Fei (FEIC) 10-Q 2011 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 3, 2011

OR

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

For the transition period from to

Commission File No. 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  o

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  o

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 the 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	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o

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

The number of shares of common stock outstanding as of August 1, 2011 was 39,157,243.

FEI COMPANY

INDEX TO FORM 10-Q

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets – July 3, 2011 and December 31, 2010	2
	Consolidated Statements of Operations – Thirteen and Twenty-Six Weeks Ended July 3, 2011 and July 4, 2010	3
	Consolidated Statements of Comprehensive Income (Loss) – Thirteen and Twenty-Six Weeks Ended July 3, 2011 and July 4, 2010	4
	Consolidated Statements of Cash Flows – Twenty-Six Weeks Ended July 3, 2011 and July 4, 2010	5
	Condensed Notes to the Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 6.	Exhibits	38
Signatures		40

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FEI Company and Subsidiaries

Consolidated Balance Sheets

(In thousands)

(Unaudited)

	July 3, 2011		December 31, 2010
Assets
Current Assets:
Cash and cash equivalents	$	305,923	$	277,617
Short-term investments in marketable securities	18,855		44,026
Short-term restricted cash	28,615		22,114
Receivables, net of allowances for doubtful accounts of $5,858 and $5,685	207,075		183,254
Inventories	202,769		155,964
Deferred tax assets	10,431		11,505
Other current assets	35,890		23,126
Total Current Assets	809,558		717,606
Non-current investments in marketable securities	76,135		38,662
Long-term restricted cash	41,815		41,377
Property, plant and equipment, net of accumulated depreciation of $106,172 and $95,720	82,039		80,681
Goodwill	44,849		44,800
Deferred tax assets	770		1,072
Non-current inventories	51,072		47,976
Other assets, net	14,570		12,248
Total Assets	$	1,120,808	$	984,422
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	61,348	$	51,529
Accrued payroll liabilities	35,945		31,765
Accrued warranty reserves	10,292		8,648
Accrued agent commissions	13,926		10,796
Deferred revenue	84,549		81,445
Income taxes payable	14,078		3,715
Accrued restructuring, reorganization, relocation and severance	2,613		4,884
Other current liabilities	29,400		31,306
Total Current Liabilities	252,151		224,088
Convertible debt	89,012		89,012
Deferred tax liabilities	7,072		4,106
Other liabilities	37,830		34,042
Commitments and contingencies
Shareholders’ Equity:
Preferred stock - 500 shares authorized; none issued and outstanding	���		—
Common stock - 70,000 shares authorized; 39,150 and 38,280 shares issued and outstanding, no par value	534,161		509,145
Retained earnings	123,396		75,024
Accumulated other comprehensive income	77,186		49,005
Total Shareholders’ Equity	734,743		633,174
Total Liabilities and Shareholders’ Equity	$	1,120,808	$	984,422

See accompanying Condensed Notes to the Consolidated Financial Statements.

2

FEI Company and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 3, 2011			July 4, 2010			July 3, 2011			July 4, 2010
Net sales:
Products	$	168,739		$	108,839		$	323,803		$	220,645
Products - related party	157			92			1,125			163
Service and components	42,131			37,028			82,935			74,150
Service and components - related party	114			89			238			189
Total net sales	211,141			146,048			408,101			295,147
Cost of sales:
Products	86,256			62,068			169,851			126,756
Service and components	29,190			24,172			56,651			49,378
Total cost of sales	115,446			86,240			226,502			176,134
Gross profit	95,695			59,808			181,599			119,013
Operating expenses:
Research and development	19,619			15,616			37,559			32,748
Selling, general and administrative	38,774			31,604			74,556			67,179
Restructuring, reorganization, relocation and severance	783			9,055			1,068			9,969
Total operating expenses	59,176			56,275			113,183			109,896
Operating income	36,519			3,533			68,416			9,117
Other (expense) income:
Interest income	689			733			1,181			1,724
Interest expense	(1,133		)	(1,303		)	(2,175		)	(2,521		)
Other, net	(449		)	(330		)	(121		)	(739		)
Total other (expense) income, net	(893		)	(900		)	(1,115		)	(1,536		)
Income before income taxes	35,626			2,633			67,301			7,581
Income tax expense (benefit)	9,566			(13,547		)	18,929			(12,703		)
Net income	$	26,060		$	16,180		$	48,372		$	20,284
Basic net income per share	$	0.67		$	0.43		$	1.25		$	0.53
Diluted net income per share	0.62			0.40			1.16			0.51
Shares used in per share calculations:
Basic	38,883			38,046			38,686			37,968
Diluted	42,566			41,813			42,359			41,775

See accompanying Condensed Notes to the Consolidated Financial Statements.

3

FEI Company and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 3, 2011			July 4, 2010			July 3, 2011			July 4, 2010
Net income	$	26,060		$	16,180		$	48,372		$	20,284
Other comprehensive income (loss), net of taxes:
Change in cumulative translation adjustment	9,636			(18,637		)	25,023			(29,437		)
Change in unrealized (loss) gain on available-for-sale securities	(17		)	17			(16		)	62
Changes due to cash flow hedging instruments:
Net gain (loss) on hedge instruments	2,211			(2,072		)	6,002			(3,054		)
Reclassification to net income of previously deferred (gains) losses related to hedge derivatives instruments	(2,088		)	1,192			(2,828		)	1,297
Comprehensive income (loss)	$	35,802		$	(3,320	)	$	76,553		$	(10,848	)

See accompanying Condensed Notes to the Consolidated Financial Statements.

4

FEI Company and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Twenty-Six Weeks Ended
	July 3, 2011			July 4, 2010
Cash flows from operating activities:
Net income	$	48,372		$	20,284
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	9,221			8,548
Amortization	942			1,550
Stock-based compensation	5,607			5,549
Other	2			(62		)
Income taxes payable (receivable), net	6,011			(22,581		)
Deferred income taxes	(285		)	5,748
(Increase) decrease in:
Receivables	(18,784		)	(4,597		)
Inventories	(34,241		)	(10,144		)
Other assets	(4,775		)	809
Increase (decrease) in:
Accounts payable	5,903			3,618
Accrued payroll liabilities	2,915			2,662
Accrued warranty reserves	1,320			458
Deferred revenue	(1,739		)	9,157
Accrued restructuring, reorganization, relocation and severance costs	(2,548		)	7,434
Other liabilities	965			(2,292		)
Net cash provided by operating activities	18,886			26,141
Cash flows from investing activities:
(Increase) decrease in restricted cash	(1,771		)	2,392
Acquisition of property, plant and equipment	(5,765		)	(4,435		)
Purchase of investments in marketable securities	(100,570		)	(69,978		)
Redemption of investments in marketable securities	88,313			110,929
Proceeds from the sale of auction rate securities	—			98,925
Other	(653		)	(204		)
Net cash (used in) provided by investing activities	(20,446		)	137,629
Cash flows from financing activities:
Redemption of 2.875% convertible note	—			(9,059		)
Withholding taxes paid on issuance of vested restricted stock units	(614		)	(680		)
Repayments on line of credit	—			(59,600		)
Proceeds from exercise of stock options and employee stock purchases	18,319			3,853
Excess tax benefit for share based payment arrangements	572			—
Net cash provided by (used in) financing activities	18,277			(65,486		)
Effect of exchange rate changes	11,589			(14,579		)
Increase in cash and cash equivalents	28,306			83,705
Cash and cash equivalents:
Beginning of period	277,617			124,199
End of period	$	305,923		$	207,904
Supplemental Cash Flow Information:
Cash paid for income taxes, net	$	7,308		$	3,439
Cash paid for interest	1,921			2,122
Increase in fixed assets related to transfers with inventories	1,541			1,761

See accompanying Condensed Notes to the Consolidated Financial Statements.

5

FEI COMPANY AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

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; and DualBeam systems, which combine a FIB and SEM on a single platform.

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

We have research, development and manufacturing operations in Hillsboro, Oregon; Eindhoven, The Netherlands; and Brno, Czech Republic. Our sales and service operations are conducted in the U.S. and approximately 50 other countries around the world. We also sell our products through independent agents, distributors and representatives in additional countries.

Basis of Presentation

The consolidated financial statements include the accounts of FEI Company and our wholly-owned 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 week periods endedJuly 3, 2011 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, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on February 18, 2011.

Use of Estimates in Financial Reporting

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 accounting policies and estimates underlying the accompanying consolidated financial statements include:

• 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;

• tax valuation allowances and unrecognized tax benefits;

• warranty liabilities;

• stock-based compensation; and

• accounting for derivatives.

6

NOTE 2. 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						Thirteen Weeks Ended
	July 3, 2011						July 4, 2010
	Net Income		Shares	Per Share Amount			Net Income		Shares	Per Share Amount
Basic EPS	$	26,060	38,883	$	0.67		$	16,180	38,046	$	0.43
Dilutive effect of 2.875% convertible debt	451		3,033	(0.04		)	572		3,383	(0.03		)
Dilutive effect of stock options calculated using the treasury stock method	—		200	—			—		107	—
Dilutive effect of restricted stock units	—		285	—			—		112	—
Dilutive effect of shares issuable to Philips	—		165	(0.01		)	—		165	—
Diluted EPS	$	26,511	42,566	$	0.62		$	16,752	41,813	$	0.40

	Twenty-Six Weeks Ended						Twenty-Six Weeks Ended
	July 3, 2011						July 4, 2010
	Net Income		Shares	Per Share Amount			Net Income		Shares	Per Share Amount
Basic EPS	$	48,372	38,686	$	1.25		$	20,284	37,968	$	0.53
Dilutive effect of 2.875% convertible debt	902		3,033	(0.07		)	1,078		3,406	(0.02		)
Dilutive effect of stock options calculated using the treasury stock method	—		211	—			—		124	—
Dilutive effect of restricted stock units	—		264	(0.01		)	—		112	—
Dilutive effect of shares issuable to Philips	—		165	(0.01		)	—		165	—
Diluted EPS	$	49,274	42,359	$	1.16		$	21,362	41,775	$	0.51

The following table sets forth the schedule of anti-dilutive securities excluded from computation of diluted EPS (number of shares, in thousands):

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 3, 2011		July 4, 2010		July 3, 2011		July 4, 2010
Convertible debt	$	—	$	—	$	—	$	—
Stock options	54		880		136		898
Restricted stock units	32		51		32		192

NOTE 3. STOCK-BASED COMPENSATION

Employee Share Purchase Plan

At our 2011 annual meeting of shareholders, which was held on May 12, 2011, 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 3,200,000 to 3,450,000.

1995 Stock Incentive Plan and 1995 Supplemental Stock Incentive Plan

Also at our 2011 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 10,250,000 to 10,500,000 shares of our common stock. 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.

The following table sets forth certain information regarding the 1995 Plan and the 1995 Supplemental Plan:

	July 3, 2011
Shares available for grant	2,862,055
Shares of common stock reserved for issuance	4,485,460

7

The following table sets forth certain information regarding all options outstanding:

	July 3, 2011
	Options Outstanding		Options Exercisable
Number	826,087		336,930
Weighted average exercise price	$	23.98	$	22.13
Aggregate intrinsic value	$ 12.3 million		$ 5.6 million
Weighted average remaining contractual term	4.5 years		2.3 years

Restricted stock units ("RSUs") outstanding, including awards issued within and outside of the 1995 Plan, totaled 797,318 at July 3, 2011.

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

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 3, 2011		July 4, 2010		July 3, 2011		July 4, 2010
Cost of sales	$	338	$	290	$	679	$	615
Research and development	446		364		898		749
Selling, general and administrative	2,034		2,053		4,030		4,185
Total stock-based compensation	$	2,818	$	2,707	$	5,607	$	5,549

As of July 3, 2011, unrecognized stock-based compensation related to outstanding, but unvested stock options and RSUs was $18.8 million, which will be recognized over the weighted average remaining vesting period of 1.8 years.

NOTE 4. CREDIT FACILITIES AND RESTRICTED CASH

Multibank Credit Agreement

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. The credit agreement expires in April 2016. 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 3, 2011, 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.

Japanese Bank Borrowing Facility

We also have a ¥50.0 million 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 3, 2011.

Restricted Cash

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. 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.

The following table sets forth information related to guarantees and letters of credit (in thousands):

	July 3, 2011
Guarantees and letters of credit outstanding	$	70,953
Amount secured by restricted cash deposits:
Current	$	28,615
Long-term	41,815
Total secured by restricted cash	$	70,430

8

NOTE 5. 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 3, 2011		December 31, 2010
Raw materials and assembled parts	$	85,785	$	57,043
Service inventories, estimated current requirements	12,333		11,581
Work-in-process	70,229		55,279
Finished goods	34,422		32,061
Total inventories	$	202,769	$	155,964
Non-current inventories	$	51,072	$	47,976

NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

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

	Twenty-Six Weeks Ended
	July 3, 2011		July 4, 2010
Balance, beginning of period	$	44,800	$	44,615
Goodwill adjustments	49		149
Balance, end of period	$	44,849	$	44,764

Other Intangible Assets

Other intangible assets are included as a component of other assets, net on our consolidated balance sheets. Patents, trademarks and other are amortized under the straight-line method over their useful lives of 2 to 15 years. Note issuance costs are amortized over the life of the related debt, which is 7 years.

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

	July 3, 2011			December 31, 2010
Patents, trademarks and other	$	8,017		$	7,758
Accumulated amortization	(4,217		)	(3,995		)
Net patents, trademarks and other	3,800			3,763
Note issuance costs	2,445			2,445
Accumulated amortization	(1,775		)	(1,600		)
Net note issuance costs	670			845
Total intangible assets included in other long-term assets	$	4,470		$	4,608

Amortization expense was as follows (in thousands):

	Twenty-Six Weeks Ended
	July 3, 2011		July 4, 2010
Purchased technology	$	—	$	196
Patents, trademarks and other	616		578
Note issuance costs	175		301
Total amortization expense	$	791	$	1,075

9

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

	Patents, Trademarks and Other		Note Issuance Costs		Total
Remainder of 2011	$	598	$	175	$	773
2012	1,103		350		1,453
2013	1,002		145		1,147
2014	644		—		644
2015	298		—		298
Thereafter	155		—		155
Total	$	3,800	$	670	$	4,470

NOTE 7. WARRANTY RESERVES

Our products generally carry a one year warranty. A reserve is established at the time of sale to cover estimated warranty costs and certain commitments for product upgrades. Our estimate of warranty cost is based primarily on our history of warranty repairs and maintenance, as applied to systems currently under warranty. For our new products without a history of known warranty costs, we estimate the expected costs based on our experience with similar product lines and technology. 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. Changes to the reserve occur as volume, product mix and warranty costs fluctuate.

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

	Twenty-Six Weeks Ended
	July 3, 2011			July 4, 2010
Balance, beginning of period	$	8,648		$	7,477
Reductions for warranty costs incurred	(5,215		)	(3,871		)
Warranties issued	6,557			4,290
Translation and changes in estimates	302			(287		)
Balance, end of period	$	10,292		$	7,609

NOTE 8. INCOME TAXES

Our tax provision for the thirteen and twenty-six week periods endedJuly 3, 2011 consisted primarily of taxes accrued in the U.S. and foreign jurisdictions. We continue to record a valuation allowance against a portion of our 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 were classified on the balance sheet as follows (in thousands):

	July 3, 2011			December 31, 2010
Deferred tax assets – current	$	10,431		$	11,505
Deferred tax assets – non-current	770			1,072
Other current liabilities	(54		)	(64		)
Deferred tax liabilities – non-current	(7,072		)	(4,106		)
Net deferred tax assets	$	4,075		$	8,407
Valuation allowance	$	2,123		$	2,123

Unrecognized Tax Benefits

During the thirteen and twenty-six week periods endedJuly 3, 2011, unrecognized tax benefits were substantially unchanged. There were no increases or decreases in prior unrecognized tax benefits resulting from settlements with taxing authorities or lapses of statutes of limitations during the periods. We recognize interest and penalties related to unrecognized tax benefits in tax expense.

10

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

	July 3, 2011		December 31, 2010
Other current liabilities	$	494	$	639
Other liabilities	7,295		6,517
Unrecognized tax benefits	$	7,789	$	7,156

For our major tax jurisdictions, the following years were open for examination by the tax authorities as of July 3, 2011:

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

NOTE 9. RELATED-PARTY ACTIVITY

Related parties with which we had transactions during the thirteen and twenty-six week periods endedJuly 3, 2011 were as follows:

• a director of Applied Materials, Inc. is a member of our Board of Directors;

• our Chief Financial Officer is on the Board of Directors of Cascade Microtech, Inc.;

• one of our named executive officers serves on the Board of Directors of Schneeberger, Inc.;

• one of the members of our Board of Directors serves on the Supervisory Board of TMC BV; and

• one of the members of our Board of Directors serves on the Board of Directors of EasyStreet Online Services.

Transactions with these related parties were as follows (in thousands):

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
Sales to Related Parties	July 3, 2011		July 4, 2010		July 3, 2011		July 4, 2010
Product sales:
Applied Materials, Inc.	$	157	$	92	$	1,125	$	163
Total product sales to related parties	157		92		1,125		163
Service sales:
Applied Materials, Inc.	106		82		220		174
Cascade Microtech, Inc.	8		7		18		15
Total service sales to related parties	114		89		238		189
Total sales to related parties	$	271	$	181	$	1,363	$	352
Purchases from Related Parties
Schneeberger, Inc.	$	593	$	668	$	1,250	$	1,589
TMC BV	4		—		28		77
EasyStreet Online Services	14		18		28		26
Cascade Microtech, Inc.	1		—		1		—
Total purchases from related parties	$	612	$	686	$	1,307	$	1,692

11

Amounts due from (to) related parties were as follows (in thousands):

	July 3, 2011
Applied Materials, Inc.	$	97
Cascade Microtech, Inc.	8
Schneeberger, Inc.	(347		)
TMC BV	(37		)
EasyStreet Online Services	(15		)
Due to related parties, net	$	(294	)

NOTE 10. 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.

Legal Matters

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 FEI Japan to cease the sale of our allegedly infringing products in Japan, and legal costs. Two of the patents in the infringement case expired in June and September 2010, respectively, and, as a consequence, Hitachi dropped those patents from the infringement case. FEI Japan has filed actions with the Japanese Patent Office to invalidate the three remaining patents from that case. Hitachi filed two new complaints in the District Court of Tokyo for past damages on the expired patents in the amount of ¥2.5 billion in July 2010 and ¥1.3 billion in October 2010. In December 2010, Hitachi filed a complaint seeking a preliminary injunction relating to one of the three remaining patents that were the subject of the permanent injunction case. On June 15, 2011, the District Court issued its ruling in that case enjoining FEI Japan from selling its Quanta™ 3D FEG equipped with an Omniprobe AutoProbe™ and gas injection system (GIS) in Japan. FEI will, however, be able to resume sales of such products after August 22, 2011 when the patent upon which the injunction was based expires.

Hitachi has also brought two ancillary claims with the Tokyo Customs Office to bar the importation of certain of our products into Japan. FEI Japan has successfully invalidated the two patents that were the subject of the first customs proceeding, and Hitachi has withdrawn its request for customs seizure in that proceeding. The second customs proceeding is still on-going.

On July 14, 2011, we were notified by the Korea Trade Commission (“KTC”) that, in response to a request by Hitachi, it had initiated an investigation of two products we import and sell in Korea that allegedly infringe a Hitachi South Korean patent.

We believe that we have meritorious defenses to Hitachi's claims, and intend to vigorously defend our interests in these matters. In management's opinion, the resolution of the Hitachi 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 period. We believe, based on the information available to us at this time and our current analysis of this information, that the potential losses associated with these litigation matters are likely to be in the range of zero to $10.0 million. These potential losses include fines and penalties and any settlement costs or judgments for the alleged potential past infringement. This range is only an estimate, however, and we cannot guarantee that our losses will not be greater than this range. Legal fees associated with this claim are expensed as incurred.

Purchase Obligations

We have commitments under non-cancelable purchase orders, primarily relating to inventory, totaling $63.4 million at July 3, 2011. These commitments expire at various times through the fourth quarter of 2012.

NOTE 11. 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.

12

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

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 3, 2011		July 4, 2010		July 3, 2011		July 4, 2010
Sales to External Customers:
Electronics	$	86,990	$	56,904	$	148,338	$	98,147
Research and Industry	55,136		37,435		125,795		83,947
Life Sciences	26,770		14,592		50,795		38,714
Service and Components	42,245		37,117		83,173		74,339
Total	$	211,141	$	146,048	$	408,101	$	295,147
Gross Profit:
Electronics	$	45,121	$	27,909	$	76,883	$	46,522
Research and Industry	24,753		13,998		55,526		32,550
Life Sciences	12,766		4,956		22,668		14,980
Service and Components	13,055		12,945		26,522		24,961
Total	$	95,695	$	59,808	$	181,599	$	119,013

	July 3, 2011		December 31, 2010
Goodwill:
Electronics	$	18,142	$	18,122
Research and Industry	18,013		17,998
Life Sciences	3,628		3,624
Service and Components	5,066		5,056
Total	$	44,849	$	44,800
Total Assets:
Electronics	$	188,395	$	174,512
Research and Industry	140,206		111,874
Life Sciences	58,966		40,604
Service and Components	157,303		143,080
Corporate and Eliminations	575,938		514,352
Total	$	1,120,808	$	984,422

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.

None of our customers represented 10% or more of our total sales in the thirteen or twenty-six week periods endedJuly 3, 2011 or July 4, 2010.

NOTE 12. RESTRUCTURING, REORGANIZATION, RELOCATION AND SEVERANCE

On April 12, 2010, we announced a restructuring program to consolidate the manufacturing of our small DualBeam product line by relocating manufacturing activities currently performed at our facility in Eindhoven, The Netherlands to our facility in Brno, Czech Republic. The balance of our small DualBeam product line is already based in Brno. The move, which has been substantially completed, resulted in severance costs, 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 small DualBeam production. In addition to the product line move, the April 2010 restructuring plan involved organizational changes designed to improve the efficiency of our finance, research and development and other corporate programs and improve our market focus. Costs incurred in connection with this plan during the thirteen and twenty-six week periods endedJuly 3, 2011 related to the consolidation of the manufacturing of our small DualBeam product line in Brno.

13

Information for costs related to this plan is as follows (in thousands):

	Thirteen Weeks Ended		Twenty-Six Weeks Ended
Costs Incurred	July 3, 2011		July 3, 2011		Life of Plan
Severance costs related to work force reduction and reorganization	$	397	$	280	$	6,713
Product line transfer, training of Brno employees and facility build-out in Brno	386		788		1,660
Total costs incurred	$	783	$	1,068	$	8,373

Presently, all of the costs incurred are expected to result in cash expenditures. We do not expect to incur significant additional costs associated with this plan.

The following table summarizes the charges, expenditures and write-offs and adjustments related to our restructuring, reorganization, relocation and severance accruals (in thousands):

Twenty-Six Weeks Ended July 3, 2011	Product line transfer and training of Brno employees			Severance, outplacement and related benefits for terminated employees			IT system upgrades		Abandoned leases, leasehold improve- ments and facilities		Total
Beginning accrued liability	$	—		$	4,832		$	20	$	32	$	4,884
Charged to expense, net	788			280			—		—		1,068
Expenditures	(788		)	(2,756		)	—		—		(3,544		)
Write-offs and adjustments	—			205			—		—		205
Ending accrued liability	$	—		$	2,561		$	20	$	32	$	2,613

NOTE 13. 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 the fair value of our financial assets and (liabilities) (in thousands):

July 3, 2011	Level 1		Level 2		Level 3		Total
Available for sale marketable securities:
Agency bonds	$	—	$	87,516	$	—	$	87,516
Certificates of deposit	—		4,462		—		4,462
Trading securities:
Equity securities – mutual funds	3,012		—		—		3,012
Derivative contracts, net	—		4,167		—		4,167
Total	$	3,012	$	96,145	$	—	$	99,157

December 31, 2010	Level 1		Level 2		Level 3		Total
Available for sale marketable securities:
U.S. Government-backed securities	$	68,497	$	—	$	—	$	68,497
Agency bonds	—		5,000		—		5,000
Certificates of deposit	—		6,322		—		6,322
Trading securities:
Equity securities – mutual funds	2,869		—		—		2,869
Derivative contracts, net	—		94		—		94
Total	$	71,366	$	11,416	$	—	$	82,782

14

Agency bonds are securities backed by U.S. government-sponsored entities.

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.

There were no changes to our valuation techniques during the twenty-six week period endedJuly 3, 2011.

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.

Our fixed rate convertible debt outstanding was as follows (in thousands):

	July 3, 2011
Fixed rate convertible debt on balance sheet	$	89,012
Fair value of fixed rate convertible debt	126,371

The fair value of our fixed rate convertible debt is based on open market trades.

NOTE 14. 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.

The aggregate notional amount of outstanding derivative contracts were as follows (in thousands):

	July 3, 2011		December 31, 2010
Cash flow hedges	$	171,000	$	133,000
Balance sheet hedges	131,524		106,882
Total outstanding derivative contracts	$	302,524	$	239,882

The outstanding contracts at July 3, 2011 have varying maturities through the fourth quarter of 2012. 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 3, 2011. In addition, there are no credit contingent features in our derivative instruments.

Balance Sheet Related

In countries outside of the U.S., we transact business in U.S. dollars and in various other currencies. We attempt to mitigate our currency exposures for recorded transactions by using forward exchange contracts to reduce the risk that our future cash flows will be adversely affected by changes in exchange rates. We enter into forward sale or purchase contracts for foreign currencies to 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) together with the transaction gain or loss from the respective balance sheet position as follows (in thousands):

	Thirteen Weeks Ended					Twenty-Six Weeks Ended
	July 3, 2011			July 4, 2010		July 3, 2011			July 4, 2010
Foreign currency (loss) gain, inclusive of the impact of derivatives	$	(716	)	$	11	$	(568	)	$	(408	)

15

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 an eighteen-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 as a component of net income. Gains and losses related to cash flow derivative contracts not designated as hedging instruments are recorded currently as a component of net income.

Summary

The fair value carrying amount of our derivative instruments was included in our balance sheet as follows (in thousands):

	Fair Value of Derivatives at				Fair Value of Derivatives at
	July 3, 2011				December 31, 2010
	Other Current Assets		Other Current Liabilities		Other Current Assets		Other Current Liabilities
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in asset position	$	7,060	$	—	$	3,763	$	—
Foreign exchange contracts in liability position	—		1,425		—		2,010
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts in asset position	$	19	$	—	$	333	$	—
Foreign exchange contracts in liability position	—		1,487		—		1,992

The effect of derivative instruments on our Consolidated Statements of Operations was as follows (in thousands):

	Thirteen Weeks Ended					Twenty-Six Weeks Ended
Foreign Exchange Contracts in Cash Flow Hedging Relationships	July 3, 2011		July 4, 2010			July 3, 2011		July 4, 2010
Amount of gain/(loss):
Recognized in OCI (effective portion)	$	5,190	$	(2,304	)	$	10,181	$	(3,746	)
Reclassified from accumulated OCI into cost of sales (effective portion)	1,983		(1,108		)	2,665		(1,157		)
Recognized in other, net (ineffective portion and amount excluded from effectiveness testing)	105		(84		)	163		(140		)
Foreign Exchange Contracts Not in Cash Flow Hedging Relationships
Amount of gain/(loss):
Recognized in other, net	$	950	$	(4,546	)	$	4,789	$	(4,992	)

The unrealized gains at July 3, 2011 are expected to be reclassified to net income during the next 18 months as a result of the underlying hedged transactions also being recorded in net income.

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NOTE 15. 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 were 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 was 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 have any effect on our financial position, results of operations or cash flows. All required disclosures are included in Note 13.

Recently Issued Accounting Guidance Not Yet Adopted

ASU 2011-04

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” which amends the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements as well as clarifies existing fair value measurement guidance and new disclosure requirements. Amendments in this ASU include: (1) allow an entity to measure the fair value of financial assets and liabilities which have offsetting positions in market risks or counterparty credit risk and meet certain conditions on a net basis; (2) for Level 3 fair value measurements, entities must disclose quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, entities must disclose the fair value hierarchy level in which the fair value measurements were determined; (4) entities must disclose the highest-and-best use of a nonfinancial asset when this use differs from the asset's current use, and the reason for the difference; and (5) disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will be effective prospectively for interim and annual periods beginning after December 15, 2011, with no early adoption permitted. We do not expect the adoption of this standard to have a material effect on our financial position, results of operations or cash flows.

ASU 2011-05

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” which revises the manner in which entities can present comprehensive income in their financial statements. The new guidance requires entities to present the components of net income and other comprehensive income in either (1) a single continuous statement of comprehensive income or (2) two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Under either method of presentation, entities are also required to present adjustments for items reclassified from other comprehensive income to net income in both net income and other comprehensive income. ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We do not expect the adoption of this standard to have a material effect on our financial position, results of operations or cash flows.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. 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,” “assume” and other words and terms of similar meaning. Such forward-looking statements include any statements regarding expectations of earnings, revenues, gross margins, non-operating expenses, tax rates, net income, foreign currency rates, funding opportunities or other financial items, as well as backlog, order levels and activity of our company as a whole or in particular markets; any statements of the plans, strategies and objectives of management for future operations, restructuring and outsourcing initiatives; any statements of factors that may affect our 2011 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; any statements of belief; any statements of assumptions underlying any of the foregoing; and any statements made under the heading “Outlook for the Remainder of 2011.”

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 could also 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.

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

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

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. 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, oil and gas 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.

18

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 3, 2011, our total backlog was $459.1 million, compared to $471.9 million at December 31, 2010. At July 3, 2011, our backlog consisted of $367.7 million related to products and $91.4 million related to Service and Components compared to product backlog of $390.6 million and Service and Components backlog of $81.3 million at December 31, 2010.

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 two years, this long-standing trend changed somewhat and, as a result, our cancellation rates may increase in the future. During the first twenty-six weeks of 2011 and all of 2010, we experienced cancellations or de-bookings of $0.4 million and $2.7 million, respectively. 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 2011

Our backlog of unfilled orders remains sizable and our rate of incoming orders for the first half of 2011 has been above the comparable period in 2010. We expect a slight seasonal decline in revenue and orders in the third quarter of 2011, however we expect revenue levels in the second half of 2011 overall, to be similar to the first half of 2011. Assuming relatively similar exchange rates, we are forecasting revenue in the second half of the year to be above the second half of 2010, and we are forecasting growth in revenue for the full year 2011 over the full year 2010.

Gross margin was 44.5% in the first half of 2011 and that is a significant improvement over 2009 and 2010 gross margins. Given relatively consistent exchange rates, we expect gross margin to be at approximately the same level in the second half of the year.

Research and development expenses are expected to increase in the second half of the year as we invest in new products. Other operating expenses are also expected to rise, but at a slower rate than revenue growth.

As a result of these factors, we forecast full year earnings for 2011 to be above 2010 levels.

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 2010 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. During the first twenty-six weeks of 2011, 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, 2010, filed with the SEC on February 18, 2011.

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Results of Operations

The following table sets forth our statement of operations data, in absolute dollars and as a percentage⁽¹⁾ of consolidated net sales (dollars in thousands):

	Thirteen Weeks Ended					Thirteen Weeks Ended
	July 3, 2011					July 4, 2010
Net sales	$	211,141		100.0	%	$	146,048		100.0	%
Cost of sales	115,446			54.7		86,240			59.0
Gross profit	95,695			45.3		59,808			41.0
Research and development	19,619			9.3		15,616			10.7
Selling, general and administrative	38,774			18.4		31,604			21.6
Restructuring, reorganization, relocation and severance	783			0.4		9,055			6.2
Operating income	36,519			17.3		3,533			2.4
Other expense, net	(893		)	(0.4	)	(900		)	(0.6	)
Income before income taxes	35,626			16.9		2,633			1.8
Income tax expense (benefit)	9,566			4.5		(13,547		)	(9.3	)
Net income	$	26,060		12.3	%	$	16,180		11.1	%

	Twenty-Six Weeks Ended					Twenty-Six Weeks Ended
	July 3, 2011					July 4, 2010
Net sales	$	408,101		100.0	%	$	295,147		100.0	%
Cost of sales	226,502			55.5		176,134			59.7
Gross profit	181,599			44.5		119,013			40.3
Research and development	37,559			9.2		32,748			11.1
Selling, general and administrative	74,556			18.3		67,179			22.8
Restructuring, reorganization, relocation and severance	1,068			0.3		9,969			3.4
Operating income	68,416			16.8		9,117			3.1
Other expense, net	(1,115		)	(0.3	)	(1,536		)	(0.5	)
Income before income taxes	67,301			16.5		7,581			2.6
Income tax expense (benefit)	18,929			4.6		(12,703		)	(4.3	)
Net income	$	48,372		11.9	%	$	20,284		6.9	%

___________________________

⁽¹⁾  Percentages may not add due to rounding.

Net Sales

Net sales increased$65.1 million, or 44.6%, to $211.1 million in the thirteen week period endedJuly 3, 2011 (the second quarter of 2011) compared to $146.0 million in the thirteen week period endedJuly 4, 2010 (the second quarter of 2010). Net sales increased$113.0 million, or 38.3%, to $408.1 million in the twenty-six week period endedJuly 3, 2011 compared to $295.1 million in the twenty-six week period endedJuly 4, 2010. The factors affecting net sales are discussed in more detail in "Net Sales by Segment" below.

Currency fluctuations increased net sales by $9.6 million and $12.4 million, respectively, during the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 as approximately 66% of our net sales in both periods were denominated in foreign currencies that fluctuated against the U.S. dollar. Weakening of the U.S. dollar against these foreign currencies generally has the effect of increasing net sales and backlog.

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Net Sales by Segment

The following tables set forth our net sales by market segment in absolute dollars and as a percentage of consolidated net sales (dollars in thousands):

	Thirteen Weeks Ended
	July 3, 2011				July 4, 2010
Electronics	$	86,990	41.2	%	$	56,904	39.0	%
Research and Industry	55,136		26.1		37,435		25.6
Life Sciences	26,770		12.7		14,592		10.0
Service and Components	42,245		20.0		37,117		25.4
Consolidated net sales	$	211,141	100.0	%	$	146,048	100.0	%

	Twenty-Six Weeks Ended
	July 3, 2011				July 4, 2010
Electronics	$	148,338	36.4	%	$	98,147	33.3	%
Research and Industry	125,795		30.8		83,947		28.4
Life Sciences	50,795		12.4		38,714		13.1
Service and Components	83,173		20.4		74,339		25.2
Consolidated net sales	$	408,101	100.0	%	$	295,147	100.0	%

Electronics

The $30.1 million, or 52.9%, increase and the $50.2 million, or 51.1%, increase, respectively, in Electronics sales in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 were primarily due to continued strong spending in leading edge technologies for development and the continued strength of the semiconductor and related markets. The volume of small DualBeam and TEM units sold in the first thirteen and twenty-six weeks of 2011 increased compared to the same periods of 2010 primarily due to strong semiconductor capital equipment spending. Currency fluctuations increased Electronics sales by $2.7 million and $2.8 million, respectively, during the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010.

Research and Industry

The $17.7 million, or 47.3%, increase and the $41.8 million, or 49.9%, increase, respectively, in Research and Industry sales in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 were primarily due to strong sales of our high-end TEMs as a result of increased spending in research markets. In general, we see our customers shifting from SEM-specific tools to TEM-specific tools as the demand to image on an increasingly small scale continues. The increase also reflects continued investment in education infrastructure in developing countries like Korea and China as well as increasing demand for our evolving line of natural resources product offerings. Currency fluctuations increased Research and Industry sales by $2.8 million and $4.7 million, respectively, during the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010.

Life Sciences

The $12.2 million, or 83.5%, increase and the $12.1 million, or 31.2%, increase, respectively, in Life Sciences sales in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 was primarily due to an increase in the number of high-end TEM units sold during the periods. Currency fluctuations increased Life Sciences sales by $1.7 million and $2.0 million, respectively, during the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010.

Service and Components

The $5.1 million, or 13.8%, increase and the $8.8 million, or 11.9%, increase, respectively, in Service and Components sales in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 were due primarily to a larger install base and improvements in the semiconductor industry, which contributed to an increase in service contracts. Currency fluctuations increased Service and Components sales by $2.4 million and $2.9 million, respectively, during the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010.

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Net Sales by Geographic Region

Over half of our net sales have been to customers outside of the U.S., and we expect that to continue. The following tables set forth our net sales by geographic location in absolute dollars and as a percentage of consolidated net sales (dollars in thousands):

	Thirteen Weeks Ended
	July 3, 2011				July 4, 2010
U.S. and Canada	$	74,180	35.1	%	$	46,089	31.6	%
Europe	59,245		28.1		45,747		31.3
Asia-Pacific Region and Rest of World	77,716		36.8		54,212		37.1
Consolidated net sales	$	211,141	100.0	%	$	146,048	100.0	%

	Twenty-Six Weeks Ended
	July 3, 2011				July 4, 2010
U.S. and Canada	$	137,805	33.8	%	$	92,279	31.3	%
Europe	117,311		28.7		91,288		30.9
Asia-Pacific Region and Rest of World	152,985		37.5		111,580		37.8
Consolidated net sales	$	408,101	100.0	%	$	295,147	100.0	%

U.S. and Canada

The $28.1 million, or 60.9%, increase and the $45.5 million, or 49.3%, increase, respectively, in sales to the U.S. and Canada in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 were primarily due to continued strong semiconductor capital equipment spending and an increase in Life Sciences sales related to an increase in high-end TEM units sold.

Europe

Our European region also includes Central America, South America, Africa (excluding South Africa), the Middle East and Russia.

The $13.5 million, or 29.5%, increase and the $26.0 million, or 28.5%, increase, respectively, in sales to Europe in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 were primarily due to increased spending by research institutions. Currency fluctuations increased European sales by $6.6 million and $6.5 million, respectively, in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010.

Asia-Pacific Region and Rest of World

The $23.5 million, or 43.4%, increase and the $41.4 million, or 37.1%, increase, respectively, in sales to the Asia-Pacific Region and Rest of World in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 were primarily driven by the strengthening economy, additional investment in educational infrastructure in emerging Asian economies, and an increase in semiconductor industry purchases. Currency fluctuations increased sales to this region by $3.0 million and $5.9 million, respectively, in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010.

Cost of Sales and Gross Margin

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

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 3, 2011		July 4, 2010		July 3, 2011		July 4, 2010
Electronics	51.9	%	49.0	%	51.8	%	47.4	%
Research and Industry	44.9		37.4		44.1		38.8
Life Sciences	47.7		34.0		44.6		38.7
Service and Components	30.9		34.9		31.9		33.6
Overall	45.3		41.0		44.5		40.3

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. The five primary drivers affecting gross margin are 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$29.2 million, or 33.9%, to $115.4 million in the thirteen week period endedJuly 3, 2011 compared to $86.2 million in the thirteen week period endedJuly 4, 2010 and increased$50.4 million, or 28.6%, to $226.5 million in the twenty-six week period endedJuly 3, 2011 compared to $176.1 million in the comparable period of 2010, primarily due to increased sales. The impact of currency fluctuations on cost of sales was an increase of $17.0 million and $20.0 million, respectively, in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010.

The net effect on our gross margin from currency fluctuations during the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 was a decrease of $7.4 million, or 5.8 percentage points, and a decrease of $7.6 million, or 3.3 percentage points, respectively.

Electronics

The increases in Electronics gross margin in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 were due primarily to increased demand for our higher-margin small DualBeams, as well as abnormally low gross margins in the prior year period as we worked through orders that were priced in late 2009 and early 2010 when we were under greater pricing pressure. We also realized product cost savings related to our consolidation of the manufacturing of our small DualBeam products at our Brno, Czech Republic facility. Currency fluctuations impacted Electronics gross margin in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 by a 4.4 percentage point decrease and a 2.7 percentage point decrease, respectively.

Research and Industry

The increases in Research and Industry gross margin in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 were primarily due to an increase in the number of small DualBeam and high-end TEM units sold, as well as growth in sales of our higher-margin natural resources products. We also realized product cost savings related to the consolidation of the manufacturing of our small DualBeam products at our Brno, Czech Republic facility. Currency fluctuations impacted Research and Industry gross margin in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 by an 8.8 percentage point decrease and a 4.6 percentage point decrease, respectively.

Life Sciences

The increases in Life Sciences gross margin in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 were primarily due to an increase in the number of high-end TEM units sold. This was partially offset by currency fluctuations which impacted Life Sciences gross margin in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 by a 9.0 percentage point decrease and a 4.6 percentage point decrease, respectively.

Service and Components

The decreases in the Service and Components gross margin in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 were primarily due to an increase in employee incentive compensation. The decrease in Service and Components gross margin in the twenty-six week period endedJuly 3, 2011 was also due to increased costs in Japan as the work flow for our service employees in Japan was interrupted by the earthquake, tsunami and nuclear power plant crisis which occurred during the first quarter of 2011. Currency fluctuations impacted Service and Components gross margin in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010 by a 2.7 percentage point decrease and a 1.5 percentage point decrease, respectively.

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 2011 and 2010 periods, we received subsidies from European governments for technology developments for semiconductor and life science equipment.

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

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 3, 2011			July 4, 2010			July 3, 2011			July 4, 2010
Gross spending	$	20,961		$	16,949		$	40,211		$	35,548
Less subsidies	(1,342		)	(1,333		)	(2,652		)	(2,800		)
Net expense	$	19,619		$	15,616		$	37,559		$	32,748

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R&D costs increased$4.0 million to $19.6 million (9.3% of net sales) in the thirteen week period endedJuly 3, 2011 compared to $15.6 million (10.7% of net sales) in the thirteen week period endedJuly 4, 2010 and increased$4.8 million to $37.6 million (9.2% of net sales) in the twenty-six week period endedJuly 3, 2011 compared to $32.7 million (11.1% of net sales) in the twenty-six week period endedJuly 4, 2010 primarily due to increased headcount and employee incentive compensation. The impact of currency fluctuations on R&D costs was an increase of $1.5 million and $1.6 million, respectively, in the thirteen and twenty-six week periods endedJuly 3, 2011 compared to the same periods of 2010.

We anticipate that R&D spending as a percentage of revenue will increase slightly in the foreseeable future as revenues increase. Actual future spending, however, will depend on market conditions.

Selling, General and Administrative Costs

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

SG&A costs increased$7.2 million to $38.8 million (18.4% of net sales) in the thirteen week period endedJuly 3, 2011 compared to $31.6 million (21.6% of net sales) in the thirteen week period endedJuly 4, 2010 primarily due to increased commissions driven by the increase in revenue, and increased employee incentive compensation.

SG&A costs increased$7.4 million to $74.6 million (18.3% of net sales) in the twenty-six week period endedJuly 3, 2011 compared to $67.2 million (22.8% of net sales) in the twenty-six week period endedJuly 4, 2010 primarily due to increased commissions driven by the increase in revenue, and increased employee incentive compensation, partially offset by a decrease in bad debt write-offs. In the first quarter of 2010, we recorded a $2.1 million charge to fully write off amounts receivable from one customer.

Restructuring, Reorganization, Relocation and Severance

On April 12, 2010, we announced a restructuring program to consolidate the manufacturing of our small DualBeam product line by relocating manufacturing activities currently performed at our facility in Eindhoven, The Netherlands to our facility in Brno, Czech Republic. The balance of our small DualBeam product line is already based in Brno. The move, which has been substantially completed, resulted in severance costs, 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 small DualBeam production. In addition to the product line move, the April 2010 restructuring plan involved organizational changes designed to improve the efficiency of our finance, research and development and other corporate programs and improve our market focus. Costs incurred in connection with this plan in the thirteen and twenty-six week periods endedJuly 3, 2011 related to the consolidation of the manufacturing of our small DualBeam product line in Brno.

Information for costs related to this plan is as follows (in thousands):

	Thirteen Weeks Ended		Twenty-Six Weeks Ended
Costs Incurred	July 3, 2011		July 3, 2011		Life of Plan
Severance costs related to work force reduction and reorganization	$	397	$	280	$	6,713
Product line transfer, training of Brno employees and facility build-out in Brno	386		788		1,660
Total costs incurred	$	783	$	1,068	$	8,373

Presently, all of the costs incurred are expected to result in cash expenditures. We do not expect to incur significant additional costs associated with this plan.

The actions related to our April 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.

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

Other (Expense) Income, Net

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

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities and totaled $0.7 million and $1.2 million, respectively, in the thirteen and twenty-six week periods endedJuly 3, 2011 and $0.7 million and $1.7 million, respectively, in the comparable periods of 2010.

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Interest expense was $1.1 million and $2.2 million, respectively, in thirteen and twenty-six week periods endedJuly 3, 2011 and $1.3 million and $2.5 million, respectively, in the comparable periods of 2010. Interest expense for both the 2011 and 2010 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.

Other (expense) income, net was a net expense of $0.4 million and $0.1 million in the thirteen and twenty-six week periods endedJuly 3, 2011, respectively, and was $0.3 million and $0.7 million, respectively, in the comparable periods of 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 endedJuly 4, 2010 on the early redemption of our 2.875% notes.

Income Tax Expense

Our effective income tax rate of 28.1% for the twenty-six week period endedJuly 3, 2011 reflected taxes accrued in the U.S. and foreign jurisdictions.

Our income tax benefit of approximately $12.7 million for the twenty-six week period endedJuly 4, 2010 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 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.

As of July 3, 2011, unrecognized tax benefits totaled $7.8 million and related primarily to uncertainty surrounding transfer pricing, tax credits and permanent establishment. All unrecognized tax benefits would decrease the effective tax rate if recognized.

Our net deferred tax assets totaled $4.1 million and $8.4 million, respectively, at July 3, 2011 and December 31, 2010. Valuation allowances on deferred tax assets totaled $2.1 million as of July 3, 2011 and December 31, 2010. 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.

Liquidity and Capital Resources

Sources of Liquidity and Capital Resources

Our sources of liquidity and capital resources as of July 3, 2011 consisted of $353.4 million of cash, cash equivalents, short-term restricted cash and short-term investments, $76.1 million in non-current investments, $41.8 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 2016.

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 3, 2011.

In the twenty-six week period endedJuly 3, 2011, cash and cash equivalents and short-term restricted cash increased$34.8 million to $334.5 million as of July 3, 2011 from $299.7 million as of December 31, 2010 primarily as a result of $18.9 millionprovided by operations, $18.3 million of proceeds from the exercise of employee stock options and a $11.6 millionfavorable effect of exchange rate changes. These factors were partially offset by $12.3 million used for the purchase of marketable securities and $5.8 million used for the purchase of property, plant and equipment.

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In the twenty-six week period endedJuly 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 millionprovided by operations, $98.9 million from the redemption of auction rate securities, $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 millionunfavorable effect of exchange rate changes.

Accounts receivable increased$23.8 million to $207.1 million as of July 3, 2011 from $183.3 million as of December 31, 2010. This increase was primarily driven by a corresponding increase in sales and was partially impacted by the timing of customer payments. The July 3, 2011 balance included a $5.2 millionincrease related to fluctuations in currency exchange rates. Our days sales outstanding, calculated on a quarterly basis, was 89 days at July 3, 2011 and 90 days at December 31, 2010.

Inventories increased$46.8 million to $202.8 million as of July 3, 2011 compared to $156.0 million as of December 31, 2010, to support our planned ramp up of shipments in 2011. The July 3, 2011 balance included a $14.4 millionincrease related to fluctuations in currency exchange rates. Our annualized inventory turnover rate, calculated on a quarterly basis, was 2.4 times for the quarter ended July 3, 2011 and 2.6 times for the quarter ended July 4, 2010.

Deferred tax assets, current and long term, net of deferred tax liabilities decreased$4.3 million to $4.1 million as of July 3, 2011 compared to $8.4 million as of December 31, 2010 primarily due to an increase in the U.S. deferred tax liabilities for unrealized cash hedging gains and fixed assets.

Other current assets increased$12.8 million to $35.9 million as of July 3, 2011 compared to $23.1 million as of December 31, 2010, primarily due to an increase in our cash flow hedge receivable as a result of the weakening of the U.S. dollar and an increase in our current income taxes receivable.

Expenditures for property, plant and equipment of $5.8 million in the twenty-six week period endedJuly 3, 2011 primarily consisted of expenditures for machinery and equipment. 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 2011 to be approximately $34 million, primarily for the development and introduction of new products, demonstration equipment and upgrades and incremental improvements to our enterprise resource planning (“ERP”) system.

Accrued payroll liabilities increased$4.2 million to $35.9 million as of July 3, 2011 compared to $31.8 million as of December 31, 2010, primarily due to accruals of employee incentive compensation.

Income taxes payable increased$10.4 million to $14.1 million as of July 3, 2011 compared to $3.7 million as of December 31, 2010 primarily due to accruals for U.S. and foreign taxes on current period income. Our receivable for income taxes of $5.6 million at July 3, 2011 is included as a component of other current assets.

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. There were no amounts outstanding under this facility as of July 3, 2011.

We also have a ¥50.0 million 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 3, 2011.

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.

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. Restricted cash balances securing bank guarantees that expire within 12 months of the balance sheet date are recorded as a current asset on our consolidated balance sheets. Restricted cash balances securing bank guarantees that expire beyond 12 months from the balance sheet date are recorded as long-term restricted cash on our consolidated balance sheet.

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The following table sets forth information related to guarantees and letters of credit (in thousands):

	July 3, 2011
Guarantees and letters of credit outstanding	$	70,953
Amount secured by restricted cash deposits:
Current	$	28,615
Long-term	41,815
Total secured by restricted cash	$	70,430

Share Repurchase Plan

A plan to repurchase up to a total of 4.0 million shares of our common stock was approved by our Board of Directors in September 2010 and does not have an expiration date. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The purchases are funded from existing cash resources and may be suspended or discontinued at any time at our discretion without prior notice. No shares were repurchased during the first twenty-six weeks of 2011, and, as of July 3, 2011, 3,794,700 shares remained available for purchase pursuant to this plan.

New Accounting Pronouncements

See Note 15 of the Condensed Notes to the Consolidated Financial Statements for a discussion of new accounting pronouncements.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks and risk management policies since the filing of our 2010 Annual Report on Form 10-K, which was filed with the SEC on February 18, 2011.

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.

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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 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 FEI Japan to cease the sale of our allegedly infringing products in Japan, and legal costs. Two of the patents in the infringement case expired in June and September 2010, respectively, and, as a consequence, Hitachi dropped those patents from the infringement case. FEI Japan has filed actions with the Japanese Patent Office to invalidate the three remaining patents from that case. Hitachi filed two new complaints in the District Court of Tokyo for past damages on the expired patents in the amount of ¥2.5 billion in July 2010 and ¥1.3 billion in October 2010. In December 2010, Hitachi filed a complaint seeking a preliminary injunction relating to one of the three remaining patents that were the subject of the permanent injunction case. On June 15, 2011, the District Court issued its ruling in that case enjoining FEI Japan from selling its Quanta™ 3D FEG equipped with an Omniprobe AutoProbe™ and gas injection system (GIS) in Japan. FEI will, however, be able to resume sales of such product after August 22, 2011 when the patent upon which the injunction was based expires.

Hitachi has also brought two ancillary claims with the Tokyo Customs Office to bar the importation of certain of our products into Japan. FEI Japan has successfully invalidated the two patents that were the subject of the first customs proceeding, and Hitachi has withdrawn its request for customs seizure in that proceeding. The second customs proceeding is still on-going.

On July 14, 2011, we were notified by the Korea Trade Commission (“KTC”) that, in response to a request by Hitachi, it had initiated an investigation of two products we import and sell in Korea that allegedly infringe a Hitachi South Korean patent.

We believe that we have meritorious defenses to Hitachi's claims, and intend to vigorously defend our interests in these matters.

In management's opinion, the resolution of the Hitachi 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 period. We believe, based on the information available to us at this time and our current analysis of this information, that the potential losses associated with these litigation matters are likely to be in the range of zero to $10.0 million. These potential losses include fines and penalties and any settlement costs or judgments for the alleged potential past infringement. This range is only an estimate, however, and we cannot guarantee that our losses will not be greater than this range. Legal fees associated with this claim are expensed as incurred.

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 and public disclosures. 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.

Our customers must make a substantial investment 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.

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

• price;

• product quality;

• breadth of product line;

• system performance;

• ease of use;

• cost of ownership;

• global technical service and support;

• success in developing or otherwise introducing new products; and

• foreign currency 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 70% of our products in the last month of each quarter. As any one shipment may be significant to meeting our quarterly sales projection (as our average selling price for a tool is approximately $1 million), 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.

Because a significant portion of our operations occur outside of the U.S., our revenues and expenses are impacted by foreign economic and regulatory conditions. In the first twenty-six weeks of 2011 and in each of the last three years, more than 66% 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., 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 and administration of the Control of Electronic Information Products (often referred to as China RoHS) regulations could lead to delays in the importation of products into China;

• political and economic instability (e.g. Thai riots, Mexican crimewave, unrest in Egypt);

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• risk of failure of internal controls and failure to detect unauthorized transactions; and

• potential labor unrest.

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

Our business depends in large part on the capital expenditures of customers within our Electronics, Research and Industry and Life Sciences market segments. See “Net Sales by Segment” included in Part I, Item 2 of this quarterly report on Form 10-Q for additional information.

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 recovered in 2010, but the duration of the recovery is uncertain. General 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.

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 $5.0 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 dependent on government investments in research and development of new technology. To the extent that governments, especially in Europe or the U.S., 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. In addition, institutional endowments and philanthropy, which are a source of funding of some customer purchases, are threatened by the recent volatility in capital markets worldwide.

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.

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

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

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.

We may suffer manufacturing capacity limitations on occasion.

As the global economic environment recovers from the downturn and orders increase, we may not be able to ramp our manufacturing capacity and supply chain 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 and we may suffer cancellations.

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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 our 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 and Czech Koruna. For the first two quarters of 2011 and for all of 2010 and 2009, approximately 30% to 40% of our revenue was denominated in euros, while more than half of our expenses were denominated in euros, Czech Koruna, or other foreign currencies. Particularly as a result of this imbalance, changes in the exchange rate between the U.S. dollar and foreign currencies, principally the euro, Czech Koruna and Japanese Yen, 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.

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. 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. See Note 14 of the Condensed Notes to Consolidated Financial Statements included in Part I, Item 1 of this quarterly report on Form 10-Q and "Qualitative and Quantitative Disclosures About Market Risk" included in our Form 10-K for the year ended December 31, 2010, which was filed with the SEC on February 18, 2011 for additional information.

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 suffering an extended slowdown with a high rate of unemployment, especially in developed countries, 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 economic distress, hardship, bankruptcy and insolvency among our customers could increase. This may make it more difficult to collect on receivables.

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

If a higher portion of our net sales in any given period have lower gross margins, our overall gross margins and earnings would be negatively affected. Our Electronics business, which ultimately depends on consumers who buy electronic devices, began to experience recovery in 2010, but the duration of the recovery is uncertain. To the extent that the recovery in this market segment slows or stalls, our overall margins may be negatively affected.

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 customers in a range of 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. In addition, the complexity of product lines and diversity of our customer base creates manufacturing planning and control challenges that may lead to higher costs of materials and labor, increased service costs, delayed shipments and excessive inventory. Failure to effectively manage these manufacturing issues may materially impact our financial position, results of operations or cash flow.

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

We are currently executing a plan to shift manufacturing for certain products to other of our factories. Moving product manufacturing includes, among others, the following risks:

• 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; and

• logistical issues arising from the moves.

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 suppliers to provide parts and components. 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. Although we use numerous vendors to supply parts, components and subassemblies for the manufacture and support of our products, some key parts 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, restrictions regulating the use of certain hazardous substances in electrical and electronic equipment in various jurisdictions 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.

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Our service business depends on our ability to reliably supply replacement parts and consumables to our customers and failure to deliver high quality parts and consumables in a timely manner could cause our service business to suffer; we also depend on remote Internet tool diagnostics which could result in security breaches.

Our service business addresses a large and diverse install base of over 7,500 tools involving diverse products of varying ages, configurations, use cases, condition, and customer requirements that are dispersed in approximately 50 countries around the globe. Providing logistical support for delivery of spare parts and consumables to these tools, particularly the older tools, can be difficult. We have attempted to address the complexity of our service requirements, in part, through a remote diagnostics system that allows us to remotely access tools through a virtual private network. If we are unable to effectively manage and support the supply and delivery of spare parts and consumables to our customers we may damage our reputation and service business. Moreover, if we suffer an unauthorized intrusion into the virtual private network providing for remote diagnostics, we, or our customers, may suffer a loss of proprietary information that could create liability for us and undermine our business.

We depend on certain business processes for order entry and failure to adhere to those processes could impair our ability to properly book and fulfill orders.

We use business processes, including automated systems, to enter and track customer orders. Failure to adhere to these processes could result in errors in bookings and discounts on tool sales. Further, inaccurate booking information could lead to delays in shipping and having to rework orders. These problems could, in turn, cause reduced margins and delayed revenue.

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.

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 twenty-six weeks of 2011 and each of the last three years, we derived more than 66% 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.

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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,” one of our competitors, Hitachi, has filed multiple actions against our subsidiary, FEI Japan, in Japanese courts and with Japanese customs and a complaint against us in Korea with the Korea Trade Commission. Based on information available to us, we believe that we have meritorious defenses against these actions 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 or Korea, 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.

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.

The degree to which we are leveraged could have important consequences, including our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited. In addition 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. 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 guarantee that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us. As a result, 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.

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.

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.

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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.

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 new and existing customers, our results of operations will be negatively impacted.

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

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

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

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

Political instability in key regions around the world, the U.S. government’s commitment to military related expenditures and current uncertainty around global sovereign debt 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 3% of our orders in 2010 were funded by the ARRA. We do not expect significant orders from this funding source in 2011.

We have long sales cycles for our systems, which may cause our results of operations to fluctuate.

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.

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The length of time it takes us to complete a sale depends on many factors, including:

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

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

• the history of previous sales to a customer;

• the complexity of the customer’s manufacturing processes;

• the introduction, or announced introduction, of new products by our competitors;

• the economic environment;

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

• the capital expenditure budget cycle of the customer.

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

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

Attracting qualified personnel is difficult, and our recruiting efforts may not be successful. Specifically, our product generation efforts depend on hiring and retaining qualified engineers. The market for qualified engineers is very competitive. In addition, experienced management and technical, marketing and support personnel in the technology industry are in high demand, and competition for such talent is intense. The loss of key personnel, or our inability to attract key personnel, could have an adverse effect on our business, financial condition or results of operations.

Our customers experience rapid technological changes, with which we must keep pace. We may be unable to properly ascertain new market needs, or introduce new products responsive to those needs, on a timely and cost-effective basis.

Customers in each of our market segments experience rapid technological change that requires new product introductions and enhancements. Our ability to remain competitive depends in large part on our ability to understand these changes and develop, in a timely and cost-effective manner, new and enhanced systems at competitive prices that respond to, and accurately predict, new market requirements. We may fail to ascertain and respond to the needs of our customers or fail to develop and introduce new and enhanced products that meet their needs, which could adversely affect our financial position. 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 sold our Phenom product line as it did not deliver the level of revenues we had originally forecast.

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.

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 and damage our business.

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.

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 our reputation 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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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.

The earthquake, tsunami and nuclear disaster in Japan did not materially impact our facilities or operations in Japan, but did cause us to incur additional costs and to defer approximately $4.0 million of product revenue from the first quarter of 2011 to the second quarter of 2011 due to damage at a customer site.

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.

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.

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.

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Item 6. Exhibits

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

3.1	Third Amended and Restated Articles of Incorporation.(1)
3.2	Articles of Amendment to the Third Amended and Restated Articles of Incorporation.(2)
3.3	Amended and Restated Bylaws, as amended on February 18, 2009.(3)
10.1	Second Amendment to Credit Agreement, Security and Pledge Agreement and Disclosure Letter, dated as of April 26, 2011, by and among FEI Company, the Guarantors identified on the signature pages thereto, the Lenders identified on the signature pages thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.(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 Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 27, 2011.

(5) Incorporated by reference to our current report on Form 8-K filed with the Securities and Exchange Commission on May 13, 2011.

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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 4, 2011	/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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