e10vq

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U49pZsiCLFzhnw/X0+uN91r/LMin+zYUyujLC+zjgoJyySCTXsyKPX/VJVb7DtLq a7lM+I/DQrOu008RS6qzww== 0000950137-07-009530.txt : 20070629 0000950137-07-009530.hdr.sgml : 20070629 20070629151033 ACCESSION NUMBER: 0000950137-07-009530 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070526 FILED AS OF DATE: 20070629 DATE AS OF CHANGE: 20070629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FSI INTERNATIONAL INC CENTRAL INDEX KEY: 0000841692 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 411223238 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17276 FILM NUMBER: 07950466 BUSINESS ADDRESS: STREET 1: 3455 LYMAN BLVD. CITY: CHASKA STATE: MN ZIP: 55318 BUSINESS PHONE: 9524485440 MAIL ADDRESS: STREET 1: 3455 LYMAN BLVD. CITY: CHASKA STATE: MN ZIP: 55318 10-Q 1 c15796e10vq.htm FORM 10-Q e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended May 26, 2007


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 Number:		0-17276

FSI INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


MINNESOTA		41-1223238

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3455 Lyman Boulevard, Chaska, Minnesota		55318

(Address of principal executive offices)		(Zip Code)

952-448-5440

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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.


þ YES		o NO

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


Large Accelerated Filer o		Accelerated Filer þ		Non-Accelerated Filer o

Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


o YES		þ NO

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

Common Stock, No Par Value — 30,438,000 shares outstanding as of June 27, 2007

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q


		PAGE NO.
PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited): Condensed Consolidated Balance Sheets as of May 26, 2007 and August 26, 2006		3

	Condensed Consolidated Statements of Operations for the quarters ended May 26, 2007 and May 27, 2006		5

	Condensed Consolidated Statements of Operations for the nine months ended May 26, 2007 and May 27, 2006		6

	Condensed Consolidated Statements of Cash Flows for the nine months ended May 26, 2007 and May 27, 2006		7

	Notes to Condensed Consolidated Financial Statements		8

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		27

Item 1A.	Risk Factors		28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29

Item 3.	Defaults upon Senior Securities		29

Item 4.	Submission of Matters to a Vote of Security Holders		29

Item 5.	Other Information		29

Item 6.	Exhibits		30

	SIGNATURE		31
Termination and Release Agreement
Stock Purchase Agreement
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906

PART I. Item 1. FINANCIAL INFORMATION

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 26, 2007 AND AUGUST 26, 2006

ASSETS
(unaudited)
(in thousands)


	May 26,			August 26,
	2007			2006
Current assets:
Cash and cash equivalents	$	14,384		$	15,672
Restricted cash		149			144
Marketable securities		9,650			11,100
Trade accounts receivable, net of allowance for doubtful accounts of $200 and $520, respectively		17,908			23,173
Inventories, net		35,504			35,682
Prepaid expenses and other current assets		7,943			11,340


Total current assets		85,538			97,111


Property, plant and equipment, at cost		79,142			77,320
Less accumulated depreciation		(58,184	)		(56,925	)

		20,958			20,395
Restricted cash		516			—
Investment		460			7,632
Intangibles, net of accumulated amortization of $13,749 and $13,619, respectively		605			1,246
Other assets		1,160			1,160


Total assets	$	109,237		$	127,544

See accompanying notes to condensed consolidated financial statements.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 26, 2007 AND AUGUST 26, 2006
(continued)

LIABILITIES AND STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands)


	May 26,			August 26,
	2007			2006
Current liabilities:
Trade accounts payable	$	4,208		$	8,803
Accrued expenses		11,217			15,212
Current portion of capital lease obligations		523			—
Customer deposits		2,471			5,408
Deferred profit		3,292			4,149


Total current liabilities		21,711			33,572

Capital lease obligations		786			—

Stockholders’ equity:
Preferred stock, no par value; 9,700 shares authorized; none issued and outstanding		—			—
Series A Junior Participating Preferred Stock, no par value; 300 shares authorized; none issued and outstanding		—			—
Common stock, no par value; 50,000 shares authorized; issued and outstanding, 30,438 and 30,309 shares, respectively		225,687			225,169
Accumulated deficit		(140,093	)		(132,052	)
Accumulated other comprehensive loss		(362	)		(218	)
Other stockholders’ equity		1,508			1,073


Total stockholders’ equity		86,740			93,972


Total liabilities and stockholders’ equity	$	109,237		$	127,544

See accompanying notes to condensed consolidated financial statements.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MAY 26, 2007 AND MAY 27, 2006

(unaudited)

(in thousands, except per share data)


	May 26,			May 27,
	2007			2006
Sales (including sales to affiliate of $3,876 and $1,788, respectively)	$	25,227		$	31,957
Cost of sales		15,840			18,909

Gross margin		9,387			13,048

Selling, general and administrative expenses		8,571			9,303
Research and development expenses		6,119			6,305

Operating loss		(5,303	)		(2,560	)

Interest expense		(50	)		(14	)
Interest income		184			244
Impairment and loss on sale of investment		(489	)		—
Other income (expense), net		45			(39	)

Loss before income taxes		(5,613	)		(2,369	)

Income taxes		55			12


Loss before equity in earnings (loss) of affiliate		(5,668	)		(2,381	)

Equity in earnings (loss) of affiliate		25			(52	)


Net loss	$	(5,643	)	$	(2,433	)


Net loss per common share:
Basic	$	(0.19	)	$	(0.08	)
Diluted	$	(0.19	)	$	(0.08	)

Weighted average common shares		30,428			30,075
Weighted average common and potential common shares		30,428			30,075

See accompanying notes to condensed consolidated financial statements.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED MAY 26, 2007 AND MAY 27, 2006

(unaudited)

(in thousands, except per share data)


	May 26,			May 27,
	2007			2006
Sales (including sales to affiliate of $5,355 and $4,386, respectively)	$	96,284		$	72,867
Cost of sales		56,485			37,821

Gross margin		39,799			35,046

Selling, general and administrative expenses		26,177			27,307
Research and development expenses		18,247			18,379

Operating loss		(4,625	)		(10,640	)

Interest expense		(152	)		(28	)
Interest income		638			807
Impairment and loss on sale of investments		(4,088	)		(500	)
Other income, net		289			103

Loss before income taxes		(7,938	)		(10,258	)

Income taxes		130			37


Loss before equity in earnings (loss) of affiliate		(8,068	)		(10,295	)

Equity in earnings (loss) of affiliate		27			(155	)


Net loss	$	(8,041	)	$	(10,450	)


Net loss per common share:
Basic	$	(0.26	)	$	(0.35	)
Diluted	$	(0.26	)	$	(0.35	)

Weighted average common shares		30,383			29,979
Weighted average common and potential common shares		30,383			29,979

See accompanying notes to condensed consolidated financial statements.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED MAY 26, 2007 AND MAY 27, 2006

(unaudited)

(in thousands)


	May 26,			May 27,
	2007			2006
OPERATING ACTIVITIES:
Net loss	$	(8,041	)	$	(10,450	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock compensation expense		427			807
Impairment and loss on sale of investments		4,088			500
Depreciation		2,723			2,620
Amortization		399			404
Gain on sale of fixed asset		(17	)		—
Equity in (earnings) loss of affiliate		(27	)		155
Changes in operating assets and liabilities:
Restricted cash		(5	)		139
Trade accounts receivable		5,265			1,880
Inventories		177			(6,806	)
Prepaid expenses and other current assets		3,396			(2,454	)
Trade accounts payable		(4,595	)		1,974
Accrued expenses		(3,998	)		(803	)
Customer deposits		(2,937	)		5,884
Deferred profit		(857	)		(213	)

Net cash used in operating activities		(4,002	)		(6,363	)


INVESTING ACTIVITIES:
Capital expenditures		(1,586	)		(1,996	)
Purchases of marketable securities		(66,650	)		(245,550	)
Sales of marketable securities		68,100			252,695
Dividend from affiliate		2,047			208
Proceeds from sale of investments		1,238			—
Proceeds from sale of fixed asset		17			—

Net cash provided by investing activities		3,166			5,357


FINANCING ACTIVITIES:
Net proceeds from issuance of common stock		518			744
Increase in restricted cash		(515	)		—
Principle payments on capital lease		(378	)		—

Net cash (used in) provided by financing activities		(375	)		744


Effect of exchange rate changes on cash and cash equivalents		(77	)		(145	)


Decrease in cash and cash equivalents		(1,288	)		(407	)

Cash and cash equivalents at beginning of period		15,672			11,352


Cash and cash equivalents at end of period	$	14,384		$	10,945

See accompanying notes to condensed consolidated financial statements.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Description of Business and Summary of Significant Accounting Policies

Description of Business

FSI International, Inc. (the “Company”) is a global supplier of surface conditioning equipment (process equipment that is used to wet-etch and remove contaminates from the surfaces of microelectronic substrates and devices), and technology and support services for microelectronics manufacturing. The Company’s broad portfolio of batch and single-wafer cleaning products includes process technologies for immersion (a method used to clean substrates and devices by immersing them in multiple tanks filled with process chemicals), spray (sprays chemical mixtures, water and nitrogen in a variety of sequences on to the substrates and devices), vapor (utilizes gas phase chemistries to selectively remove sacrificial surface films) and CryoKinetic (a momentum transfer process used to remove non-chemically bonded particles from the surface of substrates and devices). The Company’s support services programs provide product and process enhancements to extend the life of installed FSI equipment.

The Company announced the winding down of its Microlithography business in March 2003 and transitioned the Microlithography (uses light to transfer a circuit pattern onto microelectronic substrates and devices) business to a POLARIS^® Systems and Services (“PSS”) organization to focus on supporting the more than 300 installed POLARIS^® Systems, including refurbishments, upgrades, training and spares.

The Company’s customers include microelectronics manufacturers located throughout North America, Europe, Japan and the Asia-Pacific region.

Condensed Consolidated Financial Statements

The accompanying condensed consolidated financial statements have been prepared by the Company without audit and reflect all adjustments (consisting only of normal and recurring adjustments, except as disclosed in the notes) which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”) but omit certain information and footnote disclosures necessary to present the statements in accordance with accounting principles generally accepted in the United States of America. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 26, 2006, previously filed with the SEC.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that could 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 amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for the Company

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

beginning in fiscal year 2008. The Company is still evaluating the impact that the adoption of this pronouncement will have on its consolidated financial statements.

In June 2006, the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue No. 06-3 “How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF No. 06-3”). The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer, and provides that a company may adopt a policy of presenting taxes either gross within revenue or on a net basis. For any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes for each period for which an income statement is presented if those amounts are significant. This statement is effective to financial reports for interim and annual reporting periods beginning after December 15, 2006. EITF No. 06-3 became effective for the Company as of February 25, 2007. The Company collects various sales and value-added taxes on certain product and service sales, which are accounted for on a net basis.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” to address diversity in practice in quantifying financial statement misstatements. SAB No. 108 requires that the Company quantify misstatements based on their impact on each of the Company’s financial statements and related disclosures. SAB No. 108 is effective as of the end of the Company’s fiscal year 2007, allowing a one-time transitional cumulative effect adjustment to retained earnings as of August 27, 2006, for errors that were not previously deemed material, but are material under the guidance in SAB No. 108. The Company is still evaluating the impact SAB No. 108 will have on its consolidated financial statements and will adopt SAB No. 108 in the fourth quarter of fiscal 2007.

In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. This statement applies only to fair-value measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value. This statement is expected to increase the consistency of fair value measurements, but imposes no requirements for additional fair-value measures in financial statements. The provisions under SFAS No. 157 are effective for the Company beginning in the first quarter of fiscal 2008. The Company is still evaluating the impact the adoption of this pronouncement will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (SFAS No. 159). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of fiscal years that begin after November 15, 2007. The Company is still evaluating the impact the adoption of this pronouncement will have on its consolidated financial statements.

Reclassifications

Certain amounts have been reclassified to conform to the current year presentation.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(2) Inventories, net

Inventories, net are summarized as follows (in thousands):


	May 26,		August 26,
	2007		2006
Finished products	$	3,511	$	4,756
Work-in-process		13,995		17,435
Subassemblies		4,259		2,911
Raw materials and purchased parts		13,739		10,580

	$	35,504	$	35,682

(3) Accrued expenses

Accrued expenses are summarized as follows (in thousands):


	May 26,		August 26,
	2007		2006
Salaries and benefits	$	3,789	$	3,667
Product warranty		4,023		3,964
Professional fees		418		489
Income taxes		1,194		1,260
VAT taxes		192		4,257
Other		1,601		1,575

	$	11,217	$	15,212

(4) Supplementary cash flow information

The following summarizes supplementary cash flow items (in thousands):


	Nine Months Ended
	May 26,		May 27,
	2007		2006
Income taxes paid	$	93	$	32
Interest paid, net		153		—
Assets acquired by a capital lease	$	1,687	$	—

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(5) Comprehensive loss

Other comprehensive loss pertains to revenues, expenses, gains and losses that are not included in the net loss but rather are recorded directly in stockholders’ equity. For the quarters and nine months ended May 26, 2007 and May 27, 2006, other comprehensive loss consisted of the foreign currency translation adjustment. The components of comprehensive loss are summarized as follows (in thousands):


	Quarters Ended						Nine Months Ended
	May 26,			May 27,			May 26,			May 27,
	2007			2006			2007			2006
Net loss	$	(5,643	)	$	(2,433	)	$	(8,041	)	$	(10,450	)
Foreign currency translation		98			(53	)		(145	)		(600	)

Comprehensive loss	$	(5,545	)	$	(2,486	)	$	(8,186	)	$	(11,050	)

(6) Stock-Based Compensation

Stock-based compensation expense for stock options granted or vested under the Company’s stock incentive plan and Employees Stock Purchase Plan (“ESPP”) was reflected in the statements of operations for the third quarter and first nine months of each of fiscal 2007 and 2006 as follows (in thousands):


	Quarters Ended				Nine Months Ended
	May 26,		May 27,		May 26,		May 27,
	2007		2006		2007		2006
Cost of goods sold	$	6	$	11	$	22	$	32
Selling, general and administrative		112		193		316		550
Research and development		20		79		89		225

	$	138	$	283	$	427	$	807

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The fair value of each option granted under the Company’s stock incentive plan and ESPP is estimated on the date of grant using the Black-Scholes option-pricing model. The Company uses historical data to estimate the expected price volatility, the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The Company has not made any dividend payments nor does it expect to pay dividends in the foreseeable future. The following assumptions were used to estimate the fair value of options granted during the third quarter and first nine months of fiscal 2007 and 2006 using the Black-Scholes option-pricing model:


	Quarters Ended					Nine Months Ended
	May 26,		May 27,			May 26,			May 27,
	2007		2006			2007			2006
Stock options:
Volatility		*		68.0	%		69.0	%		68.5	%
Risk-free interest rates		*		4.9	%		4.7	%		4.5	%
Expected option life		*		5.5			5.5			5.6
Stock dividend yield		*		—			—			—

ESPP:
Volatility		*		*			69.0	%		68.3	%
Risk-free interest rates		*		*			5.1	%		4.3	%
Expected option life		*		*			0.5			0.5
Stock dividend yield		*		*			—			—


*		There were no stock options granted under the Company’s option plan in the third quarter of fiscal 2007 or under the ESPP in the third quarter of fiscal 2007 or the third quarter of fiscal 2006.

A summary of option activity for the first nine months of fiscal 2007 is as follows (in thousands, except price per share and contractual term):


						Weighted
				Weighted		-average
				-average		Remaining		Aggregate
	Number of			Exercise Price		Contractual		Intrinsic
	Shares			Per Share		Term		Value
Outstanding as of August 26, 2006		3,699		$	7.42
Options granted		173			5.20
Options forfeited		(5	)		3.73
Options expired		(179	)		11.26
Options exercised		(54	)		3.50


Outstanding as of May 26, 2007		3,634		$	7.19		5.4	$	778


Exercisable as of May 26, 2007		3,306		$	7.43		5.1	$	731

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The weighted-average grant-date fair value based on the Black-Scholes option-pricing model for options granted in the first nine months of fiscal 2007 was $3.32 per share, for options granted in the third quarter of fiscal 2006 was $3.22 per share, and options granted in the first nine months of fiscal 2006 was $3.10 per share. The total intrinsic value of options exercised was $13,500 during the third quarter of fiscal 2007, $108,200 during the first nine months of fiscal 2007, $92,000 during the third quarter of fiscal 2006 and $203,700 during the first nine months of fiscal 2006.

A summary of the status of our unvested options as of May 26, 2007 is as follows (in thousands, except fair value amounts):


				Weighted-average
	Number of			Grant-Date Fair
	Shares			Value
Unvested at August 26, 2006		303		$	2.75
Options granted		173			3.32
Options forfeited		(5	)		2.30
Options vested		(143	)		2.80


Unvested at May 26, 2007		328		$	3.04

As of May 26, 2007, there was $852,000 of total unrecognized compensation cost related to unvested share-based compensation granted under our plans. That cost is expected to be recognized over a weighted-average period of 1.1 years. The total fair value of option shares vested during the third quarter of fiscal 2007 was $138,000, $427,000 during the first nine months of fiscal 2007, $283,000 during the third quarter of fiscal 2006, and $806,000 during the first nine months of fiscal 2006.

(7) Capital Lease

The Company entered into a capital lease to finance lab equipment during the first quarter of fiscal 2007. The future minimum lease payments as of May 26, 2007 are as follows (in thousands):


Last three months of fiscal 2007	$	162
Fiscal 2008		648
Fiscal 2009		647

		1,457
Less imputed interest		(148	)

Total capital lease obligation	$	1,309

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(8) m•FSI LTD Transaction

Prior to the transaction described below, the Company owned a 49 percent equity interest in m•FSI, LTD (“m•FSI”), a Japanese joint venture company formed in 1991 among the Company, Mitsui & Co., Ltd. (“Mitsui”) and Mitsui’s wholly owned subsidiary, Chlorine Engineers Corp., Ltd. (“CEC”). m•FSI is engaged in the manufacturing and distribution in the Japanese market of semiconductor equipment and products, including certain products of FSI. The Company, CEC, Mizuho Capital Co., Ltd, (“Mizuho”), The Yasuda Enterprise Development III, Limited Partnership (“Yasuda”) and certain m•FSI managers (“m•FSI Management Group”) entered into a Stock Purchase Agreement (the “Agreement”). The m•FSI Management Group does not include any officers or employees of the Company. Under the Agreement, m•FSI paid on May 15, 2007, (the “Closing Date”), a $4.2 million dividend to its shareholders prior to the sales contemplated in the Agreement, of which the Company received approximately $2.0 million. In addition, under the Agreement, CEC and MBK Project Holdings Ltd. (“MPH”), a wholly owned subsidiary of Mitsui, sold all of their combined 51 percent equity ownership in m•FSI and the Company sold 28.4 percent of its equity ownership in m•FSI, or a total of 79.4 percent, to Yasuda, Mizuho and the m•FSI Management Group for a total purchase price of $1.8 million. On the Closing Date, the Company received total proceeds of $3.2 million, net of applicable taxes. The Company maintains a 20.6 percent equity ownership in m•FSI after the completion of the transaction. As a result of the transaction, the Company’s ownership and business relationship with m•FSI changed such that the Company no longer had the ability to exercise significant influence over m•FSI. Therefore, beginning in the fourth quarter of fiscal 2007, the Company will begin to account for its investment in m•FSI under the cost method. Previously, the Company accounted for its investment in m•FSI under the equity method. On the Closing Date, the Company entered into a Termination and Release Agreement with Mitsui, CEC, MPH and m•FSI, for the termination of the following agreements and any amendments thereto:

	(i)		the m•FSI Distribution Agreement, dated September 17, 2004, providing the Company with the exclusive rights to distribute m•FSI surface conditioning products outside of Japan,

	(ii)		the FSI Distribution Agreement, dated June 5, 1991, providing m•FSI with exclusive rights to distribute the Company surface conditioning products in Japan,

	(iii)		the m•FSI License Agreement, dated September 17, 2004, pursuant to which m•FSI granted to the Company a license to certain m•FSI intellectual property and technology,

	(iv)		the FSI License Agreement, dated June 5, 1991, pursuant to which the Company granted to m•FSI a license to certain of the Company’s intellectual property and technology, and

	(v)		the Shareholders Agreement, dated June 5, 1991, among the Company, CEC and MPH related to the establishment of m•FSI.

Finally, the Company and m•FSI entered into a new distribution agreement, with an initial five-year term, providing m•FSI with the exclusive right to sell, lease or otherwise distribute FSI surface conditioning products in Japan. Also, the Company, Mizuho, Yasuda and the m•FSI Management Group entered into a new shareholders agreement providing for certain governance, transfer and other rights and restrictions related to their ownership of m•FSI.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(9) Impairment and loss on sale of Investments

In anticipation of completing the transaction described in Note 8, the Company recorded a $3.6 million impairment charge in the second quarter of fiscal 2007. With the completion of the transaction in the third quarter of fiscal 2007, the Company recorded an additional $0.5 million charge related to the transaction described in Note 8. During the first nine months of fiscal 2007, the Company recorded net charges of $4.1 million related to the transaction described in Note 8.

In the second quarter of fiscal 2006, the Company recorded a $0.5 million asset impairment charge associated with an investment it had in a Malaysian foundry that was accounted for under the cost method. On March 22, 2006, the majority shareholder of this Malaysian foundry announced that the foundry would merge with another foundry and form a new entity. Subsequent to the merger announcement, the Company was contacted by the majority shareholder and given the option of selling its shares at a nominal value to the majority shareholder or providing additional debt to the foundry as part of a pre-merger restructuring. Based on this information, the Company deemed its investment as being fully impaired as of February 25, 2006 and recorded a loss of $0.5 million in the second quarter of fiscal 2006. The Company sold its shares at a nominal value to the majority shareholder during the third quarter of fiscal 2006.

(10) Contingencies

The Company generates minor amounts of liquid and solid hazardous waste and uses licensed haulers and disposal facilities to ship and dispose of such waste. In the past, the Company has received notices from state or federal enforcement agencies that the Company is a potentially responsible party (“PRP”) in connection with the investigation of several hazardous waste disposal sites owned and operated by third parties. In each matter, the Company has elected to participate in settlement offers made to all de minimis parties with respect to such sites. The risk of being named a PRP is that if any of the other PRP’s are unable to contribute its proportionate share of the liability, if any, associated with the site, those PRP’s that are financially able could be held financially responsible for the shortfall. The Company currently does not have any of these claims outstanding.

In late calendar 2006, the Company determined that certain of its replacement valves, pumps and heaters could fall within the scope of United States export licensing regulations to products that could be used in connection with chemical weapons processes. The Company determined that these regulations require it to obtain licenses to ship some of its replacement spare parts, spare parts kits and assemblies to customers in certain controlled countries as defined in the export licensing regulations. During the second quarter of fiscal 2007, the Company was granted licenses to ship replacement spare parts, spare parts kits and assemblies to all customers in the controlled countries where the Company conducts business.

The applicable export licensing regulations frequently change. Moreover, the types and categories of products that are subject to export licensing are often described in the regulations in general terms and could be subject to differing interpretations.

In the second quarter of fiscal 2007, the Company made a voluntary disclosure to the United States Department of Commerce to clarify its licensing practices and to review its practices with respect to prior sales of certain replacement valves, pumps and heaters to customers in several controlled countries as defined in the licensing regulations.

The United States Department of Commerce could assess penalties for any past violation of export control regulations. The potential penalties are dependent upon the number of shipments in violation of the export control regulations. The penalties can range from zero to $50,000 per violation. Management believes that the resolution of this matter will not have a material adverse impact to the Company’s consolidated financial condition. The licenses that were granted during the second quarter of fiscal 2007 do not necessarily mitigate the Company’s risk with respect to past violations.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(11) Cost Reductions

In the third quarter of fiscal 2007, the Company implemented cost reduction actions including an 11% reduction in headcount to approximately 500 employees and other operating cost initiatives. The cost reduction actions were related to industry conditions in the semiconductor device and thin film head (a device manufactured on a silicon wafer which is capable of reading and writing information onto a compact disc or other information storage device) segments that the Company serves, coupled with a delay in certain customer-specific equipment purchases. A total of 61 positions were eliminated in connection with this reduction of which 36 were manufacturing positions, 13 were sales, service and marketing positions and 12 were engineering positions. The terminations all occurred in the third quarter of fiscal 2007. Severance and outplacement costs recorded in the third quarter of fiscal 2007 were allocated as follows: $216,000 to selling, general and administrative expense, $216,000 to research and development expense and $142,000 to cost of goods sold.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information in this report, except for the historical information, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created by that statute. Typically, we identify forward-looking statements by use of an asterisk “*.” In some cases, you can identify forward-looking statements by terminology such as “expects,” “anticipates,” “intends,” “may,” “should,” “plans,” “believes,” “seeks,” “estimates,” “could,” “would,” or the negative of such terms or other comparable terminology. These forward-looking statements include, but are not limited to expected orders, revenues, gross margin, operating expense run rate, net loss and cash usage for the fourth quarter of fiscal 2007; and expected fourth quarter actions to lower our breakeven revenue level and to improve margins. These statements are subject to various risks and uncertainties, both known and unknown. Factors that could cause actual results to differ from these forward-looking statements include, but are not limited to the length and extent of industry slowdowns and recoveries; order delays or cancellations; general economic conditions; changes in customer capacity requirements and demand for microelectronics; the extent of demand for our products and our ability to meet demand; global trade policies; worldwide economic and political stability; our successful execution of internal performance plans; the cyclical nature of our business; volatility of the market for certain products; performance issues with key suppliers and subcontractors; the level of new orders; timely achievement of product acceptances; the timing and success of current and future product and process development programs; the success of our distributor in Japan; the success of our direct distribution organization; and the potential impairment of long-lived assets; as well as other factors listed from time to time in our SEC reports including, but not limited to, the Risk Factors set forth in the Form 10-K, as amended, for the fiscal year ended August 26, 2006. Readers also are cautioned not to place undue reliance on these forward-looking statements as actual results could differ materially. We undertake no duty to update any of the forward-looking statements after the date of this report.

This discussion and analysis should be read in conjunction with the Consolidated Condensed Financial Statements and footnotes thereto appearing elsewhere in this report.

Industry

In general, semiconductor and equipment industry analysts have become more cautious with respect to calendar 2007. Many analysts anticipate that demand for semiconductors will improve in the second half of calendar 2007 as compared to the first half.* On the other hand, some analysts are forecasting demand for equipment to weaken in the second half of calendar 2007 before recovering again in calendar 2008.*

Several semiconductor manufacturers have announced spin-offs and fab light initiatives. These changes are impacting how equipment suppliers conduct business. The recently announced combination of ST Microelectronics and Intel’s NOR (a type of flash memory chip with capabilities for applications in which programs run directly from memory) flash businesses and Texas Instruments’ announcement to partner with an Asian foundry are examples of such transactions. These initiatives, at least in the near term, can disrupt momentum on both revenue and development fronts, as the manufacturers involved delay or reduce spending until they implement their business model changes.*

In a softening industry environment, customers may take the opportunity to evaluate new products and process technologies. We continue to experience a steady flow of demonstration requests for our products and applications, particularly our ZETA^® ViPR™ technology.

It is often during periods of lower sales growth and reduced profit margins that customers request longer on-site product evaluations, sales concessions and delayed payment terms. In addition, in an effort to reduce costs and preserve cash, many customers let on-site support contracts expire. Due to lost revenue and profits, these actions put more financial burden on equipment suppliers.

Overview

During the third quarter of fiscal 2007, we completed the restructuring of m•FSI, our Japanese joint venture with Mitsui. m•FSI, established in 1991, is engaged in manufacturing and distributing semiconductor equipment and products in the Japanese market, including our surface conditioning products.

In the third quarter, we gained acceptance of another evaluation system at a key Asian customer. We also demonstrated the high volume throughput version of our MAGELLAN^® system in a customer’s production fab. As a result of leads during our Knowledge Service Seminars, we saw increased customer interest in our ViPR™ technology. In addition, we continued with customer process qualification for our new single wafer wet cleaning system.

With expected revenue in the $20 to 25 million range for the August and November 2007 quarters, we are conducting a comprehensive program and cost structure review and expect to take actions in the fourth quarter, focused on lowering our breakeven revenue level and improving our margins.* Our challenge, in the current industry environment, is to restructure our business without negatively impacting sales opportunities with new and existing customers of our flagship products while sustaining our key development initiatives and preserving our cash.

Application of Critical Accounting Policies and Estimates

In accordance with Securities and Exchange Commission guidance, those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below.

Our critical accounting policies and estimates are as follows:

	•		revenue recognition;

	•		valuation of long-lived assets;

	•		estimation of valuation allowances and accrued liabilities, specifically product warranty, inventory reserves and allowance for doubtful accounts;

	•		stock-based compensation; and

	•		income taxes.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectibility is reasonably assured. If our equipment sales involve sales to our existing customers who have previously accepted the same type(s) of equipment with the same type(s) of specifications, we account for the product sales as a multiple element arrangement. Revenue from multiple element arrangements is allocated among the separate accounting units based on the residual method. Under the residual method, the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements. We recognize the equipment revenue upon shipment and transfer of title. The other multiple elements also include installation, service contracts and training. Equipment installation revenue is valued based on estimated service person hours to complete installation and published or quoted service labor rates and is recognized when the installation has been completed and the equipment has been accepted by the customer. Training revenue is valued based on published training class prices or quoted rates and is recognized when the customers complete the training classes or when a customer-specific training period has expired. The published or quoted service labor rates and training class prices are rates actually charged and billed to our customers.

All other product sales with customer-specific acceptance provisions are recognized upon customer acceptance. Future revenues may be negatively impacted if we are unable to meet customer-specific acceptance criteria. Revenue related to spare part sales is recognized upon shipment or delivery based on the title transfer terms. Revenues related to maintenance and service contracts are recognized ratably over the duration of such contracts.

The timing and amount of revenue recognized depends on whether revenue is recognized upon shipment versus acceptance. For revenue recognized upon acceptance, it is dependent upon when customer-specific criteria are met.

Valuation of Long-Lived Assets

We assess the impairment of identifiable long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

If we determine that the carrying value of long-lived assets may not be recoverable, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model or another valuation technique. Net intangible assets and long-lived assets amounted to $21.6 million as of May 26, 2007 and as of August 26, 2006.

Product Warranty Estimation

We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, releases of new products and other factors. The warranty periods for new equipment manufactured by us typically range from one to two years. Special warranty reserves are also accrued for major rework campaigns. Although management believes the likelihood to be relatively low, claims experience could be materially different from actual results because of the introduction of new, more complex products; competition or other external forces; manufacturing changes that could impact product quality; or as yet unrecognized defects in products sold.

Inventory Reserves Estimation

We record reserves for inventory shrinkage and for potentially excess, obsolete and slow moving inventory. These reserves are based upon historical loss trends, inventory levels, physical inventory and cycle count adjustments, expected product lives, forecasted sales demand and recoverability. Results could be materially different if demand for our products decreased because of economic or competitive conditions, length of the industry downturn, or if products become obsolete because of technical advancements in the industry or by us.

In the second quarter of fiscal 2003, we recorded POLARIS^® Systems and Services (“PSS”) product inventory reserves as a result of the wind-down of our Microlithography business. During the first nine months of fiscal 2007, we had sales of PSS product inventory that had previously been written down to zero with an original cost of approximately $887,000. During the third quarter and first nine months of fiscal 2006, we had sales of PSS product inventory that had previously been written down to zero with an original cost of $410,000 and $2.0 million, respectively. Also, in the first nine months of fiscal 2007, we recorded an additional $1.2 million reserve related to used tools and other raw materials purchased since March 2003 to be used for refurbished equipment. Since the write-down of the inventory in fiscal 2003, we have had cumulative sales of PSS product inventory that had previously been written down to zero and reductions in inventory buyback requirements of approximately $9.7 million and have disposed of approximately $6.5 million of PSS product inventory. The original cost of PSS product inventory available for sale or to be disposed of as of May 26, 2007 that has been written down to zero was approximately $8.7 million. Total inventory reserves were $14.7 million as of May 26, 2007 and $13.8 million as of August 26, 2006.

Allowance for Doubtful Accounts Estimation

Management must estimate the uncollectibility of our accounts receivable. The most significant risk is a sudden

unexpected deterioration in financial condition of a significant customer who is not considered in the allowance. Management specifically analyzes accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Results could be materially impacted if the financial condition of a significant customer deteriorated, due to the cyclicality of our industry or for other reasons, and related accounts receivable are deemed uncollectible. Accounts receivable are charged off after management determines that they are uncollectible.

Stock-Based Compensation

We implemented the fair value recognition provisions of SFAS No. 123R effective August 28, 2005 using the modified prospective method. Under this method, we recognize compensation expense for all stock-based awards granted on or after August 28, 2005 and for previously granted awards not yet vested as of August 28, 2005.

We utilize the Black-Scholes option-pricing model to estimate fair value of each award on the date of grant. The Black-Scholes model requires the input of certain assumptions that involve management judgment. Key assumptions that affect the calculation of fair value include the expected life of stock-based awards and our stock price volatility. Additionally, we expense only those shares expected to vest. The assumptions used in calculating the fair value of stock-based awards and the forfeiture rate of such awards reflect management’s best estimates. However, circumstances may change and additional data may become available over time, which could result in changes to these assumptions that materially impact the fair value determination of future awards or their estimated rate of forfeiture. If factors change and we use different assumptions in the application of SFAS 123R in future periods, the compensation expense recorded under SFAS 123R may differ significantly from the expense recorded in the current period.

Income Taxes

Our effective income tax rate is based on income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. We have established valuation allowances against a portion of the U.S. and non-U.S. net operating losses to reflect the uncertainty of our ability to fully utilize these benefits given the limited carryforward periods permitted by the various jurisdictions. The evaluation of the realizability of our net operating losses requires the use of considerable management judgment to estimate the future taxable income for the various jurisdictions, for which the ultimate amounts and timing of such estimates may differ. The valuation allowance can also be impacted by changes in the tax regulations.

Significant judgment is required in determining our contingent tax liabilities. We have established contingent tax liabilities using management’s best judgment and adjust these liabilities as warranted by changing facts and circumstances. A change in our tax liabilities in any given period could have a significant impact on our results of operations and cash flows for that period.

THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL 2007 COMPARED TO THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL 2006

The Company

The following table sets forth on a consolidated basis, for the fiscal period indicated, certain income and expense items as a percent of total sales.


	Percent of Sales						Percent of Sales
	Quarter Ended						Nine Months Ended
	May 26,			May 27,			May 26,			May 27,
	2007			2006			2007			2006
Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		62.8			59.2			58.7			51.9

Gross margin		37.2			40.8			41.3			48.1
Selling, general and administrative		34.0			29.1			27.2			37.5
Research and development		24.2			19.7			18.9			25.2

Operating loss		(21.0	)		(8.0	)		(4.8	)		(14.6	)
Other income, net		(1.2	)		0.6			(3.4	)		0.5

Loss before income taxes		(22.2	)		(7.4	)		(8.2	)		(14.1	)
Income taxes		0.2			—			0.1			—
Equity in (loss) earnings of affiliate		—			(0.2	)		—			(0.2	)

Net loss		(22.4	)%		(7.6	)%		(8.3	)%		(14.3	)%

Sales Revenue and Shipments

Sales revenue decreased by $6.7 million to $25.2 million for the third quarter of fiscal 2007 as compared to $32.0 million for the third quarter of fiscal 2006. The decrease in sales revenue related primarily to a decrease in shipments from $28.6 million in the third quarter of fiscal 2006 to $20.9 million in the third quarter of fiscal 2007. The decrease in shipments related to a decrease in customer orders as a result of slower industry conditions in the third quarter of fiscal 2007 than the third quarter of fiscal 2006. Sales revenue increased by $23.4 million to $96.3 million for the first nine months of fiscal 2007 as compared to $72.9 million for the first nine months of fiscal 2006. The increase in sales revenue related to an increase in shipments from $73.3 million in the first nine months of fiscal 2006 to $95.0 million in the first nine months of fiscal 2007. The increase in shipments primarily related to an increase in backlog from $19.3 million as of the beginning of the first nine months of fiscal 2006 to $39.8 million as of the beginning of the first nine months of fiscal 2007 associated with industry cycles.

Based upon our revenue recognition policy, certain shipments to customers are not recognized until customer acceptance. Therefore, depending on the timing of shipments and customer acceptances, there are time periods where shipments may exceed sales revenue or sales revenue may exceed shipments.

International sales were $18.9 million, representing 75% of total sales, during the third quarter of fiscal 2007 and $18.7 million, representing 59% of total sales, during the third quarter of fiscal 2006. The net increase in international sales related to increases in Europe and Japan, net of decreases in the Far East. International sales were $65.8 million, representing 68% of total sales, during the first nine months of fiscal 2007 and $42.4 million, representing 58% of total sales, during the first nine months of fiscal 2006. The increase in international sales related to increases in Europe and the Far East.

We expect fourth quarter of fiscal 2007 revenues to be between $20 and $24 million.* A portion of the expected revenue is subject to us obtaining timely acceptance from our customers and orders are subject to cancellation.

Gross Margin

Our gross profit margin fluctuates due to a number of factors, including the mix of products sold; the geographic mix of products sold, with international sales generally having lower gross profit than domestic sales; initial product placement discounts; utilization of manufacturing capacity; sales of PSS product inventory previously written down to zero; and the competitive pricing environment.

Gross margin as a percentage of sales for the third quarter of fiscal 2007 was 37.2% as compared to 40.8% for the third quarter of fiscal 2006. Gross margin as a percentage of sales for the first nine months of fiscal 2007 was 41.3% as compared to 48.1% for the first nine months of fiscal 2006. The decreases in margin in the fiscal 2007 periods were primarily due to an increase in the percentage of international sales as a percent of total sales and a product mix change. The change in gross margin in the third quarter of fiscal 2007 as compared to the third quarter of fiscal 2006 was also impacted by a reduction in our capacity utilization rate as shipments declined.

The fiscal 2007 margins were also impacted by the usage of PSS product inventory that had previously been written down to zero, offset by additional inventory reserves. During the third quarter of fiscal 2007, we had no significant sales of PSS product inventory that had previously been written down to zero. During the first nine months of fiscal 2007, we had sales of PSS product inventory with an original cost of $887,000 that had previously been written down to zero. The increase in gross margin was partially offset by $389,000 of additional inventory reserves recorded in the third quarter of fiscal 2007 and $1.2 million of additional inventory reserves recorded in the first nine months of fiscal 2007 related to excess inventory purchased since March 2003 to be used for refurbished equipment. In the third quarter of fiscal 2006, we had sales of PSS product inventory with an original cost of $410,000 that had previously been written down to zero. In the first nine months of fiscal 2006, we had sales of PSS product inventory with an original cost of $2.0 million that had previously been written down to zero.

We continue to try to sell the impaired inventory to our customers as spares, refurbished systems and upgrades to existing systems. If unsuccessful, some of the items will be disposed. Any significant sales of the impaired inventory will be disclosed. Gross margins will be higher if inventory carried at a reduced cost is sold.

Gross margins for the fourth quarter of fiscal 2007 are expected to be between 41% to 43% of revenues due to expected product and geographic sales mix, partially offset by a low factory utilization rate.* The gross margin expectations do not reflect any impact from the comprehensive program and cost structure review that we are conducting and expect to begin implementing in the fourth quarter of fiscal 2007.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased to $8.6 million for the third quarter of fiscal 2007 as compared to $9.3 million for the third quarter of fiscal 2006. Selling, general and administrative expenses were $26.2 million for the first nine months of fiscal 2007 as compared to $27.3 million for the same period in fiscal 2006. The decreases in selling, general and administrative expenses for 2007 primarily related to continued cost control efforts, including the reduction in headcount and travel restrictions imposed on our employees.

We expect selling, general and administrative expenses in the fourth quarter of fiscal 2007 to be in the range of $8.3 to $8.5 million as we experience the full quarterly impact of cost reductions implemented in March 2007.* The expense estimates do not reflect any impact from the comprehensive program and cost structure review that we are conducting and expect to begin implementing in the fourth quarter of fiscal 2007.

Research and Development Expenses

Research and development expenses were $6.1 million for the third quarter of fiscal 2007 as compared to $6.3 million for the third quarter in fiscal 2006. Research and development expenses were $18.2 million for the first nine months of fiscal 2007 as compared to $18.4 million for the same period in fiscal 2006. The majority of our research and development resources are focused on expanding the application capabilities of our products,

supporting initial product placements at customer locations and development and demonstration of our new single wafer cleaning system.

Research and development expenses for the fourth quarter of fiscal 2007 are expected to be in the range of $5.7 to $5.9 million as we continue to invest in new application and product development programs and provide support for product evaluations at customer locations along with laboratory demonstrations.* The expense estimates do not reflect any impact from the comprehensive program and cost structure review that we are conducting and expect to begin implementing in the fourth quarter of fiscal 2007.

Impairment and Loss on Sale of Investment

We recorded $0.5 million of impairment and loss on sale of investment for the third quarter of fiscal 2007, $4.1 million for the first nine months of fiscal 2007 and $0.5 million of impairment of investment for the first nine months of fiscal 2006. See further discussion related to these impairments in Note 9 of the Notes to Condensed Consolidated Financial Statements.

Income Taxes

We recorded tax expense of $55,000 in the third quarter of fiscal 2007, $12,000 in the third quarter of fiscal 2006, $130,000 in the first nine months of fiscal 2007 and $37,000 in the first nine months of fiscal 2006. The increases in income tax expense in the fiscal 2007 periods primarily related to foreign withholding taxes.

Our deferred tax assets on the balance sheet as of May 26, 2007 have been fully reserved with a valuation allowance. We do not expect to reverse our valuation allowance until we are consistently profitable on a quarterly basis.*

We have net operating loss carryforwards for federal income tax purposes of approximately $149.4 million, which will begin to expire in fiscal year 2011 through fiscal 2027 if not utilized. Of this amount, approximately $15.0 million is subject to Internal Revenue Code Section 382 limitations on utilization. This limitation is approximately $1.4 million per year.

Equity in Earnings (Loss) of Affiliate

The equity in earnings (loss) of affiliate was approximately $25,000 of income for the third quarter of fiscal 2007, compared to a loss of approximately $52,000 for the third quarter of fiscal 2006. The equity in earnings (loss) of affiliate was approximately $27,000 of income for the first nine months of fiscal 2007, compared to a loss of approximately $155,000 for the first nine months of fiscal 2006.

We will no longer be recording equity in earnings (loss) of affiliates due to the May 15, 2007 transaction with m•FSI LTD. See further discussion related to the transaction in Note 8 of the Notes to Condensed Consolidated Financial Statements.

Net Loss

Net loss was $5.6 million in the third quarter of fiscal 2007, as compared to a net loss of $2.4 million in the third quarter of fiscal 2006. Net loss was $8.0 million for the first nine months of fiscal 2007, as compared to a net loss of $10.5 million for the first nine months of fiscal 2006.

Assuming that we can achieve the projected revenue, gross margin, operating expense levels, interest income and affiliate earnings, we expect to report net loss of $3.5 to $4.5 million for the fourth quarter of fiscal 2007.* The net loss estimate does not reflect any impact from the comprehensive program and cost structure review that we are conducting and expect to begin implementing in the fourth quarter of fiscal 2007.

Liquidity and Capital Resources

Cash, restricted cash, cash equivalents and marketable securities were approximately $24.7 million as of May 26, 2007, a decrease of $2.2 million from the end of fiscal 2006. The net decrease in cash, restricted cash, cash equivalents and marketable securities was primarily due to $4.0 million of cash used in operating activities, $1.6 million in capital expenditures, $0.4 million of principle payments on the capital lease, and $0.1 million of negative currency impact. The decrease in these balances were offset by a $2.0 million dividend received from m•FSI LTD, $1.2 million proceeds related to the sale of a portion of our investment in m•FSI LTD and $0.5 million of proceeds from the issuance of common stock.

Accounts receivable decreased $5.3 million from the end of fiscal 2006 to $17.9 million as of May 26, 2007. The decrease in accounts receivable was primarily due to a decrease in shipments from $36.4 million in the fourth quarter of fiscal 2006 to $20.9 million in the third quarter of fiscal 2007. Accounts receivable will fluctuate from quarter to quarter, depending on individual customers’ timing of ship dates and payment terms. In certain situations, extended payment terms may be granted to customers.

Inventory decreased slightly to $35.5 million at May 26, 2007 as compared to $35.7 million at the end of fiscal 2006. The net decrease in inventory was due to decreases in finished goods and work-in-process inventory, partially offset by increases in subassemblies and raw materials inventory. Inventory reserves were $14.7 million at May 26, 2007 as compared to reserves of $13.8 million at the end of fiscal 2006. The increase in the inventory reserves is related to the slowdown in the industry.

Trade accounts payable decreased approximately $4.6 million to $4.2 million as of May 26, 2007 as compared to $8.8 million at the end of fiscal 2006. The decrease in trade accounts payable related primarily to a decrease in inventory purchases associated with a decrease in bookings.

Customer deposits decreased approximately $2.9 million to $2.5 million as of May 26, 2007 as compared to $5.4 million at the end of fiscal 2006. The decrease primarily relates to a decrease in legacy product bookings which generally require deposits.

Deferred profit decreased approximately $0.8 million to $3.3 million at May 26, 2007 as compared to $4.1 million at the end of fiscal 2006.

As of May 26, 2007, our current ratio of current assets to current liabilities was 3.9 to 1.0 and working capital was $63.8 million. We did not have any outstanding loans with our affiliate, or lines of credit for affiliate, as of May 26, 2007.

The following table provides aggregate information about our contractual payment obligations and the periods in which payments are due (in thousands):


	Payments due by period
Contractual Obligations:	Total		Less than 1 Year		1-3 years		3-5 years		More than 5 years
Operating lease obligations	$	1,874	$	909	$	870	$	95	$	—
Capital lease obligations		1,457		648		809
Purchase obligations		2,995		2,995		—		—		—
Royalty accruals		341		341		—		—		—
Other long-term obligations ⁽¹⁾		2,000		125		500		500	$	875


Total	$	8,667	$	5,018	$	2,179	$	595	$	$875


		⁽¹⁾ Other long-term obligations related to minimum royalty payments or discounts granted under a license agreement.

Capital expenditures were approximately $1.6 million in the first nine months of fiscal 2007 and $2.0 million in the first nine months of fiscal 2006. We expect total capital expenditures to be less than $300,000 in the fourth quarter of fiscal 2007.* Depreciation and amortization for the fourth quarter of fiscal 2007 is expected to be between approximately $1.1 million to $1.2 million.*

At the expected revenue and expense run rate, we anticipate using approximately $2.5 to $3.5 million in net cash for operations in the fourth quarter of fiscal 2007.* The cash usage estimate does not reflect any impact from the comprehensive program and cost structure review that we are conducting and expect to begin implementing in the fourth quarter of fiscal 2007. The comprehensive program and cost structure review initiative is focused on lowering our break even revenue level, improving our margins and preserving cash. We believe that with existing cash, cash receipts, cash equivalents, marketable securities and internally generated funds, there will be sufficient funds to meet our currently projected working capital requirements, and to meet other cash requirements through at least mid-fiscal 2008.* We believe that success in our industry requires substantial capital to maintain the flexibility to take advantage of opportunities as they arise. One of our strategic objectives is, as market and business conditions warrant, to consider divestitures, investments or acquisitions of businesses, products or technologies, particularly those that are complementary to our surface conditioning business. We may fund such activities with additional equity or debt financing. The sale of additional equity or debt securities, whether to maintain flexibility or to meet strategic objectives, could result in additional dilution to our shareholders.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

New Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for us beginning in fiscal year 2008. We are still evaluating the impact that the adoption of this pronouncement will have on our consolidated financial statements.

includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer, and provides that a company may adopt a policy of presenting taxes either gross within revenue or on a net basis. For any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes for each period for which an income statement is presented if those amounts are significant. This statement is effective to financial reports for interim and annual reporting periods beginning after December 15, 2006. EITF No. 06-3 became effective for us as of February 25, 2007. We collect various sales and value-added taxes on certain product and service sales, which are accounted for on a net basis.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” to address diversity in practice in quantifying financial statement misstatements. SAB No. 108 requires that we quantify misstatements based on their impact on each of our financial statements and related disclosures. SAB No. 108 is effective as of the end of our fiscal year 2007, allowing a one-time transitional cumulative effect adjustment to retained earnings as of August 27, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB No. 108. We are still evaluating the impact SAB No. 108 will have on our consolidated financial statements and will adopt SAB No. 108 in the fourth quarter of fiscal 2007.

In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. This statement applies only to fair-value measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value. This statement is expected to increase the consistency of fair value measurements, but imposes no requirements for additional fair-value measures in financial statements. The provisions under SFAS No. 157 are effective for us beginning in the first quarter of fiscal 2008. We are still evaluating the impact the adoption of this pronouncement will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (SFAS No. 159). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of fiscal years that begin after November 15, 2007. We are still evaluating the impact the adoption of this pronouncement will have on our consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our cash flows and earnings are subject to fluctuations in foreign exchange rates due to an investment in our foreign-based affiliate. As of May 26, 2007, our investment represents a 20.6% interest in m•FSI LTD, a distributor of our products that operates in Japan. We denominate the majority of our sales outside of the U.S. in U.S. dollars.

Because we assumed direct sales, service and applications support and logistics responsibilities for our products in Europe and the Asia Pacific region in March 2003, we have and will continue to incur labor, service and other expenses in foreign currencies. As a result, we may be exposed to fluctuations in foreign exchange rate risks.* As of May 26, 2007, we had not entered into any hedging activities and our foreign currency transaction gains and losses for the third quarter and first nine months of fiscal 2007 were insignificant. We are currently evaluating various hedging activities and other options to minimize these risks.

We do not have significant exposure to changing interest rates as we currently have no material long-term debt. As of May 26, 2007, amortized cost approximated market value for all outstanding marketable securities. We do not undertake any specific actions to cover our exposure to interest rate risk and we are not party to any interest rate risk management transactions. The impact on loss before income taxes of a 1% change in short-term interest rates would be approximately $247,000 based on our cash, restricted cash, cash equivalents and marketable securities balances as of May 26, 2007.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

We generate minor amounts of liquid and solid hazardous waste and use licensed haulers and disposal facilities to ship and dispose of such waste. In the past, we have received notices from state or federal enforcement agencies that we are a potentially responsible party (“PRP”) in connection with the investigation of several hazardous waste disposal sites owned and operated by third parties. In each matter, we have elected to participate in settlement offers made to all de minimis parties with respect to such sites. The risk of being named a PRP is that if any of the other PRP’s are unable to contribute its proportionate share of the liability, if any, associated with the site, those PRP’s that are financially able could be held financially responsible for the shortfall. We currently do not have any of these claims outstanding.

In late calendar 2006, we determined that certain of our replacement valves, pumps and heaters could fall within the scope of United States export licensing regulations to products that could be used in connection with chemical weapons processes. We determined that these regulations require us to obtain licenses to ship some of our replacement spare parts, spare parts kits and assemblies to customers in certain controlled countries as defined in the export licensing regulations. During the second quarter of fiscal 2007, we were granted licenses to ship replacement spare parts, spare parts kits and assemblies to all customers in the controlled countries where we currently conduct business.

In the second quarter of fiscal 2007, we made a voluntary disclosure to the United States Department of Commerce to clarify our licensing practices and to review our practices with respect to prior sales of certain replacement valves, pumps and heaters to customers in several controlled countries as defined in the licensing regulations.

The United States Department of Commerce could assess penalties for any past violation of export control regulations. The potential penalties are dependent upon the number of shipments in violation of the export control regulations. The penalties can range from zero to $50,000 per violation. We believe that the resolution of this matter will not have a material adverse impact on our consolidated financial condition. The licenses that were granted during the second quarter of fiscal 2007 do not necessarily mitigate our risk with respect to past violations.

ITEM 1.A. Risk Factors

There have not been any material changes from the risk factors previously disclosed in our Form 10-K for the fiscal year ended August 26, 2006, except as set forth below.

Because our business depends on the amount that manufacturers of microelectronics spend on capital equipment, downturns in the microelectronics industry may adversely affect our results.

The microelectronics industry experiences periodic downturns, which may have a negative effect on our sales and operating results. Our business depends on the amounts that manufacturers of microelectronics spend on capital equipment. The amounts they spend on capital equipment depend on the existing and expected demand for semiconductor devices and products that use semiconductor devices. When a downturn occurs, some semiconductor manufacturers experience lower demand and increased pricing pressure for their products. As a result, they are likely to purchase less semiconductor processing equipment and have sometimes delayed making decisions to purchase capital equipment. In some cases, semiconductor manufacturers have canceled or delayed orders for our products. Typically, the semiconductor equipment industry has experienced more pronounced decreases in net sales than the semiconductor industry as a whole.

We, along with others in the semiconductor equipment industry, have recently experienced a downturn in orders for new equipment as well as delays in existing orders, primarily from logic and flash memory manufacturers. We cannot predict the extent and length of the current downturn in orders and the overall softening in the industry in these segments. In addition:

•

the semiconductor equipment industry may experience other, possibly more severe and prolonged, downturns in the future;

•

any future recovery of the microelectronics industry may not result in an increased demand by semiconductor manufacturers for capital equipment or our products; and

•

the semiconductor equipment industry may not improve in the near future or at all.

Our licensing practices related to international spare parts sales may subject us to fines and could reduce our ability to be competitive in certain countries.

In addition to offering our customers microelectronics manufacturing equipment, we provide replacement spare parts, spare part kits and assemblies. In late calendar 2006, we determined that certain of our replacement valves, pumps and heaters could fall within the scope of United States export licensing regulations to products that could be used in connection with chemical weapons processes. We determined that these regulations require us to obtain

licenses to ship some of our replacement spare parts, spare part kits and assemblies to customers in certain controlled countries as defined in the export licensing regulations. During the second quarter of fiscal 2007, we were granted licenses to ship replacement spare parts, spare parts kits and assemblies to all customers in the controlled countries where we currently conduct business.

The United States Department of Commerce could assess penalties for any past violation of export control regulations. The licenses that were granted do not mitigate our risk with respect to past violations.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

ITEM 3. Defaults upon Senior Securities

None

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

None

ITEM 5. Other Information

After consideration by the Company’s Board of Directors, the Company permitted its shareholder rights plan to expire on June 10, 2007. The Company’s shareholder rights plan was set forth in the Share Rights Agreement, dated as of May 22, 1997, between the Company and ComputerShare Investor Services, as Rights Agent (as amended, the “Rights Agreement”). The Rights Agreement and the related preferred share purchase rights expired in accordance with the terms on June 10, 2007.

ITEM 6 Exhibits and Reports on Form 8-K

(a) Exhibits


	2.1			Agreement and Plan of Reorganization, dated as of January 21, 1999 among FSI International, Inc., BMI International, Inc. and YieldUP International Corporation (4)
	2.2			Agreement and Plan of Reorganization by and Among FSI International, Inc., Spectre Acquisition Corp., and Semiconductor Systems, Inc. (1)
	2.3			Asset Purchase Agreement dated as of June 9, 1999 between FSI International, Inc. and The BOC Group, Inc. (5)
	3.1			Restated Articles of Incorporation of the Company. (2)
	3.2			Restated and amended By-Laws. (7)
	3.5			Articles of Amendment of Restated Articles of Incorporation (6)
	3.6			Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Shares. (3)
	10.1			Termination and Release Agreement dated as of May 15, 2007 with Mitsui & Co. Ltd., Chlorine Engineers Corp., Ltd., MBK Project Holdings Ltd. and m•FSI LTD.(filed herewith)
	10.2			Stock Purchase Agreement dated as of May 15, 2007 by and among FSI International, Inc., MBK Project Holdings Ltd., Chlorine Engineers Corp. Ltd., Yasuda Enterprise Development III Limited Partnership, Mizuho Capital Co., Ltd., Mr. Hideki Kawai, Mr. Takanori Yoshioka and Mr. Satoshi Shikami. (exhibits omitted) (filed herewith)
	31.1			Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(filed herewith)
	31.2			Certification by Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(filed herewith)
	32.1			Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(filed herewith)


(1)		Filed as an Exhibit to the Company’s Registration Statement on Form S-4 (as amended) dated March 21, 1996, SEC File No. 333-1509 and incorporated by reference.

(2)		Filed as an Exhibit to the Company’s Report on Form 10-Q for the quarter ended February 24, 1990, SEC File No. 0-17276, and incorporated by reference.

(3)		Filed as an Exhibit to the Company’s Report on Form 8-A, filed by the Company on June 5, 1997, SEC File No. 0-17276, and incorporated by reference.

(4)		Filed as an Exhibit to the Company’s Report on Form 8-K, filed by the Company on January 27, 1999, SEC File No. 0-17276 and incorporated by reference.

(5)		Filed as an Exhibit to the Company’s Report on Form 8-K, filed by the Company on June 24, 1999, SEC File No. 0-17276 and incorporated by reference.

(6)		Filed as an Exhibit to the Company’s Report on Form 10-K for the fiscal year ended August 28, 1999, SEC File No. 0-17276, and incorporated by reference.

(7)		Filed as an Exhibit to the Company’s Report on Form 10-Q for the fiscal quarter ended February 23, 2002, SEC File No. 0-17276 and incorporated by reference.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

SIGNATURE

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.


	FSI INTERNATIONAL, INC. [Registrant]
	By:	/s/Patricia M. Hollister
		Patricia M. Hollister
		Chief Financial Officer on behalf of the Registrant and as Principal Financial and Accounting Officer

DATE: June 29, 2007

INDEX TO EXHIBITS


Exhibit	Description	Method of Filing
2.1	Agreement and Plan of Reorganization, dated as of January 21, 1999 among FSI International, Inc., BMI International, Inc. and YieldUP International Corporation (4)	Incorporated by reference.

2.2	Agreement and Plan of Reorganization by and Among FSI International, Inc., Spectre Acquisition Corp., and Semiconductor Systems, Inc. (1)	Incorporated by reference.

2.3	Asset Purchase Agreement dated as of June 9, 1999 between FSI International, Inc. and The BOC Group, Inc. (5)	Incorporated by reference.

3.1	Restated Articles of Incorporation of the Company. (2)	Incorporated by reference.

3.2	Restated and amended By-Laws. (7)	Incorporated by reference.

3.5	Articles of Amendment of Restated Articles of Incorporation (6)	Incorporated by reference.

3.6	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Shares. (3)	Incorporated by reference.

10.1	Termination and Release Agreement dated as of May 15, 2007 with Mitsui & Co. Ltd., Chlorine Engineers Corp., Ltd., MBK Project Holdings Ltd. and m•FSI LTD.	Filed herewith.

10.2	Stock Purchase Agreement dated as of May 15, 2007 by and among FSI International, Inc., MBK Project Holdings Ltd., Chlorine Engineers Corp. Ltd., Yasuda Enterprise Development III Limited Partnership, Mizuho Capital Co., Ltd., Mr. Hideki Kawai, Mr. Takanori Yoshioka and Mr. Satoshi Shikami. (exhibits omitted)	Filed herewith

31.1	Certification by Principal Executive Officer Pursuant to section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

31.2	Certification by Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.


(1)		Filed as an Exhibit to the Company’s Registration Statement on Form S-4 (as amended) dated March 21, 1996, SEC File No. 333-1509 and incorporated by reference.

(2)		Filed as an Exhibit to the Company’s Report on Form 10-Q for the quarter ended February 24, 1990, SEC File No. 0-17276, and incorporated by reference.

(3)		Filed as an Exhibit to the Company’s Report on Form 8-A, filed by the Company on June 5, 1997, SEC File No. 0-17276, and incorporated by reference.

(4)		Filed as an Exhibit to the Company’s Report on Form 8-K, filed by the Company on January 27, 1999, SEC File No. 0-17276 and incorporated by reference.

(5)		Filed as an Exhibit to the Company’s Report on Form 8-K, filed by the Company on June 24, 1999, SEC File No. 0-17276 and incorporated by reference.

(6)		Filed as an Exhibit to the Company’s Report on Form 10-K for the fiscal year ended August 28, 1999, SEC File No. 0-17276, and incorporated by reference.

(7)		Filed as an Exhibit to the Company’s Report on Form 10-Q for the fiscal quarter ended February 23, 2002, SEC File No. 0-17276 and incorporated by reference.

EX-10.1 2 c15796exv10w1.htm TERMINATION AND RELEASE AGREEMENT exv10w1

EXHIBIT 10.1

TERMINATION AND RELEASE

THIS TERMINATION AND RELEASE (the “Agreement”), effective as of this 15^th day of May, 2007, is made by and among FSI International, Inc., a Minnesota corporation (“FSI”); Mitsui & Co., Ltd., a company organized under the laws of Japan (“MBK”); Cholorine Engineers Corp. Ltd, a company organized under the laws of Japan (“CEC”); MBK Project Holdings Ltd., a company organized under the laws of Japan (“MPH”); and m•FSI Ltd., a company organized under the laws of Japan (“m•FSI”).

WHEREAS, FSI, MBK, CEC and MPH are parties to that certain agreement among the shareholders of m•FSI originally dated June 5, 1991, as such agreement has been amended (the “Shareholders Agreement”);

WHEREAS, in connection with the Shareholders Agreement, m•FSI and FSI entered into the following additional agreements: (i) an agreement dated September 17, 2004, as amended, under which m•FSI appointed FSI as a distributor of its products (the “m•FSI Distribution Agreement); (ii) an agreement dated June 5, 1991, as amended, under which FSI appointed m•FSI as a distributor of its products (the “FSI Distribution Agreement”); (iii) an agreement dated September 17, 2004, as amended, pursuant to which m•FSI granted to FSI a license under certain m•FSI intellectual property and technology (the “m•FSI License Agreement”); and (iv) an agreement dated September 17, 2004, as amended, pursuant to which FSI granted m•FSI a license under certain FSI intellectual property rights and technology (the “FSI License Agreement”);

WHEREAS, in connection with the Shareholders Agreement, m•FSI and CEC entered into an agreement dated August 14, 1991, as amended, pursuant to which CEC granted m•FSI a license under certain CEC intellectual property rights and technology (the “CEC License Agreement”);

WHEREAS, FSI, MBK, and CEC have entered to an agreement of even date herewith with certain third parties relating to the sale of all or part of the shares in m•FSI held by FSI, MBK, CEC and MPH (the “Stock Purchase Agreement”) and, as a result, have agreed to terminate the Shareholders Agreement and FSI has agreed to enter into a new shareholders agreement with the buyers and other new shareholders of m•FSI to reflect the changed ownership structure and the various rights and obligations of the new shareholders of m•FSI as a result thereof; and

WHEREAS, in conjunction with the closing of the Stock Purchase Agreement and the execution of the new shareholders agreement, FSI and m•FSI desire to enter into a new distributorship agreement under which m•FSI will distribute certain of FSI’s products in Japan and the parties hereto desire to terminate the agreements referenced in the second and third paragraph of this Preamble.

NOW, THEREFORE, in consideration of the foregoing premises and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1. Termination of Agreements. The parties hereto agree that the following agreements shall be terminated:

(a) FSI, MBK, CEC and MPH hereby agree that the Shareholders Agreement shall be terminated.

(b) FSI and m•FSI hereby agree that the (i) m•FSI Distribution Agreement, (ii) the FSI Distribution Agreement, (iii) the m•FSI License Agreement and (iv) the FSI License Agreement shall be terminated.

All of the above referenced agreements are referred to herein as the “Terminated Agreements”. The parties to the above agreements further acknowledge and agree that, except as set forth in Section 2 below, each and every obligation of any party under any of the Terminated Agreements has been completely discharged and that such Terminated Agreement no longer have any force or effect.

2. Reservation of Rights and Continuing Obligations. Notwithstanding the termination of the Terminated Agreements, the parties acknowledge and agree that:

(a) FSI reserves its right to enforce and seek compensation under the terms and conditions of Article 26 of the Shareholders Agreement, No Competition, in the event that it is determined that CEC shall have breached such Article through the development and collaboration with Toshiba of a process for the use of electrolyzed sulfuric acid for resist stripping applications in direct competition with FSI’s ZETA ViPR products, and FSI’s ability to enforce its rights under such Article 26 shall survive termination of the Shareholders Agreement for a period of one (1) year from the date of this Agreement; and

(b) FSI shall remain obligated to honor all warranties and duties to indemnify m•FSI in respect of its products and spare parts provided to m•FSI in accordance with the terms of the FSI Distribution Agreement until the applicable warranty periods in respect of such products and spare parts sold to m•FSI under the FSI Distribution Agreement all expire.

3. Compensation for Loss of Rights. In consideration for the termination hereunder of the m•FSI License Agreement and the m•FSI Distribution Agreement and the consequent loss by FSI of rights under m•FSI’s technology and the right distribute m•FSI’s products outside of Japan, m•FSI agrees to pay to FSI the sum of Seventy-three Million Yen (¥73,000,000) by wire transfer of immediately available funds contemporaneously with the execution of this Agreement.

4. Effective Date. This Agreement shall take effect upon the Closing of the Stock Purchase Agreement and the transfer by FSI, CEC and MBK of their shares in m•FSI to the buyers under the terms of the Stock Purchase Agreement.

5. Release. Except as expressly set forth in Section 2 above, each of the parties hereto, acting for itself, its insurers, its successors and assigns, and each of them, does hereby release and forever discharge each of the other parties hereto and their respective shareholders, partners, members, directors, officers, employees, agents, consultants, successors and assigns from any and all liabilities, claims, demands and causes of action,

either in law or in equity, known or unknown, liquidated or unliquidated, which have arisen or may arise out of or are in any way connected with the Terminated Agreements on account of any act, omission, event, occurrence, representation, warranty, failure, default or breach, actual or asserted, of any party hereto or its officers, employees, agents, consultants or representatives on or prior to the date of this Agreement.

IN WITNESS WHEREOF, each party has executed this Agreement as of the day and year first above written.


FSI INTERNATIONAL INC		MITSUI & CO., LTD.
By: /s/ John C. Ely		By: /s/ Koji ARAI
Name: John C. Ely		Name: Koji ARAI
Title: VP Sales/Service		Title: General Manager Infrastructure & Environment Project Development Dept. First Projects Development Div.

CHLORINE ENTINEERS CORP., LTD		MBK PROJECT HOLDINGS LTD.
By: /s/ Yoshinori KATO		By: /s/ Masato SHIODE
Name: Yoshinori KATO		Name: Masato SHIODE
Title: President		Title: President

m•FSI LTD.

By: /s/ Hideki Kawai
Name: Hideki Kawai
Title: President & CEO

EX-10.2 3 c15796exv10w2.htm STOCK PURCHASE AGREEMENT exv10w2

Exhibit 10.2

STOCK PURCHASE AGREEMENT

by and among

FSI INTERNATIONAL, INC.,

MBK PROJECT HOLDINGS LTD.,

CHLORINE ENGINEERS CORP. LTD.

YASUDA ENTERPRISE DEVELOPMENT III, LIMITED PARTNERSHIP

MIZUHO CAPITAL CO., LTD.

MR. HIDEKI KAWAI

MR. TAKANORI YOSHIOKA

and

MR. SATOSHI SHIKAMI

May 15, 2007


1.	Definitions		1
2.	Sale And Purchase Of Stock		5
3.	The Closing		6
	3.1	Closing	6
	3.2	Deliveries	6
	3.3	Consummation of Closing	6
4.	REPRESENTATIONS AND WARRANTIES OF THE SELLERS		6
	4.1	Corporate Authority of Seller	6
	4.2	Compliance with Laws and Other Instruments; No Conflict	7
	4.3	Consents and Approvals	7
	4.4	Litigation	7
	4.5	Share Ownership	7
	4.6	Finders and Brokers	7
	4.7	Good Title	8
	4.8	Corporate Authority of the Company	8
	4.9	Capitalization of Company	8
	4.10	Title to Assets	9
	4.11	Taxes	9
	4.12	Financial Statements	9
	4.13	Absence of Undisclosed Liabilities and Obligations	9
	4.14	Absence of Certain Changes	9
	4.15	Indebtedness for Borrowed Money	10
	4.16	Condition of Tangible Assets	10
	4.17	Intellectual Property	10
	4.18	Employment Arrangements; Labor Relations	10
	4.19	Licenses, Compliance with Laws, Regulations, etc	10
	4.20	Contracts	11
	4.21	Insurance	11
	4.22	Warranty; Product Liability	11
	4.23	Environmental Matters	12
	4.24	No Relationship with Anti-Social Organizations	12
	4.25	Disclosure of Information	12
5.	REPRESENTATIONS AND WARRANTIES OF THE BUYERS		12
	5.1	Authority; Capacity	12
	5.2	Compliance with Laws and Other Instruments; No Conflict	13

-2-


	5.3	Consents and Approvals	13
	5.4	Litigation	13
	5.5	Investment Representations	13
	5.6	Finders and Brokers	13
	5.7	Investigation and Evaluation	13
6.	COVENANTS		14
	6.1	Obligations of the Parties before Closing	14
	6.2	No Negotiation	14
	6.3	Conduct Business in Ordinary Course	14
	6.4	Confidentiality and Publicity	14
	6.5	Sellers’ Representations and Warranties; Knowledge	16
7.	CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BUYER		16
	7.1	Representations and Warranties; Compliance with this Agreement	16
	7.2	No Judgment or Order	16
	7.3	No Litigation	16
	7.4	Approvals	16
	7.5	Execution	17
	7.6	Shares	17
	7.7	Financing	17
	7.8	Termination of Existing Shareholders Agreement and Existing Distribution Agreement	17
	7.9	No Material Adverse Change	17
8.	CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS		17
	8.1	Representations and Warranties; Compliance with this Agreement	17
	8.2	No Judgment or Order	17
	8.3	No Litigation	17
	8.4	Approvals	18
	8.5	Execution	18
	8.6	Dividend	18
9.	TERMINATION OF AGREEMENT		18
	9.1	Termination	18
	9.2	Effect of Termination	18
10.	INDEMNIFICATION		19
	10.1	Indemnification Obligation	19
	10.2	Limitations	19

-3-


	10.3	Survival of Indemnification Obligation; Limitations	20
	10.4	Third Party Claims	20
	10.5	Indemnification by Buyers	20
	10.6	Sole and Exclusive Remedy	21
	10.7	Tax Adjustment	21
11.	MISCELLANEOUS		21
	11.1	Governing Law	21
	11.2	Headings	21
	11.3	Notices and Other Communications	21
	11.4	Amendment of Agreement; No Waiver	23
	11.5	Severability	23
	11.6	Fees and Expenses	23
	11.7	Entire Agreement	23
	11.8	Successors and Assigns	23
	11.9	English Language	23
	11.10	Counterparts	24
Exhibit A		Schedule of Exceptions
Exhibit B		Articles of Incorporation of Company
Schedule 3.2		Certificate of board resolution of the company approving share transfer contemplated under the Agreement

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STOCK PURCHASE AGREEMENT

This STOCK PURCHASE AGREEMENT (the “Agreement”), is entered into as of May 15, 2007 by and among FSI INTERNATIONAL, INC., a Minnesota corporation (“FSI”), CHLORINE ENGINEERS CORP. LTD., a Japanese corporation (“CEC”), and MBK PROJECT HOLDINGS LTD., a Japanese corporation (“MPH”) (FSI, CEC and MPH, each individually, a “Seller” and, collectively, the “Sellers”), on one hand, and The Yasuda Enterprise Development III, Limited Partnership, a Japanese fund (“Yasuda”), Mizuho Capital Co., Ltd., a Japanese corporation (“Mizuho”), Mr. Hideki Kawai, a Japanese citizen and resident (“Mr. Kawai”), Mr. Takanori Yoshioka, a Japanese citizen and resident (“Mr. Yoshioka”), and Mr. Satoshi Shikami, a Japanese citizen and resident (“Mr. Shikami”) (Yasuda, Mizuho, Mr. Kawai, Mr. Yoshioka and Mr. Shikami each individually, a “Buyer” and, collectively, the “Buyers”; and Yasuda and Mizuho, each individually a “Fund Buyer” and collectively, the “Fund Buyers” and Mr. Kawai, Mr. Yoshioka and Mr. Shikami, each individually an “Individual Buyer” and collectively, the “Individual Buyers”) on the other hand. The Sellers and the Buyers are also referred to herein each individually as a “Party” and collectively as the “Parties.”

RECITALS

WHEREAS, the Sellers currently own nine thousand (9,000) shares of common stock (the “Shares”) of mŸFSI Ltd., a Japanese corporation (the “Company”), and desire to sell certain of the Shares (the “Purchased Shares”) on the terms contemplated herein; and

WHEREAS, the Buyers desire to purchase from the Sellers, all of the Purchased Shares, subject to the terms and conditions set forth herein.

ACCORDINGLY, the Parties agree as follows:

1. Definitions

1.1 “Affiliate” means, as to any Person, (a) with respect to an individual: (i) each Member of the Immediate Family of such Person; (ii) any Person that is directly or indirectly controlled (as defined below in this definition) by such individual or one or more Members of the Immediate Family of such individual; and (iii) any Person with respect to which such individual or one or more Members of the Immediate Family of such individual serves as a director, officer, partner, executor, or trustee (or in a similar capacity); and (b) with respect to a Person other than an individual, any Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the entity specified. For purposes of this Agreement, “control” of a person means the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities or other equity interests, by Contract or otherwise.

1.2 “Agreement” is defined in the preamble.

1.3 “Ancillary Agreements” means the New Shareholders Agreement, the New Distribution Agreement, the Management Engagement Agreement and other agreements

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reasonably requested by Buyers for purposes of effecting the transactions contemplated hereby.

1.4 “Applicable Law” means, as to any Person, any statute, law, rule, regulation, directive, treaty, judgment, order, decree or injunction of any Governmental Entity that is applicable to or binding upon such Person or any of its properties or to which such Person or any of its properties is subject.

1.5 “Articles” means the Company’s articles of incorporation (teikan) as amended to date.

1.6 “Business Day” means any day other than a Saturday or Sunday or other day on which commercial banks in Tokyo and New York are authorized or required by law to close.

1.7 “Buyer” and “Buyers” are defined in the preamble.

1.8 “CEC” is defined in the preamble.

1.9 “Closing” is defined in Section 3.1.

1.10 “Closing Date” is defined in Section 3.1.

1.11 “Closing Payment” is defined in Section 3.2.

1.12 “Confidential Information” is defined in Section 6.4(a).

1.13 “Constitutional Documents” means, as applicable, articles of incorporation, bylaws, certificate or corporate registration (tokibo-tohon), board of directors regulations, and board of statutory auditors regulations.

1.14 “Contracts” means contracts, agreements, commitments or binding understandings, whether written or oral.

1.15 “Contractual Obligation” means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage or other instrument to which such Person is a party or by which it or any of its properties are bound.

1.16 “Employees” means all employees of the Company and the Subsidiary as of the date hereof.

1.17 “Environmental Law” means any law (statutory or common), treaty, rule or regulation, or determination of a Governmental Entity in Japan, now in effect and applicable to the Company or the Subsidiary regulating, relating to or imposing liability or standards of conduct concerning air emissions, water discharges, management of solid or hazardous waste, or otherwise concerning the protection of the environment.

1.18 “Existing CEC License Agreement” means the CEC License Agreement pursuant to which CEC granted the Company a license under certain of its intellectual property and technology dated as of August 14, 1991, as amended.

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1.19 “Existing FSI Distribution Agreement” means the FSI Exclusive Distributorship Agreement dated as of June 5, 1991 between FSI and the Company, as amended to date.

1.20 “Existing FSI License Agreement” means the FSI License Agreement pursuant to which FSI granted the Company a license under certain of its intellectual property and technology dated as of September 17, 2004, as amended.

1.21 “Existing mŸFSI Distribution Agreement” means the mŸFSI Exclusive Agreement dated as of September 17, 2004 between the Company and FSI, as amended.

1.22 “Existing mŸFSI License Agreement” means the mŸFSI License Agreement pursuant to which the Company granted FSI a license under certain of the Company’s intellectual property and technology dated as of September 17, 2004, as amended.

1.23 “Existing Shareholders Agreement” means the Shareholders Agreement dated as of June 5, 1991 among FSI, Mitsui & Co., Ltd. and CEC, as amended.

1.24 “Facility” means the facilities of the Company and or the Subsidiary located at (a) Harmony Tower 22nd Floor, Honcho 1 Chome, 32-2, Nakano-ku, Tokyo, Japan, (b) Okayama Research Park, 5311 Haga, Okayama-city, Okayama, Japan, and (c) 280 Minoridai Matsudo-shi, Chiba 270-2231, Japan, and “Facilities” means all of them.

1.25 “Financial Statements” is defined in Section 4.12.

1.26 “FSI” is defined in the preamble.

1.27 “Fund Buyer” and “Fund Buyers” are defined in the preamble.

1.28 “Governmental Entity” means any domestic or foreign government, governmental entity, court, tribunal, agency, or other regulatory, administrative or judicial agency, commissioner of organization, and any subdivision, branch or department of any of the foregoing.

1.29 “Hazardous Substance” means any substance which is listed or defined in any Environmental Law as hazardous, toxic or dangerous, including, without limitation, polychlorinated biphenyls (pcbs).

1.30 “Individual Buyer” and “Individual Buyers” are defined in the preamble.

1.31 “Intellectual Property” means (i) patents, patent applications and patent disclosures, including without limitation any reissues, extensions, divisions, continuations, or continuations-in-part; (ii) trademarks, service marks, trade dress, logos, trade names, and corporate names copyrights and maskworks and all applications, registrations, applications and renewals in connection therewith; (iii) copyrights and maskworks and all applications, registrations and renewals in connection therewith; (iv) trade secrets, confidential information, know-how, formulas, compositions, manufacturing and production processes and techniques; (v) the computer programs licensed to the Company or the Subsidiary and used in the business of the Company or Subsidiary as currently conducted; (vi) all rights as a licensee or authorized user of the intellectual property of any third party; and (vii) all copies and tangible embodiments of the foregoing in whatever form or medium; in each case which are material to the conduct of the Company’s or the Subsidiary’s business.

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1.32 “Japanese GAAP” means generally accepted accounting principles as in effect in Japan from time to time and consistently applied.

1.33 “Loss” and “Losses” is defined in Section 10.1.

1.34 “Liens” is defined in Section 4.10.

1.35 “Management Engagement Agreement” means the Management Engagement Agreement to be entered by and between Yasuda, Mizuho and certain management members of the Company, in such form as mutually agreed by the parties thereto.

1.36 “Material Adverse Effect” means, with respect to any Person, any event, occurrence, fact, condition, change, or effect that is or will be materially adverse to the business (as currently conducted and as proposed to be conducted), operations, prospects, results of operations, condition (financial or otherwise), properties, or assets (including intangible assets) of such Person.

1.37 “Material Contracts” is defined in Section 4.20(a).

1.38 “Member of the Immediate Family” of a Person who is an individual means a spouse, parent, child, sibling, mother- or father-in-law, son- or daughter-in-law, and brother- or sister-in-law of such Person.

1.39 “Minor Claim Amount” is defined in Section 10.2(a).

1.40 “Mizuho” is defined in the preamble.

1.41 “MPH” is defined in the preamble.

1.42 “Mr. Kawai” is defined in the preamble.

1.43 “New Distribution Agreement” means the Distribution Agreement to be entered by and between FSI and the Company, in such form as mutually agreed by FSI, the Company and the Buyers.

1.44 “New Shareholders Agreement” means the Shareholders Agreement to be entered by and between the Buyers and FSI, in such form as mutually agreed by the parties thereto.

1.45 “Permitted Liens” is defined in Section 4.10.

1.46 “Person” means any individual, partnership, limited liability company, corporation, joint stock company, trust, unincorporated association, joint venture, Governmental Entity, or other entity, whether acting in an individual, fiduciary or other capacity.

1.47 “Proprietary Rights” is defined in Section 4.17.

1.48 “Purchase Price” is defined in Section 2.

1.49 “Remedies Exception” means the performance of a Person’s obligations except to the extent enforceability may be limited by applicable bankruptcy, insolvency,

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reorganization, moratorium or other laws affecting the enforcement of creditors’ rights generally and by general equitable principles.

1.50 “Schedule of Exceptions” means the Schedule of Exceptions to the Sellers’ representations and warranties in Section 4, in the form attached hereto as Exhibit A.

1.51 “Seller” and “Sellers” are defined in the preamble.

1.52 “Sellers’ Account” and “Sellers’ Accounts” are defined in Section 3.2.

1.53 “Senior Lenders” is defined in Section 4.15.

1.54 “Subsidiary” means any corporation, limited liability company, limited partnership, trust or other entity with respect to which another Person has the power, directly or indirectly through one or more intermediaries, to vote or direct the voting, whether by contract or otherwise, of a sufficient number of securities or equity interests in such entity to elect a majority of the directors, management committee or similar governing body of such entity. When used without reference to a particular Person, the “Subsidiary” means Harmonix Ltd., the sole Subsidiary of the Company.

1.55 “Threshold Amount” is defined in Section 10.2(b).

1.56 “Transaction Proposal” is defined in Section 6.2.

1.57 “Yasuda” is defined in the preamble.

1.58 “Yen” and “¥” means the lawful currency of Japan.

2. Sale And Purchase Of Stock

Subject to the terms and conditions of this Agreement, at the Closing, each Seller hereby agrees to sell, convey, transfer, assign and deliver to each Buyer, and such Buyer hereby agrees to purchase from such Seller, the number of Purchased Shares set forth in the box below applicable to such Seller and such Buyer (showing such number of Purchased Shares, and the percentage of Company interest represented by, and Purchase Price apportioned to, such number of Purchased Shares), free and clear of any Lien. In consideration for the Purchased Shares, the Buyers shall pay to the Sellers the aggregate purchase price of Two Hundred Fourteen Million Three Hundred Eighty Thousand Yen (¥214,380,000) as apportioned among the Buyers and the Sellers as below (the “Purchase Price”).


		Seller												Total for each Buyer
		FSI				CEC				MPH
Buyer	Yasuda		1,003	11.1	%		1,206	13.4	%		2,250	25.0	%		4,459	49.5	%
		¥30,090,000				¥36,180,000				¥67,500,000				¥133,770,000
	Mizuho		1,553	17.3	%		201	2.2	%		0	0			1,754	19.5	%
		¥46,590,000				¥6,030,000				0				¥52,620,000
	Mr. Kawai		0	0			633	7.0	%		0	0			633	7.0	%
		0				¥18,990,000				0				¥18,990,000
	Mr. Yoshioka		0	0			200	2.2	%		0	0			200	2.2	%
		0				¥6,000,000				0				¥6,000,000

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		Seller												Total for each Buyer
		FSI				CEC				MPH
	Mr. Shikami		0	0			100	1.1	%		0	0			100	1.1	%
		0				¥3,000,000				0				¥3,000,000
			0	0			0	0			0	0			0	0
		0				0				0				0
Total for each Seller			2,556	28.4	%		2,340	26.0	%		2,250	25.0	%		7,146	79.4	%
		¥76,680,000				¥70,200,000				¥67,500,000				¥214,380,000

3. The Closing

3.1 Closing. The closing of the sale and purchase of the Purchased Shares (the “Closing”) shall take place at the offices of Ito & Mitomi/Morrison & Foerster LLP, AIG Building, 11th Floor, 1-1-3 Marunouchi, Chiyoda-ku, Tokyo 100-0005, Japan on May 15, 2007, or at such other location and time as the Parties may mutually agree upon in writing (the “Closing Date”).

3.2 Deliveries. At the Closing, each Seller will deliver to each Buyer one or more stock certificates representing the number of Purchased Shares to be sold by such Seller to such Buyer pursuant hereto and the other items set forth in Schedule 3.2, against such Buyer’s delivery to such Seller of an amount (the “Closing Payment”) equal to the amount set forth in the applicable box above. Each Buyer shall deliver the Closing Payment by wire transfer of Yen in immediately available funds to each Seller’s bank account (a “Seller’s Account” and collectively the “Sellers’ Accounts”) designated in writing by such Seller at least five (5) Business Days prior to the Closing Date.

3.3 Consummation of Closing. All acts, deliveries, and confirmations comprising the Closing shall be deemed to occur simultaneously upon the occurrence of the last act, delivery or confirmation of the Closing, and none of such acts, deliveries or confirmations shall be effective unless and until the last of same shall have occurred.

4. REPRESENTATIONS AND WARRANTIES OF THE SELLERS

Except as otherwise provided herein, each Seller, severally, and not jointly, hereby represents and warrants the following Section 4 in its entirety to the Fund Buyers and Sections 4.1 through 4.7 to the Individual Buyers, as of the date hereof and as of the Closing Date, except as set forth in the Schedule of Exceptions; provided that neither MPH nor CEC makes representations nor warranties set forth in Sections 4.17, 4.22 and 4.23:

4.1 Corporate Authority of Seller.

(a) Organization. Such Seller is (i) a corporation duly organized and validly existing under the laws of its jurisdiction of organization, and (ii) is in good standing under the laws of its jurisdiction of organization.

(b) Authority. Such Seller has the requisite corporate power and authority to enter into and to perform its obligations under this Agreement and the Ancillary Agreements to which it is or will be a party. The execution, delivery and performance of this Agreement and the Ancillary Agreements to which it is or will be a party and the transactions contemplated hereby and thereby have been duly authorized by all necessary proceedings.

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(c) Enforceability. Each of this Agreement and the Ancillary Agreements to which it is a party constitutes, or upon execution and delivery will constitute, valid and legally binding obligations of such Seller enforceable against it in accordance with their respective terms, subject to the Remedies Exception.

4.2 Compliance with Laws and Other Instruments; No Conflict. Neither the Company nor the Subsidiary is in violation of or default under, and no condition exists that with notice or lapse of time or both, would constitute a violation of or default under, (i) the Company’s or the Subsidiary’s Constitutional Documents, or (ii) any Contractual Obligation, except for violations or defaults which, both individually and in the aggregate, would not have a Material Adverse Effect on the Company or the Subsidiary. The execution and delivery of this Agreement and the Ancillary Agreements to which it is party by such Seller and the performance by such Seller of its obligations hereunder and thereunder do not and will not (i) conflict with or contravene any provision of such Seller’s Constitutional Documents or the Articles, (ii) violate or conflict with any provision of Applicable Law which is applicable to such Seller, to the Company or to the Subsidiary or any of their respective assets, (iii) conflict with, result in any breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or give rise to a right of payment under or the right to terminate, amend, modify, abandon or accelerate, any Contractual Obligation to which such Seller, the Company or the Subsidiary is a party or by which any of their respective properties or assets are bound, or (iv) result in or require the creation or imposition of any Lien upon or with respect to any of the property or assets of such Seller, the Company or the Subsidiary.

4.3 Consents and Approvals. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity or other Person is required by or with respect to such Seller, the Company or the Subsidiary in connection with the execution and delivery of this Agreement or the Ancillary Agreements to which it is a party, or the consummation of the transactions contemplated hereby or thereby.

4.4 Litigation. There is no material action, suit, or other legal or administrative proceeding or governmental investigation pending or, to the best of such Seller’s knowledge, threatened against such Seller, the Company or the Subsidiary, or any of their respective assets, which materially question the validity or enforceability of this Agreement or the transactions contemplated hereby, and to such Sellers’ knowledge, there is no basis for any of the foregoing.

4.5 Share Ownership. Such Seller is the record and beneficial owner of the number of Purchased Shares set forth opposite such Seller’s name in Section 2 and the record and beneficial owner of the number of Shares set forth opposite such Seller’s name in Schedule 4.5. Such Seller does not own any other securities issued by, or other obligations of, the Company or the Subsidiary. The Shares and the certificates representing the Shares are owned by such Seller, free and clear of all Liens whatsoever.

4.6 Finders and Brokers. Neither such Seller nor any Person acting on behalf of such Seller has negotiated with or retained any finder, broker, intermediary or any similar Person in connection with any of the transactions contemplated hereunder, nor incurred or agreed to pay, or taken any other action that would entitle any Person to receive, any brokerage fee, finder’s fee or other similar fee or commission with respect to any of the transactions contemplated hereunder for which any Buyer or the Company is or could be liable.

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4.7 Good Title. The stock certificates to be delivered by such Seller to each Buyer at the Closing will effectively vest in such Buyer good, valid and marketable title to the Purchased Shares, free and clear of all Liens.

4.8 Corporate Authority of the Company.

(a) Organization; Subsidiary. Each of the Company and the Subsidiary is a corporation duly organized and validly existing under the laws of Japan. The Company’s sole Subsidiary is Harmonix Ltd. and the Company does not own any shares or other ownership interest in any other entity. The Subsidiary does not own any shares or other ownership interest in any entity. Each of the Company and the Subsidiary is duly qualified to conduct business in each jurisdiction in which the nature of its business or the ownership of its properties requires such qualification, and where the failure to be so qualified would reasonably be expected to have a Material Adverse Effect.

(b) Power and Authority. Each of the Company and the Subsidiary has all requisite power to own its properties and conduct its business as currently conducted and as proposed to be conducted. The copy of the Articles attached hereto as Exhibit B is a true and complete copy of the Company’s articles of incorporation, as amended to date.

4.9 Capitalization of Company.

(a) The authorized capital stock of the Company and the Subsidiary, and the issued and outstanding shares of common stock of the Company and the Subsidiary, are set forth in Schedule 4.9. All of the Shares are duly authorized, validly issued, and the Purchased Shares owned by the Seller are fully paid and non-assessable. Except as set forth in Schedule 4.9, no securities of the Company or the Subsidiary are authorized or outstanding.

(b) Except pursuant to this Agreement, there are no subscriptions, securities exercisable for or convertible into shares of capital stock of the Company or the Subsidiary, calls, preemptive rights, options or other agreements or rights to purchase or otherwise to receive from or sell to the Company or the Subsidiary securities of any kind. Neither the Company nor the Subsidiary has any obligation or agreement under any contingency whatsoever to issue any equity or debt securities, or to pay, perform, guaranty, or satisfy in whole or in part any debt, obligation or agreement incurred or made by any Person other than the Company or the Subsidiary, as applicable, and neither the Company nor the Subsidiary has any obligation under any contingency whatsoever to share its income with any Person, or to make, accrue or set aside any payment or amount measured in any way by any part or all of its income.

(c) All of the Shares have been issued, in compliance with Applicable Law. All of the shares of the Subsidiary have been issued in compliance with Applicable Law.

4.10 Title to Assets. Each of the Company and the Subsidiary has, good and marketable title to, or a valid leasehold interest in, all of its properties and assets, free and clear of all liens, charges, security interests, pledges, fects options,

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encumbrances, and other restrictions on use and third party rights of any kind (collectively, “Liens”) except for (a) Liens for current taxes, assessments and governmental charges or levies not yet delinquent for which appropriate accruals have been created, (b) statutory Liens imposed by law which are incurred in the ordinary course of business for obligations not yet due to carriers, warehousemen, employees, mechanics and suppliers and (c) Liens as described in Schedule 4.10 hereof (collectively, “Permitted Liens”). Such properties and assets constitute all of the assets necessary for the conduct of the Company’s and the Subsidiary’s business as currently conducted and proposed to be conducted.

4.11 Taxes. Each of the Company and the Subsidiary has filed all tax returns and reports required by Applicable Law and has paid or will have paid prior to the Closing Date all taxes, assessments and penalties due and payable as of the Closing Date, the non payment of which would have Material Adverse Effect. The tax returns and reports filed by the Company and the Subsidiary are true and correct in all material respects and there is no basis for imposition of interest, penalty or other duties for tax delinquency. There are no material tax Liens upon any of the assets of the Company or the Subsidiary. No national or local tax return or tax return liability of the Company or the Subsidiary is presently under audit by any tax authority, nor has such audit been proposed in writing by any tax authority.

4.12 Financial Statements. Schedule 4.12 sets forth the audited financial statements of the Company on an unconsolidated basis for each of last three fiscal years ending on June 30, 2004, 2005 and 2006 (the “Financial Statements”) The Financial Statements fairly and accurately reflect the books and accounts of the Company, and present the financial position of the Company as of the dates indicated and the results of the operations of the Company for the periods indicated, in accordance with Japanese GAAP. The records and books of account of the Company fairly and accurately reflect all of its items of income and expense and all assets and liabilities and accruals, on a consistent basis, throughout the period covered thereby, except as otherwise disclosed in the Financial Statements. The Financial Statements have been audited and reviewed by the Company’s then current corporate auditors, whose opinions on such statements are unqualified. As reflected in the Financial Statements, except for the deficiency described in Section 4.13, the Company has fully funded all pension liabilities and retirement allowances required to be funded by it in respect of the Employees of the Company under Applicable Law and any applicable collective bargaining or other labor agreements.

4.13 Absence of Undisclosed Liabilities and Obligations. Except as set forth in Schedule 4.13, neither the Company nor the Subsidiary has any liability or obligation, whether accrued, absolute, direct, contingent, or otherwise, which is not reflected in the Financial Statements, other than obligations and liabilities incurred in the ordinary course of business that are not required under the Japanese GAAP to be reflected therein and other than obligations and liabilities incurred in the ordinary course of business since the Financial Statements for the Fiscal Year ended June 30, 2006. The Company’s funding deficiency owing to the pension fund of Mitsui & Co., Ltd. is Eleven Million Five Hundred Fifty-Seven Thousand Eighty Yen (¥11,557,080).

4.14 Absence of Certain Changes. Since June 30, 2006, (i) the Company has not paid any dividend or otherwise distributed assets to its shareholders, except as contemplated in Section 8.6, (ii) there has occurred no change in the capital stock of the Company and (iii) there has occurred no event or condition of any character that has either individually or in the aggregate had, or that could be reasonably expected to have, a Material Adverse Effect on the Company.

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4.15 Indebtedness for Borrowed Money. Schedule 4.15 lists each Person to which the Company is indebted for borrowed money in an aggregate outstanding amount that exceeds ¥10,000,000 (the “Senior Lenders”), the principal amount of such indebtedness (as of the date hereof), and the principal agreements under which such indebtedness was incurred. The Company has provided to the Buyers a complete list of all other loan or similar agreements to which the Company is a party or otherwise obligated with respect thereto, and there is no default, or condition that with the giving of notice or lapse of time or both would constitute a default, under any such agreements by the Company listed in Schedule 4.15.

4.16 Condition of Tangible Assets. To the knowledge of such Seller, all items of machinery, equipment, and other tangible assets used by the Company are in good operational condition, ordinary wear and tear excepted, as warranted by the respective suppliers under the relevant contracts.

4.17 Intellectual Property. The Company is the legal and beneficial owner of all right, title and interest in and to the Intellectual Property, having good title thereto, free and clear of any and all Liens, or has a valid license to use the Intellectual Property. The Intellectual Property is valid, in good standing, enforceable and not the subject of any challenge, and the Company has taken all necessary measures and precautions to maintain the enforceability, value and confidentiality of the Intellectual Property. The Company has not previously assigned, transferred, conveyed or otherwise encumbered any right, title or interest in or to the Intellectual Property, and except as set forth in Schedule 4.17, has not granted to any third party any license to use any of the Intellectual Property in any manner, or any covenant not to sue for any use of any of the Intellectual Property. The use of the Intellectual Property by the Company in its business, does not violate, infringe or otherwise conflict with any copyright, trade secret, trademark, servicemark or patent (the “Proprietary Rights”) of any third party. No claim has been brought by any person or entity alleging that the use of Intellectual Property by the Company in its business violates, infringes or otherwise conflicts or interferes with any Proprietary Rights of any third party. Each current and former employee, consultant and contractor of the Company (a “Contract Party”) has executed an agreement requiring the Contract Party to maintain the confidentiality of any confidential information to which the Contract Party was exposed during the course of performing any work for the Company, and to assign to the Company, as applicable, all right, title and interest in and to any Proprietary Rights authored, invented, developed, created or reduced to practice by the Contract Party.

4.18 Employment Arrangements; Labor Relations. All amounts owing to the Employees in connection with their employment with, or provision of services to, the Company through the Closing Date have been timely paid in full. There are no pending strikes, lockouts or other labor disputes against the Company or between the Company and their employees, and no significant unfair labor practice complaint is pending in respect of the Company before any Governmental Entity. There are no collective bargaining agreements to which the Company is subject.

4.19 Licenses, Compliance with Laws, Regulations, etc. Schedule 4.19 sets forth all material permits, licenses and other approvals and authorizations held by the Company and which are necessary for the conduct of its business as presently conducted, and without which the current business of Company would suffer a Material Adverse Effect, and all of such licenses, permits and other approvals and authorizations are in good standing full force and effect. The Company has not received any notice that any of such licenses, permits, approvals or authorizations will lapse or be terminated by action of a Governmental Entity on

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and/or before the Closing Date. Except where failure to comply would not have a Material Adverse Effect upon the Company, the Company has complied, and is in compliance, in all material respects, with all Applicable Law.

4.20 Contracts.

(a) Schedule 4.20 sets forth a listing of all of the Contracts to which the Company is a party or by or to which any of its assets or properties are bound or subject which are material to the business of the Company, except for one or more agreements evidencing the senior debt facility specified in Section 7.7 (the “Material Contracts”). Except as provided in the Schedule 4.20, each of the Material Contracts constitutes a valid and binding obligation of the Company, is in full force and effect on the Closing Date, and will not be affected by the transactions contemplated hereby. The Company has fulfilled and performed in all material respects its obligations under each of the Material Contracts.

(b) Except as set forth in Schedule 4.20, none of the Material Contracts is subject to any existing default by or event of default with respect to the Company, which would reasonably be expected to have a Material Adverse Effect or event which with the giving of notice or the passage of time or both would constitute a default by the Company and which would reasonably be expected to have a Material Adverse Effect. To the knowledge of such Seller, no default or event of default which would reasonably be expected to have a Material Adverse Effect exists with regard to any other party to a Material Contract.

(c) Except as set forth in Schedule 4.20, the Company is not a party to any Material Contract where any consent is necessary to consummate the transactions contemplated herein or in any Ancillary Agreement to which it is a party.

(d) Except as set forth in Schedule 4.20, to the knowledge of the Seller, there are no agreements or contracts between the Company and any of its employees, agents, officers, directors, shareholders or any entity in which any officer, director or shareholder owns a more than five percent equity interest.

(e) Except as set forth in Schedule 4.20, the Company is not a party to any agreement which materially limits the freedom of the Company or the Subsidiary to compete in any line of business or with any firm or person.

4.21 Insurance. The Company has maintained and does maintain insurance policies with responsible and reputable insurance companies or associations in such amounts and covering such risks as may be customary for similarly situated entities, including product liability insurance.

4.22 Warranty; Product Liability. Schedule 4.22 sets forth an accurate, correct and complete list and summary description of all existing claims arising from or alleged to arise from the breach of product warranties given in sales contracts between the Company and its customers (“Warranty Claims”), and any injury to person or property or economic damage (“Product Liability Claims”) exceeding the amount of ¥2.5 million arising prior to the Closing Date.

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4.23 Environmental Matters. The Company has complied in all material respects with all Environmental Laws, and no citations, notices, or orders have been issued to the Company under any such laws. Such Seller does not have any knowledge of any deposit, storage, disposal, burial, discharge, spillage, uncontrolled loss, seepage or filtration of any Hazardous Substance at, upon, under, or within the Facility. The Company has not caused or permitted to occur any condition which may cause a discharge of any Hazardous Substance at, upon, under or within any premises currently or previously occupied by the Company.

4.24 No Relationship with Anti-Social Organizations. To such Seller’s knowledge, none of such Seller and/or the Company is or belongs to any illegal or anti-social organizations or any organizations which promote illegal or anti-social activities or behaviors as prohibited under the Anti-Social Organization Law (Bouryokudan-in ni yoru Futou-na Koui no Boushi-to-ni Kansuru Horitsu) (Law No. 77 of 1991, as amended).

4.25 Disclosure of Information. Except to the extent set forth in the Schedule of Exceptions, all representations and warranties made by such Seller in this Agreement are true, complete and correct in all material respects and do not and will not contain any untrue statement of material fact or omit to state any material fact required to be stated or necessary to make the statements in light of the circumstances in which they were made not misleading.

5. REPRESENTATIONS AND WARRANTIES OF THE BUYERS

Each Buyer, severally, and not jointly, hereby represents and warrants to the Sellers as of the date hereof and as of the Closing Date as follows, provided that the Individual Buyers do not make represents and warranties set forth in Section 5.1(a) and (b):

5.1 Authority; Capacity.

(a) Organization. Such Buyer is (i) a duly organized and validly existing under the laws of Japan, and (ii) is in good standing under the laws of Japan.

(b) Authority. Such Buyer has the requisite power and authority to enter into and to perform its obligations under this Agreement and the Ancillary Agreements to which it is or will be a party. The execution, delivery and performance of this Agreement and the Ancillary Agreements to which it is or will be a party and the transactions contemplated hereby and thereby have been duly authorized by all necessary proceedings.

(c) Enforceability. Each of this Agreement and the Ancillary Agreements to which it is a party constitutes, or upon execution and delivery will constitute, valid and legally binding obligations of the Buyer enforceable against it in accordance with their respective terms, subject to the Remedies Exception.

(d) Capacity. Such Buyer has all requisite legal capacity to execute and deliver this Agreement and the Ancillary Agreements to which it is a party, and to consummate the transactions contemplated hereby and thereby.

5.2 Compliance with Laws and Other Instruments; No Conflict. Such Buyer is not in violation of or default under, and no condition exists that with notice or lapse of time or both, would constitute a violation of or default under (i) the Constitutional Documents, if any, of such Buyer, (ii) any Contractual Obligation, except for violations or defaults which,

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both individually and in the aggregate, would not have a Material Adverse Effect on such Buyer. The execution and delivery of this Agreement and the Ancillary Agreements to which it is party by such Buyer and the performance by such Buyer of its obligations hereunder and thereunder do not and will not (i) conflict with or contravene any provision of the Constitutional Documents, if any, of such Buyer, (ii) violate or conflict with any provision of Applicable Law which is applicable to such Buyer or any of its assets, (iii) conflict with, result in any breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or give rise to a right of payment under or the right to terminate, amend, modify, abandon or accelerate, any Contractual Obligation to which such Buyer is a party or by which any of its properties or assets are bound, or (iv) result in or require the creation or imposition of any Lien upon or with respect to any of the property or assets of such Buyer.

5.3 Consents and Approvals. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity or other Person is required by or with respect to such Buyer in connection with the execution and delivery of this Agreement or the Ancillary Agreements to which it is a party, or the consummation of the transactions contemplated hereby or thereby.

5.4 Litigation. There is no material action, suit, or other legal or administrative proceeding or governmental investigation pending or, to such Buyer’s knowledge, threatened against such Buyer, or any of its properties or assets, or which materially question the validity or enforceability of this Agreement or the transactions contemplated hereby and, to such Buyer’s knowledge, there is no basis for any of the foregoing.

5.5 Investment Representations. Such Buyer is acquiring the Purchased Shares for its own account and for investment, and not with a view to any distribution of any of such Purchased Shares.

5.6 Finders and Brokers. Neither such Buyer nor any Person acting on behalf of such Buyer has negotiated with or retained any finder, broker, intermediary or any similar Person in connection with any of the transactions contemplated hereunder for whose brokerage fee, finder’s fee or other similar fee or commission shall be or could be payable by the Company or any Seller.

5.7 Investigation and Evaluation. Such Buyer acknowledges that (i) such Buyer is experienced in the purchase of shares in companies similar to the Company, (ii) such Buyer and its directors, officers, attorneys, accountants and advisors have been given the opportunity to examine to the full extent deemed necessary and desirable all the books, records and other information with respect to the Company, (iii) such Buyer is fully capable of evaluating the adequacy and accuracy of the information obtained by such Buyer in the course of its investigations, (iv) such Buyer has not relied on Sellers with respect to any matter in connection with such Buyer’s evaluation of the Company other than the representations and warranties of Sellers specifically set forth in Section 4 hereof and (v) SELLERS ARE MAKING NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE COMPANY OTHER THAN THOSE EXPRESSLY SET FORTH IN SECTION 4 HEREOF.

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6. COVENANTS

6.1 Obligations of the Parties before Closing. From the date of this Agreement through the Closing Date, the following undertakings of the Parties shall apply:

(a) Notice of Certain Events Pending Closing. During the period prior to the Closing Date, each of the Sellers shall promptly notify the Buyers in writing of (i) any material change in the business of the Company or the Subsidiary, (ii) the threat or commencement of any material litigation by or against the Company or the Subsidiary, or (iii) any event, condition, fact or circumstance that may make the timely satisfaction of any of the conditions set forth in Section 7 impossible or unlikely.

(b) Mutual Consultation. Buyers and Sellers will consult with each other Parties regarding all significant developments, transactions, and proposals relating to the Company as notified by Sellers in accordance with Section 6.1(a) above.

(c) Further Assurances. Subject to the terms and conditions hereof, each Party agrees to use all commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement.

6.2 No Negotiation. Other than discussions with the Buyers regarding the transactions contemplated hereby, no Seller shall and the Sellers shall cause the Company not to, directly or indirectly, through any officer, director, agent or otherwise, make, solicit, initiate or encourage submission of any proposal or offer from any Person (including any of its officers or employees) relating to any merger, consolidation, acquisition, purchase or other significant transaction relating to, the Company’s shares, business or assets or by such Person (a “Transaction Proposal”). The Sellers shall immediately cease and cause to be terminated all ongoing contacts or negotiations, if any, with respect to any Transaction Proposal. The Sellers shall promptly notify the Buyers if any Transaction Proposal, or any inquiry or contact with any Person with respect thereto, is made and shall promptly provide the Buyers with such information regarding such Transaction Proposal, inquiry or contact as any Buyer may reasonably request.

6.3 Conduct Business in Ordinary Course. Through the Closing Date, the Sellers and Mr. Kawai and any other Individual Buyers currently a part of the senior management of the Company shall, severally but not jointly, cause each of the Company and the Subsidiary to conduct its business only in the ordinary course and, in addition, shall cause each of the Company and the Subsidiary not to: (i) enter into any agreement which may have a Material Adverse Effect on the Company or the Subsidiary; (ii) place or allow to be placed any Liens other than Permitted Liens, on any of the Company’s or the Subsidiary’s assets; (iii) sell or otherwise dispose of any interest in any of its assets other than in the ordinary course of business; (iv) issue or cause to be issued any new shares or securities or any options or rights to purchase shares or securities; (v) except as contemplated by Section 8.6 hereof, declare or pay any dividend or other distributions; or (vi) commit any act or omit to do any act, or engage in any activity or transaction or incur any obligation (by contract or otherwise) which (individually or in the aggregate) could be reasonably expected to have a Material Adverse Effect on the Company, the Subsidiary or on any of the transactions contemplated hereby.

6.4 Confidentiality and Publicity.

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(a) Each Party and its Affiliates shall maintain in confidence all confidential information (oral or written) identified as such received from any other Party in connection with this Agreement (including the Company Information, “Confidential Information”), shall use such Confidential Information only in connection with the transactions contemplated hereby, shall not disclose any such Confidential Information to a third party or make any unauthorized use thereof and shall not use for its benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person or entity, any Company Information. “Company Information,” as used in the preceding sentence, means any information regarding the Company’s and the Subsidiary’s business methods, business policies, procedures, techniques, research or development projects or results; historical or projected financial information, budgets, trade secrets or other knowledge or processes of or developed by the Company or the Subsidiary; any names and addresses of customers or clients or any data on or relating to past, present or prospective Company or Subsidiary customers or clients; or any other confidential information relating to or dealing with the business, or operations or activities of the Company or the Subsidiary, excepting in each case information otherwise lawfully known generally by, or readily accessible to, the trade or the general public. Each Party and its Affiliates shall treat such Confidential Information with the same degree of care against disclosure or unauthorized use which it affords to its own confidential information of a similar nature or a reasonable degree of care, whichever is greater. Notwithstanding the foregoing, Confidential Information shall not include any information that (i) has become generally available in the public domain, (ii) was in the receiving party’s possession prior to disclosure, (iii) was independently developed by the receiving party, or (iv) was received from a third party who had a right to disclose such information.

(b) In the event that a Party is requested or required (by Applicable Law or by oral questions, interrogatories, requests for information or documents by any Governmental Entity or other Person in legal proceedings, subpoenas, civil investigative demands or other similar processes) to disclose any Confidential Information received from a disclosing party, the recipient party so requested or required shall provide the disclosing party with prompt written notice of any such request or requirement so that the disclosing party may object to production, seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement. If, in the absence of a protective order or other remedy or the receipt of a waiver of the disclosing party, such recipient party is nonetheless legally compelled to disclose such Confidential Information, such recipient party may, without liability hereunder, disclose that portion of the Confidential Information which is legally required to be disclosed.

(c) Except as may be required by Applicable Law, including, without limitation, the securities laws of any relevant jurisdiction, no press release, publicity, disclosure or notice to any Person concerning any of the transactions contemplated hereby shall be issued, given, made or otherwise disseminated by any Party or any of its Affiliates at any time (whether prior to, at or after the Closing) without the prior written approval of, in the case the disclosing party is a Seller or a Buyer, all of the other Parties or, in the case the disclosing party is the Company, either the Buyers (before the Closing Date) or all of the Sellers (after the Closing Date), which approval shall not be unreasonably withheld; provided, that promptly after the date hereof (and

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in any event within one (1) week after the date hereof), the Sellers and the Buyers shall (or the Buyers, acting alone, at any time after the expiration of such one (1) week period, may, if the Sellers and the Buyers have not by then acted jointly) issue a press release announcing the signing of this Agreement and the effect of this Agreement on the ownership of the Company, and provided, further, that any Buyer may freely circulate such press release and that any Buyer, following notice to the Sellers at any time after the date hereof may make appropriate inquiries of the Company’s customers and suppliers.

6.5 Sellers’ Representations and Warranties; Knowledge. For purposes of this Agreement, any representation herein “to such Seller’s knowledge” means that the statement in question is true and accurate to the best knowledge of any of (i) directors; (ii) officers; or (iii) employees (who are in charge of managing the investment in, and the distribution relationship, with the Company) of such Seller.

7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BUYER

The obligation of each Buyer to consummate the transactions contemplated by this Agreement is subject to the satisfaction, or written waiver by such Buyer, of each of the following conditions on or prior to Closing; and the occurrence of the Closing without any Seller’s notifying the Buyers prior thereto that conditions set forth in Sections 7.1 through 7.4 have not been satisfied shall cause the Sellers to be deemed to have stated conclusively that conditions set forth in Sections 7.1 through 7.4 have been satisfied.

7.1 Representations and Warranties; Compliance with this Agreement. Subject to the Schedule of Exceptions, the representations and warranties of the Sellers contained in Section 4 hereof shall be true and correct in all material respects as of the Closing Date. The Sellers shall have performed and complied in all material respects with all of their agreements and covenants contained herein and in the Ancillary Agreements which are required to be performed by any of them on or before the Closing Date, including, without limitation, delivery of the Purchased Shares and the other items set forth in Schedule 3.2 to the Buyers on the Closing Date.

7.2 No Judgment or Order. There shall not be any judgment or order of a court of competent jurisdiction, any ruling of any Governmental Entity, or any condition imposed under Applicable Law which would prohibit the purchase and sale of the Purchased Shares hereunder or subject any Buyer to any penalty or other onerous condition under any Applicable Law if the Purchased Shares were to be purchased hereunder.

7.3 No Litigation. No action, suit or proceeding before any court or any other Governmental Entity shall have been commenced or threatened (i) seeking to restrain, prevent or change the terms of the transactions contemplated hereby or challenging the validity or legality of any such transactions, or (ii) which would, if resolved adversely, severally or in the aggregate, have a Material Adverse Effect on any Party, the Company or the Subsidiary.

7.4 Approvals. All filings, consents, approvals, qualifications, and registrations required by any Governmental Entity or other Person which are necessary or otherwise appropriate for the Sellers to consummate the transactions contemplated by this Agreement shall have occurred, been made or been obtained, all waiting periods under Applicable Law shall have expired, shall not have been revoked, rescinded or otherwise modified.

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7.5 Execution. The Sellers shall have duly executed and delivered, on or prior to the Closing, the Agreement, the Ancillary Agreements to which the Sellers respectively are party and any other documents in respect of the transactions contemplated herein and therein, in each case, in the form and substance acceptable to the Fund Buyers.

7.6 Shares. The Sellers shall have owned the Shares from the date of this Agreement through the Closing Date free and clear of all Liens.

7.7 Financing. The Company shall have obtained a senior debt facility from one or more banks on terms and conditions acceptable to the Fund Buyers and in an amount sufficient for the Company to pay dividends as contemplated by Section 8.6.

7.8 Termination of Existing Shareholders Agreement and Existing Distribution Agreement. The termination agreement for the Existing Shareholders Agreement, the Existing FSI License Agreement, the Existing mŸFSI License Agreement, the Existing FSI Distributorship Agreement, the Existing mŸFSI Distributorship Agreement and the Existing CEC License Agreement shall have been executed under which the above mentioned agreements shall be terminated upon the completion of the Closing and thereafter shall be of no further force and effect and the parties to such Agreements shall have provided a release of the other parties, as applicable.

7.9 No Material Adverse Change. There shall not have occurred since the execution of this Agreement any event, fact, circumstance or action that would reasonably likely have a Material Adverse Effect on the Company or the Subsidiary.

8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS

The obligation of each Seller to consummate the transactions contemplated by this Agreement is subject to the satisfaction, or written waiver by such Seller, of each of the following conditions on or prior to Closing; and the occurrence of the Closing without any Buyer’s notifying the Sellers prior thereto that conditions set forth in Sections 8.1 through 8.4 have not been satisfied shall cause the Buyers to be deemed to have stated conclusively that conditions set forth in Sections 8.1 through 8.4 have been satisfied

8.1 Representations and Warranties; Compliance with this Agreement. The representations and warranties of the Buyers contained in Section 5 hereof shall be true and correct in all material respects as of the Closing Date. The Buyers shall have performed and complied in all material respects with all of its agreements and covenants contained herein and the Ancillary Agreements which are required to be performed by them on or before the Closing Date, including, without limitation, delivery of the Closing Payment to the Sellers on the Closing Date.

8.2 No Judgment or Order. There shall not be any judgment or order of a court of competent jurisdiction, any ruling of any Governmental Entity, or any condition imposed under Applicable Law which would prohibit the purchase and sale of the shares hereunder or subject any Seller to any penalty or other onerous condition under any Applicable Law if the Purchased Shares were to be purchased hereunder.

8.3 No Litigation. No action, suit or proceeding before any court or any other Governmental Entity shall have been commenced or threatened (i) seeking to restrain, prevent or change the terms of the transactions contemplated hereby or challenging the

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validity or legality of any such transactions, or (ii) which would, if resolved adversely, severally or in the aggregate, have a Material Adverse Effect on any Party, the Company or the Subsidiary.

8.4 Approvals. All filings, consents, approvals, qualifications, and registrations required by any Governmental Entity or other Person which are necessary or otherwise appropriate for the Buyers to consummate the transactions contemplated by this Agreement shall have occurred, been made or been obtained, all waiting periods under Applicable Law shall have expired, shall not have been revoked, rescinded or otherwise modified.

8.5 Execution. The Buyers shall have duly executed and delivered, on or prior to the Closing, the Agreement, the Ancillary Agreements to which they are party and any other documents in respect of the transactions contemplated herein and therein.

8.6 Dividend. The Company shall have declared dividends in the aggregate amount of Five Hundred Five Million Eight Thousand Yen (¥505,008,000), and such dividends have been paid proportionately to each of the Sellers (subject to applicable withholding taxes to be withheld by the Company) on the Closing Date immediately prior to the Closing, subject to the fulfillment or waiver, as applicable, of all other conditions to the Closing.

9. TERMINATION OF AGREEMENT

9.1 Termination. This Agreement may be terminated prior to Closing as follows:

(a) at the election of the Sellers or the Buyers, if the Closing shall not have occurred on or prior to August 31, 2007, other than as a result of a breach of any material term of condition hereof by the Party seeking to so terminate;

(b) at the election of the Sellers or the Buyers, if the other Party (the Sellers in the case of a breach by any Buyer, and the Buyers in the case of a breach by any Seller) breaches any material term or condition of this Agreement and there is no reasonable possibility of cure prior to the Closing Date;

(c) at the election of the Sellers or the Buyers, if any action, suit or proceeding shall have been instituted or threatened before, or instituted or threatened by, any Governmental Entity to restrain or prevent the consummation of the transactions contemplated hereby or to seek damages in connection with such transactions, and the Sellers or the Buyers, as the case may be, reasonably and in good faith deems it impractical or inadvisable to proceed in view of such legal proceedings or threat thereof; or

(d) at any time on or prior to the Closing Date, by mutual written consent of the Parties.

9.2 Effect of Termination. Except for the obligations set forth in Sections 10 and 11 and this Section 9.2, if this Agreement shall be terminated pursuant to the preceding Section 9.1, all obligations, representations and warranties of the Parties hereto under this Agreement that relate to the Closing (or the transactions contemplated thereby or in connection therewith) that have not been consummated shall terminate, provided, that

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nothing in this Section 9.2 shall relieve any Party of liability for breach of any warranty, covenant or agreement herein.

10. INDEMNIFICATION

10.1 Indemnification Obligation. Each Seller (in such capacity, an “Indemnifying Party”) hereby agrees to indemnify the Buyers (an “Indemnified Party”) severally and not jointly, in proportion to the number of the Purchased Shares each Indemnifying Party transferred to the Indemnified Parties, from and against any and all claims, demands, liabilities, costs, damages, expenses (including, without limitation, reasonable attorneys’ fees and expenses and reasonable costs of investigation), and causes of action of any nature whatsoever (a “Loss” and, collectively, “Losses”) arising from breach in any material respect of any representation, warranty (regardless of any due diligence, examinations, inspections, audits and other investigations a Buyer has heretofore made or may hereafter make, with respect to such representations and warranties), covenant, agreement or obligation made or to be performed by such Indemnifying Party hereunder or under the Ancillary Agreements to which it is a party; provided that Losses arising from a breach of the representations and warranties set forth in Sections 4.17, 4.22 and 4.23 shall be indemnified in their entirety solely by FSI. Each Seller acknowledges and agrees that, if there is any such breach relating to or affecting the Company or the Subsidiary, or the condition of the Company or the Subsidiary, then a Buyer itself shall be deemed, by virtue of its ownership of capital stock of the Company, to have incurred Losses, which shall be deemed to include, without limitation, such Buyer’s pro rata share of an amount equal to the difference between (i) the total net assets of the Company had such breach not occurred and (ii) the total net assets of the Company as decreased by, or relating to, or reflecting, such breach; provided that such difference shall be computed by an independent certified public accountant to be designated by the mutual agreement between Indemnifying Party and the Indemnified Party.

10.2 Limitations. Notwithstanding the terms of Section 10.1 above, the Sellers’ obligation to indemnify Buyers for Losses asserted by Sellers shall be subject to the following limitations:

(a) The Sellers will have no obligation to indemnify Buyers for any Losses asserted by Buyers unless the amount of such Loss is equal to or greater than ¥2,500,000 (the “Minor Claim Amount”), and any Loss that does not equal or exceed the Minor Claim Amount shall not count towards the Threshold Amount;

(b) Buyers shall first be obligated to use commercially reasonable efforts to obtain and apply the proceeds of any insurance available to compensate the Company for the Losses subject to the indemnification claim (whether such insurance is maintained by the Buyers or by the Company), and to the extent any Loss is reimbursed to the Buyers or the Company under an applicable insurance policy, the Sellers will have no obligation to indemnify Buyers for such Loss and such Loss shall not count toward the Threshold Amount;

(c) The Sellers will have no obligation to indemnify Buyers for Losses unless and until the cumulative aggregate amount of such Losses equals or exceeds ¥10,000,000 (the “Threshold Amount”), in which case the Sellers will be liable for all Losses in excess of such amount, subject to subsection (d) immediately below; and

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(d) The aggregate liability of the Sellers to Buyers for Losses claimed under this Section 10 shall not exceed an amount equal to fourty percent (40 %) of the sum of (i) the Purchase Price and (ii) the amount of dividend (before withholding tax) contemplated under Section 8.6 hereunder, that the Sellers have received from the Buyers or the Company, as applicable.

10.3 Survival of Indemnification Obligation; Limitations. Except as set forth below in this Section 10.3, all representations, warranties and covenants made by each Seller in this Agreement shall be deemed to have been made or given, as the case may be, as of the date hereof and as of the Closing and shall survive the Closing for a period of one (1) year; provided, however, the representations, warranties and covenants of each Seller set forth in Sections 4.11 and 4.23 shall survive the Closing for a period of three (3) years.

10.4 Third Party Claims. If any lawsuit or enforcement action is filed against an Indemnified Party with respect to which such Indemnified Party is entitled to indemnification under this Section 10 or an Indemnified Party becomes aware of any fact, condition or event which may give rise to Losses for which indemnification may be sought under this Section 10, then such Indemnified Party shall give notice thereof (a “Claim Notice”) to the Party against whom indemnity is (or may be) sought as promptly as practicable. If within thirty (30) days after receipt of the Claim Notice the Indemnifying Party acknowledges in writing to the Indemnified Party that the Indemnifying Party is obligated under the terms hereof to defend such lawsuit or action or that it will defend under a reservation of rights and without any assumption of liability, then the Indemnifying Party shall be entitled, if it so elects at its own cost, risk and expense, (a) to take control of the defense and investigation of such lawsuit or action, (b) to employ and engage attorneys at its discretion and the Indemnified Party to handle and defend the same, and (c) to compromise or settle such claim. In connection with the Indemnifying Party’s defense as described in the foregoing sentence, each Indemnified Party shall, as expressly required by such Indemnifying Party, (at the Indemnifying Party’s cost and expense) cooperate in all reasonable respects with the Indemnifying Party and its attorneys in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom; provided, however, that subject to the foregoing control, discretion and rights of the Indemnifying Party, an Indemnified Party may, at its own cost, participate in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom. The Parties shall cooperate with each other in any notifications to insurers. If the Indemnifying Party fails to assume the defense of such claim within thirty (30) calendar days after receipt of the Claim Notice as provided above, then the Party against which such claim has been asserted, or to which such facts or condition relates, shall (upon delivering notice to such effect to the Indemnifying Party) have the right (but not the obligation) to undertake, at the Indemnifying Party’s cost and expense, the defense, compromise or settlement of such claim on behalf of, and for the account and risk of, the Indemnifying Party. In the event the Indemnified Party assumes the defense of the claim, the Indemnified Party will seek to keep the Indemnifying Party timely informed of the progress of any such defense, compromise or settlement. The Indemnifying Party shall be liable for any settlement of any action effected pursuant to and in accordance with this Section 10 and for any final judgment (subject to any right of appeal), and the Indemnifying Party agrees to indemnify and hold harmless the Indemnified Party from and against any Losses by reason of such settlement or judgment.

10.5 Indemnification by Buyers. Each Buyer (in such capacity an Indemnifying Party) agrees to indemnify the Sellers (each such Seller an Indemnified Party) severally, and

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not jointly, from and against any and all Losses incurred by Sellers arising from a breach in any material respect of any representation, warranty, covenant, agreement or obligation made or to be performed by such Indemnifying Party hereunder or under the Ancillary Agreements. The limitations on the indemnification obligations of the Sellers under Section 10.2 above shall apply mutatis mutandis to the indemnification obligations of the Buyers under this Section 10.5.

10.6 Sole and Exclusive Remedy. After the Closing, the rights set forth in Sections 10.1 through 10.5 will be the exclusive remedy for (a) any breach of any of the representations and warranties contained in Sections 4 and 5 of this Agreement and (b) any breach by a Party of any of the agreements and covenants contained in this Agreement, in each case in lieu of contract remedies; provided, however, that the Parties otherwise will also have available to them all other remedies available under law, including specific performance or other equitable remedies, to enforce the obligations set forth in Section 6.4 hereof.

10.7 Tax Adjustment. Any payment to a Party contemplated under this Section 10 will be, for tax purposes, to the extent permitted by law, an adjustment to the Purchase Price. The Parties acknowledge and agree that such payment is subject to withholding taxes to be withheld by the Company and that none of the Company or the Buyers shall be obligated to “gross-up” such payment.

11. MISCELLANEOUS

11.1 Governing Law. This Agreement shall be construed in accordance with and governed by the laws of Japan. Each Party hereby submits to the non-exclusive jurisdiction of the Tokyo District Court for purposes of all legal proceedings arising out of or relating to this Agreement and the transactions contemplated hereby.

11.2 Headings. The headings of the sections of this Agreement are for convenience and shall not by themselves determine the interpretation of this Agreement. Unless otherwise provided, all references to articles, sections, exhibits and Schedules in this Agreement are to articles, sections, exhibits and Schedules of this Agreement.

11.3 Notices and Other Communications. Any and all notices, requests, demands and other communications required or otherwise contemplated to be made under this Agreement shall be in writing and in English and shall be provided by one or more of the following means and shall be deemed to have been duly given (a) if delivered personally, when received, (b) if transmitted by facsimile, on the date of transmission with receipt of a transmittal confirmation, or (c) if by international courier service, on the fourth (4th) business day following the date of deposit with such courier service, or such earlier delivery date as may be confirmed in writing to the sender by such courier service. All such notices, requests, demands and other communications shall be addressed as follows:

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If to Buyers:

Yasuda Enterprise Development III, Limited Partnership
Kojimachi 4-chome Kyodo Bldg. 9F
4-2-7 Kojimachi,
Chiyoda-ku, Tokyo 102-0083
Japan
Facsimile: +81-3-6811-7092
Attention: Taisuke Hitomi

Mizuho Capital Co., Ltd.
4-3, Nihombashi-kabutocho
Chuo-ku, Tokyo 103-0026
Japan
Facsimile: +81-3-3664-3449
Attention: Kenichi Ohta

Mr. Hideki Kawai
Harmony Tower 22F
32-2, Hon-cho 1-chome
Nakano-ku, Tokyo 164-0012
Japan
Facsimile: +81-3-5309-8401

Mr. Takanori Yoshioka
Harmony Tower 22F
32-2, Hon-cho 1-chome
Nakano-ku, Tokyo 164-0012
Japan
Facsimile: +81-3-5309-8401

Mr. Satoshi Shikami
Harmony Tower 22F
32-2, Hon-cho 1-chome
Nakano-ku, Tokyo 164-0012
Japan
Facsimile: +81-3-5309-8401

If to the Sellers:

FSI International, Inc.
3455 Lyman Boulevard
Chaska,
Minnesota 55318-3052
U.S.A.
Facsimile: +1-952-448-1300
Attention: Benno Sand

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Chlorine Engineers Corp. Ltd.
Tomiokabashi Building
6-11 Fukagawa 2-chome
Koto-ku, Tokyo 135-0033
Japan
Facsimile: +81-5245-8128
Attention: Keisuke Nakayama

MBK Project Holdings Ltd.
2-1 Ohtemachi 1-chome
Chiyoda-ku, Tokyo 100-0004
Japan
Facsimile: +81-3-3285-9116
Attention: Yasuhiro Tanaka

or to such other address or facsimile number as a Party may have specified to the other parties in writing delivered in accordance with this Section 11.3.

11.4 Amendment of Agreement; No Waiver. Any provision of this Agreement may be amended only upon the Parties’ mutual written agreement. No failure to exercise and no delay in exercising any right, power or privilege granted under this Agreement shall operate as a waiver of such right, power or privilege. No single or partial exercise of any right, power or privilege granted under this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

11.5 Severability. If any provision of this Agreement is determined by a court of law to be illegal or unenforceable, then such provision will be enforced to the maximum extent possible and other provisions will remain fully effective and enforceable, and if no feasible interpretation would save such provision, it shall be severed from the remainder of this Agreement, which shall remain in full force and effect unless the severed provision is essential to the rights or benefits intended by the Parties. In such event, the Parties hereto shall use best efforts to negotiate, in good faith, a substitute, valid and enforceable provision or agreement which most nearly effects the intent of the Parties hereto in entering into this Agreement.

11.6 Fees and Expenses. Each Party shall be solely responsible for the payment of the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such Party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.

11.7 Entire Agreement. This Agreement, including the Exhibits and Schedules attached hereto, constitutes the entire agreement among the Parties regarding the subject matter hereof. Any previous agreement between the Parties is superseded by this Agreement.

11.8 Successors and Assigns. Except as expressly provided herein, the rights and obligations hereunder may not be assigned or delegated by any Party without the prior written consent of all other Parties. Subject to the foregoing, the provisions hereof shall inure to the benefit of, and be binding upon, the successors and permitted assigns of the Parties. Each Party agrees that this Agreement shall not benefit or create any right or cause of action in or on behalf of any Person other than the Parties, except as otherwise provided in Section 10.1.

-27-

11.9 English Language. This Agreement is in the English language only, which language shall be controlling in all respects. No translation, if any, of this Agreement into Japanese or any other language shall have any force or effect in the interpretation of or in the determination of the intent of the Parties with respect hereto. Notwithstanding the foregoing, the Parties acknowledge and agree that certain portions of Schedules are in the Japanese language and that such Japanese language portions shall be controlling to the extent of the matters set forth therein.

11.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

-28-

IN WITNESS WHEREOF, the parties have caused to be executed this Agreement as of the date first above written.


FSI INTERNATIONAL, INC.
By:	/s/ John C. Ely
	Name:	John C. Ely
	Title:	VP Sales/Service


CHLORINE ENGINEERS CORP. LTD.
By:	/s/ Yoshinori KATO
	Name:	Yoshinori KATO
	Title:	President


MBK PROJECT HOLDINGS LTD.
By:	/s/ Masato SHIODE
	Name:	Masato SHIODE
	Title:	President


YASUDA ENTERPRISE DEVELOPMENT III, LIMITED PARTNERSHIP
By:	/s/ Kazushige Tachibana
	Name:	Kazushige Tachibana
	Title:	President and Representative Director Yasuda Enterprise Development Co., Ltd. General Partner

-29-


MIZUHO CAPITAL CO., LTD.
By:	/s/ Akira Kiyohara
	Name:	Akira Kiyohara
	Title:	President Mizuho Capital Co., Ltd.



	/s/ Hideki Kawai
	Hideki Kawai



	/s/ Takanori Yoshioka
	Takanori Yoshioka



	/s/ Satoshi Shikami
	Satoshi Shikami

-30-

Exhibit A Schedule of Exceptions

Schedule 4.5 Share Ownership

Schedule 4.8 Corporate Authority of the Company

Schedule 4.9 Capitalization of Company

Schedule 4.10 Title to Assets

Schedule 4.12 Financial Statements

Schedule 4.13 Absence of Undisclosed Liabilities and Obligations

Schedule 4.15 Indebtedness for Borrowed Money

Schedule 4.17 Intellectual Property

Schedule 4.19 License, Compliance with Laws, Regulations, etc.

Schedule 4.20 Contracts

Schedule 4.22 Warranty — Product Liability

Exhibit B Articles of Incorporation of Company

Schedule 3.2 Certificate of the board resolution of the company approving share transfer contemplated under the Agreement

-31-

EX-31.1 4 c15796exv31w1.htm CERTIFICATION PURSUANT TO SECTION 302 exv31w1

EXHIBIT 31.1

CERTIFICATIONS

I, Donald S. Mitchell, certify that:

1. I have reviewed this quarterly report on Form 10-Q of FSI International, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 29, 2007



	/s/ DONALD S. MITCHELL
	Donald S. Mitchell
	Chairman and CEO (Principal Executive Officer)

EX-31.2 5 c15796exv31w2.htm CERTIFICATION PURSUANT TO SECTION 302 exv31w2

EXHIBIT 31.2

CERTIFICATIONS

I, Patricia M. Hollister, certify that:

1. I have reviewed this quarterly report on Form 10-Q of FSI International, Inc.;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 29, 2007



	/s/ PATRICIA M. HOLLISTER
	Patricia M. Hollister
	Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1 6 c15796exv32w1.htm CERTIFICATION PURSUANT TO SECTION 906 exv32w1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)

In connection with the Quarterly Report of FSI International, Inc., a Minnesota corporation (the “Company”), on Form 10-Q for the quarter ended May 26, 2007 as filed with the Securities and Exchange Commission (the “Report”), each of the undersigned hereby certifies, pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to the undersigned’s knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: June 29, 2007



	/s/ Donald S. Mitchell
	Donald S. Mitchell
	Chairman, President and Chief Executive Officer



	/s/ Patricia M. Hollister
	Patricia M. Hollister
	Chief Financial Officer and Assistant Secretary

-----END PRIVACY-ENHANCED MESSAGE-----

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	m•FSI LTD.
	By:	/s/ Hideki Kawai
		Name: Hideki Kawai
		Title: President & CEO