facility in accordance with the settlement agreement. Following these calls and redemption, and as of July 4, 2010, there was no longer a balance outstanding on the UBS Credit Facility.

NOTE 7. 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 4, 2010		December 31, 2009
Raw materials and assembled parts	$	44,843	$	44,829
Service inventories, estimated current requirements		14,865		15,765
Work-in-process		50,326		57,762
Finished goods		21,894		19,886
Total inventories	$	131,928	$	138,242
Non-current inventories	$	41,713	$	44,385

9

The activity in our manufacturing inventory and our service spare parts inventory valuation allowance accounts was as follows (in thousands):

	Manufacturing Inventory Valuation Allowance			Service Spare Parts Inventory Valuation Allowance
Balance, December 31, 2008	$	6,173		$	16,035
Expense		2,496			3,688
Write-offs		(1,164	)		(1,599	)
Translation adjustments		97			(11	)
Balance, July 5, 2009	$	7,602		$	18,113
Balance, December 31, 2009	$	8,349		$	19,975
Expense		1,058			2,538
Write-offs		(635	)		(2,519	)
Translation adjustments		(459	)		(778	)
Balance, July 4, 2010	$	8,313		$	19,216

NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

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

	Twenty-Six Weeks Ended
	July 4, 2010		July 5, 2009
Balance, beginning of period	$	44,615	$	40,964
Additions		—		3,631
Adjustments to goodwill		149		5
Balance, end of period	$	44,764	$	44,600

Additions represent the goodwill from our acquisition in the second quarter of 2009 of certain assets of a division of an Australian software company that provides software for our mineral liberation analysis products.

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

Other intangible assets are included as a component of other assets, net on our consolidated balance sheets. The gross amount of our other intangible assets and the related accumulated amortization were as follows (in thousands):

	Amortization Period	July 4, 2010			December 31, 2009
Purchased technology	5 to 12 years	$	45,940		$	46,299
Accumulated amortization			(45,786	)		(45,913	)
			154			386
Patents, trademarks and other	2 to 15 years		7,398			7,474
Accumulated amortization			(3,382	)		(2,852	)
			4,016			4,622
Note issuance costs	7 years		2,496			2,747
Accumulated amortization			(1,455	)		(1,405	)
			1,041			1,342
Total intangible assets included in other long-term assets		$	5,211		$	6,350

10

Amortization expense was as follows (in thousands):

	Twenty-Six Weeks Ended
	July 4, 2010		July 5, 2009
Purchased technology	$	196	$	425
Patents, trademarks and other		578		559
Note issuance costs		301		456
	$	1,075	$	1,440

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 2010	$	154	$	520	$	178
2011		—		982		357
2012		—		937		357
2013		—		881		149
2014		—		503		—
Thereafter		—		193		—
	$	154	$	4,016	$	1,041

NOTE 9. 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 4, 2010			July 5, 2009
Balance, beginning of period	$	7,477		$	6,439
Reductions for warranty costs incurred		(3,871	)		(5,190	)
Warranties issued		4,290			5,420
Translation and changes in estimates		(287	)		14
Balance, end of period	$	7,609		$	6,683

NOTE 10. INCOME TAXES

We recorded a tax benefit of approximately $13.5 million and $12.7 million for the thirteen and twenty-six week periods ended July 4, 2010. The benefit primarily resulted from the release of valuation allowance recorded against U.S. deferred tax assets and liabilities for unrecognized tax benefits. These amounts were offset by taxes accrued in both the U.S. and foreign tax jurisdictions.

In June 2010, we received confirmation that the U.S. and The Netherlands taxing authorities had entered into a mutual agreement on various transfer pricing issues related to our operations. We had previously provided valuation allowances against U.S. deferred tax assets and tax reserves related to the uncertainty surrounding sources of future U.S. income and the outcome of the negotiations between the taxing authorities.

As a result of the mutual agreement, we released valuation allowance and tax reserves of approximately $47.9 million, of which $12.5 million was recorded as a benefit to shareholder’s equity. The remaining $35.4 million of tax benefit was offset by tax expense of $18.1 million to recognize the impact of our new transfer pricing methodology in prior periods.

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We continue to record a valuation allowance against a portion of 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 Income Taxes

Deferred tax assets, net of a valuation allowance of $3.5 million and $38.0 million, respectively, as of July 4, 2010 and December 31, 2009 were classified on the balance sheet as follows (in thousands):

	July 4, 2010			December 31, 2009
Deferred tax assets – current	$	15,402		$	2,734
Deferred tax assets – non-current		6,938			3,369
Other current liabilities		(3,906	)		(229	)
Deferred tax liabilities – non-current		(8,989	)		(4,298	)
Net deferred tax assets	$	9,445		$	1,576

Unrecognized Tax Benefits

During the thirteen and twenty-six week periods ended July 4, 2010, unrecognized tax benefits decreased by approximately $14.1 million and zero, respectively. The decrease in prior unrecognized tax benefits resulting from effective settlements with taxing authorities was approximately $16.4 million during the thirteen-week period. There were no increases or decreases for lapses of statutes of limitations during the period. 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 4, 2010 and December 31, 2009 were classified on the balance sheet as follows (in thousands):

	July 4, 2010		December 31, 2009
Other current liabilities	$	1,595	$	17,734
Other liabilities		4,434		2,416
Unrecognized tax benefits	$	6,029	$	20,150

During the thirteen and twenty-six week periods ended July 4, 2010, we reclassified $0 and $0.4 million, respectively, of unrecognized tax benefits 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 4, 2010:

Jurisdiction	Open Tax Years
U.S.	2005 and forward
The Netherlands	2005 and forward
Czech Republic	2008 and forward

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NOTE 11. RELATED PARTY AND OTHER ACTIVITY

During the thirteen and twenty-six week periods ended July 4, 2010 and the comparable periods of 2009, we sold products and services to Applied Materials, Inc. A director of Applied Materials, Inc. 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, Inc. Sales to Applied Materials, Inc. and Cascade Microtech, Inc. were as follows (in thousands):

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 4, 2010		July 5, 2009		July 4, 2010		July 5, 2009
Product sales:
Applied Materials, Inc.	$	92	$	53	$	163	$	380
Total product sales		92		53		163		380
Service and component sales:
Applied Materials, Inc.	$	82	$	70	$	174	$	104
Cascade Microtech, Inc.		7		1		15		2
Total service and component sales		89		71		189		106
Total sales to related parties	$	181	$	124	$	352	$	486

As of July 4, 2010, Applied Materials, Inc. and Cascade Microtech, Inc. owed us $31,000 and $7,000, respectively, related to their purchases.

One of our named executive officers serves on the Board of Directors of Schneeberger, Inc., one of the members of our Board of Directors also serves on the Supervisory Board of TMC BV and one of the members of our Board of Directors also serves on the Board of Directors of EasyStreet Online Services.

During the thirteen and twenty-six week periods ended July 4, 2010 and the comparable periods of 2009, we purchased products and services from Schneeberger, Inc., TMC BV and EasyStreet Online Services as follows (in thousands):

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 4, 2010		July 5, 2009		July 4, 2010		July 5, 2009
Schneeberger, Inc.	$	668	$	272	$	1,589	$	2,038
TMC BV		—		50		77		132
EasyStreet Online Services		18		32		26		78

Amounts owed for these purchases were as follows (in thousands):

	As of July 4, 2010
Schneeberger, Inc.	$	440
TMC BV		—
EasyStreet Online Services		—

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NOTE 12. REDEMPTION OF 2.875% CONVERTIBLE SUBORDINATED NOTES

We redeemed the following amounts of our 2.875% Convertible Subordinated Notes in the twenty-six week period ended July 4, 2010:

Date	Amount Redeemed		Redemption Price		Redemption Discount		Related Note Issuance Costs Written Off
June 24, 2010	$	7,940,000	98.9	%	$	89,325	$	90,904
June 29, 2010		1,200,000	99.0	%		12,000		13,703
	$	9,140,000			$	101,325	$	104,607

NOTE 13. COMMITMENTS AND CONTINGENCIES

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

In November 2009, Hitachi High-Technologies Corporation (“Hitachi”) filed a complaint against our subsidiary, FEI Company Japan Ltd. (“FEI Japan”), in the District Court in Tokyo alleging infringement of five patents. Hitachi’s complaint seeks a permanent injunction requiring us to cease the sale of our allegedly infringing products in Japan, and attorneys’ fees and costs. Subsequent to the initial action, Hitachi brought ancillary claims to bar the importation of certain of our products into Japan. The customs proceedings have been concluded and the resolution is not expected to have any material effect on our business. We believe that we have meritorious defenses to these claims, and intend to vigorously defend our interests in this matter.

In management’s opinion, the resolution of this case, 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 period. 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.

We have commitments under non-cancelable purchase orders, primarily relating to inventory, totaling $60.8 million at July 4, 2010. These commitments expire at various times through the third quarter of 2011.

NOTE 14. 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.

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

Thirteen Weeks Ended July 4, 2010	Electronics		Research and Industry		Life Sciences		Service and Components		Corporate and Eliminations			Total
Sales to external customers	$	56,904	$	37,435	$	14,592	$	37,117	$	—		$	146,048
Gross profit		27,909		13,998		4,956		12,945		—			59,808
Thirteen Weeks Ended July 5, 2009
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
Twenty-Six Weeks Ended July 4, 2010
Sales to external customers	$	98,147	$	83,947	$	38,714	$	74,339	$	—		$	295,147
Gross profit		46,522		32,550		14,980		24,961		—			119,013
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
July 4, 2010
Total assets	$	137,424	$	102,715	$	35,533	$	133,802	$	489,999		$	899,473
Goodwill		18,108		17,987		3,622		5,049		(2	)		44,764
December 31, 2009
Total assets	$	99,091	$	127,938	$	59,897	$	137,207	$	529,836		$	953,969
Goodwill		18,139		17,785		3,628		5,064		(1	)		44,615

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.

No customer represented 10% or more of our total sales in the thirteen or twenty-six week periods ended July 4, 2010. One customer accounted for more than 10% of our total sales in the thirteen and twenty-six week periods ended July 5, 2009.

NOTE 15. RESTRUCTURING, REORGANIZATION, RELOCATION AND SEVERANCE

April 2008 Restructuring

In the thirteen and twenty-six week periods ended July 4, 2010, we incurred a total of $1.0 million and $1.9 million of costs, respectively, under 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. Also included in these costs were amounts related to IT system upgrades, which are expected to increase the efficiency of our manufacturing operations. Total costs incurred related to this plan were $9.7 million as of July 4, 2010 and we expect to incur approximately $1.4 million in the remainder of 2010 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 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 total cost of the restructuring to be approximately $11.1 million.

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A summary of the expenses related to our April 2008 restructuring plan is as follows:

Type of Expense	Expected Total Costs	Amount Incurred and Expected Timing for Remainder of Charges
Severance costs related to work force reduction of 3% (approximately 60 employees)	$3.3 million	$3.3 million incurred.
Transfer of manufacturing and other activities	$0.3 million	$0.3 million incurred.
Shift of supply chain	$6.1 million	$5.4 million incurred. Remainder in 2010.
IT system upgrades	$1.4 million	$0.7 million incurred. Remainder in 2010

April 2010 Restructuring

On April 12, 2010, we announced a restructuring program to consolidate the manufacturing of our smallDualBeam product line by relocating manufacturing activities currently performed at our facility in Eindhoven to our facility in Brno, Czech Republic. The balance of our smallDualBeam product line is already based in Brno. The planned move, which is expected to be implemented over the next six to nine months, will result in the termination of approximately 50 positions in Eindhoven. The move will include severance costs, expected costs to transfer the product line, costs to train Brno employees and costs to build-out the existing Brno facility to add capacity for the additional smallDualBeam production. Severance costs were accrued as of July 4, 2010 as such amounts are probable and reasonably estimable. The other costs are being expensed as incurred. Consummation will be subject to local contractual, legal and regulatory requirements, including, but not limited to, communications and negotiations with the works council and trade unions involved in the Eindhoven operations. The principal goal of the product line move is to reduce manufacturing costs for the smallDualBeam product. In addition to the product line move, the April 2010 restructuring involves organizational changes designed to improve the efficiency of our finance, research and development and other corporate programs and improve our market focus.

We incurred a total of $8.1 million of costs related to the April 2010 restructuring plan in the thirteen and twenty-six week periods ended July 4, 2010 and expect to incur an additional $1.4 million to $2.2 million as detailed in the table below. Presently, all of the costs described are expected to result in cash expenditures and we currently expect the total cost of the restructuring to be approximately $9.5 million to $10.3 million.

Restructuring Activity Expense Type	Approximate Range of Expected Costs	Expected Timing
Severance costs related to work force reduction and reorganization (approximately 50 employees)	$8.5 million – $9 million in cash expense	$7.7 million incurred. Remainder in third quarter of 2010 through Second Quarter of 2011
Product line transfer, training of Brno employees and facility build-out in Brno	$1.0 million - $1.3 million in cash expense	$0.4 million incurred. Remainder in third quarter of 2010 through Second Quarter of 2011

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The following table summarizes activity related to our restructuring, reorganization, relocation and severance accruals (in thousands):

Twenty-Six Weeks Ended July 4, 2010	Beginning Accrued Liability		Charged to Expense, Net		Expenditures			Write-Offs and Adjustments		Ending Accrued Liability
Severance, outplacement and related benefits for terminated employees	$	—	$	8,082	$	(963	)	$	170	$	7,289
Transfer of manufacturing and related activities and shift of supply chain		—		779		(779	)		—		—
IT system upgrades		—		748		(748	)		—		—
Abandoned leases, leasehold improvements and facilities		32		—		—			—		32
Product line transfer, training of Brno employees and facility build-out in Brno		—		360		(344	)				16
	$	32	$	9,969	$	(2,834	)	$	170	$	7,337

NOTE 16. FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES

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 and (liabilities) (in thousands):

Fair Value at July 4, 2010	Level 1		Level 2			Level 3
Available for sale marketable securities:
U.S. Treasury and Agency securities	$	113,517	$	—		$	—
Certificates of deposit		—		6,959			—
Trading securities:
Equity securities – mutual funds		2,613		—			—
Derivative contracts, net		—		(4,777	)		—
	$	116,130	$	2,182		$	—
Fair Value at December 31, 2009
Available for sale marketable securities:
U.S. Government-backed securities	$	128,170	$	—		$	—
Certificates of deposit and commercial paper		33,575		—			—
Trading securities:
Equity securities – mutual funds		2,848		—			—
ARS		—		—			87,188
Derivative contracts, net		—		(2,286	)		—
Put Right		—		—			11,711
	$	164,593	$	(2,286	)	$	98,899

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

	Auction Rate Securities			Put Right
Balance, December 31, 2009	$	87,188		$	11,711
Call of ARS		(11,850	)		—
Losses due to the change in fair value of ARS included as a component of other income, net		(626	)		—
Gains due to the change in fair value of Put Right included as a component of other income, net		—			637
Balance, April 4, 2010		74,712			12,348
Call and redemption of ARS		(87,075	)		—
Gains due to the settlement of ARS included as a component of other income, net		12,363			—
Loss due to the write-off of Put Right as a result of the settlement of the ARS included as a component of other income, net		—			(12,348	)
Balance, July 4, 2010	$	—		$	—

	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 4, 2010.

There were no changes to our valuation techniques during the first two quarters of 2010.

We believe the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities are a reasonable approximation of the fair value of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.

At July 4, 2010, we had $90.9 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 $89.8 million at July 4, 2010.

NOTE 17. DERIVATIVE INSTRUMENTS

In the normal course of business, we are exposed to foreign currency risk and we use derivatives to mitigate financial exposure from movements in foreign currency exchange rates. As of July 4, 2010 and December 31, 2009, the aggregate notional amount of our outstanding derivative contracts designated as cash flow hedges was $68.0 million and $50.0 million, respectively and the aggregate notional amount of our outstanding derivative contracts for our balance sheet positions was $92.7 million and $88.9 million, respectively. The outstanding contracts at July 4, 2010 have varying maturities through the third quarter of 2011. We do not enter into derivative financial instruments for speculative purposes.

We attempt to 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 4, 2010. In addition, there are no credit contingent features in our derivative instruments.

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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 economically 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 $0 and $0.4 million, respectively, in the thirteen and twenty-six week periods ended July 4, 2010 and $1.3 million and $2.7 million, respectively, in the comparable periods of 2009.

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.

Summary

At July 4, 2010 and December 31, 2009, the fair value carrying amount of our derivative instruments was 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 4, 2010		December 31, 2009		July 4, 2010		December 31, 2009
Derivatives Designated as Hedging Instruments (Cash Flow Hedges)
Foreign Exchange Contracts	$	715	$	671	$	2,047	$	549
Derivatives Not Designated as Hedging Instruments (Balance Sheet Related)
Foreign Exchange Contracts	$	156	$	183	$	3,601	$	2,591

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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 4, 2010 and July 5, 2009 were as follows (in thousands):

Derivatives in 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 4, 2010
Foreign Exchange Contracts	$	(2,304	)	Cost of Goods Sold	$	(1,108	)	Other, net	$	(84	)
Thirteen Weeks Ended July 5, 2009
Foreign Exchange Contracts	$	1,103		Cost of Goods Sold	$	(18	)	Other, net	$	(503	)
Twenty-Six Weeks Ended July 4, 2010
Foreign Exchange Contracts	$	(3,746	)	Cost of Goods Sold	$	(1,157	)	Other, net	$	(140	)
Twenty-Six Weeks Ended July 5, 2009
Foreign Exchange Contracts	$	802		Cost of Goods Sold	$	(268	)	Other, net	$	(1,729	)

Derivatives Not Designated as Hedging Instruments (Balance Sheet Related)	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
Thirteen Weeks Ended July 4, 2010
Foreign Exchange Contracts	Other, net	$	(4,546	)
Thirteen Weeks Ended July 5, 2009
Foreign Exchange Contracts	Other, net	$	(544	)
Twenty-Six Weeks Ended July 4, 2010
Foreign Exchange Contracts	Other, net	$	(4,992	)
Twenty-Six Weeks Ended July 5, 2009
Foreign Exchange Contracts	Other, net	$	(460	)

The unrealized losses at July 4, 2010 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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NOTE 18. BAD DEBT EXPENSE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

In March 2010, we filed suit in the United States District Court for the Eastern District of Virginia to collect approximately $2.4 million of receivables owed to us by Cambridge Global Services (“Cambridge”) of Chantilly, Virginia. Cambridge purchased three systems from us on behalf of a U.S. Federal agency and a prime contractor through a set-aside program. We delivered the systems to the end-user customers. The government agency and its contractors have paid Cambridge, but Cambridge has not paid us. Our action was one of several suits that have been filed by other scientific equipment companies against Cambridge for nonpayment for similar federal government-related purchases. We recorded bad debt expense of $2.1 million in the first quarter of 2010 to increase our reserve for uncollectible receivables for the full amount of the Cambridge receivable.

NOTE 19. NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Guidance

ASU 2010-06

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements,” which requires new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into or out of Level 1 and Level 2 fair-value classifications. It also requires information on purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair-value assets and liabilities. These disclosures are required for fiscal years beginning on or after December 15, 2009. The ASU also clarifies existing fair-value measurement disclosure guidance about the level of disaggregation, inputs and valuation techniques, which are required to be implemented in fiscal years beginning on or after December 15, 2010. Since the requirements of this ASU only relate to disclosure, the adoption of the guidance did not and will not have any effect on our financial position, results of operations or cash flows.

ASU 2009-13

In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (an update to Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force.” This update provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The update introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. The adoption of this guidance effective January 1, 2010, did not have a significant effect on changes to the units of accounting, changes in how we allocate arrangement consideration among the deliverables or changes to the timing and pattern of revenue recognition and is not expected to have a material impact on our financial position, results of operations or cash flows in the future.

ASU 2009-05

In August 2009, the FASB issued ASU 2009-05, an update to Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” This update provides amendments to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. Among other provisions, this update provides clarification that, in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the valuation techniques described in ASU 2009-05. ASU 2009-05 will become effective for our annual financial statements for the year ending December��31, 2009. The adoption of this guidance effective January 1, 2010 did not have a material effect on our financial position, results of operations or cash flows.

SFAS No. 167

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R),” which amends certain concepts related to consolidation of variable interest entities. SFAS No. 167 has been codified within ASC 810, “Consolidation.” Among other accounting and disclosure requirements, this guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach

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focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. We do not have any variable interest entities that fall under this guidance and, accordingly, the adoption of the provisions of SFAS No. 167 effective January 1, 2010, did 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,” which relates to accounting for transfers of financial assets. This guidance, which has been codified within ASC 860, “Transfers and Servicing,” improves 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 continuing interest in transferred financial assets. In addition, this guidance amends various ASC concepts with respect to accounting for transfers and servicing of financial assets and extinguishments of liabilities, including removing the concept of qualified special purpose entities. The adoption of SFAS No. 166 did not have any effect on our financial position, results of operations or cash flows.

NOTE 20. SUBSEQUENT EVENT

In July 2010, we redeemed a total of $1.8 million face amount of our 2.875% convertible notes. Following these redemptions, there was $89.1 million of the notes outstanding.

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, tax rates, net income 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 2010 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 or spending of our target markets; any statements concerning the effects of litigation on our financial condition; any statements concerning the resolution of any tax positions or use of tax assets; any statements concerning the effect of new accounting pronouncements on our financial position, results of operations or cash flows; 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 2010.” 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 segment, the Research and Industry market segment, the Life Sciences market segment and the Service and Components market segment.

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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”).

The Electronics market segment consists of customers in the semiconductor, data storage and related industries such as manufacturers of solar panels and light-emitting diodes (“LEDs”). For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 45 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 advances in perpendicular recording head technology, such as 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 segment 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 mineral concentration analysis, root cause failure analysis and quality control applications.

The Life Sciences market segment includes universities, government laboratories 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 – Orders and Backlog

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 4, 2010, our total backlog was $402.5 million, compared to $354.6 million at December 31, 2009. At July 4, 2010, our backlog consisted of $321.3 million of products and $81.2 million related to Service and Components compared to product backlog of $286.6 million and Service and Components backlog of $68.0 million at December 31, 2009.

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 low. However, in the last year, this long-standing trend changed somewhat and, as a result, our historic cancellation rates may increase in the future. During the first two quarters of 2010 and all of 2009, we experienced cancellations

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or de-bookings of $1.0 million and $12.4 million, respectively. Virtually all of the cancellations and de-bookings occurred prior to the second quarter of 2010 when the global economy and the industrial outlook were under more pressure. From time to time, we have experienced difficulty in shipping our product from backlog due to single-sourcing issues and problems in securing electronic components from a certain vendor. In addition, product shipments have been extended 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 movements. 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 2010

We expect revenue in the second half of 2010 to increase compared to the first half of 2010, based on the backlog of existing orders, continued cyclical strength in the Electronics markets, the positive response to recent product introductions, continued adoption of electron microscopy in the Life Sciences markets, continued worldwide spending on nanotechnology infrastructure and a global economic recovery. Our goal is to attain higher margins through higher overall sales volume, increased volume of higher margin products in the backlog, a larger portion of the Electronics market business, the stronger dollar and continued improvement in operations and the supply chain. Although our revenue growth may be constrained if the U.S. dollar sustains its recent strength compared with the end of 2009, due to a significant portion of our revenue being denominated in euros, in general, a stronger U.S. dollar will increase our margins and operating income because our expense growth is moderated by the same dollar strength compared with the euro and the Czech koruna.

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 2009 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 as described below regarding revenue recognition, during the first two quarters of 2010, 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, 2009, filed with the SEC on February 19, 2010.

Effective January 1, 2010, we early adopted the provision of the FASB’s Accounting Standards Update No. 2009-13 (“ASU 2009-13”), which amended existing accounting guidance for revenue recognition for multiple-element arrangements. As a result of the adoption of ASU 2009-13, we have revised our critical accounting policies for revenue recognition to address the changes and have included the revised policy below.

Revenue Recognition

We recognize revenue when persuasive evidence of a contractual agreement exists, delivery has occurred or service have been rendered, the seller’s price to the buyer is fixed and determinable, and collectability is reasonably assured.

For products demonstrated to meet our published specifications, revenue is recognized when the title to the product and the risks and rewards of ownership pass to the customer. The portion of revenue related to installation and final acceptance, of which the estimated fair value is generally 4% of the total revenue of the transaction, is deferred until such installation and final customer acceptance are completed. For products produced according to a particular customer’s specifications, revenue is recognized when the product meets the customer’s specifications and when the title and the risks and rewards of ownership have passed to the customer. In each case, the portion of revenue applicable to installation and customer acceptance is

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recognized upon meeting specifications at the installation site. For new applications of our products where performance cannot be assured prior to meeting specifications at the installation site, no revenue is recognized until such specifications are met.

We enter into arrangements with customers whereby they purchase products, accessories and service contracts from us at the same time. For sales arrangements containing multiple elements (products or services), revenue relating to the undelivered elements is deferred at the relative selling price of the element as determined using the sales price hierarchy established in ASU 2009-13. To be considered a separate element, the deliverable in question must represent a separate element under the accounting rules and fulfill the following criteria: the delivered item or items must have value to the customer on a standalone basis; and, if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. If the arrangement does not meet all criteria above, the entire amount of the transactions is deferred until all elements are delivered.

For sales arrangements that contain multiple deliverables (products or services), to the extent that the deliverables within a multiple-element arrangement are not accounted for pursuant to other accounting standards, revenue is allocated among the deliverables using the selling price hierarchy established in ASU 2009-13 to determine the selling price of each deliverable. The selling price hierarchy allows for the use of an estimated selling price (“ESP”) to determine the allocation of arrangement consideration to a deliverable in a multiple-element arrangement in the absence of vendor specific objective evidence (“VSOE”) or third-party evidence (“TPE”). We determine the selling price in multiple-element arrangements using VSOE or TPE if available. VSOE is determined based on the price charged for the same deliverable when sold separately and TPE is established based on the price charged by our competitors or third parties for the same deliverable. If we are unable to determine the selling price because VSOE or TPE does not exist, we determine ESP for the purposes of allocating total arrangement consideration among the elements by considering several internal and external factors such as, but not limited to, costs incurred to manufacture the product and normal profit margins from the sale of similar products, historical sales of similar products, geographical considerations and overall pricing practices.

These factors are subject to change as we modify our pricing practices and such changes could result in changes to determination of VSOE, TPE and ESP, which could result in our future revenue recognition from multiple-element arrangements being materially different than our results in the current period.

Generally, revenue from all elements in a multiple-element arrangement is recognized within 18 months of the shipment of the first item in the arrangement.

We provide maintenance and support services under renewable, term maintenance agreements. Maintenance and support fee revenue is recognized ratably over the contractual term, which is generally 12 months, and commences from the start date.

Revenue from time and materials-based service arrangements is recognized as the service is performed. Spare parts revenue is generally recognized upon shipment.

Deferred revenue represents customer deposits on equipment orders, orders awaiting customer acceptance and prepaid service contract revenue. Deferred revenue is recognized in accordance with our revenue recognition policies described above.

New Accounting Pronouncements

See Note 19 of the Condensed Notes to the Consolidated Financial Statements for a discussion of new accounting pronouncements.

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Health Care Reform Legislation

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act, and on March 30, 2010, the President signed the Health Care and Education Affordability Reconciliation Act of 2010. We believe that our current medical program for our U.S. based employees is consistent with the new mandates and that our costs are well below the thresholds that trigger excise taxes. We do not offer post-retirement medical coverage to our U.S. based employees. As a result, we do not believe that the new health care reform legislation will have any material impact on our results of operations or financial position.

Results of Operations

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

	Thirteen Weeks  Ended(1) July 4, 2010					Thirteen Weeks  Ended(1) July 5, 2009
Net sales	$	146,048		100.0	%	$	140,263		100.0	%
Cost of sales		86,240		59.0			84,102		60.0
Gross profit		59,808		41.0			56,161		40.0
Research and development		15,616		10.7			16,657		11.9
Selling, general and administrative		31,604		21.6			31,825		22.7
Restructuring, reorganization, relocation and severance costs		9,055		6.2			1,067		0.8
Operating income		3,533		2.4			6,612		4.7
Other income (expense), net		(900	)	(0.6	)		(1,501	)	(1.1	)
Income before income taxes		2,633		1.8			5,111		3.6
Income tax (benefit) expense		(13,547	)	(9.3	)		1,451		1.0
Net income	$	16,180		11.1	%	$	3,660		2.6	%
	Twenty-Six Weeks  Ended(1) July 4, 2010					Twenty-Six Weeks  Ended(1) July 5, 2009
Net sales	$	295,147		100.0	%	$	282,096		100.0	%
Cost of sales		176,134		59.7			167,243		59.3
Gross profit		119,013		40.3			114,853		40.7
Research and development		32,748		11.1			33,437		11.9
Selling, general and administrative		67,179		22.8			64,651		22.9
Restructuring, reorganization, relocation and severance costs		9,969		3.4			2,029		0.7
Operating income		9,117		3.1			14,736		5.2
Other income (expense), net		(1,536	)	(0.5	)		(1,821	)	(0.6	)
Income before income taxes		7,581		2.6			12,915		4.6
Income tax (benefit) expense		(12,703	)	(4.3	)		2,917		1.0
Net income	$	20,284		6.9	%	$	9,998		3.5	%

(1) Percentages may not add due to rounding.

Net sales increased $5.7 million, or 4.1%, to $146.0 million, in the thirteen weeks ended July 4, 2010 (the second quarter of 2010) compared to $140.3 million in the thirteen weeks ended July 5, 2009 (the second quarter of 2009). Net sales increased $13.0 million, or 4.6%, to $295.1 million in the twenty-six week period ended July 4, 2010 compared to $282.1 million in the twenty-six week period ended July 5, 2009. These increases reflect increases in Electronics and Service and Components, partially offset by decreases in Research and Industry and Life Sciences as described more fully below.

Currency fluctuations further decreased net sales by approximately $2.8 million and increased net sales by approximately $0.9 million, respectively, during the thirteen and twenty-six week periods ended July 4, 2010 compared to the same periods of 2009 as approximately 30% of our net sales were denominated in foreign currencies that fluctuated 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 decreased to $146.0 million in the second quarter of 2010 compared to $149.1 million in the first quarter of 2010. Currency fluctuations between the U.S. dollar and foreign currencies, primarily the euro, resulted in a decrease of approximately $5.0 million compared to the first quarter 2010.

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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 4, 2010				July 5, 2009
Electronics	$	56,904	39.0	%	$	32,329	23.0	%
Research and Industry		37,435	25.6	%		55,221	39.4	%
Life Sciences		14,592	10.0	%		19,612	14.0	%
Service and Components		37,117	25.4	%		33,101	23.6	%
	$	146,048	100.0	%	$	140,263	100.0	%
	Twenty-Six Weeks Ended
	July 4, 2010				July 5, 2009
Electronics	$	98,147	33.3	%	$	61,688	21.9	%
Research and Industry		83,947	28.4	%		113,559	40.3	%
Life Sciences		38,714	13.1	%		40,477	14.3	%
Service and Components		74,339	25.2	%		66,372	23.5	%
	$	295,147	100.0	%	$	282,096	100.0	%

Electronics

The $24.6 million, or 76.0%, increase and the $36.5 million, or 59.1%, increase, respectively, in Electronics sales in the thirteen and twenty-six week periods ended July 4, 2010 compared to the same periods of 2009 were primarily due to increases in semiconductor data storage company capital spending for capacity expansion and new process development. We realized increases in unit sales of our wafer-level and smallDualBeam products. Offsetting the increase in the thirteen week period was a decrease of $0.2 million related to currency fluctuations. The impact of currency fluctuations for the twenty-six week period was an increase in sales of $0.5 million.

Research and Industry

The $17.8 million, or 32.2%, decrease and the $29.6 million, or 26.1%, decrease, respectively, in Research and Industry sales in the thirteen and twenty-six week periods ended July 4, 2010 compared to the same periods of 2009 were due primarily to decreased volumes of smallDualBeam and higher-priced TEM systems, partially due to the timing of customer order requirements. In addition, the twenty-six week period of 2009 included a large sale to a middle eastern university customer with no comparable sale in 2010. Also contributing to the decreases in the thirteen and twenty-six week periods were a $1.6 million and $0.3 million decrease, respectively, related to currency fluctuations.

Life Sciences

The $5.0 million, or 25.6%, decrease and the $1.8 million, or 4.4%, decrease, respectively, in Life Sciences sales in the thirteen and twenty-six week periods ended July 4, 2010 compared to the same periods of 2009 were due primarily to the timing of unit sales of our higher-priced TEM products, which can fluctuate with customer readiness and requirements. Currency fluctuations also decreased Life Sciences sales by $0.6 million in the thirteen week period. The impact of currency fluctuations offset the decrease in the twenty-six week period by $0.1 million.

Service and Components

The $4.0 million, or 12.1%, increase and the $8.0 million, or 12.0%, increase, respectively, in Service and Components sales in the thirteen and twenty-six week periods ended July 4, 2010 compared to the same periods of 2009 were due primarily to a larger install base and improvement in the semiconductor industry, which contributed to increases in service contracts. Currency fluctuations decreased Service and Component sales by $0.4 million and increased Service and Component sales by $0.6 million, respectively, in the thirteen and twenty-six week periods ended July 4, 2010 compared to the same periods of 2009.

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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 4, 2010				July 5, 2009				July 4, 2010				July 5, 2009
U.S. and Canada	$	46,089	31.6	%	$	40,410	28.8	%	$	92,279	31.3	%	$	95,892	34.0	%
Europe		45,747	31.3	%		60,552	43.2	%		91,288	30.9	%		109,476	38.8	%
Asia-Pacific Region and Rest of World		54,212	37.1	%		39,301	28.0	%		111,580	37.8	%		76,728	27.2	%
	$	146,048	100.0	%	$	140,263	100.0	%	$	295,147	100.0	%	$	282,096	100.0	%

U.S. and Canada

The $5.7 million, or 14.1%, increase in sales to the U.S. and Canada in the thirteen week period ended July 4, 2010 compared to the same period of 2009 was primarily due to an increase in Electronics segment sales, partially offset by a decline in Research and Industry segment sales. The twenty-six week period ended July 4, 2010 compared to the same period of 2009 was more affected by the decline in Research and Industry segment sales than the increase in Electronics segment sales, which resulted in a $3.6 million, or 3.8%, decrease in sales.

Europe

Our European region also includes Central America, South America, Africa (excluding South Africa), the Middle East and Russia. The $14.8 million, or 24.5%, decrease and the $18.2 million, or 16.6%, decrease, respectively, in sales to Europe in the thirteen and twenty-six week periods ended July 4, 2010 compared to the same periods of 2009 were primarily due to decreases in Research and Industry and Life Sciences spending as discussed above. In addition, the twenty-six week period of 2009 included a large sale to a middle eastern university customer with no comparable sale in 2010. Currency fluctuations decreased European sales by $4.1 million and $1.8 million, respectively, in the thirteen and twenty-six week periods of 2010 compared to the same periods of 2009.

Asia-Pacific Region and Rest of World

The $14.9 million, or 37.9%, increase and the $34.9 million, or 45.4%, increase, respectively, in sales to the Asia-Pacific Region and Rest of World in the thirteen and twenty-six week periods ended July 4, 2010 compared to the same periods of 2009 were primarily due to increased Electronics segment sales, primarily to semiconductor and data storage customers, as well as to our investment in sales and service infrastructure in the Asia-Pacific Region.

Cost of Sales and Gross Margin

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

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 4, 2010		July 5, 2009		July 4, 2010		July 5, 2009
Electronics	49.0	%	48.3	%	47.4	%	49.1	%
Research and Industry	37.4	%	39.9	%	38.8	%	42.6	%
Life Sciences	34.0	%	42.8	%	38.7	%	39.6	%
Service and Components	34.9	%	30.6	%	33.6	%	30.3	%
Overall	41.0	%	40.0	%	40.3	%	40.7	%

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.

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Cost of sales increased $2.1 million, or 2.5%, to $86.2 million in the thirteen week period ended July 4, 2010 compared to $84.1 million in the thirteen week period ended July 5, 2009 and increased $8.9 million, or 5.3%, to $176.1 million in the twenty-six week period ended July 4, 2010 compared to $167.2 million in the twenty-six week period ended July 5, 2009. These increases were primarily due to increased sales. Currency fluctuations decreased cost of sales by $4.2 million and increased cost of sales by $0.8 million, respectively, in the thirteen and twenty-six week periods of 2010 compared to the same periods of 2009.

The net effect on our gross margin from currency fluctuations during the thirteen and twenty-six week periods ended July 4, 2010 was an approximately $1.4 million, or a 1.7 percentage point, increase, and a $0.1 million, or an insignificant percentage point, increase, respectively.

Electronics

The increase in Electronics gross margin in the thirteen week period ended July 4, 2010 compared to the same period of 2009 was primarily due to currency fluctuations, which increased the gross margin by 2.5 percentage points. The decrease in Electronics gross margin in the twenty-six week period ended July 4, 2010 compared to the same period of 2009 was primarily due to the shipment of orders in the first quarter of 2010 that were priced during the cyclical downturn in 2009, which was a more competitive pricing environment. Offsetting the decrease in the twenty-six week period was the impact of currency fluctuations, which increased the Electronics gross margins by 0.9 percentage points in the 2010 period compared to the same period of 2009.

Research and Industry

The decreases in Research and Industry gross margin in the thirteen and twenty-six week periods ended July 4, 2010 compared to the same periods of 2009 were primarily due to a shift in product mix to fewer smallDualBeam and higher-end TEM units sold, both of which carry higher margins. Offsetting the decrease in the thirteen week period was the impact of currency fluctuations, which increased Research and Industry gross margins by 1.3 percentage points. The impact of currency fluctuations in the twenty-six week period further decreased gross margins by 1.2 percentage points.

Life Sciences

The decrease in the Life Sciences gross margins in the thirteen week period ended July 4, 2010 compared to the same period of 2009 was primarily due to more higher-margin TEM products sold in the 2009 period. Offsetting the decrease was the impact of currency fluctuations, which increased Life Sciences gross margins by 1.0 percentage points. In the twenty-six week period ended July 4, 2010 compared to the same period of 2009, the number of higher-margin TEM units sold was relatively flat, which contributed to more constant gross margins. Also contributing to the decrease were currency fluctuations, which decreased Life Sciences gross margins by 1.1 percentage points during the twenty-six week period of 2010 compared to the same period of 2009.

Service and Components

The increases in the Service and Components gross margin in the thirteen and twenty-six week periods ended July 4, 2010 compared to the same periods of 2009 were primarily due to incremental contract revenue, as well as increased time and material sales as customers, primarily in the Electronics segment, prepare for increased demand and capacity improvements. In addition, a flat cost structure also contributed to the margin increase.

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 2010 and 2009 periods, we received subsidies from European governments for technology developments specifically in the areas of semiconductor and life science equipment.

R&D costs decreased $1.1 million to $15.6 million (10.7% of net sales) in the thirteen week period ended July 4, 2010 compared to $16.7 million (11.9% of net sales) in the thirteen week period ended July 5, 2009 and decreased $0.7 million to $32.7 million (11.1% of net sales) in the twenty-six week period ended July 4, 2010 compared to $33.4 million (11.9% of net sales) in the twenty-six week period ended July 5, 2009.

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

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 4, 2010			July 5, 2009			July 4, 2010			July 5, 2009
Gross spending	$	16,949		$	18,463		$	35,548		$	36,416
Less subsidies		(1,333	)		(1,806	)		(2,800	)		(2,979	)
Net expense	$	15,616		$	16,657		$	32,748		$	33,437

The decreases in R&D costs in the thirteen and twenty-six week periods ended July 4, 2010 compared to the same periods of 2009 were primarily due to expense controls. Currency fluctuations decreased R&D costs by $0.5 million for the thirteen week period of 2010 and increased R&D costs $0.5 million for the twenty-six week period of 2010.

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

Selling, General and Administrative Costs

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

SG&A costs decreased $0.2 million to $31.6 million (21.6% of net sales) in the thirteen week period ended July 4, 2010 compared to $31.8 million (22.7% of net sales) in the thirteen week period ended July 5, 2009 and increased $2.5 million to $67.2 million (22.8% of net sales) in the twenty-six week period ended July 4, 2010 compared to $64.7 million (22.9% of net sales) in the twenty-six week period ended July 5, 2009.

The decrease in SG&A costs in the thirteen week period ended July 4, 2010 compared to the same period of 2009 was primarily due to currency fluctuations of $0.5 million, offset by increased internal and agent sales commissions, primarily in Asia, which has a higher rate structure. The increase in SG&A costs in the twenty-six week period of 2010 compared to the same period of 2009 was due primarily to a $1.7 million increase in bad debt expense (see Note 18 of Condensed Notes to the Consolidated Financial Statements), as well as an increase in internal and agent sales commissions, offset by lower legal and accounting costs and a decrease in amortization of purchased intangible assets.

Restructuring, Reorganization, Relocation and Severance

In the thirteen and twenty-six week periods ended July 4, 2010, we incurred a total of $1.0 million and $1.9 million of costs, respectively, under 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. Also included in these costs were amounts related to IT system upgrades, which are expected to increase the efficiency of our manufacturing operations. Total costs incurred related to this plan were $9.7 million as of July 4, 2010 and we expect to incur approximately $1.4 million in the remainder of 2010 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 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 total cost of the restructuring to be approximately $11.1 million.

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A summary of the expenses related to our April 2008 restructuring plan is as follows:

Type of Expense	Expected Total Costs	Amount Incurred and Expected Timing for Remainder of Charges
Severance costs related to work force reduction of 3% (approximately 60 employees)	$3.3 million	$3.3 million incurred.
Transfer of manufacturing and other activities	$0.3 million	$0.3 million incurred.
Shift of supply chain	$6.1 million	$5.4 million incurred. Remainder in 2010.
IT system upgrades	$1.4 million	$0.7 million incurred. Remainder in 2010

The actions related to our 2008 restructuring plan reduced annualized manufacturing costs and operating expenses and increased cash flow by approximately $6.0 million in 2009 and we expect them to reduce such costs and increase cash flow by approximately $15 million to $18 million over the next three years.

April 2010 Restructuring

On April 12, 2010, we announced a restructuring program to consolidate the manufacturing of our smallDualBeam product line by relocating manufacturing activities currently performed at our facility in Eindhoven to our facility in Brno, Czech Republic. The balance of our smallDualBeam product line is already based in Brno. The planned move, which is expected to be implemented over the next six to nine months, will result in the termination of approximately 50 positions in Eindhoven. The move will include severance costs, expected costs to transfer the product line, costs to train Brno employees and costs to build-out the existing Brno facility to add capacity for the additional smallDualBeam production. Severance costs were accrued as of July 4, 2010 as such amounts are probable and reasonably estimable. The other costs are being expensed as incurred. Consummation will be subject to local contractual, legal and regulatory requirements, including, but not limited to, communications and negotiations with the works council and trade unions involved in the Eindhoven operations. The principal goal of the product line move is to reduce manufacturing costs for the smallDualBeam product. In addition to the product line move, the April 2010 restructuring involves organizational changes designed to improve the efficiency of our finance, research and development and other corporate programs and improve our market focus.

We incurred a total of $8.1 million of costs related to the April 2010 restructuring plan in the thirteen and twenty-six week periods ended July 4, 2010 and expect to incur an additional $1.4 million to $2.2 million as detailed in the table below. Presently, all of the costs described are expected to result in cash expenditures and we currently expect the total cost of the restructuring to be approximately $9.5 million to $10.3 million.

Restructuring Activity Expense Type	Approximate Range of Expected Costs	Expected Timing
Severance costs related to work force reduction and reorganization (approximately 50 employees)	$8.5 million – $9 million in cash expense	$7.7 million incurred. Remainder in third quarter of 2010 through Second Quarter of 2011
Product line transfer, training of Brno employees and facility build-out in Brno	$1.0 million - $1.3 million in cash expense	$0.4 million incurred. Remainder in third quarter of 2010 through Second Quarter of 2011

The actions related to our 2010 restructuring plan are expected to reduce manufacturing costs and operating expenses and increase cash flow by approximately $4.5 million per year once the move to the Czech Republic is complete.

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The following table summarizes activity related to our restructuring, reorganization, relocation and severance accruals (in thousands):

Twenty-Six Weeks Ended July 4, 2010	Beginning Accrued Liability		Charged  to Expense, Net		Expenditures			Write-Offs and Adjustments		Ending Accrued Liability
Severance, outplacement and related benefits for terminated employees	$	—	$	8,082	$	(963	)	$	170	$	7,289
Transfer of manufacturing and related activities and shift of supply chain		—		779		(779	)		—		—
IT system upgrades		—		748		(748	)		—		—
Abandoned leases, leasehold improvements and facilities		32		—		—			—		32
Product line transfer, training of Brno employees and facility build-out in Brno		—		360		(344	)		—		16
	$	32	$	9,969	$	(2,834	)	$	170	$	7,337

Other Income (Expense), Net

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

Interest expense for both the 2010 and 2009 periods included interest expense related to our 2.875% convertible notes. 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 $15.0 million of our 2.875% convertible notes.

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 thirteen and twenty-six week periods ended July 4, 2010, Other, net related to foreign currency gains and losses on transactions, cash flow hedge ineffectiveness and realized and unrealized gains and losses on the changes in fair value of derivative contracts entered into to hedge these transactions. We also recognized a $0.1 million gain in the thirteen and twenty-six week periods ended July 4, 2010 on the early redemption of our 2.875% notes.

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.

Income Tax Expense

Our income tax benefit of approximately $13.5 million and $12.7 million for the thirteen and twenty-six week periods ended July 4, 2010, respectively, primarily resulted from the release of valuation allowance recorded against U.S. deferred tax assets and liabilities for unrecognized tax benefits. These amounts were offset by taxes accrued in both the U.S. and foreign tax jurisdictions.

In June 2010, we received confirmation that the U.S. and The Netherlands taxing authorities had entered into a mutual agreement with us on various transfer pricing issues related to our operations. We had previously provided valuation allowances against U.S. deferred tax assets and tax reserves related to the uncertainty surrounding sources of future U.S. income and the outcome of the negotiations between the taxing authorities.

As a result of the mutual agreement, we released valuation allowance and tax reserves of approximately $47.9 million, of which $12.5 million was recorded as a benefit to shareholder’s equity. The remaining $35.4 million of tax benefit was offset by tax expense of $18.1 million to recognize the impact of our new transfer pricing methodology in prior periods.

Our income tax expense of $2.9 million for the twenty-six weeks ended July 5, 2009 reflected taxes accrued in foreign jurisdictions, reduced by tax benefits related to the release of valuation allowance recorded against net operating loss deferred tax assets utilized to offset income earned in the U.S. The effective tax rate also reflected the release of certain tax contingencies due to the lapse of statutes of limitation in the first quarter of 2009.

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As of July 4, 2010, unrecognized tax benefits totaled $6.0 million and related primarily to uncertainty surrounding intercompany pricing, tax credits and permanent establishment. All unrecognized tax benefits would decrease the effective tax rate if recognized.

Our net deferred tax assets totaled $9.4 million and $1.6 million, respectively, at July 4, 2010 and December 31, 2009. Valuation allowances on deferred tax assets totaled $3.5 million and $38.0 million, respectively, as of July 4, 2010 and December 31, 2009. We continue to record a valuation allowance against a portion of 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.

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.

Liquidity and Capital Resources

Auction Rate Securities, Put Right and UBS Credit Facility

During the second quarter of 2010, all of our remaining ARS were redeemed, with the proceeds being used to repay in full the UBS Credit Facility. In connection with the redemption of the remaining ARS, the Put Right was terminated. As of July 4, 2010, we did not have any ARS on our balance sheet and the UBS Credit Facility had been terminated.

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 4, 2010.

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 4, 2010, we had $45.1 million of these guarantees and letters of credit outstanding, of which approximately $44.5 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.

Sources of Liquidity and Capital Resources

Our sources of liquidity and capital resources as of July 4, 2010 consisted of $330.6 million of cash, cash equivalents, short-term restricted cash and short-term investments, $12.2 million in non-current investments, $32.6 million of long-term restricted cash, $100.0 million available under revolving credit facilities, 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 4, 2010.

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In the twenty-six week period ended July 4, 2010, cash and cash equivalents and short-term restricted cash increased $78.5 million to $219.8 million as of July 4, 2010 from $141.3 million as of December 31, 2009 primarily as a result of $26.1 million provided by operations, $98.9 million from the redemption of ARS, $3.9 million of proceeds from the exercise of employee stock options and the net redemption of $41.0 million of marketable securities. These factors were partially offset by $4.4 million used for the purchase of property, plant and equipment, $59.6 million of repayments on our UBS line of credit, $9.1 million used for the early redemption of $9.1 million par value of our 2.875% convertible subordinated notes and a $14.6 million unfavorable effect of exchange rate changes.

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 $7.7 million provided by operations, $70.8 million of proceeds from our UBS line of credit, $3.1 million of proceeds from the exercise of employee stock options and a $0.7 million favorable effect of exchange rate changes. 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 and $4.1 million used for the purchase of certain assets of a division of an Australian software company.

Accounts receivable increased $0.6 million to $153.2 million as of July 4, 2010 from $152.6 million as of December 31, 2009, primarily due to the timing of system acceptances for balances due on acceptance, offset by a decrease in sales in the second quarter of 2010 as compared to the fourth quarter of 2009. The July 4, 2010 balance included a $5.4 million decrease related to changes in currency exchange rates. Our days sales outstanding, calculated on a quarterly basis, was 96 days at July 4, 2010 compared to 90 days at December 31, 2009.

Inventories decreased $6.3 million to $131.9 million as of July 4, 2010 compared to $138.2 million as of December 31, 2009, primarily due to weakness of the euro relative to the U.S. dollar in foreign exchange markets, the timing of shipments and product mix. The July 4, 2010 balance also included a $14.9 million decrease related to changes in currency exchange rates. Our annualized inventory turnover rate, calculated on a quarterly basis, was 2.6 times for the quarter ended July 4, 2010 and 2.3 times for the quarter ended July 5, 2009.

Deferred tax assets, current and long term, net of deferred tax liabilities increased $7.8 million to $9.4 million as of July 4, 2010 compared to $1.6 million as of December 31, 2009 primarily due to release of valuation allowances against our U.S. deferred tax assets.

Other current assets increased $1.8 million to $41.3 million as of July 4, 2010 compared to $39.5 million as of December 31, 2009, primarily due to a $13.5 million increase in our income tax receivables as a result of tax refunds due from the settlement of various transfer pricing issues with The Netherlands and the excess of current tax payments over current tax expense in various jurisdictions, offset by the $11.7 million decrease in value of the Put Right related to our previously outstanding ARS. Other current assets at July 4, 2010 and December 31, 2009 included $0 and $11.7 million, respectively, for the value of the Put Right and $17.2 million and $3.7 million, respectively, of income taxes receivable.

Expenditures for property, plant and equipment of $4.4 million in the twenty-six week period ended July 4, 2010 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 2010 to be approximately $16 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 $3.8 million to $13.8 million as of July 4, 2010 compared to $17.6 million as of December 31, 2009, primarily due to the reclassification of a portion of our lease receivables to current.

Income taxes payable increased $4.8 million to $6.1 million as of July 4, 2010 compared to $1.3 million as of December 31, 2009 primarily due to accruals for U.S. taxes on current period income. Our receivable for income taxes of $17.2 million at July 4, 2010 is included as a component of other current assets.

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Other current liabilities decreased $17.4 million to $30.3 million as of July 4, 2010 compared to $47.7 million as of December 31, 2009, primarily due to the release of $16.4 million of accruals for unrecognized tax benefits as a result of the settlement with The Netherlands taxing authorities regarding various transfer pricing issues.

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 2009 Annual Report on Form 10-K, which was filed with the SEC on February 19, 2010.

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 defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in 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.

In March 2010, we filed suit in the United States District Court for the Eastern District of Virginia to collect approximately $2.4 million of receivables owed to us by Cambridge Global Services (“Cambridge”) of Chantilly, Virginia. Cambridge purchased three systems from us on behalf of a U.S. Federal agency and a prime contractor through a set-aside program. We delivered the systems to the end-user customers. The government agency and its contractors have paid Cambridge, but Cambridge has not paid us. Our action was one of several suits that have been filed by other scientific equipment companies against Cambridge for nonpayment for similar federal government-related purchases. In July 2010, we obtained a default judgment in the matter. Regardless, the amount of the exposure was fully reserved for in the first quarter of 2010. As a result, in management’s opinion, this matter is not expected to have a material adverse effect on our future results of operations.

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In November 2009, Hitachi High-Technologies Corporation (“Hitachi”) filed a complaint against our subsidiary, FEI Company Japan Ltd. (“FEI Japan”), in the District Court in Tokyo alleging infringement of five patents. Hitachi’s complaint seeks a permanent injunction requiring us to cease the sale of our allegedly infringing products in Japan, and attorneys’ fees and costs. Subsequent to the initial action, Hitachi brought ancillary claims to bar the importation of certain of our products into Japan. The customs proceedings have been concluded and the resolution is not expected to have any material impact on our business. We believe that we have meritorious defenses to these claims, and intend to vigorously defend our interests in this matter.

In management’s opinion, the resolution of these cases, 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. These claims, 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 description of the risks and uncertainties associated with our business is set forth below. You should carefully consider such risks and uncertainties, together with the other information contained in this report and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.

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. In addition, these competitors may be willing to operate at a less profitable level than at which we would expect to operate. 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;

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• global technical service and support;

• success in developing or otherwise introducing new products; and

• foreign currency fluctuations.

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. For the first two quarters of 2010 and in each of the last three years, more than 61% of our sales 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. 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 or swine 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. In addition, we may suffer manufacturing capacity limitations on occasion.

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:

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	Twenty-Six Weeks Ended
	July 4, 2010				July 5, 2009
Electronics	$	98,147	33.3	%	$	61,688	21.9	%
Research and Industry		83,947	28.4	%		113,559	40.3	%
Life Sciences		38,714	13.1	%		40,477	14.3	%
Service and Components		74,339	25.2	%		66,372	23.5	%
	$	295,147	100.0	%	$	282,096	100.0	%

The largest sub-parts of the Electronics market segment 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. Beginning with the second half of 2007, we experienced significant variability in bookings and revenue in our Electronics segment due to the downturn in the spending cycle in the semiconductor and data storage industry. The semiconductor capital equipment market has recovered strongly in the first half of 2010, but the durability and duration of the recovery are uncertain. Global economic conditions may be beginning to stabilize, but economic recovery is tentative and its strength is unknown. During downturns, our sales and gross profit margins generally decline.

The Research and Industry market segment is also affected by overall economic conditions, but is not as cyclical as the Electronics market segment. 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 threatened by the recent significant declines in capital markets world-wide. Recently, both philanthropic giving and endowments have declined.

The Life Sciences market segment is a smaller and still emerging market, and the tools we sell into that market often have average selling prices ranging from $0.5 million to over $3.0 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.

A significant portion of our Life Sciences and Research and Industry revenue is dependant on government investments in research and development of new technology. To the extent that governments, especially in Europe, reduce their spending in response to budget deficits and debt limitations, demand for our products could be affected. To date, we have not seen an impact from such actions. The funding cycles for our customers tend to extend over multiple quarters and several countries have reaffirmed their commitment to scientific research, but the longer-term impact of potential government fiscal austerity measures on our growth rate cannot be determined at this time.

As a capital equipment provider, our revenues depend in large part on the spending patterns of our customers, who could 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.

Moreover, as the global economic environment recovers from the downturn and orders increase, we may not be able to ramp our manufacturing capacity fast enough to keep pace with order intake for every product line offered. As a consequence, our ability to realize revenue on orders may be delayed or, in some cases, reduced.

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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 2010 and all of 2009, approximately 30% to 40% of our revenue was denominated in euros, while more than half of our expenses were denominated in euros or other foreign currencies. Particularly as a result of this imbalance, changes in the exchange rate between the U.S. dollar and foreign currencies, especially the euro, can impact our revenues, gross margins, results of operations and cash flows. We undertake hedging transactions to limit our exposure to changes in the dollar/euro exchange rate. The hedges are designed to protect us as the dollar weakens but also provide us with some flexibility if the dollar strengthens.

We use option contracts and zero cost collars in an effort to reduce the exposure of our cash flows to exchange rate movements. 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. We recorded an $84,000 and a $1.7 million charge, respectively, for hedge ineffectiveness related to our cash flow hedges in the first

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two quarters of 2010 and 2009 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 $0.4 million and $2.7 million, respectively, in the first two quarters of 2010 and 2009.

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 4, 2010.

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.

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 the past. 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 could increase. This may make it more difficult to collect on receivables. Global economic conditions may be beginning to stabilize, but economic recovery is tentative and its strength is unknown.

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 and 2009, 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 as compared to 2007. Our Electronics business, which ultimately depends on consumers who buy electronic devices, has been showing signs of recovery since the end of 2009, but the strength and durability of the recovery are uncertain. To the extent that the recovery in this market segment slows or stalls, our overall margins may be negatively affected. In addition, the Life Sciences segment has been growing as a percentage of our business. Particularly in the second half of 2009, Life Sciences margins were below overall averages due to aggressive pricing on certain new products, as well as unexpected higher manufacturing costs on some of our new products. If we are not able to reduce manufacturing costs and obtain higher pricing, our margins could suffer in the future.

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

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

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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.

We have initiated various corporate wide restructuring and infrastructure improvement programs in order to increase operational efficiency, reduce costs as well as balance the effects of currency fluctuations on our financial results. These actions have historically included reductions of work-force as well as the costs to migrate portions of our supply chain to dollar-linked contracts.

In 2008, we announced a restructuring that will involve estimated cash charges of approximately $11.1 million, $9.7 million of which has been incurred through July 4, 2010. The 2008 plan includes relocating part of our supply chain, relocating and outsourcing some manufacturing to reduce cost of goods sold and improve imbalances in our foreign currency exposures and upgrading IT systems in order to increase the efficiency of our manufacturing operations. In addition, we will have severed some employees and are aiming to lower operating expenses. The expense of the restructuring adversely affected our financial performance for 2008 and 2009 and the first two quarters of 2010. Moreover, the cash charges for the 2008 restructuring are 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.

On April 12, 2010, we announced a restructuring program to consolidate the manufacturing of our smallDualBeam product line by relocating manufacturing activities currently performed at our facility in Eindhoven to our facility in Brno, Czech Republic. The balance of our smallDualBeam product line is already based in Brno. The planned move, which is expected to be implemented over the next nine months, will result in the termination of approximately 50 positions in Eindhoven. The move will include severance costs, expected costs to transfer the product line, costs to train Brno employees and costs to build-out the existing Brno facility to add capacity for the additional smallDualBeam production. Consummation will be subject to local contractual, legal and regulatory requirements, including, but not limited to, communications and negotiations with the works council and trade unions involved in the Eindhoven operations. The principal goal of the product line move is to reduce manufacturing costs for the smallDualBeam product. In addition to the product line move, the announced restructuring involves organizational changes designed to improve the efficiency of our finance, research and development and other corporate programs and improve our market focus. We will incur various costs and expenses related to the restructuring, which are expected to total between approximately $9.5 million and $10.3 million, $8.1 million of which have been incurred through July 4, 2010.

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 restructuring plans 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.

We are currently implementing a plan to shift manufacturing for certain products to other of our factories and third parties in 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.

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.

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, AP Tech, Frencken Mechatronics B.V., Sanmina-SCI Corporation and AZD Praha SRO 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

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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.

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.

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. Any claim of infringement from a third party, even one without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from running the business.

As described in more detail in the section entitled “Item 1. Legal Proceedings,” in November 2009, one of our competitors, Hitachi, filed suit against our subsidiary, FEI Japan, in the District Court in Tokyo alleging infringement of five patents. Based on information available to us, we believe that we have meritorious defenses against the lawsuit and we intend to vigorously defend our interests in these matters. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could prohibit us from selling one or more products in Japan, and could include monetary damages. If we were to receive an unfavorable ruling, or if we are unable to negotiate a satisfactory settlement in this matter, our business and results of operations could be materially harmed.

In addition, our competitors or other entities may 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.

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If we become subject to additional 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 4, 2010, we had total convertible long-term debt of $90.9 million due in 2013. 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 4, 2010. 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;

• our shareholders may be further 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 3,095,741 shares of our common stock. These shares, however, were not included in our diluted share count for the thirteen or twenty-six week periods ended July 5, 2009, 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.

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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.

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.

In February 2009, the U.S. Congress passed the American Recovery and Reconstruction Act (the “ARRA”), which included approximately $15 billion of additional stimulus funding for agencies which are our customers, or which fund some of our customers. A portion of these funds could be allocated to scientific equipment purchases. Less than 5% and 10% of our orders in the first two quarters of 2010 and the second half of 2009, respectively, were funded by the ARRA and agency awards under the ARRA have been occurring somewhat more slowly than we expected. If the funding under the ARRA is rescinded, or if the agencies allocate the funds away from our types of equipment, a potential source of growth for us could be reduced or removed completely.

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;

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• 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.

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.

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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.

In addition, new product launches are costly and may not always prove to be successful. For example, in the fourth quarter of 2009, we announced the sale of ourPhenom product line to the NTS Group as it did not deliver the level of revenues we had originally forecast.

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. For the first two quarters of 2010 and in each of the last three years, we have derived more than 61% of our sales from countries outside of the U.S. If we fail to adequately protect our intellectual property rights in these countries, our business may be materially adversely affected.

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

We 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 rates and 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.

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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.

Natural disasters, catastrophic events, terrorist acts and acts of war may seriously harm our business and revenues, costs and expenses and financial condition.

Our worldwide operations could be subject to earthquakes, volcanic eruptions, telecommunications failures, power interruptions, water shortages, closure of transport routes, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics or pandemics, terrorist acts, acts of war and other natural or manmade disasters or business interruptions. For many of these events we carry no insurance. The occurrence of any of these business disruptions could seriously harm our revenue and financial condition and increase our costs and expenses. The impact of such events could be disproportionately greater on us than on other companies as a result of our significant international presence. Our corporate headquarters, and a portion of our research and development activities, are located on the Pacific coast, and other critical business operations and some of our suppliers are located in Asia, near major earthquake faults. We rely on major logistics hubs, primarily in Europe, Asia and the U.S. to manufacture and distribute our products and to move products to customers in various regions. Our operations could be adversely affected if manufacturing, logistics or other operations in these locations are disrupted for any reason, including those described above. The ultimate impact on us, our significant suppliers and our general infrastructure of being consolidated in certain geographical areas is unknown, but our revenue, profitability and financial condition could suffer in the event of a catastrophic event.

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.

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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 U.S. statutes such as 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. Depending on the shipment, we are also subject to Dutch or Czech law regarding export controls and licensing requirements. 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 shareholder.

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	Settlement Agreement by and between Robert H.J. Fastenau and FEI Company, dated April 20, 2010.(4)
10.2	1995 Stock Incentive Plan, as amended.(5)
10.3	Employee Share Purchase Plan, as amended.(5)
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.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

(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/A filed with the Securities and Exchange Commission on April 23, 2010.

(5) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 14, 2010.

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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, 2010	/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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