UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended: December 31, 2010

OR

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

Commission File Number: 000-22780

FEI COMPANY

(Exact name of registrant as specified in its charter)

Oregon	93-0621989
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5350 NE Dawson Creek Drive, Hillsboro, Oregon	97124-5793
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 503-726-7500

Securities registered pursuant to Section 12(b) of the Act: Common Stock and associated Preferred Stock

Purchase Rights (currently attached to and trading only with the Common Stock)

Name of each exchange on which registered: NASDAQ Global Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.  x

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

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the last sales price ($18.93) as reported by The NASDAQ Global Stock Market, as of the last business day of the registrant’s most recently completed second fiscal quarter (July 4, 2010), was $719,410,533.

The number of shares outstanding of the registrant’s Common Stock as of February 15, 2011 was 38,562,701 shares.

Documents Incorporated by Reference

The Registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its Proxy Statement for its 2011 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

FEI COMPANY

2010 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business		2
Item 1A.	Risk Factors		9
Item 1B.	Unresolved Staff Comments		22
Item 2.	Properties		22
Item 3.	Legal Proceedings		23
Item 4.	Reserved		23
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		24
Item 6.	Selected Financial Data		26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		46
Item 8.	Financial Statements and Supplementary Data		49
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		89
Item 9A.	Controls and Procedures		89
Item 9B.	Other Information		91
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance		91
Item 11.	Executive Compensation		91
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		91
Item 13.	Certain Relationships and Related Transactions, and Director Independence		91
Item 14.	Principal Accountant Fees and Services		91
	PART IV
Item 15.	Exhibits and Financial Statement Schedules		92
Signatures			95

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PART I

Item 1. Business

Overview

We were founded in 1971 and our shares began trading on The NASDAQ Stock Market in 1995. We are a leading supplier of instruments for nanoscale imaging, analysis and prototyping to enable research, development and manufacturing in a range of industrial, academic and research institutional applications. We report our revenue based on a market-focused organization: the Electronics market segment, the Research and Industry market segment, the Life Sciences market segment and the Service and Components market segment.

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

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

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

The Electronics market segment consists of customers in the semiconductor, data storage and related industries, such as manufacturers of solar panels and light-emitting diodes (“LEDs”). For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 45 nanometers and smaller, the use of multiple layers of new materials such as copper and low-k dielectrics and increasing device complexity. Our products are used primarily in laboratories to speed new product development and increase yields by enabling 3D wafer metrology, defect analysis, root cause failure analysis and circuit edit for modifying device structures. In the data storage market, our products offer 3D metrology for thin film head processing and root cause failure analysis. Factors affecting our data storage business include advances in perpendicular recording heads technology, such as rapidly increasing storage densities that require smaller recording heads, thinner geometries and materials that increase the complexity of device structures.

The Research and Industry market segment includes universities, public and private research laboratories and customers in a wide range of industries, including automobiles, aerospace, forensics, metals, mining and petrochemicals. Growth in these markets is driven by global corporate and government funding for research and development in materials science and by development of new products and processes based on innovations in materials at the nanoscale. Our solutions provide researchers and manufacturers with atomic-level resolution images and permit development, analysis and production of advanced products. Our products are also used in mineral concentration analysis, root cause failure analysis and quality control applications.

The Life Sciences market segment includes universities, government laboratories and research institutes engaged in biotech and life sciences applications, as well as pharmaceutical, biotech and medical device companies and hospitals. Our products’ ultra-high resolution imaging allows cell biologists and drug researchers to create detailed 3D reconstructions of complex biological structures. Our products are also used in particle analysis and a range of pathology and quality control applications.

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Our Service and Components market segment provides support for products and customers for the entire life cycle of a tool from installation through the warranty period, and after warranty period through contract coverage or on a time and materials basis. We believe strong technical support is an important part of the value proposition that we offer customers when a tool is sold. Our Service and Components market segment provides support across all markets and all regions.

Core Technologies

We use several core technologies to deliver a range of value-added customer solutions. Our core technologies include:

• focused ion beams, which allow modification of structures in sub-micron geometries;

• focused electron beams, which allow imaging, analysis and measurement of structures at sub-micron and even atomic levels;

• beam gas chemistries, which increase the effectiveness of ion and electron beams and allow etching and deposition of materials on structures at sub-micron levels; and

• domain software, system automation and sample management tools, which provide faster access to data and improved ease of use for operators of our systems.

Particle beam technologies—focused ion beams and electron beams. The emission and focusing of ions, which are positively or negatively charged atoms, or electrons from a source material, is fundamental to many of our products. Particle beams are accelerated and focused on a sample for purposes of high resolution imaging and sample processing. The fundamental properties of ion and electron beams permit them to perform various functions. The relatively low mass subatomic electrons interact with the sample and release secondary electrons. When collected, these secondary electrons can provide high quality images at nanometer-scale resolution. In previously thinned samples, collection of high energy electrons transmitted through the sample can yield image resolution at the atomic scale. The much greater mass ions dislodge surface particles, also resulting in displacement of secondary ions and electrons. Through the use of FIBs, the surface can be modified or milled with sub-micron precision by direct action of the ion beam or in combination with gases. Secondary electrons and ions may also be collected for imaging and compositional analysis. Our ion and electron beam technologies provide advanced capabilities and applications when coupled with our other core technologies.

Beam gas chemistry. Beam gas chemistry plays an important role in enabling our electron and ion beam based products to perform many tasks successfully. Beam gas chemistry involves the interaction of the primary ion beam with an injected gas near the surface of the sample. This interaction results in either the deposition of material or the enhanced removal of material from the sample. Both of these processes are critical to optimizing and expanding FIB and SEM applications. Our markets have growing needs for gas chemistry technologies, and we have aimed our development strategy at meeting these requirements.

• Deposition: Deposition of materials enables our FIBs to connect or isolate features electrically on, for example, an integrated circuit. A deposited layer of metal also can be used before FIB milling to protect surface features for more accurate cross-sectioning or sample preparation.

• Etching: The fast, clean and selective removal of material is the most important function of our FIBs. Our FIBs have the ability to mill specific types of material faster than other surrounding material. This process is called selective etching and is used to enhance image contrast or aid in the modification of various structures.

System automation and sample management. Drawing on our knowledge of application needs, and using robotics and image recognition and reconstruction software, we have developed automation capabilities that allow us to increase system performance, speed and precision. These capabilities have been especially important to our development efforts for in-line products and applications in the Electronics market segment and are expected to be increasingly important in emerging production and process control applications in the Research and Industry and Life Sciences market segments. Two important areas where we have developed significant automation technologies are TEM sample preparation and 3D process control. TEMs are widely used in the semiconductor and data storage markets to obtain valuable high-resolution images of extremely small, even atomic-level, structures. TEM sample preparation has traditionally been a slow and difficult manual process. With our DualBeam systems and proprietary

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software, we have automated this process, significantly improving the sample consistency and overall throughput. Similarly, by automating 3D process control applications, we allow customers to acquire previously unobtainable subsurface process metrics directly from within the production line, improving process management.

Research and Development

We have research and development operations in Hillsboro, Oregon; Eindhoven, The Netherlands; Brno, Czech Republic; and Brisbane, Australia.

Our research and development staff at December 31, 2010 consisted of 346 employees, including scientists, engineers, designer draftsmen, technicians and software developers.

In the last year, we introduced several new and improved products, including:

• the Helios Nanolab x50 series of small-stage DualBeams, with new electron beam and ion-beam capabilities for advance applications; and

• the Nova Nanosem 50 series of SEMs with a wide range of applications.

We also introduced a number of application-specific products that further our strategy of providing solutions for specific sets of customers. These products included:

• a Life Sciences version of our Magellan SEM;

• a software addition to our TEM line for Life Sciences; and

• SEMs with software targeted at applications in mining and oil and gas.

We believe our knowledge of field emission technology and products incorporating focused ion beams remain critical to our performance in the focused charged particle beam business. Drawing on this technology, we have developed a number of product innovations, including:

• Enhancement in the S/TEM system platform with unprecedented stability coupled with new aberration correctors and monochromator technology, enabling sub-angstrom resolution;

• Enhanced robotics, processes and tool connectivity, enabling in-line sample lift-out and S/TEM imaging from semiconductor wafers for defect analysis and process control applications with new automation software that improves the quality and consistency of multiple site-specific samples;

• Advanced image processing hardware and software enabling high performance 3D tomographic, TEM-based imaging and advance cryogenic fixation technology and subsequent imaging of aqueous samples at cryo temperatures in a TEM for aqueous biological and colloidal polymer, pigment and nanoparticle samples;

• High-speed analytic characterization technology that includes the proprietary X-Field Emission Guns (“X-FEG”) ultra-high brightness electron source and Super-X, our new Energy Dispersive X-ray (“EDX”) detection system based on Silicon Drift Detector (“SDD”) technology; and

• Direct electron detector technology with improved quantum efficiency, capturing more information from a given electron dose, and accelerating the rate at which the signal-to-noise ratio improves over the exposure period.

From time to time, we engage in joint research and development projects with some of our customers and other parties. In Europe, our electron microscope development is conducted in collaboration with universities and research institutions, often supported by European Union research and development programs. We periodically have received public funds under Dutch government and European Union-funded research and development programs, and expect to continue to leverage these funding opportunities in the future. However, these funds can vary from year to year and we are not able to predict the amount of future funding. We also maintain other informal collaborative relationships with universities and other research institutions, and we work with several of our customers to evaluate new products.

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The markets into which we sell our principal products are subject to rapid technological development, product innovation and competitive pressures. Consequently, we have expended substantial amounts of money on research and development. We generally intend to continue investing in research and development and believe that continued investment will be important to our ability to address the needs of our customers and to develop additional product offerings. Research and development efforts continue to be directed toward development of next generation product platforms, new ion and electron columns, beam chemistries, system automation and new applications. We believe these areas hold promise of yielding significant new products and existing product enhancements. Research and development efforts are subject to change due to product evolution and changing market needs. Often, these changes cannot be predicted.

Net research and development expense was $66.3 million in 2010, $67.7 million in 2009 and $70.4 million in 2008.

Manufacturing

We have manufacturing operations located in Hillsboro, Oregon; Eindhoven, The Netherlands; and Brno, Czech Republic. Our system manufacturing operations consist largely of final assembly and the testing of finished products. Product performance is documented and validated with factory acceptance and selective customer witness acceptance tests before these products are shipped. We also fabricate electron and ion source materials and manufacture component products at our facilities in Oregon and the Czech Republic.

We currently use numerous vendors to supply parts, components and subassemblies for the manufacture and support of our products. Some key parts may only be obtained from a single supplier or a limited group of suppliers. In particular, we rely on: VDL Enabling Technologies Group, AP Tech, Frencken Mechatronics B.V., Sanmina-SCI Corporation and AZD Praha SRO for our supply of mechanical parts and subassemblies; Gatan, Inc. for critical accessory products; and Neways Electronics, N.V. for some of our electronic subassemblies. A portion of the subcomponents that make up the components and sub-assemblies supplied to us are proprietary in nature and are provided to our suppliers only from single sources. We monitor those parts subject to single or a limited source supply to seek to minimize factory down time due to unavailability of such parts, which could impact our ability to meet manufacturing schedules.

Sales, Marketing and Service

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

Our sales and marketing staff at December 31, 2010 consisted of 313 employees, including account managers, direct salespersons, sales support management, administration, demo lab personnel, marketing support, product managers, product marketing engineers, applications specialists and technical writers. Applications specialists identify and develop new applications for our products, which we expect to further expand our markets. Our sales force and marketing efforts are organized through four geographic sales and services divisions: North America, Europe, the Asia-Pacific region and Japan. Our service staff at December 31, 2010 consisted of 522 employees.

We require sales representatives to have the technical expertise and understanding of the businesses of our principal and potential customers to meet the requirements for selling our products. Normally, a sales representative will have the knowledge of, and experience with, our products or similar products, markets or customers at the time the sales representative is hired. We also provide additional training to our sales force on an ongoing basis. Our marketing efforts include presentations at trade shows, advertising in trade journals, development of printed collateral materials, customer forums, public relations efforts in trade media and our website. In addition, our employees publish articles in scientific journals and make presentations at scientific conferences.

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In a typical sale, our sales representatives provide a potential customer with information about our products, including specifications and performance data. The customer then often participates in a product demonstration at our facilities, using samples provided by the customer. The sales cycle for our systems typically ranges from three to 12 months, but can be longer when our customers are evaluating new applications of our technology.

Our products are sold generally with a 12 month warranty. Customers may purchase service contracts for our products of one year or more in duration after expiration of any warranty. We employ service engineers in each of the four regions in which we have sales and service divisions. We also contract with independent service representatives for product service in some foreign countries.

Competition

The markets for our products are highly competitive. Some of our competitors and potential competitors have greater financial, marketing and production resources than we do. In addition, some of our competitors have formed collaborative relationships and otherwise may cooperate with each other. Additionally, markets for our products are subject to constant change, due in part to evolving customer needs. As we respond to this change, the elements of competition as well as the specific competitors may change. Moreover, one or more of our competitors might achieve a technological advance that would put us at a competitive disadvantage.

Our significant competitors include, among others: JEOL Ltd., Hitachi High Technologies Corporation and Carl Zeiss SMT A.G. We believe the key competitive factors are performance, range of features, reliability and price. We believe that we are competitive with respect to each of these factors. Our ability to remain competitive depends in part upon our success in developing new and enhanced systems and introducing these systems at competitive prices on a timely basis.

Our service business faces little significant third-party competition. Because of the highly specialized nature of our products and technology, and because of the critical mass necessary to support a worldwide field service capability, few competitors have emerged to provide service to our installed base of systems. Some of our older, less sophisticated equipment, particularly in the Research and Industry market segment, is serviced by independent field service engineers who compete directly with us. We believe we will continue to provide most of the field service for our products.

Patents and Intellectual Property

We rely on a combination of trade secret protection (including use of nondisclosure agreements), trademarks, copyrights and patents to establish and protect our proprietary rights. These intellectual property rights may not have commercial value or may not be sufficiently broad to protect the aspect of our technology to which they relate or competitors may design around the patents. We own, solely or jointly, approximately 181 patents in the U.S. and approximately 308 patents outside of the U.S., many of which correspond to the U.S. patents. Further, we license additional patents from third parties. Our patents expire over a period of time from 2011 to 2029.

Several of our competitors hold patents covering a variety of focused ion beam products and applications and methods of use of focused ion and electron beam products. Some of our customers may use our products for applications that are similar to those covered by these patents. As the number and sophistication of focused ion and electron beam products in the industry increase through the continued introduction of new products by us and others, and the functionality of these products further overlaps, manufacturers and users of ion and electron beam products may become increasingly subject to infringement claims.

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We also depend on trade secrets used in the development and manufacture of our products. We endeavor to protect these trade secrets but the measures we have taken to protect these trade secrets may be inadequate or ineffective.

We claim trademarks on a number of our products and have registered some of these marks. Use of the registered and unregistered marks, however, may be subject to challenge with the potential consequence that we would have to cease using marks or pay fees for their use.

Our automation software incorporates software from third-party suppliers, which is licensed to end users along with our proprietary software. We depend on these outside software suppliers to continue to develop automation capacities. The failure of these suppliers to continue to offer and develop software consistent with our automation efforts could undermine our ability to deliver product applications.

Employees

At December 31, 2010, we had 1,788 full-time equivalent, permanent employees and 25 temporary employees worldwide. Some of the 1,235 employees who are employed outside of the U.S. are covered by national, industry-wide agreements or national work regulations that govern various aspects of employment conditions and compensation. None of our U.S. employees are subject to collective bargaining agreements, and we have never experienced a work stoppage, slowdown or strike in any of our worldwide operations. We believe we maintain good employee relations.

Backlog

Orders received in a particular period that cannot be built and shipped to the customer in that period represent backlog. We only recognize backlog for purchase commitments for which the terms of the sale have been agreed upon, including price, configuration, options and payment terms. Product backlog consists of all open orders meeting these criteria. Service and Components backlog consists of open orders for service, unearned revenue on service contracts and open orders for spare parts. U.S. government backlog is limited to contracted amounts. In addition, some of the U.S. government backlog represents uncommitted funds. At December 31, 2010, our total backlog was $471.9 million, compared to $354.6 million at December 31, 2009. At December 31, 2010, our backlog consisted of $390.6 million of products and $81.3 million related to Service and Components compared to product backlog of $286.6 million and Service and Components backlog of $68.0 million at December 31, 2009.

Customers may cancel or delay delivery on previously placed orders, although our standard terms and conditions include penalties for cancellations made close to the scheduled delivery date. As a result, the timing of the receipt of orders or the shipment of products could have a significant impact on our backlog at any date. Historically, cancellations have been low. However, in the last two years, this long-standing trend changed somewhat and, as a result, our cancellation rates may increase in the future. During 2010 and 2009, we experienced cancellations or de-bookings of $2.7 million and $12.4 million, respectively. From time to time, we have experienced difficulty in shipping our product from backlog due to single-sourcing issues and problems in securing electronic components from a certain vendor. In addition, product shipments have been extended due to delays in completing certain application development, by our customers pushing out shipments because their facilities are not ready to install our systems and by our own manufacturing delays due to the technical complexity of our products and supply chain issues. A significant portion of our backlog is denominated in currencies other than the U.S. dollar and, therefore, our reported backlog fluctuates, to an extent, as a result of foreign currency exchange rate movements. For these reasons, the amount of backlog at any date is not necessarily indicative of revenue to be recognized in future periods.

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Geographic Revenue and Assets

The following table summarizes sales by geographic region in 2010 (in thousands):

	U.S. and Canada		Europe		Asia- Pacific and Rest of World		Total
Product sales	$	131,283	$	160,927	$	187,570	$	479,780
Service and Component sales		72,719		46,467		35,256		154,442
Total sales	$	204,002	$	207,394	$	222,826	$	634,222

Sales to countries which totaled 10% or more of our total net sales in 2010 were as follows (dollars in thousands):

	Dollar Amount		% of Total Net Sales
United States	$	200,845		31.7	%

Our long-lived assets were geographically located as follows at December 31, 2010 (in thousands):

United States	$	50,747
The Netherlands		18,817
Other		17,264
Total	$	86,828

See also Note 20 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional geographic and segment information.

Seasonality

Our history shows that our revenues and bookings normally peak in the fourth quarter. Bookings are normally the lowest in the second quarter and revenues are normally lowest in the third quarter, although that was not the pattern in 2010.

These seasonal trends can be offset by numerous other factors, including our introduction of new products, the overall economic cycle and the business cycles in the semiconductor and data storage industries.

Where You Can Find More Information

Our principal executive offices are located at 5350 NE Dawson Creek Drive, Hillsboro, Oregon 97124. Our website is at http://www.fei.com. We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 as amended (“Exchange Act”). We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. You can inspect and copy our reports, proxy statements and other information filed with the SEC at the offices of the SEC’s Public Reference Room located at 100 F Street, NE, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of Public Reference Rooms. The SEC also maintains an Internet website at http://www.sec.gov/ where you can obtain most of our SEC filings. You can also obtain copies of these materials free of charge by contacting our investor relations department at 503-726-7500.

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Item 1A. Risk Factors

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

We operate in highly competitive industries, and we cannot be certain that we will be able to compete successfully in such industries.

The industries in which we operate are intensely competitive. Established companies, both domestic and foreign, compete with us in each of our product lines. Some of our competitors have greater financial, engineering, manufacturing and marketing resources than we do and may price their products very aggressively. In addition, these competitors may be willing to operate at a less profitable level than at which we would expect to operate. Our significant competitors include, among others: JEOL Ltd., Hitachi High Technologies Corporation and Carl Zeiss SMT A.G. In addition, some of our competitors have formed collaborative relationships and otherwise may cooperate with each other.

Our customers must make a substantial investment to install and integrate capital equipment into their laboratories and process applications. As a result, once a manufacturer has selected a particular vendor’s capital equipment, the manufacturer generally relies on that equipment for a specific production line or process control application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, if a particular customer selects a competitor’s capital equipment, we expect to experience difficulty selling to that customer for a significant period of time.

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

• price;

• product quality;

• breadth of product line;

• system performance;

• ease of use;

• cost of ownership;

• global technical service and support;

• success in developing or otherwise introducing new products; and

• foreign currency fluctuations.

We cannot be certain that we will be able to compete successfully on these or other factors, which could negatively impact our revenues, gross margins and net income in the future.

Because many of our shipments occur in the last month of a quarter, we are at risk of one or more transactions not being delivered according to forecast.

We have historically shipped approximately 75% of our products in the last month of each quarter. As any one shipment may be significant to meeting our quarterly sales projection, any slippage of shipments into a subsequent quarter may result in our not meeting our quarterly sales projection, which may adversely impact our results of operations for the quarter.

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Because we have significant operations outside of the U.S., we are subject to political, economic and other international conditions that could result in increased operating expenses and regulation of our products and increased difficulty in maintaining operating and financial controls.

Because a significant portion of our operations occur outside of the U.S., our revenues and expenses are impacted by foreign economic and regulatory conditions. In each of the last three years, more than 61% of our sales came from outside of the U.S. We have manufacturing facilities in Brno, Czech Republic and Eindhoven, The Netherlands and sales offices in many other countries.

Moreover, we operate in over 50 countries, 23 with a direct presence. Some of our global operations are geographically isolated, are distant from corporate headquarters and/or have little infrastructure support. Therefore, maintaining and enforcing operating and financial controls can be difficult. Failure to maintain or enforce controls could have a material adverse effect on our control over service inventories, quality of service, customer relationships and financial reporting.

Our exposure to the business risks presented by foreign economies will increase to the extent we continue to expand our global operations. International operations will continue to subject us to a number of risks, including:

• longer sales cycles;

• multiple, conflicting and changing governmental laws and regulations;

• protectionist laws and business practices that favor local companies;

• price and currency exchange rates and controls;

• taxes and tariffs;

• export restrictions;

• difficulties in collecting accounts receivable;

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

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

• the implementation and administration of the Control of Electronic Information Products (often referred to as China RoHS) regulations could lead to delays in the importation of products into China;

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

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

• potential labor unrest.

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

Our business depends in large part on the capital expenditures of customers within our Electronics, Research and Industry and Life Sciences market segments, which, along with Service and Components sales, accounted for the following amounts (in thousands) and percentages of our net sales for the periods indicated:

	Year Ended December 31,
	2010				2009
Electronics	$	222,795	35.1	%	$	126,417	21.9	%
Research and Industry		182,430	28.8	%		231,462	40.1	%
Life Sciences		74,555	11.8	%		81,824	14.2	%
Service and Components		154,442	24.3	%		137,641	23.8	%
	$	634,222	100.0	%	$	577,344	100.0	%

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The largest sub-parts of the Electronics market segment are the semiconductor and data storage industries. These industries are cyclical and have experienced significant economic downturns at various times in the last decade. Such downturns have been characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity. A downturn in one or both of these industries, or the businesses of one or more of our customers, could have a material adverse effect on our business, prospects, financial condition and results of operations. Beginning with the second half of 2007, we experienced significant variability in bookings and revenue in our Electronics segment due to the downturn in the spending cycle in the semiconductor and data storage industry. The semiconductor capital equipment market recovered in 2010, but the duration of the recovery is uncertain. General global economic conditions may be beginning to stabilize, but economic recovery is tentative and its strength is unknown. During downturns, our sales and gross profit margins generally decline.

The Research and Industry market segment is also affected by overall economic conditions, but is not as cyclical as the Electronics market segment.

The Life Sciences market segment is a smaller and still emerging market, and the tools we sell into that market often have average selling prices ranging from $0.5 million to over $4.0 million. Consequently, loss of demand among a relatively small group of potential customers can have a material impact on the overall demand for our products. As a result, movement of a small number of sales from one quarter to the next could cause significant variability in quarter-to-quarter growth rates, even as we believe that this market has the potential for long-term growth.

A significant portion of our Life Sciences and Research and Industry revenue is dependent on government investments in research and development of new technology. To the extent that governments, especially in Europe or the U.S., reduce their spending in response to budget deficits and debt limitations, demand for our products could be affected. To date, we have not seen an impact from such actions. The funding cycles for our customers tend to extend over multiple quarters and several countries have reaffirmed their commitment to scientific research, but the longer-term impact of potential government fiscal austerity measures on our growth rate cannot be determined at this time. In addition, institutional endowments and philanthropy, which are a source of funding of some customer purchases, are threatened by the recent volatility in capital markets worldwide.

As a capital equipment provider, our revenues depend in large part on the spending patterns of our customers, who could delay expenditures or cancel orders in reaction to variations in their businesses or general economic conditions. Because a high proportion of our costs are fixed, we have a limited ability to reduce expenses quickly in response to revenue shortfalls. In a prolonged economic downturn, we may not be able to reduce our significant fixed costs, such as manufacturing overhead, capital equipment or research and development costs, which may cause our gross margins to erode and our net loss to increase or earnings to decline.

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

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

To the extent we make investments in entities that we control, or have significant influence in, our financial results will reflect our proportionate share of the financial results of the entity.

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We may suffer manufacturing capacity limitations on occasion.

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

If our customers cancel or reschedule orders or if an anticipated order for even one of our systems is not received in time to permit shipping during a certain fiscal period, our operating results for that fiscal period may fluctuate and our business and financial results for such period could be materially and adversely affected. Cancellation risks rise in periods of economic downturn.

Our customers are able to cancel or reschedule orders, generally with limited or no penalties, depending on the product’s stage of completion. The amount of purchase orders at any particular date, therefore, is not necessarily indicative of sales to be made in any given period. Our build cycle, or the time it takes us to build a product to customer specifications, typically ranges from one to six months. During this period, the customer may cancel the order, although generally we will be entitled to receive a cancellation fee based on the agreed-upon shipment schedule. The risks of cancellation are higher during times of economic downturn, such as the U.S. and global economies are presently experiencing. In addition, we derive a substantial portion of our net sales in any fiscal period from the sale of a relatively small number of high-priced systems, with a large portion in the last month of the quarter. Further, in some cases, our customers have to make changes to their facilities to accommodate the site requirements for our systems and may reschedule their orders because of the time required to complete these facility changes. This is particularly true of our high-performance TEMs. As a result, the timing of revenue recognition for a single transaction could have a material effect on our revenue and results of operations for a particular fiscal period.

Due to these and other factors, our net revenues and results of operations have fluctuated in the past and are likely to fluctuate significantly in the future on a quarterly and annual basis. It is possible that in some future quarter or quarters our results of operations will be below the expectations of public market analysts or investors. In such event, the market price of our common stock may decline significantly.

Due to our extensive international operations and sales, we are exposed to foreign currency exchange rate risks that could adversely affect our revenues, gross margins and results of operations.

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

We use option contracts and zero cost collars in an effort to reduce the exposure of our cash flows to exchange rate movements. These contracts are considered derivatives. We are required to carry all open derivative contracts on our balance sheet at fair value. When specific accounting criteria have been met, derivative contracts can be designated as hedging instruments and changes in fair value related to these derivative contracts are recorded in other comprehensive income, rather than net income, until the underlying hedged transaction affects net income, which is at the time the gains or losses related to the derivatives are recorded in cost of goods sold. We are required to record changes in fair value for derivatives not designated as hedges in net income in the current period. Our ability to designate derivative contracts as hedges significantly reduces the volatility in our operating results due to changes in the fair value of the derivative contracts.

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Achieving hedge designation is based on evaluating the effectiveness of the derivative contracts’ ability to mitigate the foreign currency exposure of the linked transaction. We are required to monitor the effectiveness of all new and open derivative contracts designated as hedges on a quarterly basis. We recorded a $117,000 and a $1.3 million charge, respectively, for hedge ineffectiveness related to our cash flow hedges in 2010 and 2009 as a result of currency fluctuations. Failure to meet the hedge accounting requirements could result in the requirement to record deferred and current realized and unrealized gains and losses into net income in the current period. This failure could result in significant fluctuations in operating results. In addition, we will continue to recognize unrealized gains and losses related to the changes in fair value of derivative contracts not designated as hedges in the current period net income. Accordingly, the related impact to operating results may be recognized in a different period than the foreign currency impact of the hedged transaction.

We also enter into foreign forward exchange contracts that are designed to partially mitigate the impact of specific cash, receivables or payables positions denominated in foreign currencies. Foreign currency losses recorded in other income (expense), inclusive of the impact of derivatives which are not designated as hedges, totaled $1.2 million and $3.6 million, respectively, in 2010 and 2009.

We seek to mitigate derivative credit risk by transacting with highly rated counterparties. We have evaluated the credit and non-performance risks associated with our derivative counterparties and believe them to be insignificant and not warranting a credit adjustment at December 31, 2010.

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

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

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

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

If a higher portion of our net sales in any given period have lower gross margins, our overall gross margins and earnings would be negatively affected. For example, during 2008 and 2009, our net sales contained a smaller portion of sales from our relatively higher margin products within the Electronics segment, which contributed to a decrease in our overall gross margins as compared to 2007. Our Electronics business, which ultimately depends on consumers who buy electronic devices, recovered strongly in 2010, but the duration of the recovery is uncertain. To the extent that the recovery in this market segment slows or stalls, our overall margins may be negatively affected.

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

Our business is based on a myriad of technologies, encompassed in multiple different product lines, addressing various customers in a range of markets in different regions of the world. A business of our breadth and complexity requires significant management time, attention and resources. In addition, significant changes to our business, such as changes in manufacturing, operations, product lines, market

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focus or organizational structure or focus, can be distracting, time-consuming and expensive. These changes can have short-term adverse effects on our financial results. In addition, the complexity of product lines and diversity of our customer base creates manufacturing planning and control challenges that may lead to higher costs of materials and labor, increased service costs, delayed shipments and excessive inventory. Failure to effectively manage these manufacturing issues may materially impact our financial position, results of operations or cash flow.

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

We are currently implementing a plan to shift manufacturing for certain products to other of our factories and third parties in the U.S. Moving product manufacturing includes, among others, the following risks:

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

• unanticipated additional costs connected to such moves;

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

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

• logistical issues arising from the moves; and

• potential vendor problems.

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

Dependence on contract manufacturing and outsourcing other portions of our supply chain may adversely affect our ability to bring products to market and damage our reputation.

As part of our efforts to streamline operations and cut costs, we have been outsourcing aspects of our manufacturing processes and other functions and we continue to evaluate additional outsourcing. If our contract manufacturers or other outsourcers fail to perform their obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, and replacement manufacturers may be unavailable, which may preclude us from fulfilling our customer orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control. Moreover, delays could cause us to suffer penalties with our customers, which could also impact our profitability.

We rely on a limited number of suppliers to provide parts and components. Failure of any of these suppliers to provide us with quality products in a timely manner could negatively affect our revenues and results of operations.

Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient quantities to us in a timely and cost-effective manner could negatively affect our business, including our ability to convert backlog into revenue. Although we use numerous vendors to supply parts, components and subassemblies for the manufacture and support of our products, some key parts may only be obtained from a single supplier or a limited group of suppliers. In particular, we rely on: VDL Enabling Technologies Group, AP Tech, Frencken Mechatronics B.V., Sanmina-SCI Corporation and AZD Praha SRO for our supply of mechanical parts and subassemblies; Gatan, Inc. for critical accessory products; and Neways Electronics, N.V. for some of our electronic subassemblies. In addition, some of our suppliers rely on sole suppliers. As a result of this concentration of key suppliers, our results of operations may be materially and adversely affected if we do not timely and cost-effectively receive a sufficient quantity of quality parts to meet our production requirements or if we are required to find alternative suppliers for these supplies. We may not be able to expand our supplier group or to reduce our dependence on single suppliers. If our suppliers are not able to meet our supply requirements, constraints

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may affect our ability to deliver products to customers in a timely manner, which could have an adverse effect on our results of operations. In addition, restrictions regulating the use of certain hazardous substances in electrical and electronic equipment in various jurisdictions may impact parts and component availability or our electronics suppliers’ ability to source parts and components in a timely and cost-effective manner. Overall, because we only have a few equipment suppliers, we may be more exposed to future cost increases for this equipment.

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

Our service business addresses a large and diverse install base of over 5,000 tools involving diverse products of varying ages, configurations, use cases, condition, and customer requirements that are dispersed in approximately 50 countries around the globe. Providing logistical support for delivery of spare parts and consumables to these tools, particularly the older tools, can be difficult. We have attempted to address the complexity of our service requirements, in part, through a remote diagnostics system that allows us to remotely access tools through a virtual private network. If we are unable to effectively manage and support the supply and delivery of spare parts and consumables to our customers we may damage our reputation and service business. Moreover, if we suffer an unauthorized intrusion into the virtual private network providing for remote diagnostics, we, or our customers, may suffer a loss of proprietary information that could create liability for us and undermine our business.

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

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

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

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

The loss of one or more of our key customers would result in the loss of significant net revenues.

A relatively small number of customers account for a large percentage of our net revenues, although no customer has accounted for more than 10% of total annual net revenues in the recent past. Our business will be seriously harmed if we do not generate as much revenue as we expect from these key customers, if we experience a loss of any of our key customers or if we suffer a substantial reduction in orders from these customers. Our ability to continue to generate revenues from our key customers will depend on our ability to introduce new products that are desirable to these customers.

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

Several of our competitors hold patents covering a variety of technologies that may be included in some of our products. In addition, some of our customers may use our products for applications that are similar to those covered by these patents. From time to time, we, and our respective customers, have received correspondence from our competitors claiming that some of our products, as sold by us or used by our customers, may be infringing one or more of these patents. Any claim of infringement from a third party, even one without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from running the business.

As described in more detail in the section entitled “Item 3. Legal Proceedings,” one of our competitors, Hitachi, has filed multiple actions against our subsidiary, FEI Japan, in Japanese courts and with Japanese customs. Based on information available to us, we believe that we have meritorious defenses against these actions and we intend to vigorously defend our interests in these matters. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could prohibit us from selling one or more products in Japan, and could include monetary damages. If we were to receive an unfavorable ruling, or if we are unable to negotiate a satisfactory settlement in this matter, our business and results of operations could be materially harmed.

In addition, our competitors or other entities may assert infringement claims against us or our customers in the future with respect to current or future products or uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. Additionally, if claims of infringement are asserted against our customers, those customers may seek indemnification from us for damages or expenses they incur.

If we become subject to additional infringement claims, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question or defending our position. These licenses, however, may not be available on satisfactory terms or at all. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, these potential infringement claims could have a material adverse effect on our business, prospects, financial condition and results of operations.

We have fixed debt obligations, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future manufacturing capacity and research and development needs.

As of December 31, 2010, we had total convertible long-term debt of $89.0 million due in 2013. In addition, we have a secured credit line for $100.0 million and also have access to a $50.0 million yen unsecured uncommitted bank borrowing facility in Japan. However, no amounts were outstanding on these credit facilities at December 31, 2010. The degree to which we are leveraged could have important consequences, including but not limited to the following:

• our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited;

• our credit line contains numerous restrictive covenants, which, if not adhered to, could result in the cancellation of the entire line;

• our shareholders may be further diluted if holders of all or a portion of our outstanding 2.875% subordinated convertible notes elect to convert their notes, up to a maximum aggregate of 3,032,777 shares of our common stock. These shares were not included in our diluted share count for 2009 or 2008 because they were antidilutive, but were included in 2010; and

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

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Our ability to pay interest and principal on our debt securities, to satisfy our other debt obligations and to make planned expenditures will be dependent on our future operating performance, which could be affected by changes in economic conditions and other factors, some of which are beyond our control. A failure to comply with the covenants and other provisions of our debt instruments could result in events of default under such instruments, which could permit acceleration of the debt under such instruments and in some cases acceleration of debt under other instruments that contain cross-default or cross-acceleration provisions. If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. We cannot assure you that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.

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

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

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

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

During the course of executing the restructuring, we could incur material non-cash charges such as write-downs of inventories or other tangible assets. We test our goodwill and other intangible assets for impairment annually or when an event occurs indicating the potential for impairment. If we record an impairment charge as a result of this analysis, it could have a material impact on our results of operations.

Because we do not have long-term contracts with our customers, our customers may stop purchasing our products at any time, which makes it difficult to forecast our results of operations and to plan expenditures accordingly.

We do not have long-term contracts with our customers. Accordingly:

• customers can stop purchasing our products at any time without penalty;

• customers may cancel orders that they previously placed;

• customers may purchase products from our competitors;

• we are exposed to competitive pricing pressure on each order; and

• customers are not required to make minimum purchases.

If we do not succeed in obtaining new sales orders from new and existing customers, our results of operations will be negatively impacted.

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

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

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

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

Political instability in key regions around the world coupled with the U.S. government’s commitment to military related expenditures put at risk federal discretionary spending, including spending on nanotechnology research programs and projects that are of particular importance to our business. Also, changes in U.S. Congressional appropriations practices could result in decreased funding for some of our customers. At the state and local levels, the need to compensate for reductions in federal matching funds, as well as financing of federal unfunded mandates, creates strong pressures to cut back on research expenditures as well. A potential reduction of federal funding may adversely affect our business. Moreover, due to the world-wide economic downturn, many state and national governments are seeing significant declines in tax revenue, while also seeing increased demand for services. This could reduce the money available to our potential customers from government funding sources that could be used to purchase our products and services.

In February 2009, the U.S. Congress passed the American Recovery and Reconstruction Act (the “ARRA”), which included approximately $15 billion of additional stimulus funding for agencies which are our customers, or which fund some of our customers. A portion of these funds could be allocated to scientific equipment purchases. Less than 3% and 10% of our orders in 2010 and the second half of 2009, respectively, were funded by the ARRA. We do not expect significant orders from this funding source in 2011.

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

Our sales cycle can be 12 months or longer and is unpredictable. Variations in the length of our sales cycle could cause our net sales and, therefore, our business, financial condition, results of operations, operating margins and cash flows, to fluctuate widely from period to period. These variations could be based on factors partially or completely outside of our control.

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

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

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

• the history of previous sales to a customer;

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• the complexity of the customer’s manufacturing processes;

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

• the economic environment;

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

• the capital expenditure budget cycle of the customer.

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

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

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

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

Customers in each of our market segments experience rapid technological change that requires new product introductions and enhancements. Our ability to remain competitive depends in large part on our ability to understand these changes and develop, in a timely and cost-effective manner, new and enhanced systems at competitive prices that respond to, and accurately predict, new market requirements. We may fail to ascertain and respond to the needs of our customers or fail to develop and introduce new and enhanced products that meet their needs, which could adversely affect our financial position. In addition, new product introductions or enhancements by competitors could cause a decline in our sales or a loss of market acceptance of our existing products. Increased competitive pressure also could lead to intensified price competition, resulting in lower margins, which could materially adversely affect our business, prospects, financial condition and results of operations.

Our success in developing, introducing and selling new and enhanced systems depends on a variety of factors, including:

• selection and development of product offerings;

• timely and efficient completion of product design and development;

• timely and efficient implementation of manufacturing processes;

• effective sales, service and marketing functions; and

• product performance.

Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both the future demand for products under development and the equipment required to produce such products. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products. On occasion, certain product and application developments have taken longer than expected. These delays can have an adverse affect on product shipments and results of operations.

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The process of developing new high technology capital equipment products and services is complex and uncertain, and failure to accurately anticipate customers’ changing needs and emerging technological trends, to complete engineering and development projects in a timely manner and to develop or obtain appropriate intellectual property could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our predictions will result in products that the market will accept.

To the extent that a market does not develop for a new product, we may decide to discontinue or modify the product. These actions could involve significant costs and/or require us to take charges in future periods. If these products are accepted by the marketplace, sales of our new products may cannibalize sales of our existing products. Further, after a product is developed, we must be able to manufacture sufficient volume quickly and at low cost. To accomplish this objective, we must accurately forecast production volumes, mix of products and configurations that meet customer requirements. If we are not successful in making accurate forecasts, our business and results of operations could be significantly harmed.

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

We may not be able to enforce our intellectual property rights, especially in foreign countries, which could have a material adverse affect on our business.

Our success depends in large part on the protection of our proprietary rights. We incur significant costs to obtain and maintain patents and defend our intellectual property. We also rely on the laws of the U.S. and other countries where we develop, manufacture or sell products to protect our proprietary rights. We may not be successful in protecting these proprietary rights, these rights may not provide the competitive advantages that we expect or other parties may challenge, invalidate or circumvent these rights.

Further, our efforts to protect our intellectual property may be less effective in some countries where intellectual property rights are not as well protected as they are in the U.S. Many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. For 2010, we derived more than 67% of our sales from countries outside of the U.S. If we fail to adequately protect our intellectual property rights in these countries, our business may be materially adversely affected.

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

We may have exposure to income tax rate fluctuations as well as to additional tax liabilities, which would impact our financial position.

As a corporation with operations both in the U.S. and abroad, we are subject to income taxes in both the U.S. and various foreign jurisdictions. Our effective tax rate is subject to significant fluctuation from one period to the next as the income tax rates for each year are a function of the following factors, among others:

• the effects of a mix of profits or losses earned by us and our subsidiaries in numerous foreign tax jurisdictions with a broad range of income tax rates;

• our ability to utilize recorded deferred tax assets;

• changes in uncertain tax positions, interest or penalties resulting from tax audits; and

• changes in tax rates and laws or the interpretation of such laws.

Changes in the mix of these items and other items may cause our effective tax rate to fluctuate between periods, which could have a material adverse effect on our financial results.

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We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the U.S. and various foreign jurisdictions.

We are regularly under audit by tax authorities with respect to both income and non-income taxes and may have exposure to additional tax liabilities as a result of these audits.

Significant judgment is required in determining our provision for income taxes and other tax liabilities. Although we believe that our tax estimates are reasonable, we cannot assure you that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals.

Many of our current and planned products are highly complex and may contain defects or errors that can only be detected after installation, which may harm our reputation and damage our business.

Our products are highly complex, and our extensive product development, manufacturing and testing processes may not be adequate to detect all defects, errors, failures and quality issues that could impact customer satisfaction or result in claims against us. As a result, we could have to replace certain components and/or provide remediation in response to the discovery of defects in products after they are shipped. The occurrence of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by our customers and other losses to us or to our customers. These occurrences could also result in the loss of, or delay in, market acceptance of our products and loss of sales, which would harm our business and adversely affect our revenues and profitability.

Some of our systems use hazardous gases and emit x-rays, which, if not properly contained, could result in property damage, bodily injury and death.

A product safety failure, such as a hazardous gas or x-ray leak or extreme pressure release, could result in substantial liability and could also significantly damage customer relationships and our reputation and disrupt future sales. Moreover, remediation could require redesign of the tools involved, creating additional expense, increasing tool costs and damaging sales. In addition, the matter could involve significant litigation that would divert management time and resources and cause unanticipated legal expense. Further, if such a leak or release involved violation of health and safety laws, we may suffer substantial fines and penalties in addition to the other damage suffered.

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

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

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Unforeseen health, safety and environmental costs could impact our future net earnings.

Some of our operations use substances that are regulated by various federal, state and international laws governing health, safety and the environment. We could be subject to liability if we do not handle these substances in compliance with safety standards for storage and transportation and applicable laws. We will record a liability for any costs related to health, safety or environmental remediation when we consider the costs to be probable and the amount of the costs can be reasonably estimated.

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

We are subject to export control laws that limit which products we sell and where and to whom we sell our products. Moreover, export licenses are required from government agencies for some of our products in accordance with various statutory authorities, including U.S. statutes such as the Export Administration Act of 1979, the International Emergency Economic Powers Act of 1977, the Trading with the Enemy Act of 1917 and the Arms Export Control Act of 1976. Depending on the shipment, we are also subject to Dutch or Czech law regarding export controls and licensing requirements. We may not be successful in obtaining these necessary licenses in order to conduct business abroad. Failure to comply with applicable export controls or the termination or significant limitation on our ability to export certain of our products would have an adverse effect on our business, results of operations and financial condition.

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

Changes in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results. Other new accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practices have occurred and may occur in the future. New rules, changes to existing rules, if any, or the questioning of current practices may adversely affect our reported financial results or change the way we conduct our business.

Provisions of our charter documents, our shareholder rights plan and Oregon law could make it more difficult for a third party to acquire us, even if the offer may be considered beneficial by our shareholders.

Our articles of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our Board of Directors. Our Board of Directors has also adopted a shareholder rights plan, or “poison pill,” which would significantly dilute the ownership of a hostile acquirer. In addition, the Oregon Control Share Act and the Oregon Business Combination Act limit the ability of parties who acquire a significant amount of voting stock to exercise control over us. These provisions may have the effect of lengthening the time required for a person to acquire control of us through a proxy contest or the election of a majority of our Board of Directors, may deter efforts to obtain control of us and may make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by our shareholder.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate headquarters is located in a facility we own in Hillsboro, Oregon. This facility totals approximately 180,000 square feet and houses a range of activities, including manufacturing, research and development, corporate finance and administration and sales and marketing.

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We also maintain a major facility in Eindhoven, The Netherlands, consisting of 263,285 square feet of space. The lease for this space expires in 2019. Present lease payments are approximately $268,000 per month. This facility is used for research and development, manufacturing, sales, marketing and administrative functions.

We maintain a manufacturing and development facility in Brno, Czech Republic, which consists of 113,494 square feet of space, and is leased for approximately $153,000 per month. The lease expires in 2012.

We operate support offices for sales, service and some research and development in leased facilities in the People’s Republic of China (“PRC”), Japan, Hong Kong, Singapore, The Netherlands, Australia and the U.S., as well as other smaller offices in the other countries where we have direct sales and service operations. In some of these locations, we lease space directly.

We expect that our facilities arrangements will be adequate to meet our needs for the foreseeable future and, overall, believe we can meet increased demand for facilities that may be required to meet increased demand for our products. In addition, we believe that, if product demand increases, we can use outsourced manufacturing, additional manufacturing shifts and currently underutilized space as a means of adding capacity without increasing our direct investment in additional facilities.

Item 3. Legal Proceedings

We are involved in various legal proceedings and receive claims from time to time, arising in the normal course of our business activities, including claims for alleged infringement or violation of intellectual property rights.

In November 2009, Hitachi High-Technologies Corporation (“Hitachi”) filed a complaint against our subsidiary, FEI Company Japan Ltd. (“FEI Japan”), in the District Court in Tokyo alleging infringement of five patents. Hitachi’s complaint seeks a permanent injunction requiring us to cease the sale of our allegedly infringing products in Japan, and legal costs. Two of the patents in the infringement case expired in June and September 2010 respectively, and, as a consequence, Hitachi dropped those patents from the infringement case. Hitachi filed two new complaints in the District Court of Tokyo for past damages on the expired patents in the amount of 2.5 billion yen in July 2010 and 1.3 billion yen in October 2010. Hitachi has also brought ancillary claims to bar the importation of certain of our products into Japan. One of these customs proceedings has been concluded and the other is on-going. FEI Japan has filed actions with the Japanese Patent Office to invalidate two of the patents that were the subject of the first customs proceeding, and to invalidate one of the patents from the infringement case, which is also the subject of the second customs proceeding. To date, FEI Japan has successfully invalidated two patents. Hitachi will have an opportunity to amend their patents to preserve some claims. Overall, the resolution of these proceedings is not expected to have any material impact on our business. We believe that we have meritorious defenses to Hitachi’s claims, and intend to vigorously defend our interests in these matters.

In management’s opinion, the resolution of these cases, as well as other matters, is not expected to have a material adverse effect on our financial condition, but it could be material to the net income or cash flows of a particular quarter. These claims, or any claim of infringement or violation of intellectual property rights, with or without merit, could require us to change our technology, change our business practices, pay damages, enter into a licensing arrangement or take other actions that may result in additional costs or other actions that are detrimental to our business.

Item 4. Reserved

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Prices, Issuances of Common Stock and Dividends

Our common stock is quoted on the NASDAQ Global Market under the symbol FEIC. The high and low sales prices on the NASDAQ Global Market for the past two years were as follows:

2009	High		Low
Quarter 1	$	20.51	$	11.36
Quarter 2		23.67		14.69
Quarter 3		26.50		21.22
Quarter 4		25.78		22.50
2010	High		Low
Quarter 1	$	24.59	$	18.80
Quarter 2		23.32		18.91
Quarter 3		21.59		16.51
Quarter 4		26.79		18.98

The approximate number of beneficial shareholders and shareholders of record at February 9, 2011 was 8,894 and 83, respectively.

In February 1997, we acquired the electron optics business of Philips pursuant to a combination agreement between us and a subsidiary of Philips. We issued shares of our common stock to Philips at the time of the combination and agreed to issue additional shares of our common stock when stock options that were outstanding on the date of the closing of the combination (February 21, 1997) are exercised. The additional shares are issued at a rate of approximately 1.22 shares to Philips for each share issued on exercise of these options. During 2010 or 2009, we did not issue any shares of our common stock to Philips in connection with this agreement and, as of December 31, 2010, 165,000 shares of our common stock remained issuable under this agreement.

We did not pay or declare any cash dividends in 2010 or 2009. We intend to retain any earnings for use in our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

Repurchases of Common Stock

A plan to repurchase up to a total of 4.0 million shares of our common stock was approved by our Board of Directors in September 2010. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The purchases are funded from existing cash resources and may be suspended or discontinued at any time at our discretion without prior notice.

	Total number of shares purchased		Average price paid per share		Total number of shares  purchased as part of publicly announced plan		Maximum number of shares that may yet be purchased under the plan
October 4 to October 31		—		—		—		4,000,000
November 1 to November 28		86,300	$	23.01		86,300		3,913,700
November 29 to December 31		119,000		24.23		119,000		3,794,700
Total		205,300		23.66		205,300		3,794,700

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Equity Compensation Plans

Information regarding securities authorized for issuance under equity compensation plans will be included in the section titled “Securities Authorized for Issuance Under Equity Compensation Plans” in the proxy statement for our 2011 Annual Meeting of Shareholders and is incorporated by reference herein.

Stock Performance Graph

The following line-graph presentation compares cumulative five-year shareholder returns on an indexed basis, assuming a $100 initial investment and reinvestment of dividends, of (a) FEI Company, (b) a broad-based equity market index and (c) an industry-specific index. The broad-based market index used is the NASDAQ Composite Index and the industry-specific index used is the NASDAQ Non-Financial Index.

	Base Period		Indexed Returns Year Ended
Company/Index	12/31/05		12/31/06		12/31/07		12/31/08		12/31/09		12/31/10
FEI Company	$	100.00	$	137.55	$	129.51	$	98.37	$	121.85	$	137.77
NASDAQ Composite		100.00		110.38		122.14		73.31		106.57		125.92
NASDAQ Non-Financial		100.00		109.66		124.39		56.94		85.86		101.80

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Item 6. Selected Financial Data

The selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.

In thousands, except per share amounts	Year Ended December 31,
Statement of Operations Data	2010			2009			2008			2007			2006
Net sales	$	634,222		$	577,344		$	599,179		$	592,510		$	479,491
Cost of sales		364,958			347,840			364,638			346,090			283,045
Gross profit		269,264			229,504			234,541			246,420			196,446
Total operating expenses(1)		213,806			197,882			203,413			191,707			173,399
Operating income		55,458			31,622			31,128			54,713			23,047
Other expense, net(2)		(3,236	)		(3,961	)		(4,528	)		(486	)		(5,699	)
Income from continuing operations before income taxes		52,222			27,661			26,600			54,227			17,348
Income tax (benefit) expense(3)		(1,326	)		5,017			8,612			8,077			10,467
Income from continuing operations		53,548			22,644			17,988			46,150			6,881
Loss from discontinued operations, net of tax		—			—			—			—			(947	)
Gain on disposal of discontinued operations, net of tax(4)		—			—			—			390			3,335
Net income	$	53,548		$	22,644		$	17,988		$	46,540		$	9,269
Basic income per share from continuing operations	$	1.41		$	0.60		$	0.49		$	1.29		$	0.20
Basic income per share from discontinued operations		—			—			—			0.01			0.07
Basic net income per share	$	1.41		$	0.60		$	0.49		$	1.30		$	0.27
Diluted income per share from continuing operations	$	1.34		$	0.60		$	0.48		$	1.23		$	0.20
Diluted income per share from discontinued operations		—			—			—			0.01			0.07
Diluted net income per share	$	1.34		$	0.60		$	0.48		$	1.24		$	0.27
Shares used in basic per share calculations		38,083			37,537			36,766			35,709			33,818
Shares used in diluted per share calculations		41,737			37,905			37,158			40,725			34,223

	December 31,
	2010		2009		2008		2007		2006
Balance Sheet Data
Cash and cash equivalents	$	277,617	$	124,199	$	146,521	$	280,593	$	110,656
Working capital		493,518		435,034		355,917		434,558		477,660
Total assets		984,422		953,969		832,172		1,007,836		837,561
Short-term line of credit		—		59,600		—		—		—
Current portion of convertible debt		—		—		—		189,395		—
Convertible debt, net of current portion		89,012		100,000		115,000		115,000		292,252
Shareholders’ equity		633,174		567,524		519,089		493,708		368,020

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(1) Included in operating expenses was $11.1 million, $3.5 million and $4.3 million, respectively, of restructuring, reorganization, relocation and severance in 2010, 2009 and 2008.

Included in 2006 operating expenses were the following:

• restructuring, reorganization, relocation and severance charges of $12.6 million;

• merger costs of $0.5 million;

• asset impairment charges of $0.5 million; and

• a $1.5 million gain related to the sale of certain intellectual property rights to a privately-held company.

(2) Included in other income (expense), net in 2009 were the following:

• a $2.0 million gain on the early redemption of our 2.875% notes;

• a $0.5 million net gain on our auction rate securities (“ARS”) and our put right with UBS AG (together with its affiliates, “UBS”) (the “Put Right”); and

• a $1.3 million charge for cash flow hedge ineffectiveness, foreign currency gains and losses on transactions and realized and unrealized gains and losses on the changes in fair value of derivative contracts entered into to hedge these transactions.

Included in other income (expense), net in 2008 were the following:

• $18.4 million of unrealized losses on our ARS and a $17.9 million gain related to the fair value of the put right we received pursuant to an agreement we entered into with UBS, the issuer of the ARS. The put right requires UBS to repurchase all of our ARS at par on or before June 30, 2010;

• a $1.3 million charge for ineffectiveness of certain of our cash flow hedges due to increased currency volatility;

• a $1.3 million gain related to the disposal of an insignificant sales subsidiary; and

• $6.3 million of non-cash interest expense related to our $150 million zero coupon convertible notes.

Included in other income (expense), net in 2007 were the following:

• a $0.5 million gain related to the disposal of one of our cost-method investments;

• a $0.5 million gain on the sale of a minority interest in a small technology company; and

• $11.8 million of non-cash interest expense related to our $150 million zero coupon convertible notes.

Included in other income (expense), net in 2006 were the following:

• interest expense of $0.5 million in the first half of 2006 related to the repurchase of $29.0 million face value of our 5.5% convertible notes;

• a $5.2 million gain related to the sale of our entire ownership interest in a privately-held company in the third quarter of 2006;

• a $3.9 million charge related to the write-off of our equity and debt investment in a privately-held company in the third quarter of 2006; and

• $10.8 million of non-cash interest expense related to our $150 million zero coupon convertible notes.

(3) Our 2010 tax provision reflected benefits related to the release of valuation allowance recorded against U.S. deferred tax assets and liabilities for unrecognized tax benefits, offset by taxes accrued in both the U.S. and foreign tax jurisdictions. As a result of a mutual agreement between the U.S. and The Netherlands taxing authorities regarding various transfer pricing issues related to our operations, we released valuation allowance and tax reserves of approximately $47.9 million, of which $12.5 million was recorded as a benefit to shareholder’s equity. The remaining $35.4 million of tax benefit was offset by tax expense of $18.1 million to recognize the impact of our new transfer pricing methodology in prior periods.

Our 2009 tax provision reflected taxes accrued in foreign jurisdictions, reduced by a tax benefit of $3.9 million related to the release of valuation allowances recorded against net operating loss deferred tax assets utilized to offset income earned in the U.S. The tax provision also reflected the release of tax liabilities totaling $1.3 million due to the lapses of statutes of limitations and effective settlements with tax authorities.

Our 2008 tax provision reflected taxes on foreign earnings offset by a $1.5 million release of unrecognized tax benefits, including interest and penalties, as a result of the settlement of foreign tax audits and a tax benefit of $0.5 million related to the release of a valuation allowance recorded against net operating loss deferred tax assets utilized to offset income earned in the U.S.

Our 2007 tax provision reflected taxes on foreign earnings offset by a $4.7 million release of unrecognized tax benefits, including interest and penalties, as a result of settlements with foreign taxing authorities and lapses of statutes of limitations and a tax benefit of $5.3 million related to the release of a valuation allowance recorded against net operating loss deferred tax assets utilized to offset income earned in the U.S.

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Our 2006 tax provision consisted primarily of taxes accrued in foreign jurisdictions and reflects a benefit of $1.5 million related to the release of valuation allowances against a portion of U.S. deferred tax assets utilized during the period.

(4) Represents the gain on the sale of our Knights Technology assets.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts and use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “appear” and other words and terms of similar meaning. Such forward-looking statements include any statements regarding expectations of earnings, revenues, gross margins, non-operating expense, tax rates, net income, funding opportunities or other financial items, as well as backlog, order levels and activity of our company as a whole or in particular markets; any statements of the plans, strategies and objectives of management for future operations, restructuring and outsourcing initiatives; any statements of factors that may affect our 2011 operating results; any statements concerning proposed new products, services, developments, changes to our restructuring reserves, our competitive position, hiring levels, sales and bookings or anticipated performance of products or services; any statements related to future capital expenditures; any statements related to the needs or expected growth or spending of our target markets; any statements concerning the effects of litigation on our financial condition; any statements concerning the resolution of any tax positions or use of tax assets; any statements concerning the effect of new accounting pronouncements on our financial position, results of operations or cash flows; any statements regarding future economic conditions or performance; any statements of belief; any statements of assumptions underlying any of the foregoing; and any statements made under the heading “Outlook for 2011.” From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. The risks, uncertainties and assumptions referred to above include, but are not limited to, those discussed here and the risks discussed from time to time in our other public filings. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us as of the date of this report, and we assume no obligation to update these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-Q and 8-K filed with, or furnished to, the SEC. You also should read Item 1A. “Risk Factors” for factors that we believe could cause our actual results to differ materially from expected and historical results. Other factors also could adversely affect us.

SUMMARY OF PRODUCTS AND SEGMENTS

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

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

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

The Electronics market segment consists of customers in the semiconductor, data storage and related industries such as manufacturers of solar panels and light-emitting diodes (“LEDs”). For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 45 nanometers and smaller, the use of multiple layers of new materials such as copper and low-k dielectrics and increasing device complexity. Our products are used primarily in laboratories to speed new product development and increase yields by enabling 3D wafer metrology, defect analysis, root cause failure analysis and circuit edit for modifying device structures. In the data storage market, our products offer 3D metrology for thin film head processing and root cause failure analysis. Factors affecting our business include advances in perpendicular recording head technology, such as rapidly increasing storage densities that require smaller recording heads, thinner geometries and materials that increase the complexity of device structures.

The Research and Industry market segment includes universities, public and private research laboratories and customers in a wide range of industries, including automobiles, aerospace, forensics, metals, mining and petrochemicals. Growth in these markets is driven by global corporate and government funding for research and development in materials science and by development of new products and processes based on innovations in materials at the nanoscale. Our solutions provide researchers and manufacturers with atomic-level resolution images and permit development, analysis and production of advanced products. Our products are also used in mineral concentration analysis, root cause failure analysis and quality control applications.

The Life Sciences market segment includes universities, government laboratories and research institutes engaged in biotech and life sciences applications, as well as pharmaceutical, biotech and medical device companies and hospitals. Our products’ ultra-high resolution imaging allows cell biologists and drug researchers to create detailed 3D reconstructions of complex biological structures. Our products are also used in particle analysis and a range of pathology and quality control applications.

SALES AND BACKLOG

Net sales increased to $634.2 million in 2010 compared to $577.3 million in 2009. This increase reflects increases in Electronics and Service and Components, partially offset by decreases in Research and Industry and Life Sciences as described more fully below.

At December 31, 2010, our total backlog was $471.9 million compared to $354.6 million at December 31, 2009. As discussed in the section titled “Business-Backlog,” orders received in a particular period that cannot be built and shipped to the customer in that period represent backlog.

OUTLOOK FOR 2011

We enter 2011 with record backlog of unfilled orders. In addition, we increased our manufacturing capacity in the latter half of 2010 and revenue in the fourth quarter of 2010 was above prior quarters. These factors lead us to believe that we will see revenue growth in the first half of 2011. For the second half of 2011, we have less visibility, but our pipeline of potential orders is strong. As a result, we expect that 2011 will show improved revenue growth over what we have seen in recent years. This growth is driven by a rebound in our Research and Industry market, continued recovery of the semiconductor industry and continuing penetration of our tools into emerging markets. A change in any of these factors could adversely affect our business.

Our gross margins improved in the second half of 2010, primarily because of product mix, increased volume, a better competitive pricing environment and operational improvements. We expect these factors to continue to influence our gross margins in 2011. Accordingly, we expect gross margins for the full year of 2011 to improve year over year from 2010.

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Operating expenses are expected to increase compared with 2010, as we invest in new products and expanded markets.

The effective tax rate for 2011 will be higher than in 2010. However, the combination of higher revenue and improved gross margins are expected to generate pre-tax earnings growth for the full year.

RESULTS OF OPERATIONS

The following table sets forth our statement of operations data (in thousands):

	Year Ended December 31,
	2010			2009			2008
Net sales	$	634,222		$	577,344		$	599,179
Cost of sales		364,958			347,840			364,638
Gross profit		269,264			229,504			234,541
Research and development		66,274			67,698			70,378
Selling, general and administrative		136,465			126,728			128,768
Restructuring, reorganization, relocation and severance costs		11,067			3,456			4,267
Operating income		55,458			31,622			31,128
Other expense, net		(3,236	)		(3,961	)		(4,528	)
Income from continuing operations before income taxes		52,222			27,661			26,600
Income tax (benefit) expense		(1,326	)		5,017			8,612
Net income	$	53,548		$	22,644		$	17,988

The following table sets forth our statement of operations data as a percentage of net sales:

	Year Ended December 31,(1)
	2010			2009			2008
Net sales		100.0	%		100.0	%		100.0	%
Cost of sales		57.5			60.2			60.9
Gross profit		42.5			39.8			39.1
Research and development		10.5			11.7			11.7
Selling, general and administrative		21.5			22.0			21.5
Restructuring, reorganization, relocation and severance costs		1.7			0.6			0.7
Operating income		8.7			5.5			5.2
Other expense, net		(0.5	)		(0.7	)		(0.8	)
Income from continuing operations before income taxes		8.2			4.8			4.4
Income tax (benefit) expense		(0.2	)		0.9			1.4
Net income		8.4	%		3.9	%		3.0	%

⁽¹⁾ Percentages may not add due to rounding.

Net sales increased $56.9 million, or 9.9%, to $634.2 million in 2010 compared to $577.3 million in 2009 and decreased $21.9 million, or 3.6%, in 2009 compared to $599.2 million in 2008. The factors affecting net sales are discussed in more detail in the Net Sales by Segment discussion below.

Currency fluctuations decreased net sales by approximately $6.6 million in 2010 compared to 2009 as approximately 68% of our net sales were denominated in foreign currencies that fluctuated against the U.S. dollar. Currency fluctuations decreased net sales by approximately $9.6 million in 2009 compared to 2008 as approximately 66% of our net sales were denominated in foreign currencies that declined in strength against the U.S. dollar. A significant portion of our revenue is denominated in foreign currencies, especially the euro. As the U.S. dollar strengthens against these foreign currencies, this generally has the effect of reducing net sales and backlog.

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Net Sales by Segment

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

	Year Ended December 31,
	2010				2009				2008
Electronics	$	222,795	35.1	%	$	126,417	21.9	%	$	152,076	25.4	%
Research and Industry		182,430	28.8	%		231,462	40.1	%		238,615	39.8	%
Life Sciences		74,555	11.8	%		81,824	14.2	%		70,815	11.8	%
Service and Components		154,442	24.3	%		137,641	23.8	%		137,673	23.0	%
	$	634,222	100.0	%	$	577,344	100.0	%	$	599,179	100.0	%

Electronics

The $96.4 million, or 76.2%, increase in Electronics sales in 2010 compared to 2009 was primarily due to an increase in semiconductor and data storage company capital spending for capacity expansion and new process development. We realized increases in unit sales of our wafer-level and small DualBeam products. In addition, currency fluctuations increased Electronics sales by $0.7 million as compared to the prior year.

The $25.7 million, or 16.9%, decrease in Electronics sales in 2009 compared to 2008 was primarily due to a decrease in the volume of our sales as a result of the cyclical downturn in the semiconductor industry. In addition, currency movements decreased Electronics sales by $0.5 million in 2009 compared to 2008.

Research and Industry

The $49.0 million, or 21.2%, decrease in Research and Industry sales in 2010 compared to 2009 was due primarily to decreased volumes of our small DualBeam and higher-priced TEM systems, partially due to the timing of customer order requirements and sluggish U.S. and world economies. In addition, 2009 included a large sale to a middle eastern university customer with no comparable sale in 2010. Also contributing to the decrease was a $4.3 million decrease related to currency fluctuations.

The $7.2 million, or 3.0%, decrease in Research and Industry sales in 2009 compared to 2008 was due primarily to a $6.3 million decrease related to currency movements, as well as the global recession and slowdown in research spending in some areas. While fewer units were sold in 2009 compared to 2008, we realized an increase in the average price per unit sold for our TEMs and SEMs due to shifts in product mix.

Life Sciences

The $7.3 million, or 8.9%, decrease in Life Sciences sales in 2010 compared to 2009 was due primarily to the timing of unit sales of our higher-priced TEM products, which can fluctuate with customer readiness and facility requirements and a decrease of $2.3 million related to currency fluctuations. These factors were partially offset by the increasing adoption of electron microscopy technology for life sciences applications. While we expect long-term growth, Life Sciences is an emerging market with a relatively small number of high dollar unit sales and, accordingly, sales from this segment may vary significantly from quarter to quarter.

The $11.0 million, or 15.5%, increase in Life Sciences sales in 2009 compared to 2008 was primarily due to continued expansion of our high-end cryogenic TEM product offerings and increasing use of electron microscopes, especially our TEM product offerings, in life sciences applications. These increases were partially offset by the sale of fewer units in 2009 compared to 2008 and a $1.2 million decrease related to currency fluctuations.

Service and Components

The $16.8 million, or 12.2%, increase in Service and Components sales in 2010 compared to 2009 was due primarily to a larger install base and increased proportion of service to the semiconductor industry, which contributed to increases in service contracts. Currency fluctuations decreased Service and Component sales by $0.7 million in 2010 compared to 2009.

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Service and Components sales were flat in 2009 compared to 2008 due primarily to a $1.6 million decrease related to currency movements and decreased sales of our components as a result of industry-wide reductions in semiconductor capital equipment spending, offset by an increase in service revenue due to a larger installed base. In the first half of 2009, some customers deferred renewing certain service contracts due to idle machinery as a result of over-capacity in the semiconductor industry. Component sales include sales of individual components as well as equipment refurbishment.

Net Sales by Geographic Region

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

	Year Ended December 31,
	2010				2009				2008
U.S. and Canada	$	204,002	32.2	%	$	198,637	34.4	%	$	216,182	36.1	%
Europe		207,394	32.7	%		211,807	36.7	%		201,128	33.6	%
Asia-Pacific Region and Rest of World		222,826	35.1	%		166,900	28.9	%		181,869	30.3	%
	$	634,222	100.0	%	$	577,344	100.0	%	$	599,179	100.0	%

U.S. and Canada

The $5.4 million, or 2.7%, increase in sales to the U.S. and Canada in 2010 compared to 2009 was primarily due to an increase in Electronics segment sales, partially offset by a decline in Research and Industry segment sales. The weak condition of the U.S. economy had a negative effect on Research and Industry spending.

The $17.5 million, or 8.1%, decrease in sales to the U.S. and Canada in 2009 compared to 2008 was primarily due to lower Electronics sales due to a downturn in capital spending in the semiconductor industry, which experienced a sharp decline in demand beginning in the second half of 2008. Sales to the Research and Industry and Life Sciences segments were flat in 2009 compared to 2008.

Europe

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

The $4.4 million, or 2.1%, decrease in sales to Europe in 2010 compared to 2009 was primarily due to a decrease in Research and Industry spending as discussed above and a $13.5 million decrease related to currency fluctuations. These decreases were partially offset by an increase in sales of our small DualBeams, mainly to the Electronics segment. In addition, 2009 included a large sale to a middle eastern university customer with no comparable sale in 2010.

The $10.7 million, or 5.3%, increase in sales to Europe in 2009 compared to 2008 was primarily due to an increase in Research and Industry sales as a result of ongoing private and government investment in advanced materials research. In addition, a large sale to a middle eastern university positively affected the 2009 results. Offsetting these factors was a $13.8 million negative effect related to currency fluctuations.

Asia-Pacific Region and Rest of World

The $55.9 million, or 33.5%, increase in sales to the Asia-Pacific Region and Rest of World in 2010 compared to 2009 was primarily due to increased Electronics segment sales, principally to semiconductor and data storage customers, as well as to our investment in sales and service infrastructure in the Asia-Pacific Region. In addition, we have benefited from an increase in purchases from universities and research institutions within Asia. Currency fluctuations increased sales to the Asia-Pacific Region and Rest of World by $6.9 million in 2010 compared to 2009.

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The $15.0 million, or 8.2%, decrease in sales to the Asia-Pacific Region and Rest of World in 2009 compared to 2008 was primarily due to decreased sales from our Electronics segment as semiconductor capital spending declined, partially offset by improvements in research spending and our strategic emphasis on growing our Asian sales.

Cost of Sales and Gross Margin

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

	Year Ended December 31,
	2010			2009			2008
Electronics		50.2	%		48.8	%		47.5	%
Research and Industry		41.0	%		42.0	%		40.7	%
Life Sciences		41.0	%		34.7	%		37.7	%
Service and Components		33.7	%		30.6	%		28.0	%
Overall		42.5	%		39.8	%		39.1	%

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

Cost of sales increased $17.2 million, or 4.9%, to $365.0 million in 2010 compared to $347.8 million in 2009 primarily due to increased sales. Currency fluctuations decreased cost of sales by $13.2 million in 2010 compared to 2009.

Gross margins were positively affected in 2010 due to purchasing and operational improvements, a lower level of competitive pricing pressure in 2010 and improved product mix with increased Electronics segment sales and increased high-end TEM and small DualBeam systems being sold. The net effect on our gross margin from currency fluctuations during 2010 was an approximately $6.6 million, or a 1.5 percentage point, increase.

Cost of sales decreased $16.8 million, or 4.6%, to $347.8 million in 2009 compared to $364.6 million in 2008 primarily due to an approximately $19.1 million decrease related to currency fluctuations and lower sales. These factors were partially offset by a shift in mix to a larger percentage of our sales coming from our Life Sciences segment, which has lower gross margins than sales from our Electronics segment. The net effect on our gross margin from currency fluctuations in 2009 was an approximately $9.5 million, or a 2.3 percentage point, increase.

Electronics

The increase in Electronics gross margin in 2010 compared to 2009 was primarily due to currency fluctuations, which increased the gross margin by 2.4 percentage points. In addition, we sold more of our higher-margin small DualBeam systems in 2010 compared to 2009 and faced less pricing pressure in 2010 compared to 2009. These factors were partially offset by the shipment of orders in the first quarter of 2010 that were priced during the cyclical downturn in 2009, which was a more competitive pricing environment. Later quarters of 2010 realized improved pricing as compared to 2009 as the sales priced during the more competitive environment of 2009 were shipped in previous quarters. Also offsetting the improvements in 2010 was a decrease in gross margin related to inventory adjustments to write down certain older inventory. These adjustments reduced gross margin by $1.0 million, or 0.5 percentage points.

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The increase in Electronics gross margin in 2009 compared to 2008 was due primarily to currency fluctuations, partially offset by a shift in mix away from the higher-margin data storage and other wafer-level DualBeam products in 2009. We also sold fewer higher-margin small DualBeams in 2009 and experienced pricing pressures on certain products. Similarly, significant pricing pressure on certain transactions in the first quarter of 2008 lowered gross margins in 2008.

Research and Industry

Gross margins for Research and Industry declined in 2010 compared to 2009 primarily due to a shift in product mix away from small DualBeam and higher-end TEM units. The decline in Research and Industry gross margins was partially offset by the positive impact of currency fluctuations in 2010 compared to 2009, which increased gross margins by 0.9 percentage points.

The increase in the Research and Industry gross margin in 2009 compared to 2008 resulted primarily from continued penetration of our high-end product offerings being sold into research institutions and sales of large-scale bundled systems with higher overall margins. Additionally, currency fluctuations improved gross margins 2.6 percentage points.

Life Sciences

Gross margins for Life Sciences improved in 2010 compared to 2009 due to increased sales of our higher-margin TEM products. Additionally, currency fluctuations increased Life Sciences gross margins by 1.1 percentage points in 2010 compared to 2009.

The decrease in the Life Sciences gross margin in 2009 compared to 2008 was primarily due to aggressive pricing and unexpected higher costs of selected strategic early-stage shipments of higher-end TEM products, partially offset by favorable currency fluctuations in 2009.

Service and Components

The increase in the Service and Components gross margin in 2010 compared to 2009 was primarily due to incremental contract revenue, as well as increased time and material sales as customers, primarily in the Electronics segment, prepare for increased demand and capacity improvements. In addition, a flat cost structure and operating efficiencies also contributed to the margin increase.

The increase in the Service and Components gross margin in 2009 compared to 2008 was primarily due to favorable currency fluctuations and improvements in part usage and cost control.

Research and Development Costs

Research and development (“R&D”) costs include labor, materials, overhead and payments to third parties for research and development of new products and new software or enhancements to existing products and software. These costs are presented net of subsidies received for such efforts. During 2010, 2009 and 2008, we received subsidies from European governments for technology developments specifically in the areas of semiconductor and life science equipment.

R&D costs were $66.3 million (10.5% of net sales) in 2010, $67.7 million (11.7% of net sales) in 2009 and $70.4 million (11.7% of net sales) in 2008.

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

	Year Ended December 31,
	2010			2009			2008
Gross spending	$	71,682		$	74,401		$	74,238
Less subsidies		(5,408	)		(6,703	)		(3,860	)
Net expense	$	66,274		$	67,698		$	70,378

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The decrease in R&D costs in 2010 compared to 2009 was primarily due to currency fluctuations and expense controls. Currency fluctuations decreased R&D costs by $1.2 million in 2010 compared to 2009.

The decrease in R&D costs in 2009 compared to 2008 was primarily due to an increase in subsidies received as a result of more subsidy-funded projects in 2009, as well as a decrease as a result of favorable currency fluctuations of $2.8 million, offset by increased spending for R&D projects as we continue to invest in the development of new products.

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

Selling, General and Administrative Costs

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

SG&A costs were $136.5 million (21.5% of net sales) in 2010, $126.7 million (22.0% of net sales) in 2009 and $128.8 million (21.5% of net sales) in 2008.

The increase in SG&A costs in 2010 compared to 2009 was primarily due to increased internal and agent sales commissions, primarily in Asia, as revenue from Asia increased and the proportion of agent sales is larger in Asia than any other region. In addition, SG&A costs in 2010 included a $1.9 million increase in bad debt expense compared to 2009 for receivables owed to us by Cambridge Global Services. These factors were partially offset by lower legal and accounting costs and decreases in amortization of purchased intangible assets. Currency fluctuations decreased SG&A costs by $1.0 million in 2010 compared to 2009.

The decrease in SG&A costs in 2009 compared to 2008 was due primarily to a $2.2 million decrease related to currency movements. In addition, lower legal, accounting, consulting and travel and entertainment costs contributed to the decreases. Offsetting these decreases were an increase in labor and related costs and an increase in agent commissions due to a higher mix of sales through agents for sales in emerging markets.

Restructuring, Reorganization, Relocation and Severance

April 2008 Restructuring

In 2010, 2009 and 2008, we incurred $3.8 million, $3.5 million and $4.3 million, respectively, under our April 2008 restructuring plan related to improving the efficiency of our operations and improving the currency balance in our supply chain so that more of our costs are denominated in dollar or dollar-linked currencies. Also included in these costs were amounts related to IT system upgrades, which are expected to increase the efficiency of our manufacturing operations. Total costs incurred related to this plan were $11.6 million as of December 31, 2010 and we do not expect to incur any additional costs related to this plan in 2011. These actions are expected to reduce operating expenses, improve our factory utilization and help offset the effect of currency fluctuations on our cost of goods sold. The main activities and related costs are described in the table below. All of the costs resulted in cash expenditures and we do not expect to incur any additional costs under this plan.

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

Type of Expense	Total Costs
Severance costs related to work force reduction of 3% (approximately 60 employees)	$	3.3 million
Transfer of manufacturing and other activities	$	0.3 million
Shift of supply chain	$	5.9 million
IT system upgrades	$	2.1 million

The actions related to our 2008 restructuring plan reduced manufacturing costs and operating expenses and increased cash flow by approximately $6.0 million annually.

April 2010 Restructuring

On April 12, 2010, we announced a restructuring program to consolidate the manufacturing of our small DualBeam product line by relocating manufacturing activities currently performed at our facility in Eindhoven, The Netherlands to our facility in Brno, Czech Republic. The balance of our small DualBeam product line is already based in Brno. The planned move, which is expected to be implemented over the next six months, will result in the termination of approximately 30 positions in Eindhoven, The Netherlands. This expectation is down from our original estimate of 50 positions and is driven by improved business conditions in The Netherlands. The move will include severance costs, expected costs to transfer the product line, costs to train Brno employees and costs to build-out the existing Brno facility to add capacity for the additional small DualBeam production. Severance costs were accrued as of July 4, 2010, as such amounts were probable and reasonably estimable. We adjusted our severance accrual in the second half of 2010 to reflect the reduced estimate of employees subject to the severance agreement. The principal goal of the product line move is to reduce manufacturing costs for the small DualBeam product. In addition to the product line move, the April 2010 restructuring involves organizational changes designed to improve the efficiency of our finance, research and development and other corporate programs and improve our market focus.

We incurred a total of $7.3 million of costs related to the April 2010 restructuring plan in 2010 and expect to incur an additional $1.0 million to $1.7 million as detailed in the table below. Presently, all of the costs described are expected to result in cash expenditures and we currently expect the total cost of the restructuring to be approximately $8.3 million to $9.0 million.

A summary of the expenses related to our April 2010 restructuring plan is as follows:

Restructuring Activity Expense Type	Approximate Range of Expected Costs	Expected Timing
Severance costs related to work force reduction and reorganization (approximately 30 employees)	$7.2 million – $7.7 million in cash expense	$6.4 million incurred. Remainder through the second quarter of 2011
Product line transfer, training of Brno employees and facility build-out in Brno	$1.1 million - $1.3 million in cash expense	$0.9 million incurred. Remainder through the second quarter of 2011

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

For information regarding the related accrued liability, see Note 13 of Notes to Consolidated Financial Statements.

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Other Income (Expense), Net

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

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities and totaled $2.6 million in 2010, $2.9 million in 2009 and $14.4 million in 2008. The decrease in 2010 compared to 2009 was primarily due to the use of $10.9 million of cash for the repayment of debt in 2010 and lower market interest rates. The decrease in 2009 compared to 2008 was primarily due to lower interest rates and a decrease in our invested balances, primarily due to the use of $13.1 million of cash and $194.9 million of cash, respectively, for the repayment of debt in 2009 and 2008.

Interest expense for 2010, 2009 and 2008 included interest expense related to our 2.875% convertible notes. Interest expense in 2008 also included interest related to our 5.5% convertible notes, which were repaid in full in January 2008 and $6.3 million of non-cash interest related to the effects of the adoption, on January 1, 2009, of accounting guidance regarding debt instruments that may be settled in cash upon conversion. See Note 22 of Notes to Consolidated Financial Statements.

The amortization of capitalized note issuance costs related to our convertible note issuances is also included as a component of interest expense. Interest expense in 2010 and 2009 included $0.1 million and $0.3 million, respectively, related to the write-off of note issuance costs in connection with the early redemption of a total of $11.0 million and $15.0 million, respectively, of our 2.875% convertible notes.

Interest expense in 2008 included $0.2 million of premiums and commissions paid on the repurchase of the remaining $45.9 million of our 5.5% convertible notes as well as the write-off of $0.1 million of related deferred note issuance costs and $0.4 million of premiums and commissions paid on the repurchase of $148.9 million principal amount of our $150.0 million zero coupon convertible notes as well as the write-off of $0.2 million of related deferred note issuance costs.

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

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

Other, net in 2010 included a $0.1 million gain on the early redemption of a portion of our 2.875% convertible notes.

Other, net in 2009 included a $2.0 million gain on the early redemption of our 2.875% notes and a $1.3 million charge for cash flow hedge ineffectiveness, foreign currency gains and losses on transactions and realized and unrealized gains and losses on the changes in fair value of derivative contracts entered into to hedge these transactions.

Other, net in 2008 included a loss of $1.3 million related to ineffectiveness of certain of our cash flow hedges due to increased currency volatility and a $1.3 million gain related to the disposal of an insignificant sales subsidiary. In addition, during the fourth quarter of 2008, we classified our ARS as trading securities and, therefore, recognized an $18.4 million unrealized loss due to a decline in the fair market value of the ARS. Offsetting this loss was a $17.9 million gain related to the fair value of a put right (the “Put Right”) we received pursuant to an agreement we entered into with UBS, the issuer of the ARS.

Income Tax Expense

Our income tax benefit of approximately $1.3 million in 2010 primarily resulted from benefits related to the release of valuation allowance recorded against U.S. deferred tax assets and liabilities for unrecognized tax benefits, offset by taxes accrued in both the U.S. and foreign tax jurisdictions.

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In June 2010, as a result of a mutual agreement between the U.S. and The Netherlands taxing authorities regarding various transfer pricing issues related to our operations, we released valuation allowance and tax reserves of approximately $47.9 million, of which $12.5 million was recorded as a benefit to shareholder’s equity. The remaining $35.4 million of tax benefit was offset by tax expense of $18.1 million to recognize the impact of our new transfer pricing methodology in prior periods.

Our effective income tax rate of 18.1% for 2009 reflected taxes accrued in foreign jurisdictions, reduced by a tax benefit of $3.9 million related to the release of valuation allowance recorded against net operating loss deferred tax assets utilized to offset income earned in the U.S. The tax rate also reflected the release of tax liabilities totaling $1.3 million due to the lapses of statutes of limitations and effective settlements with tax authorities.

Our effective income tax rate of 32.4% for 2008 reflected taxes on foreign earnings offset by a $1.5 million release of unrecognized tax benefits, including interest and penalties, as a result of the settlement of foreign tax audits and a tax benefit of $0.5 million related to the release of valuation allowance recorded against net operating losses used to offset income earned in the U.S.

As of December 31, 2010, unrecognized tax benefits totaled $7.2 million and related primarily to uncertainty surrounding tax credits and permanent establishment. All unrecognized tax benefits would decrease the effective tax rate if recognized.

Our net deferred tax assets totaled $8.4 million and $1.6 million, respectively, at December 31, 2010 and 2009. Valuation allowances on deferred tax assets totaled $2.1 million and $38.0 million, respectively, as of December 31, 2010 and 2009. We continue to record a valuation allowance against a portion of U.S. deferred tax assets, as we believe it is unlikely that we will be able to utilize the deferred tax assets in future periods.

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

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity and Capital Resources

Our sources of liquidity and capital resources as of December 31, 2010 consisted of $343.8 million of cash, cash equivalents, short-term restricted cash and short-term investments, $38.7 million in non-current investments, $41.4 million of long-term restricted cash, $100.0 million available under revolving credit facilities, as well as potential future cash flows from operations. Restricted cash relates to deposits to secure bank guarantees for customer prepayments that expire through 2015.

We believe that we have sufficient cash resources and available credit lines to meet our expected operational and capital needs for at least the next twelve months from December 31, 2010.

In 2010, cash and cash equivalents and short-term restricted cash increased $158.4 million to $299.7 million as of December 31, 2010 from $141.3 million as of December 31, 2009 primarily as a result of $75.0 million provided by operations, $98.9 million from the redemption of ARS, $8.0 million of proceeds from the exercise of employee stock options and the net redemption of $81.5 million of marketable securities. These factors were partially offset by $8.9 million used for the purchase of property, plant and equipment, $59.6 million of repayments on our UBS line of credit, $10.9 million used for the early redemption of $11.0 million par value of our 2.875% convertible subordinated notes and a $9.6 million unfavorable impact of exchange rate changes.

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In 2009, cash and cash equivalents and short-term restricted cash decreased $16.2 million to $141.3 million as of December 31, 2009 from $157.5 million as of December 31, 2008 primarily as a result of $13.1 million used for the repayment of $15.0 million face amount of our 2.875% convertible notes, $13.4 million used for the purchase of property, plant and equipment, the net purchase of $129.5 million of marketable securities and $4.1 million used for the purchase of certain assets of a division of an Australian software company. These factors were offset by $68.1 million provided by operations, $59.6 million of net proceeds from our UBS line of credit, $6.9 million of proceeds from the exercise of employee stock options and a $0.2 million favorable impact of exchange rate changes.

Accounts receivable increased $30.7 million to $183.3 million as of December 31, 2010 from $152.6 million as of December 31, 2009, primarily due to an increase in sales in the fourth quarter of 2010 as compared to the fourth quarter of 2009. The December 31, 2010 balance included a $0.3 million increase related to fluctuations in currency exchange rates. Our days sales outstanding, calculated on a quarterly basis, was 90 days at both December 31, 2010 and 2009.

Inventories increased $17.8 million to $156.0 million as of December 31, 2010 compared to $138.2 million as of December 31, 2009, to support our planned ramp up of shipments in 2011. The December 31, 2010 balance included a $5.3 million decrease related to fluctuations in currency exchange rates. Our annualized inventory turnover rate, calculated on a quarterly basis, was 2.6 times for the quarters ended December 31, 2010 and 2009.

Deferred tax assets, current and long term, net of deferred tax liabilities increased $6.8 million to $8.4 million as of December 31, 2010 compared to $1.6 million as of December 31, 2009 primarily due to release of valuation allowances against our U.S. deferred tax assets.

Other current assets decreased $16.4 million to $23.1 million as of December 31, 2010 compared to $39.5 million as of December 31, 2009, primarily due to the $11.7 million decrease in the value of the Put Right related to our previously outstanding ARS and a $3.3 million decrease in our income tax receivables as a result of tax refunds received from the settlement of various transfer pricing issues with The Netherlands and the excess of current tax payments over current tax expense in various jurisdictions. Other current assets at December 31, 2010 and 2009 included $0 and $11.7 million, respectively, for the value of the Put Right and $0.4 million and $3.7 million, respectively, of income taxes receivable.

Expenditures for property, plant and equipment of $8.9 million in 2010 primarily consisted of expenditures for machinery and equipment, including instruments used for demonstration as part of our marketing programs. We expect to continue to invest in capital equipment, demonstration systems and R&D equipment for applications development. We estimate our total capital expenditures in 2011 to be approximately $34 million, primarily for the development and introduction of new products, demonstration equipment and upgrades and incremental improvements to our enterprise resource planning (“ERP”) system.

Other assets, net decreased $5.4 million to $12.2 million as of December 31, 2010 compared to $17.6 million as of December 31, 2009, primarily due to the reclassification of a portion of our lease receivables to current and amortization of existing intangible assets.

Income taxes payable increased $2.4 million to $3.7 million as of December 31, 2010 compared to $1.3 million as of December 31, 2009 primarily due to accruals for U.S. taxes on current period income. Our receivable for income taxes of $0.4 million at December 31, 2010 is included as a component of other current assets.

Other current liabilities decreased $16.4 million to $31.3 million as of December 31, 2010 compared to $47.7 million as of December 31, 2009, primarily due to the release of $16.4 million of accruals for unrecognized tax benefits as a result of the settlement with The Netherlands taxing authorities regarding various transfer pricing issues.

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Auction Rate Securities, Put Right and UBS Credit Facility

During the second quarter of 2010, all of our remaining ARS were redeemed, with the proceeds being used to repay in full the remaining amounts due on our $70.8 million credit facility with UBS (the “UBS Credit Facility”). In connection with the redemption of the remaining ARS, the Put Right was terminated. As of December 31, 2010, we did not have any ARS on our balance sheet and the UBS Credit Facility had been terminated.

Other Credit Facilities and Letters of Credit

We have a $100.0 million secured revolving credit facility, including a $50.0 million subfacility for the issuance of letters of credit. We may, upon notice to JPMorgan Chase Bank, N.A., request to increase the revolving loan commitments by an aggregate amount of up to $50.0 million with new or additional commitments subject only to the consent of the lender(s) providing the new or additional commitments, for a total secured credit facility of up to $150.0 million. We also have a 50.0 million yen unsecured and uncommitted bank borrowing facility in Japan and various limited facilities in select foreign countries. We mitigate credit risk by transacting with highly rated counterparties. We have evaluated the credit and non-performance risks associated with our lenders and believe them to be insignificant. No amounts were outstanding under any of these facilities as of December 31, 2010.

As part of our contracts with certain customers, we are required to provide letters of credit or bank guarantees which these customers can draw against in the event we do not perform in accordance with our contractual obligations. At December 31, 2010, we had $64.1 million of these guarantees and letters of credit outstanding, of which approximately $63.5 million were secured by restricted cash deposits. Restricted cash balances securing bank guarantees that expire within 12 months of the balance sheet date are recorded as a current asset on our consolidated balance sheets. Restricted cash balances securing bank guarantees that expire beyond 12 months from the balance sheet date are recorded as long-term restricted cash on our consolidated balance sheet.

Share Repurchase Plan

A plan to repurchase up to a total of 4.0 million shares of our common stock was approved by our Board of Directors in September 2010 and does not have an expiration date. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The purchases are funded from existing cash resources and may be suspended or discontinued at any time at our discretion without prior notice. During the fourth quarter of 2010, we repurchased 205,300 shares for a total of $4.9 million, or an average of $23.66 per share. As of December 31, 2010, 3,794,700 shares remained available for purchase pursuant to this plan.

CONTRACTUAL PAYMENT OBLIGATIONS

A summary of our contractual commitments and obligations as of December 31, 2010 was as follows (in thousands):

	Payments Due By Period
Contractual Obligation	Total		2011		2012 and 2013		2014 and 2015		2016 and beyond
Convertible Debt	$	89,012	$	—	$	89,012	$	—	$	—
Convertible Debt Interest		6,184		2,559		3,625		—		—
Letters of Credit and Bank Guarantees		64,104		26,756		3,674		653		33,021
Purchase Order Commitments		52,024		52,024		—		—		—
Pension Related Obligations		1,840		24		90		110		1,616
Deferred Compensation Liability		2,869		—		—		—		2,869
Capital Leases		3,031		1,473		1,452		106		—
Operating Leases		47,075		7,189		11,392		8,050		20,444
Total	$	266,139	$	90,025	$	109,245	$	8,919	$	57,950

We also have other liabilities of $6.5 million relating to additional uncertain tax positions. However, as we are unable to reliably estimate the timing of future payments related to these additional uncertain tax positions, we have excluded this amount from the table above.

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OFF-BALANCE SHEET ARRANGEMENTS

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

RECENTLY ISSUED ACCOUNTING GUIDANCE

See Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.

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

• the timing of revenue recognition;

• the allowance for doubtful accounts;

• valuations of excess and obsolete inventory;

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

• restructuring, reorganization, relocation and severance costs;

• tax valuation allowances and unrecognized tax benefits;

• warranty liabilities;

• stock-based compensation; and

• accounting for derivatives.

It is reasonably possible that the estimates we make may change in the future.

Revenue Recognition

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

For products demonstrated to meet our published specifications, revenue is recognized when the title to the product and the risks and rewards of ownership pass to the customer. The portion of revenue related to installation, of which the estimated fair value is generally 4% of the total revenue of the transaction, is deferred until such installation and final customer acceptance are completed. For products produced according to a particular customer’s specifications, revenue is recognized when the product meets the customer’s specifications and when the title and the risks and rewards of ownership have passed to the customer. In each case, the portion of revenue applicable to installation is recognized upon meeting specifications at the installation site. For new applications of our products where performance cannot be assured prior to meeting specifications at the installation site, no revenue is recognized until such specifications are met.

We enter into arrangements with customers whereby they purchase products, accessories and service contracts from us at the same time. For sales arrangements containing multiple elements (products or services), revenue relating to the undelivered elements is deferred at the estimated selling price of the element as determined using the sales price hierarchy established in Financial Accounting Standards

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Board (“FASB”) Accounting Standards Update No. 2009-13 (“ASU 2009-13”). To be considered a separate element, the deliverable in question must represent a separate element under the accounting guidance and fulfill the following criteria: the delivered item or items must have value to the customer on a standalone basis; and, if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. If the arrangement does not meet all criteria above, the entire amount of the transactions is deferred until all elements are delivered.

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

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

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

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

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

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

Allowance for Doubtful Accounts

The allowance for doubtful accounts is estimated based on collection experience and known trends with current customers. The large number of entities comprising our customer base and their dispersion across many different industries and geographies somewhat mitigates our credit risk exposure and the magnitude of our allowance for doubtful accounts. Our estimates of the allowance for doubtful accounts are reviewed and updated on a quarterly basis. Changes to the reserve may occur based upon changes in revenue levels and associated balances in accounts receivable and estimated changes in individual customers’ credit quality. Historically, we have not incurred significant write-offs of accounts receivable, however, an individual loss could be significant due to the relative size of our sales transactions. Our bad debt expense totaled $2.5 million, $0.6 million and $1.1 million, respectively, in 2010, 2009 and 2008. Our allowance for doubtful accounts totaled $5.7 million and $3.3 million, respectively, at December 31, 2010 and 2009.

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Valuation of Excess and Obsolete Inventory

Inventory is stated at the lower of cost or market, with cost determined by standard cost methods, which approximate the first-in, first-out method. Inventory costs include material, labor and manufacturing overhead.

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

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

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

Provision for manufacturing inventory valuation adjustments totaled $3.6 million, $4.1 million and $1.7 million, respectively, in 2010, 2009 and 2008. Provision for service spare parts inventory valuation adjustments totaled $6.2 million, $7.0 million and $4.3 million, respectively, in 2010, 2009 and 2008.

Lives and Recoverability of Equipment and Other Long-Lived Assets

We evaluate the remaining life and recoverability of equipment and other assets, including intangible assets, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If there is an indication of impairment, we prepare an estimate of future, undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying value of the asset, we adjust the carrying amount of the asset to its estimated fair value. No impairments related to our equipment or other long-lived assets were recognized during 2010, 2009 or 2008.

Goodwill

Goodwill represents the excess purchase price over fair value of net assets acquired. Goodwill and other identifiable intangible assets with indefinite useful lives are not amortized, but, instead, a two-step impairment test is performed at least annually. We test goodwill for impairment in the fourth quarter of each year. First, the fair value of each reporting unit is compared to its carrying value. We have defined our reporting units to be our operating segments. Fair value is determined based on the present value of estimated cash flows using available information regarding expected cash flows of each reporting unit, discount rates and the expected long-term cash flow growth rates. Discount rates are determined based on the cost of capital for the reporting unit. If the fair value of the reporting unit exceeds the carrying

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value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The implied fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded. No impairments were identified in step one of our annual analysis during the fourth quarter of 2010, 2009 or 2008.

Restructuring, Reorganization, Relocation and Severance Costs

Restructuring, reorganization, relocation and severance costs are recognized and recorded at fair value as incurred. Such costs include severance and other costs related to employee terminations as well as facility costs related to future abandonment of various leased office and manufacturing sites. Also, included are certain period costs to move our existing supply chain, as well as migration of certain IT systems to new platforms. Changes in our estimates could occur, and have occurred, due to fluctuations in exchange rates, the sublease of unused space, unanticipated voluntary departures before severance was required and unanticipated redeployment of employees to vacant positions. See Note 13 of Notes to Consolidated Financial Statements for additional information.

Income Taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of the assets and liabilities. We record a valuation allowance to reduce deferred tax assets to the amount expected to “more likely than not” be realized in our future tax returns. During 2010, 2009 and 2008, we released approximately $32.9 million, $3.9 million and $0.5 million, respectively, in valuation allowance relating to U.S. deferred tax assets utilized to offset U.S. taxable income generated during the respective periods. Should we determine that we would not be able to realize all or part of our remaining net deferred tax assets in the future, increases to the valuation allowance for deferred tax assets may be required. Conversely, if we determine that certain tax assets that have been reserved for may be realized in the future, we may reduce our valuation allowance in future periods. Our net deferred tax assets totaled $8.4 million and $1.6 million, respectively, at December 31, 2010 and 2009 and our valuation allowance totaled $2.1 million and $38.0 million, respectively.

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

At December 31, 2010 and 2009, the liabilities related to total unrecognized tax benefits were $7.2 million and $20.2 million respectively, all of which would have an impact on the effective tax rate if recognized. Included in the liabilities for unrecognized tax benefits were accruals for interest and penalties of $1.2 million and $2.2 million, respectively. Unrecognized tax benefits relate mainly to uncertainty surrounding tax credits and permanent establishment. See Note 12 of Notes to Consolidated Financial Statements for additional information.

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Warranty Liabilities

Our products generally carry a one-year warranty. A reserve is established at the time of sale to cover estimated warranty costs and certain commitments for product upgrades. Our estimate of warranty cost is primarily based on our history of warranty repairs and maintenance, as applied to systems currently under warranty. For our new products without a history of known warranty costs, we estimate the expected costs based on our experience with similar product lines and technology. While most new products are extensions of existing technology, the estimate could change if new products require a significantly different level of repair and maintenance than similar products have required in the past. Our estimated warranty costs are reviewed and updated on a quarterly basis. Changes to the reserve occur as volume, product mix and warranty costs fluctuate.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based payment awards granted to our employees and directors, including employee stock options, non-vested stock and stock purchases related to our employee share purchase plan based on the estimated fair value of the award on the grant date. We utilize the Black-Scholes valuation model for valuing our stock option awards.

The use of the Black-Scholes valuation model to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates at the time they are made, but these estimates involve inherent uncertainties and the application of expense could be materially different in the future.

Compensation expense is only recognized on awards that ultimately vest. Therefore, we have reduced the compensation expense to be recognized over the vesting period for anticipated future forfeitures. Forfeiture estimates are based on historical forfeiture patterns. We update our forfeiture estimates quarterly and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.

Accounting for Derivatives

We use a combination of forward contracts, zero cost collar contracts, option contracts and other instruments to hedge certain anticipated foreign currency exchange transactions. When specific hedge criteria have been met, changes in fair values of hedge contracts relating to anticipated transactions are recorded in other comprehensive income rather than net income until the underlying hedged transaction affects net income. One of the criteria for this accounting treatment is that the forward exchange contract amount should not be in excess of specifically identified anticipated transactions. By their nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decrease below hedged levels, or when the timing of transactions changes significantly, we reclassify a portion of the cumulative changes in fair values of the related hedge contracts from other comprehensive income to other income (expense) during the quarter in which such changes occur.

We also use foreign forward exchange contracts to mitigate the foreign currency exchange impact of our cash, receivables and payables denominated in foreign currencies. These derivatives do not meet the criteria for hedge accounting and, accordingly, changes in the fair value are recognized in net income in the current period.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Rate Risk

A large portion of our business is conducted outside of the U.S. through a number of foreign subsidiaries. Each of the foreign subsidiaries keeps its accounting records in its respective local currency. These local-currency-denominated accounting records are translated at exchange rates that fluctuate up or down from period to period and consequently affect our consolidated results of operations and financial position. The major foreign currencies in which we experience periodic fluctuations are the euro, the Czech koruna, the Japanese yen and the British pound sterling. For each of the last three years, more than 61% of our sales occurred outside of the U.S.

In addition, because of our substantial research, development and manufacturing operations in Europe, we incur a greater proportion of our costs in Europe than the revenue we derive from sales in that geographic region. Our raw materials, labor and other manufacturing costs are primarily denominated in U.S. dollars, euros and Czech korunas. This situation negatively affects our gross margins and results of operations when the dollar weakens in relation to the euro or koruna. A strengthening of the dollar in relation to the euro or koruna would have a net positive effect on our gross margins and results of operations. Movement of Asian currencies in relation to the dollar and euro can also affect our reported sales and results of operations because we derive more revenue than we incur costs from the Asia-Pacific region. In addition, several of our competitors are based in Japan and a weakening of the Japanese yen has the effect of lowering their prices relative to ours.

Assets and liabilities of foreign subsidiaries are translated using the exchange rates in effect at the balance sheet date. Revenues and expenses are translated using the average exchange rate during the period. The resulting translation adjustments decreased shareholders’ equity and comprehensive income in 2010 by $12.1 million. Holding other variables constant, if the U.S. dollar weakened by 10% against all currencies that we translate, shareholders’ equity would increase by approximately $32.3 million as of December 31, 2010. Holding other variables constant, if the U.S. dollar strengthened by 10% against all currencies that we translate, shareholders’ equity would decrease by approximately $26.4 million as of December 31, 2010.

Risk Mitigation

We use derivatives to mitigate financial exposure resulting from fluctuations in foreign currency exchange rates. When specific accounting criteria have been met, changes in fair values of derivative contracts relating to anticipated transactions are recorded in other comprehensive income, rather than net income, until the underlying hedged transaction affects net income. Changes in fair value for derivatives not designated as hedging instruments are recognized in net income in the current period. As of December 31, 2010, the aggregate notional amount of our outstanding derivative contracts designated as cash flow hedges was $133.0 million, which contracts have varying maturities through the second quarter of 2012. The aggregate notional amount of our outstanding balance sheet-related derivative contracts at December 31, 2010 was $106.9 million, which contracts have varying maturities through the first quarter of 2011. We do not enter into derivative financial instruments for speculative purposes.

Holding other variables constant, if the U.S. dollar weakened by 10%, the market value of our foreign currency contracts outstanding as of December 31, 2010 would increase by approximately $24.0 million. The increase in value relating to the forward sale or purchase contracts would, however, be substantially offset by the revaluation of the transactions being hedged. A 10% increase in the U.S. dollar relative to the hedged currencies would have a similar, but negative, effect on the value of our foreign currency contracts, substantially offset again by the revaluation of the transactions being hedged.

Balance Sheet Related

We attempt to mitigate our currency exposures for recorded transactions by using forward exchange contracts to reduce the risk that our future cash flows will be adversely affected by changes in exchange

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rates. We enter into forward sale or purchase contracts for foreign currencies to hedge specific cash, receivables or payables positions denominated in foreign currencies. Changes in fair value of derivatives entered into to mitigate the foreign exchange risks related to these balance sheet items are recorded in other income (expense) currently together with the transaction gain or loss from the hedged balance sheet position.

The hedging transactions we undertake are intended to limit our exposure to changes in the dollar/euro exchange rate. Foreign currency losses recorded in other income (expense), inclusive of the impact of derivatives, totaled $1.2 million, $3.6 million and $4.9 million, respectively, in 2010, 2009 and 2008.

Cash Flow Hedges

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

These derivatives meet the criteria to be designated as hedges and, accordingly, we record the change in fair value of these hedge contracts relating to anticipated transactions in other comprehensive income rather than net income until the underlying hedged transaction affects net income. We recognized realized gains of $1.9 million in 2010 in cost of sales related to hedge results, compared to realized gains of $0.4 million in 2009 and $6.0 million in 2008. As of December 31, 2010, $1.3 million of deferred unrealized net losses on outstanding derivatives have been recorded in other comprehensive income and are expected to be reclassified to net income during the next 18 months as a result of the underlying hedged transactions also being recorded in net income. We recorded a charge of $117,000 in 2010 and $1.3 million in both 2009 and 2008 for hedge ineffectiveness as a result of currency volatility. We continually monitor our hedge positions and forecasted transactions and, in the event changes to our forecast occur, we may have dedesignations of our cash flow hedges in the future. Additionally, given the volatility in the global currency markets, the effectiveness attributed to these hedges may decrease or, in some instances, may result in dedesignation as a cash flow hedge, which would require us to record a charge in other income (expense) in the period of ineffectiveness or dedesignation.

Interest Rate Risk

Our exposure to market risk for changes in interest rates primarily relates to our investments. Since we had no variable interest rate debt outstanding at December 31, 2010, our interest expense is relatively fixed and not affected by changes in interest rates. In the event we issue any new debt in the future, increases in interest rates will increase the interest expense associated with the debt.

The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This objective is accomplished by making diversified investments, consisting only of investment grade securities.

Cash, Cash Equivalents and Restricted Cash

As of December 31, 2010, we held cash and cash equivalents of $277.6 million and short-term restricted cash of $22.1 million that consisted of cash and highly liquid short-term investments having maturity dates of no more than 90 days at the date of acquisition. Declines of interest rates over time would reduce our interest income from our highly liquid short-term investments. A decrease in interest rates of one percentage point would cause a corresponding decrease in annual interest income of approximately $3.0 million assuming our cash and cash equivalent balances at December 31, 2010 remained constant and were earning at least 1% per annum, which, at December 31, 2010, they were not. Due to the nature of our highly liquid cash equivalents, an increase in interest rates would not materially change the fair market value of our cash and cash equivalents.

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Fixed Rate Debt Securities

As of December 31, 2010, we held short-term fixed rate investments of $44.0 million that consisted of certificates of deposit, commercial paper and government-backed securities. These investments are recorded on our balance sheet at fair value based on quoted market prices. Unrealized gains/losses resulting from changes in the fair value are recorded, net of tax, in shareholders’ equity as a component of other comprehensive income (loss). Interest rate fluctuations impact the fair value of these investments, however, given our ability to hold these investments until maturity or until the unrealized losses recover, we do not expect these fluctuations to have a material impact on our results of operations, financial position or cash flows. Declines in interest rates over time would reduce our interest income from our short-term investments, as our short-term portfolio is re-invested at current market interest rates. A decrease in interest rates of one percentage point would cause a corresponding decrease in our annual interest income from these items of approximately $0.4 million assuming our investment balances at December 31, 2010 remained constant and were earning at least 1% per annum, which, at December 31, 2010, they were not.

Fair Value of Convertible Debt

The fair market value of our fixed rate convertible debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The interest rate changes affect the fair market value of our long-term debt, but do not impact earnings or cash flows. At December 31, 2010, we had $89.0 million of fixed rate convertible debt outstanding. Based on open market trades, we have determined that the fair market value of our long-term fixed interest rate debt was approximately $99.6 million at December 31, 2010.

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Item 8. Financial Statements and Supplementary Data

Unaudited quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2010 is as follows:

2010 (In thousands, except per share data)	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Net sales	$	149,099		$	146,048		$	153,005		$	186,070
Cost of sales		89,894			86,240			86,476			102,348
Gross profit		59,205			59,808			66,529			83,722
Total operating expenses(1)		53,621			56,275			48,913			54,997
Operating income		5,584			3,533			17,616			28,725
Other expense, net		(636	)		(900	)		(1,057	)		(643	)
Income before income taxes		4,948			2,633			16,559			28,082
Income tax expense (benefit)(2)		844			(13,547	)		4,639			6,738
Net income	$	4,104		$	16,180		$	11,920		$	21,344
Basic net income per share	$	0.11		$	0.43		$	0.31		$	0.56
Diluted net income per share	$	0.11		$	0.40		$	0.30		$	0.52
Shares used in basic per share calculation		37,891			38,046			38,186			38,083
Shares used in diluted per share calculation		38,308			41,813			41,536			41,737

2009 (In thousands, except per share data)	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Net sales	$	141,833		$	140,263		$	140,799		$	154,449
Cost of sales		83,141			84,102			85,418			95,179
Gross profit		58,692			56,161			55,381			59,270
Total operating expenses(3)		50,568			49,549			47,482			50,283
Operating income		8,124			6,612			7,899			8,987
Other expense, net(4)		(320	)		(1,501	)		(809	)		(1,331	)
Income before income taxes		7,804			5,111			7,090			7,656
Income tax expense(5)		1,466			1,451			1,030			1,070
Net income	$	6,338		$	3,660		$	6,060		$	6,586
Basic net income per share	$	0.17		$	0.10		$	0.16		$	0.17
Diluted net income per share	$	0.17		$	0.10		$	0.16		$	0.17
Shares used in basic per share calculation		37,322			37,450			37,610			37,767
Shares used in diluted per share calculation		37,616			37,745			38,067			38,194

(1) Operating expenses in the first, second, third and fourth quarters of 2010 included $0.9 million, $9.1 million, $0.5 million and $0.6 million, respectively, of restructuring, reorganization, relocation and severance expense.

(2) Income tax benefit in the second quarter of 2010 included a net benefit of $17.3 million related to an agreement between U.S. and The Netherlands taxing authorities regarding various transfer pricing issues and a reduction in our valuation allowance against U.S. deferred tax assets. See also Note 12 of Notes to Consolidated Financial Statements.

(3) Operating expenses in the first, second, third and fourth quarters of 2009 included $1.0 million, $1.1 million, $0.6 million and $0.8 million, respectively, of restructuring, reorganization, relocation and severance expense.

(4) Included in other income (expense), net in 2009 were the following:

• $3.7 million, $1.4 million, $2.8 million and $(1.2) million of unrealized gains (losses) related to our ARS in the first, second, third and fourth quarter, respectively, and $(3.6) million, $(1.1) million, $(2.8) million and $1.3 million of unrealized gains (losses) related to the fair value of the Put Right we received pursuant to an agreement we entered into with UBS, the issuer of the ARS, in the first, second, third and fourth quarter, respectively. The Put Right required UBS to repurchase all of our ARS at par on or before June 30, 2010; and

• a $1.3 million charge for ineffectiveness of certain of our cash flow hedges due to increased currency volatility.

(5) Income tax expense in 2009 included the release of $3.9 million of valuation allowances recorded against net operating loss deferred tax assets utilized to offset income earned in the U.S., a portion of which was recorded each quarter, as well as a $1.3 million benefit related to the lapses of statutes of limitations and effective settlements with tax authorities.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

FEI Company:

We have audited the accompanying consolidated balance sheet of FEI Company and subsidiaries as of December 31, 2010 and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FEI Company and subsidiaries as of December 31, 2010 and the results of their operations and their cash flows for the year ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FEI Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 18, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Portland, Oregon

February 18, 2011

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

FEI Company

Hillsboro, Oregon

We have audited the accompanying consolidated balance sheet of FEI Company and subsidiaries (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of FEI Company and subsidiaries as of December 31, 2009, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

February 19, 2010

Portland, Oregon

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FEI Company and Subsidiaries

Consolidated Balance Sheets

(In thousands)

	December 31,
	2010		2009
Assets
Current Assets:
Cash and cash equivalents	$	277,617	$	124,199
Short-term investments in marketable securities		44,026		212,119
Short-term restricted cash		22,114		17,141
Receivables, net of allowances for doubtful accounts of $5,685 and $3,306		183,254		152,601
Inventories		155,964		138,242
Deferred tax assets		11,505		2,734
Other current assets		23,126		39,470
Total Current Assets		717,606		686,506
Non-current investments in marketable securities		38,662		39,662
Long-term restricted cash		41,377		35,901
Property, plant and equipment, net of accumulated depreciation of $95,720 and $86,942		80,681		81,893
Goodwill		44,800		44,615
Deferred tax assets		1,072		3,369
Non-current inventories		47,976		44,385
Other assets, net		12,248		17,638
Total Assets	$	984,422	$	953,969
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	51,529	$	40,587
Accrued payroll liabilities		31,765		18,911
Accrued warranty reserves		8,648		7,477
Accrued agent commissions		10,796		10,046
Deferred revenue		81,445		65,805
Income taxes payable		3,715		1,321
Accrued restructuring, reorganization, relocation and severance		4,884		32
Short-term line of credit		—		59,600
Other current liabilities		31,306		47,693
Total Current Liabilities		224,088		251,472
Convertible debt		89,012		100,000
Deferred tax liabilities		4,106		4,298
Other liabilities		34,042		30,675
Commitments and contingencies
Shareholders’ Equity:
Preferred stock - 500 shares authorized; none issued and outstanding		—		—
Common stock - 70,000 shares authorized; 38,280 and 37,859 shares issued and outstanding, no par value		509,145		485,557
Retained earnings		75,024		21,476
Accumulated other comprehensive income		49,005		60,491
Total Shareholders’ Equity		633,174		567,524
Total Liabilities and Shareholders’ Equity	$	984,422	$	953,969

See accompanying Notes to Consolidated Financial Statements.

52

FEI Company and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

	For the Year Ended December 31,
	2010			2009			2008
Net Sales:
Products	$	479,437		$	439,125		$	459,383
Products - related party		343			578			2,123
Service and components		154,021			137,361			137,314
Service and components - related party		421			280			359
Total net sales		634,222			577,344			599,179
Cost of Sales:
Products		262,571			252,307			265,543
Service and components		102,387			95,533			99,095
Total cost of sales		364,958			347,840			364,638
Gross Profit		269,264			229,504			234,541
Operating Expenses:
Research and development		66,274			67,698			70,378
Selling, general and administrative		136,465			126,728			128,768
Restructuring, reorganization, relocation and severance		11,067			3,456			4,267
Total operating expenses		213,806			197,882			203,413
Operating Income		55,458			31,622			31,128
Other Income (Expense):
Interest income		2,632			2,880			14,362
Interest expense		(4,504	)		(5,441	)		(14,220	)
Other, net		(1,364	)		(1,400	)		(4,670	)
Total other income (expense), net		(3,236	)		(3,961	)		(4,528	)
Income before income taxes		52,222			27,661			26,600
Income tax (benefit) expense		(1,326	)		5,017			8,612
Net income	$	53,548		$	22,644		$	17,988
Basic net income per share	$	1.41		$	0.60		$	0.49
Diluted net income per share	$	1.34		$	0.60		$	0.48
Shares used in per share calculations:
Basic		38,083			37,537			36,766
Diluted		41,737			37,905			37,158

See accompanying Notes to Consolidated Financial Statements.

53

FEI Company and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

	For the Year Ended December 31,
	2010			2009			2008
Net income	$	53,548		$	22,644		$	17,988
Other comprehensive income, net of taxes:
Change in cumulative translation adjustment		(12,077	)		8,945			(11,169	)
Change in unrealized loss on available-for-sale securities		—			(66	)		(11,720	)
Change in minimum pension liability		—			(36	)		498
Reclassification of auction rate securities unrealized losses to other income, net		—			—			11,686
Changes due to cash flow hedging instruments:
Net (loss) gain on hedge instruments		(1,466	)		440			2,192
Reclassification to net income of previously deferred losses (gains) related to hedge derivatives instruments		2,057			844			(6,215	)
Comprehensive income	$	42,062		$	32,771		$	3,260

See accompanying Notes to Consolidated Financial Statements.

54

FEI Company and Subsidiaries

Consolidated Statements of Shareholders’ Equity

For The Years Ended December 31, 2010, 2009 and 2008

(In thousands)

	Common Stock						Retained Earnings			Accumulated Other Comprehensive			Total Shareholders’
	Shares			Amount			(Deficit)			Income			Equity
Balance at December 31, 2007		36,405		$	447,772		$	(19,156	)	$	65,092		$	493,708
Net income		—			—			17,988			—			17,988
Employee purchases of common stock through employee share purchase plan		259			4,804			—			—			4,804
Restricted shares issued and stock options exercised related to employee stock-based compensation plans		585			9,280			—			—			9,280
Stock-based compensation expense		—			8,153			—			—			8,153
Zero coupon convertible note settlement		37			1,013			—			—			1,013
Reclassification of auction rate securities unrealized losses to other income, net		—			—			—			11,686			11,686
Tax benefit of non-qualified stock option exercises		—			329			—			—			329
Restricted stock unit taxes for net share settlement		—			(1,458	)		—			—			(1,458	)
Translation adjustment		—			—			—			(11,169	)		(11,169	)
Unrealized loss on available for sale securities		—			—			—			(11,720	)		(11,720	)
Minimum pension liability, net of taxes		—			—			—			498			498
Net adjustment for fair value of hedge derivatives		—			—			—			(4,023	)		(4,023	)
Balance at December 31, 2008		37,286			469,893			(1,168	)		50,364			519,089
Net income		—			—			22,644			—			22,644
Employee purchases of common stock through employee share purchase plan		271			4,662			—			—			4,662
Restricted shares issued and stock options exercised related to employee stock-based compensation plans		386			2,260			—			—			2,260
Stock-based compensation expense		—			10,598			—			—			10,598
Restricted stock unit taxes for net share settlement		(84	)		(1,856	)		—			—			(1,856	)
Translation adjustment		—			—			—			8,945			8,945
Unrealized loss on available for sale securities		—			—			—			(66	)		(66	)
Minimum pension liability, net of taxes		—			—			—			(36	)		(36	)
Net adjustment for fair value of hedge derivatives		—			—			—			1,284			1,284
Balance at December 31, 2009		37,859			485,557			21,476			60,491			567,524
Net income		—			—			53,548			—			53,548
Employee purchases of common stock through employee share purchase plan		281			4,860			—			—			4,860
Restricted shares issued and stock options exercised related to employee stock-based compensation plans		447			3,099			—			—			3,099
Stock-based compensation expense		—			10,482			—			—			10,482
Restricted stock unit taxes for net share settlement		(102	)		(2,075	)		—			—			(2,075	)
Repurchase of common stock		(205	)		(4,862	)		—			—			(4,862	)
Tax benefit of non-qualified stock option exercises		—			12,084			—			—			12,084
Translation adjustment		—			—			—			(12,077	)		(12,077	)
Net adjustment for fair value of hedge derivatives		—			—			—			591			591
Balance at December 31, 2010		38,280		$	509,145		$	75,024		$	49,005		$	633,174

See accompanying Notes to Consolidated Financial Statements.

55

FEI Company and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	For the Year Ended December 31,
	2010			2009			2008
Cash flows from operating activities:
Net income	$	53,548		$	22,644		$	17,988
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		17,371			17,140			16,481
Amortization		2,669			3,092			10,589
Stock-based compensation		10,482			10,599			8,153
Gain on trading securities and UBS Put Right		(26	)		(501	)		—
Asset impairments and write-offs of property, plant and equipment and other assets		—			—			528
Loss on disposal of investments, property, plant and equipment and intangible assets		333			277			274
Write-off of deferred note issuance costs on redemption		126			250			226
Gain on redemption of 2.875% convertible note		(115	)		(2,025	)		—
Income taxes receivable (payable), net		(7,926	)		3,313			7,862
Deferred income taxes		4,814			(869	)		2,536
(Increase) decrease in:
Receivables		(29,347	)		(8,678	)		16,680
Inventories		(31,398	)		(1,160	)		(15,439	)
Other assets		2,178			(1,120	)		(799	)
Increase (decrease) in:
Accounts payable		11,812			4,916			4,000
Accrued payroll liabilities		13,183			(1,053	)		(6,421	)
Accrued warranty reserves		1,235			1,015			(109	)
Deferred revenue		18,446			20,036			(16,184	)
Accrued restructuring, reorganization, relocation and severance costs		4,585			(205	)		(237	)
Other liabilities		3,028			380			8,407
Net cash provided by operating activities		74,998			68,051			54,535
Cash flows from investing activities:
Increase in restricted cash		(13,539	)		(5,810	)		(1,537	)
Acquisition of property, plant and equipment		(8,886	)		(13,430	)		(13,482	)
Proceeds from disposal of property, plant and equipment		4			30			1
Purchase of investments in marketable securities		(179,698	)		(190,654	)		(93,857	)
Redemption of investments in marketable securities		261,190			61,107			112,449
Proceeds from the sale of auction rate securities		98,925			11,200			—
Other		(540	)		(4,570	)		(3,286	)
Net cash provided by (used in) investing activities		157,456			(142,127	)		288
Cash flows from financing activities:
Redemption of convertible notes		(10,893	)		(13,077	)		(194,869	)
Witholding taxes paid on issuance of vested restricted stock units		(2,076	)		(1,856	)		(1,456	)
Proceeds from line of credit		—			70,800			—
Repayments on line of credit		(59,600	)		(11,200	)		—
Proceeds from exercise of stock options and employee stock purchases		7,983			6,871			14,097
Repurchases of common stock		(4,862	)		—			—
Other		—			—			(491	)
Net cash (used in) provided by financing activities		(69,448	)		51,538			(182,719	)
Effect of exchange rate changes		(9,588	)		216			(6,176	)
Increase (decrease) in cash and cash equivalents		153,418			(22,322	)		(134,072	)
Cash and cash equivalents:
Beginning of year		124,199			146,521			280,593
End of year	$	277,617		$	124,199		$	146,521
Supplemental Cash Flow Information:
Cash paid (refunds received) for income taxes, net	$	(983	)	$	2,391		$	(2,780	)
Cash paid for interest		3,833			4,581			7,783
Inventories transferred from (to) fixed assets		8,697			(8,297	)		(7,240	)

See accompanying Notes to Consolidated Financial Statements.

56

FEI COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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

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

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

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

Basis of Presentation

The consolidated financial statements include the accounts of FEI Company and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates in Financial Reporting

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant accounting policies and estimates underlying the accompanying consolidated financial statements include:

• the timing of revenue recognition;

• the allowance for doubtful accounts;

• valuations of excess and obsolete inventory;

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

• restructuring, reorganization, relocation and severance costs;

• tax valuation allowances and unrecognized tax benefits;

• warranty liabilities;

• stock-based compensation; and

• accounting for derivatives.

It is reasonably possible that the estimates we make may change in the future.

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Concentration of Credit Risk

Instruments that potentially subject us to concentration of credit risk consist principally of cash and cash equivalents, short-term investments and receivables. Our investment policy limits investments with any one issuer to 10% or less of the total investment portfolio, with the exception of money market funds and securities issued by the U.S. government or its agencies which may comprise up to 100% of the total investment portfolio. Our exposure to credit risk concentrations within our receivables balance is limited due to the large number of entities comprising our customer base and their dispersion across many different industries and geographies.

Dependence on Key Suppliers

Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient quantities to us in a timely and cost-effective manner could negatively affect our business, including our ability to convert backlog into revenue. Although we use numerous vendors to supply parts, components and subassemblies for the manufacture and support of our products, some key parts may only be obtained from a single supplier or a limited group of suppliers. In particular, we rely on: VDL Enabling Technologies Group, AP Tech, Frencken Mechatronics B.V., Sanmina-SCI Corporation and AZD Praha SRO for our supply of mechanical parts and subassemblies; Gatan, Inc. for critical accessory products; and Neways Electronics, N.V. for some of our electronic subassemblies. In addition, some of our suppliers rely on sole suppliers. As a result of this concentration of key suppliers, our results of operations may be materially and adversely affected if we do not timely and cost-effectively receive a sufficient quantity of quality parts to meet our production requirements or if we are required to find alternative suppliers for these supplies. We may not be able to expand our supplier group or to reduce our dependence on single suppliers. If our suppliers are not able to meet our supply requirements, constraints may affect our ability to deliver products to customers in a timely manner, which could have an adverse effect on our results of operations. In addition, world-wide restrictions governing the use of certain hazardous substances in electrical and electronic equipment (RoHS regulations) may impact parts and component availability or our electronics suppliers’ ability to source parts and components in a timely and cost-effective manner. Overall, because we only have a few equipment suppliers, we may be more exposed to future cost increases for this equipment.

In addition, we rely on a limited number of equipment manufacturers to develop and supply the equipment we use to manufacture our products. The failure of these manufacturers to develop or deliver quality equipment on a timely basis could have a material adverse effect on our business and results of operations. In addition, because we only have a few equipment suppliers, we may be more exposed to future cost increases for this equipment.

Cash and Cash Equivalents

Cash and cash equivalents include cash deposits in banks, money market funds and other highly liquid marketable securities with maturities of three months or less at the date of acquisition.

Restricted Cash

Our restricted cash balances are held in deposit accounts with banks that have issued guarantees and letters of credit to our customers for system sales transactions and customer advance deposits relating to prepayments for service contracts, mainly in Europe and Asia. This restricted cash can be drawn on by the bank if goods are not delivered or services are not properly performed. In addition, while the restricted cash is held in the bank it is earning interest. Given these deposit accounts require satisfaction of conditions other than a withdrawal demand for us to receive a return of principal, are interest bearing and are held for extended periods of time, we have concluded these balances are similar in nature to our other investments and that inclusion in investing activities on our statement of cash flows is appropriate and consistent with our treatment of other investments. Restricted cash balances securing bank guarantees that expire within 12 months of the balance sheet date are recorded as a current asset on our consolidated balance sheets. Restricted cash balances securing bank guarantees that expire beyond 12 months from the balance sheet date are recorded as long-term restricted cash on our consolidated balance sheets.

58

Accounts Receivable

Activity within our accounts receivable allowance for the three-year period ended December 31, 2010 was as follows (in thousands):

Balance, December 31, 2007	$	3,819
Expense		1,125
Write-offs		(1,787	)
Translation adjustments		(18	)
Balance, December 31, 2008		3,139
Expense		628
Write-offs		(525	)
Translation adjustments		64
Balance, December 31, 2009		3,306
Expense		2,499
Write-offs		(63	)
Translation adjustments		(57	)
Balance, December 31, 2010	$	5,685

Write-offs include amounts written off for specifically identified bad debts.

Marketable Securities

Our investments include marketable debt securities, certificates of deposit, commercial paper and government-backed securities with maturities greater than 90 days at the time of purchase. Our fixed maturity securities are classified as available-for-sale securities and, accordingly, are carried at fair value, based on quoted market prices, with the unrealized gains or losses reported, net of tax, in shareholders’ equity as a component of accumulated other comprehensive income (loss).

Certain equity securities held in short-term and long-term investments related to the executive deferred compensation plan are classified as trading securities (see Note 4). Investments designated as trading securities are carried at fair value on the balance sheet, with the unrealized gains or losses recorded in interest income (expense) or other income (expense) in the period incurred.

Realized gains and losses on all investments are recorded on the specific identification method and are included in interest income (expense) or other income (expense) in the period incurred. Investments with maturities greater than 12 months from the balance sheet date are classified as non-current investments, unless they are expected to be liquidated within the next 12 months; in which case, the investment is classified as current.

Inventories

Inventories are stated at the lower of cost or market, with cost determined by standard cost methods, which approximate the first-in, first-out method. Inventory costs include material, labor and manufacturing overhead. Service inventories that exceed the estimated requirements for the next 12 months based on recent usage levels are reported as other long-term assets. Management has established inventory reserves based on estimates of excess and/or obsolete current and non-current inventory.

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

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

59

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

Non-service inventory valuation adjustments totaled $3.6 million, $4.1 million and $1.7 million, respectively, in 2010, 2009 and 2008. Provision for service inventory valuation adjustments totaled $6.2 million, $7.0 million and $4.3 million, respectively, in 2010, 2009 and 2008.

Income Taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of the assets and liabilities. We record a valuation allowance to reduce deferred tax assets to the amount expected to “more likely than not” be realized in our future tax returns. During 2010, 2009 and 2008, we released approximately $32.9 million, $3.9 million and $0.5 million, respectively, in valuation allowance relating to U.S. deferred tax assets utilized to offset U.S. taxable income generated during the respective periods. Should we determine that we would not be able to realize all or part of our remaining net deferred tax assets in the future, increases to the valuation allowance for deferred tax assets may be required. Conversely, if we determine that certain tax assets that have been reserved for may be realized in the future, we may reduce our valuation allowance in future periods. Our net deferred tax assets totaled $8.4 million and $1.6 million, respectively, at December 31, 2010 and 2009 and our valuation allowance totaled $2.1 million and $38.0 million, respectively.

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

At December 31, 2010 and 2009, the liabilities related to total unrecognized tax benefits were $7.2 million and $20.2 million respectively, all of which would have an impact on the effective tax rate if recognized. Included in the liabilities for unrecognized tax benefits were accruals for interest and penalties of $1.2 million and $2.2 million, respectively. Unrecognized tax benefits relate mainly to uncertainty surrounding intercompany pricing and permanent establishment. See Note 12 of Notes to Consolidated Financial Statements for additional information.

Property, Plant and Equipment

Land is stated at cost. Buildings and improvements are stated at cost and depreciated over estimated useful lives of approximately 40 years using the straight-line method. Machinery and equipment, including systems used in research and development activities, production and in demonstration laboratories, are stated at cost and depreciated over estimated useful lives of approximately three to seven years using the straight-line method. Leasehold improvements are amortized over the shorter of their economic lives or the lease term. Maintenance and repairs are expensed as incurred.

60

Demonstration systems consist primarily of internally manufactured products and related accessories that we use for marketing purposes in our demonstration laboratories (“NanoPorts”) or for trade shows. These systems are not held for sale and accordingly are recorded as a component of property, plant and equipment and depreciated using the straight-line method over their expected useful lives of approximately three to seven years with the expense being reflected as a component of selling, general and administrative.

On occasion, we loan systems to customers on a temporary basis while they wait for their tool to be manufactured or for evaluation. These systems are included in our finished goods inventories and the lending/evaluation periods are typically for a time period of less than one year. The sale of disposable products or services is not typically included in these arrangements. Any expense associated with these systems is recorded as a component of cost of sales.

Additionally, we lease systems to customers as operating type leases where we are the lessor. Under the operating method, rental revenue is recognized over the lease period. The leased asset is depreciated over the life of the lease. In addition to the depreciation charge, maintenance costs and the cost of any other services rendered under the provision of the lease that pertain to the current accounting period are charged to expense.

Long-Lived Asset Impairment

We evaluate the remaining life and recoverability of equipment and other assets that are to be held and used, including purchased technology and other intangible assets with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If there is an indication of impairment, we prepare an estimate of future, undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying value of the asset, we adjust the carrying amount of the asset to its estimated fair value. Long-lived assets to be disposed of by sale are valued at the lower of book value or fair value less cost to sell.

Goodwill

Goodwill represents the excess purchase price over fair value of net assets acquired. Goodwill and other identifiable intangible assets with indefinite useful lives are not amortized, but, instead, a two-step impairment test is performed at least annually. We test goodwill for impairment in the fourth quarter of each year. First, the fair value of each reporting unit is compared to its carrying value. We have defined our reporting units to be our operating segments. Fair value is determined based on the present value of estimated cash flows using available information regarding expected cash flows of each reporting unit, discount rates and the expected long-term cash flow growth rates. Discount rates are determined based on the cost of capital for the reporting unit. If the fair value of the reporting unit exceeds the carrying value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The implied fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded. No impairments were identified in step one of our annual analysis during the fourth quarter of 2010, 2009 or 2008.

Segment Reporting

We have determined that we operate in four reportable operating segments: Electronics, Research and Industry, Life Sciences and Service and Components. There are no differences between the accounting policies used for our business segments compared to those used on a consolidated basis.

61

Revenue Recognition

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

For products demonstrated to meet our published specifications, revenue is recognized when the title to the product and the risks and rewards of ownership pass to the customer. The portion of revenue related to installation, of which the estimated fair value is generally 4% of the total revenue of the transaction, is deferred until such installation and final customer acceptance are completed. For products produced according to a particular customer’s specifications, revenue is recognized when the product meets the customer’s specifications and when the title and the risks and rewards of ownership have passed to the customer. In each case, the portion of revenue applicable to installation is recognized upon meeting specifications at the installation site. For new applications of our products where performance cannot be assured prior to meeting specifications at the installation site, no revenue is recognized until such specifications are met.

We enter into arrangements with customers whereby they purchase products, accessories and service contracts from us at the same time. For sales arrangements containing multiple elements (products or services), revenue relating to the undelivered elements is deferred at the estimated selling price of the element as determined using the sales price hierarchy established in Financial Accounting Standards Board (“FASB”) Accounting Standards Update No. 2009-13 (“ASU 2009-13”). To be considered a separate element, the deliverable in question must represent a separate element under the accounting guidance and fulfill the following criteria: the delivered item or items must have value to the customer on a standalone basis; and, if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. If the arrangement does not meet all criteria above, the entire amount of the transactions is deferred until all elements are delivered.

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

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

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

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

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

Deferred Revenue

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

Product Warranty Costs

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

A roll-forward of our warranty liability was as follows (in thousands):

Balance, December 31, 2007	$	6,585
Reductions for warranty costs incurred		(10,708	)
Warranties issued		10,622
Translation adjustments		(60	)
Balance, December 31, 2008		6,439
Reductions for warranty costs incurred		(9,751	)
Warranties issued		10,727
Translation adjustments		62
Balance, December 31, 2009		7,477
Reductions for warranty costs incurred		(7,958	)
Warranties issued		9,137
Translation adjustments		(8	)
Balance, December 31, 2010	$	8,648

Research and Development

Research and development costs are expensed as incurred. We periodically receive funds from various organizations to subsidize our research and development. These funds are reported as an offset to research and development expense. These subsidies totaled $5.4 million, $6.7 million and $3.9 million in 2010, 2009 and 2008, respectively. Subsidies have decreased due to lower project spending in 2010 compared to 2009.

Advertising

Advertising costs are expensed as incurred and are included as a component of selling, general and administrative costs on our consolidated statements of operations. Advertising expense totaled $2.4 million, $2.4 million and $3.7 million in 2010, 2009 and 2008, respectively.

Restructuring, Reorganization, Relocation and Severance

Liabilities for costs associated with exit or disposal activities are recognized and measured at fair value in the period the liability is incurred. See Note 13.

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Computation of Per Share Amounts

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

	Year Ended December 31,
	2010							2009
	Net Income		Shares		Per Share Amount			Net Income		Shares		Per Share Amount
Basic EPS	$	53,548		38,083	$	1.41		$	22,644		37,537	$	0.60
Dilutive effect of stock options calculated using the treasury stock method		—		111		(0.01	)		—		108		—
Dilutive effect of restricted stock units		—		155		(0.01	)		—		90		—
Dilutive effect of 2.875% convertible debt		2,270		3,223		(0.05	)		—		—		—
Dilutive effect of shares issuable to Philips		—		165		—			—		170		—
Diluted EPS	$	55,818		41,737	$	1.34		$	22,644		37,905	$	0.60
Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Stock options, restricted shares and restricted stock units				1,430							961
Convertible debt				—							3,407

	Year Ended December 31, 2008
	Net Income		Shares		Per Share Amount
Basic EPS	$	17,988		36,766	$	0.49
Dilutive effect of stock options calculated using the treasury stock method		—		168		(0.01	)
Dilutive effect of restricted stock units		—		39		—
Dilutive effect of shares issuable to Philips		—		185		—
Diluted EPS	$	17,988		37,158	$	0.48
Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Stock options, restricted shares and restricted stock units				—
Convertible debt				3,918

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based payment awards granted to our employees and directors, including employee stock options, non-vested stock and stock purchases related to our employee share purchase plan based on the estimated fair value of the award on the grant date. We utilize the Black-Scholes valuation model for valuing our stock option awards.

The use of the Black-Scholes valuation model to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates at the time they are made, but these estimates involve inherent uncertainties and the determination of expense could be materially different in the future.

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We amortize stock-based compensation expense on a straight-line basis over the vesting period of the individual award with estimated forfeitures considered. Vesting periods are generally four years. Shares to be issued upon the exercise of stock options will come from newly issued shares. The exercise price of issued options equals the grant date fair value of the underlying shares and the options generally have a legal life of seven years.

Compensation expense is only recognized on awards that ultimately vest. Therefore, we have reduced the compensation expense to be recognized over the vesting period for anticipated future forfeitures. Forfeiture estimates are based on historical forfeiture patterns. We update our forfeiture estimates quarterly and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.

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

Year Ended December 31,	2010		2009		2008
Cost of sales	$	1,211	$	1,352	$	1,036
Research and development		1,538		1,312		1,061
Selling, general and administrative		7,733		7,935		6,056
	$	10,482	$	10,599	$	8,153

Stock-based compensation costs related to inventory or fixed assets were not significant in the years ended December 31, 2010, 2009 or 2008.

The following weighted average assumptions were utilized in determining fair value pursuant to the Black-Scholes option pricing model:

Year Ended December 31,	2010	2009	2008
Risk-free interest rate	0.14% - 2.27%	0.14% - 2.35%	0.5% - 3.2%
Dividend yield	0.0%	0.0%	0.0%
Expected lives:
Option plans	5.6 – 5.9 years	5.2 years	-(1)
Employee share purchase plan	6 months	6 months	6 months
Volatility	31% - 51%	44% -51%	37% - 46%
Discount for post vesting restrictions	0.0%	0.0%	0.0%

(1) No options granted during 2008.

The risk-free rate used is based on the U.S. Treasury yield over the estimated term of the options granted. Expected lives were estimated based on historical exercise data. The expected volatility is calculated based on the historical volatility of our common stock.

Foreign Currency Translation

Assets and liabilities denominated in a foreign currency, where the local currency is the functional currency, are translated to U.S. dollars at the exchange rate in effect on the respective balance sheet date. Gains and losses resulting from the translation of assets, liabilities and equity are included in accumulated other comprehensive income on the consolidated balance sheet. Transactions representing revenues, costs and expenses are translated using an average rate of exchange for the period, and the related gains and losses are reported as other income (expense) on our consolidated statement of operations.

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NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Guidance

ASU 2010-06

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

ASU 2009-13

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

ASU 2009-05

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

SFAS No. 167

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R),” which amends certain concepts related to consolidation of variable interest entities. SFAS No. 167 has been codified within ASC 810, “Consolidation.” Among other accounting and disclosure requirements, this guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. We do not have any variable interest entities that fall under this guidance and, accordingly, the adoption of the provisions of SFAS No. 167 effective January 1, 2010, did not have any effect on our financial position, results of operations or cash flows.

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SFAS No. 166

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an Amendment of FASB Statement No. 140,” which relates to accounting for transfers of financial assets. This guidance, which has been codified within ASC 860, “Transfers and Servicing,” improves the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a continuing interest in transferred financial assets. In addition, this guidance amends various ASC concepts with respect to accounting for transfers and servicing of financial assets and extinguishments of liabilities, including removing the concept of qualified special purpose entities. The adoption of SFAS No. 166 did not have any effect on our financial position, results of operations or cash flows.

NOTE 3. ARS CALL AND REDEMPTION, SETTLEMENT OF THE PUT RIGHT AND UBS CREDIT FACILITY REPAYMENT

During 2010, $37.2 million of our auction rate securities (“ARS”) were called at par. The remaining total of $61.7 million of our ARS were put to UBS AG (together with its affiliates, “UBS”) on June 30, 2010 in accordance with our put right (the “Put Right”). As of December 31, 2010 we no longer held any investments in ARS. Additionally, in conjunction with the redemption of the ARS, we no longer have a value assigned to the UBS Put Right. We recorded a gain on the settlement of the ARS of $11.7 million in 2010 as a component of other income, net. Offsetting this gain in other income, net in 2010 were charges due to the write off of our Put Right of $11.7 million.

The cash proceeds from the calls and redemption of the ARS were first used to repay the amount outstanding under the UBS Credit Facility in accordance with the settlement agreement. Following these calls and redemption, and as of December 31, 2010, there was no longer a balance outstanding on the UBS Credit Facility. The UBS Credit Facility was terminated in connection with the full repayment of amounts outstanding.

The net amount recorded as a component of other income (expense), net related to the ARS and the Put Right totaled $26,000, $0.5 million and $(0.5) million, respectively, in 2010, 2009 and 2008. See also Note 21.

NOTE 4. INVESTMENTS

Investments held consisted of the following (in thousands):

December 31, 2010	Cost basis		Unreal- ized gains		Unreal- ized losses			Estimated fair value		Short- term invest- ments		Long- term invest- ments		Other assets(1)
Fixed Maturity Securities
Certificates of deposit and commercial paper	$	11,324	$	—	$	(2	)	$	11,322	$	8,037	$	3,285	$	—
U.S. Government-backed securities		68,495		2		—			68,497		35,989		32,508		—
Fixed Maturity Securities		79,819		2		(2	)		79,819		44,026		35,793		—
Equity Securities
Mutual funds		2,750		119		—			2,869		—		2,869		—
Cost Method Investments		608		—		—			608		—		—		608
	$	83,177	$	121	$	(2	)	$	83,296	$	44,026	$	38,662	$	608

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December 31, 2009	Cost basis		Unreal- ized gains		Unreal- ized losses			Estimated fair value		Short- term invest- ments		Long- term invest- ments		Other assets(1)
Fixed Maturity Securities
Certificates of deposit and commercial paper	$	33,585	$	13	$	(23	)	$	33,575	$	31,657	$	1,918	$	—
U.S. Government-backed securities		128,198		—		(28	)		128,170		93,274		34,896		—
ARS		98,925		—		(11,737	)(2)		87,188		87,188		—		—
Fixed Maturity Securities		260,708		13		(11,788	)		248,933		212,119		36,814		—
Equity Securities
Mutual funds		3,138		—		(290	)		2,848		—		2,848		—
Cost Method Investments		608		—		—			608		—		—		608
	$	264,454	$	13	$	(12,078	)	$	252,389	$	212,119	$	39,662	$	608

(1) Investments for which it is not practical to estimate fair value are included at cost and primarily consist of investments in privately-held companies.

(2) Unrealized gains or losses on the ARS, which were held as trading securities, were included in other income (expense), net and were substantially offset by unrealized gains or losses on the related Put Right. See also Notes 3 and 21.

Realized gains and losses on sales of marketable debt securities were insignificant in 2010, 2009 and 2008.

We review available for sale investments in debt and equity securities for other than temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. In the evaluation of whether an impairment is “other-than-temporary,” we consider our ability and intent to hold the investment until the market price recovers, the reasons for the impairment, compliance with our investment policy, the severity and duration of the impairment and expected future performance. Unrealized losses on our corporate notes and bonds and government-backed securities are mainly due to interest rate movements, and no unrealized losses of any significance existed for a period in excess of 12 months.

Our investments classified as trading securities, such as assets related to our deferred compensation plan, are carried on the balance sheet at fair value. All unrealized gains or losses are recorded in other income (expense), net in the period incurred.

For investments in small privately-held companies, which are recorded at cost, it is often not practical to estimate fair value. In order to assess if impairments exist that are “other-than-temporary,” we reviewed recent interim financial statements and held discussions with these entities’ management about their current financial conditions and future economic outlooks. We also considered our willingness to support future funding requirements as well as our intention and/or ability to hold these investments long-term. At both December 31, 2010 and 2009, we had $0.6 million in cost-method investments on our balance sheet.

Contractual maturities or expected liquidation dates of long-term marketable securities at December 31, 2010 were as follows (in thousands):

	1 - 2 years		Total
Certificates of deposit, commercial paper and U.S. Government-backed securities	$	79,819	$	79,819

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NOTE 5. FACTORING OF ACCOUNTS RECEIVABLE

In 2010 and 2009, we entered into agreements under which we sold a total of $10.3 million and $13.5 million, respectively, of our accounts receivable at a discount to unrelated third party financiers without recourse. The transfers qualified for sales treatment and, accordingly, discounts related to the sale of the receivables, which were immaterial, were recorded on our statements of operations as other expense.

NOTE 6. INVENTORIES

Inventories consisted of the following (in thousands):

	December 31,
	2010		2009
Raw materials and assembled parts	$	57,043	$	44,829
Service inventories, estimated current requirements		11,581		15,765
Work-in-process		55,279		57,762
Finished goods		32,061		19,886
Total inventories	$	155,964	$	138,242
Non-current inventories	$	47,976	$	44,385

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):

	December 31,
	2010			2009
Land	$	7,780		$	7,780
Buildings and improvements		21,216			18,562
Leasehold improvements		9,616			7,530
Machinery and equipment		79,901			85,138
Demonstration systems		26,208			24,588
Other fixed assets		31,680			25,237
		176,401			168,835
Accumulated depreciation		(95,720	)		(86,942	)
Total property, plant and equipment, net	$	80,681		$	81,893

NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

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

	Year Ended December 31,
	2010		2009
Balance, beginning of year	$	44,615	$	40,964
Additions		—		3,631
Adjustments to goodwill		185		20
Balance, end of year	$	44,800	$	44,615

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

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

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Other Intangible Assets

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

	Amortization Period		December 31,
			2010			2009
Purchased technology		5 to 12 years	$	46,105		$	46,299
Accumulated amortization				(46,105	)		(45,913	)
				—			386
Patents, trademarks and other		2 to 15 years		7,758			7,474
Accumulated amortization				(3,995	)		(2,852	)
				3,763			4,622
Note issuance costs		7 years		2,445			2,747
Accumulated amortization				(1,600	)		(1,405	)
				845			1,342
Total intangible assets included in other long-term assets			$	4,608		$	6,350

Amortization expense, excluding note issuance cost write-offs, and including amortization of the debt discount for our zero coupon note issuance that was paid off in 2008 pursuant to accounting guidance for debt instruments that may be settled in cash upon conversion (see Note 22), was as follows (in thousands):

	Year Ended December 31,
	2010		2009		2008
Purchased technology	$	358	$	638	$	1,808
Patents, trademarks and other		1,167		1,129		1,108
Note issuance costs		497		652		767
Debt discount		—		—		6,487
	$	2,022	$	2,419	$	10,170

Expected amortization, without consideration for foreign currency effects, is as follows over the next five years and thereafter (in thousands):

	Patents, Trademarks and Other		Note Issuance Costs
2011	$	1,008	$	350
2012		992		350
2013		935		145
2014		559		—
2015		205		—
Thereafter		64		—
	$	3,763	$	845

NOTE 9. CREDIT FACILITIES AND RESTRICTED CASH

Multibank Credit Agreement

On June 4, 2008, we entered into a multibank credit agreement (the “Credit Agreement”). The Credit Agreement provides for a $100.0 million secured revolving credit facility, including a $50.0 million subfacility for the issuance of letters of credit. We may, upon notice to JPMorgan Chase Bank, N.A., (the “Agent”), request to increase the revolving loan commitments by an aggregate amount of up to $50.0 million with new or additional commitments subject only to the consent of the lender(s) providing the new or additional commitments, for a total secured credit facility of up to $150.0 million. In connection with this loan agreement, we incurred approximately $0.8 million of loan origination fees, which are being amortized as additional interest expense over the five-year term of the loan.

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The Credit Agreement contains quarterly commitment fees that vary based on borrowings outstanding.

The revolving loans under the Credit Agreement will generally bear interest, at our option, at either (i) the alternate base rate, which is defined as a rate per annum equal to the higher of (A) Agent’s prime rate as announced from time to time and (B) the average rate of the overnight federal funds plus a margin equal to 0.50%, plus a margin equal to between 0.00% and 0.50%, depending on our leverage ratio as of the fiscal quarter most recently ended, or (ii) a floating per annum rate based on LIBOR (based on one, two, three or six-month interest periods) plus a margin equal to between 1.00% and 2.00%, depending on our leverage ratio as of the fiscal quarter most recently ended. A default interest rate shall apply on all obligations during an event of default under the Credit Agreement, at a rate per annum equal to 2.00% above the applicable interest rate. Revolving loans may be borrowed, repaid and reborrowed until June 4, 2013 and voluntarily prepaid at any time without premium or penalty.

The obligations under the Credit Agreement are guaranteed by our present and future material domestic subsidiaries. In addition, obligations outstanding under the Credit Agreement are secured by substantially all of our assets and the assets of our material domestic subsidiaries.

The Credit Agreement contains customary covenants for a credit facility of this size and type, that include, among others, covenants that limit our ability to incur indebtedness, create liens, merge or consolidate, dispose of assets, make investments, enter into swap agreements, pay dividends or make distributions, enter into transactions with affiliates, enter into restrictive agreements and enter into sale and leaseback transactions. The Credit Agreement provides for financial covenants that require us to maintain a minimum interest coverage ratio and minimum liquidity, and limit the maximum leverage that we can maintain at any one time.

The Credit Agreement contains customary events of default for a credit facility of this size and type that include, among others, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness, bankruptcy and insolvency defaults, material judgments defaults, defaults for the occurrence of certain ERISA events and change of control defaults. The occurrence of an event of default could result in an acceleration of the obligations under the Credit Agreement.

As of December 31, 2010, there were no revolving loans or letters of credit outstanding under the Credit Agreement, we were in compliance with all covenants and we were not in default under the Credit Agreement.

Japanese Bank Borrowing Facility

We also have a 50.0 million yen unsecured and uncommitted bank borrowing facility in Japan and various limited facilities in select foreign countries. No amounts were outstanding under any of these facilities as of December 31, 2010.

Restricted Cash

As part of our contracts with certain customers, we are required to provide letters of credit or bank guarantees which these customers can draw against in the event we do not perform in accordance with our contractual obligations. At December 31, 2010, we had $64.1 million of these guarantees and letters of credit outstanding, of which approximately $63.5 million were secured by restricted cash deposits. Restricted cash balances securing bank guarantees that expire within 12 months of the balance sheet date are recorded as a current asset on our consolidated balance sheets. Restricted cash balances securing bank guarantees that expire beyond 12 months from the balance sheet date are recorded as long-term restricted cash on our consolidated balance sheet.

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NOTE 10. CONVERTIBLE NOTES

2.875% Convertible Subordinated Notes

On May 19, 2006, we issued $115.0 million aggregate principal amount of convertible subordinated notes. The interest rate on the notes is 2.875%, payable semi-annually. The notes are due on June 1, 2013, are subordinated to all previously existing and future senior indebtedness, and are effectively subordinated to all indebtedness and other liabilities of our subsidiaries. The cost of this transaction, including underwriting discounts and commissions and offering expenses, totaled $3.1 million and is recorded on our balance sheet in other long-term assets and is being amortized over the life of the notes. The amortization of these costs totals $0.1 million per quarter and is reflected as additional interest expense in our statements of operations.

We redeemed the following amounts of our 2.875% Convertible Subordinated Notes:

Date	Amount Redeemed		Redemption Price			Redemption Discount		Related Note Issuance Costs Written Off
February 2009	$	15,000,000		86.5	%	$	2,025,000	$	250,154
June 24, 2010		7,940,000		98.9	%		89,325		90,904
June 29, 2010		1,200,000		99.0	%		12,000		13,703
July 8, 2010		1,848,000		99.25	%		13,860		20,546
Total for 2010		10,988,000					115,185		125,153
	$	26.0 million				$	2,140,185	$	375,307

The remaining $89.0 million of notes outstanding at December 31, 2010 are convertible into 3,032,777 shares of our common stock, at the note holder’s option, at a price of $29.35 per share.

NOTE 11. LEASE OBLIGATIONS

We have operating leases for certain of our manufacturing and administrative facilities that extend through 2019. The lease agreements generally provide for payment of base rental amounts plus our share of property taxes and common area costs. The leases generally provide renewal options at current market rates.

Rent expense is recognized on a straight-line basis over the term of the lease. Rent expense was $7.2 million in 2010, $7.2 million in 2009 and $7.6 million in 2008.

The approximate future minimum rental payments due under these agreements as of December 31, 2010, were as follows (in thousands):

Year Ending December 31,
2011	$	7,189
2012		6,573
2013		4,819
2014		3,996
2015		4,054
Thereafter		20,444
Total	$	47,075

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NOTE 12. INCOME TAXES

Income before income taxes included the following components:

	Year Ended December 31,
	2010		2009		2008
U.S.	$	6,930	$	10,544	$	4,986
Foreign		45,292		17,117		21,614
Total	$	52,222	$	27,661	$	26,600

Income tax expense (benefit) consisted of the following (in thousands):

	Year Ended December 31,
	2010			2009			2008
Current:
Federal	$	5,303		$	—		$	—
State		551			483			(63	)
Foreign		2,415			6,914			8,112
		8,269			7,397			8,049
U.S. deferred benefit		(9,001	)		—			—
Foreign deferred (benefit) expense		(594	)		(2,380	)		563
Total income tax (benefit) expense	$	(1,326	)	$	5,017		$	8,612

The effective income tax rate applied to net income varied from the U.S. federal statutory rate due to the following (in thousands):

	Year Ended December 31,
	2010			2009			2008
Tax expense at statutory rates	$	18,278		$	9,681		$	11,520
Increase (decrease) resulting from:
State income taxes, net of federal benefit		551			890			520
Foreign tax benefit		(3,859	)		(1,466	)		(1,343	)
Research and experimentation benefit		(1,065	)		(1,225	)		(1,982	)
Tax audit settlements and lapses of statutes of limitations		1,097			(1,328	)		(1,483	)
Non-deductible items		4,517			1,715			1,527
Release of valuation allowance		(20,400	)		(3,886	)		(464	)
Other		(445	)		636			317
	$	(1,326	)	$	5,017		$	8,612

Our income tax benefit of approximately $1.3 million in 2010 primarily resulted from benefits related to the release of valuation allowance recorded against U.S. deferred tax assets and liabilities for unrecognized tax benefits, offset by taxes accrued in both the U.S. and foreign tax jurisdictions. As a result of a mutual agreement between the U.S. and The Netherlands taxing authorities regarding various transfer pricing issues related to our operations, during the second quarter of 2010, we released valuation allowance and tax reserves of approximately $47.9 million, of which $12.5 million was recorded as a benefit to shareholder’s equity. The remaining $35.4 million of tax benefit was offset by tax expense of $18.1 million to recognize the impact of our new transfer pricing methodology in prior periods.

Our tax expense in 2009 and 2008 primarily reflected taxes on foreign earnings, offset by the release of valuation allowance recorded against net operating loss deferred tax assets utilized to offset income earned in the U.S.

Current taxes payable were reduced for tax benefits recorded to common stock and related to stock compensation of $12.1 million, $0 and $0.3 million, respectively, in 2010, 2009 and 2008.

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Deferred Income Taxes

Net deferred tax assets and liabilities were included in the following consolidated balance sheet accounts:

	December 31,
	2010			2009
Deferred tax assets – current	$	11,505		$	2,734
Deferred tax assets – non-current		1,072			3,369
Other current liabilities		(64	)		(229	)
Deferred tax liabilities – non-current		(4,106	)		(4,298	)
Net deferred tax assets	$	8,407		$	1,576

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and deferred tax liabilities were as follows (in thousands):

	December 31,
	2010			2009
Deferred tax assets:
Accrued liabilities	$	2,224		$	1,476
Warranty reserves		1,420			1,372
Inventory reserves		7,686			7,712
Allowance for bad debts		502			448
Revenue recognition		4,096			3,786
Loss carryforwards		—			17,398
Tax credit carryforwards		1,971			7,455
Fixed assets		273			177
Intangible assets		226			712
Unrealized investment		1,471			1,129
Stock compensation		2,807			1,071
Other assets		1,584			1,350
Gross deferred tax assets		24,260			44,086
Valuation allowance		(2,123	)		(37,982	)
Net deferred tax assets		22,137			6,104
Deferred tax liabilities:
Intangible assets		(757	)		—
Fixed assets		(4,832	)		(283	)
Revenue recognition		(4,053	)		—
Other liabilities		(4,088	)		(4,245	)
Total deferred tax liabilities		(13,730	)		(4,528	)
Net deferred tax asset	$	8,407		$	1,576

Deferred tax expense of $0.4 million, $0.1 million and $0.1 million was recorded in other comprehensive income in 2010, 2009 and 2008, respectively.

As of December 31, 2010 and 2009, our valuation allowance on deferred tax assets totaled $2.1 million and $38.0 million, respectively, including $0 and $9.4 million, respectively, attributable to excess stock option deductions included in the net operating loss deferred tax asset. The decrease in the valuation allowance in 2010 primarily related to receiving confirmation that the U.S. and The Netherlands taxing authorities had entered into a mutual agreement on various transfer pricing issues related to our operations. In assessing the realizability of deferred tax assets, we utilize a more likely than not standard. If it is determined that it is “more likely than not” that deferred tax assets will not be realized, a valuation allowance must be established against the deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, historical operating performance, projected future taxable income and tax planning strategies in making this assessment. Our “more likely than not” assessment was principally based upon our historical losses in the U.S. and our forecast of future profitability in certain tax jurisdictions, primarily the U.S.

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State research and development tax credit carryforwards as of December 31, 2010 were $1.5 million and expire between 2011 and 2015. Federal foreign tax credit carryforwards as of December 31, 2010 were $1.0 million and begin to expire in 2017.

As of December 31, 2010, U.S. income taxes have not been provided for approximately $86.5 million of cumulative undistributed earnings of several non-U.S. subsidiaries, as our current intention is to reinvest these earnings indefinitely outside the U.S. Foreign tax provisions have been provided for these cumulative undistributed earnings. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Similarly, we have not provided deferred taxes on the cumulative translation adjustment related to those non-U.S. subsidiaries.

Unrecognized Tax Benefits and Other Tax Contingencies

As of December 31, 2010, unrecognized tax benefits related mainly to uncertainty surrounding tax credits and permanent establishment. A rollforward of our unrecognized tax benefits was as follows (in thousands):

	Unrecognized Tax Benefits
Balance at December 31, 2007	$	15,747
Additions for tax positions taken in 2008		4,060
Increases for tax positions taken in prior periods		375
Decreases for lapses in statutes of limitations		(332	)
Decreases for settlements with taxing authorities		(1,483	)
Balance at December 31, 2008		18,367
Additions for tax positions taken in 2009		2,648
Increases for tax positions taken in prior periods		846
Decreases for tax positions taken in prior periods		(383	)
Decreases for lapses in statutes of limitations		(398	)
Decreases for settlements with taxing authorities		(930	)
Balance at December 31, 2009		20,150
Additions for tax positions taken in 2010		4,461
Increases for tax positions taken in prior periods		663
Decreases for tax positions taken in prior periods		—
Decreases for lapses in statutes of limitations		(1,548	)
Decreases for settlements with taxing authorities		(16,570	)
Balance at December 31, 2010	$	7,156

The decrease for settlements with taxing authorities in 2010 primarily related to receiving confirmation that the U.S. and The Netherlands taxing authorities had entered into a mutual agreement on various transfer pricing issues related to our operations.

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

	December 31,
	2010		2009
Other current liabilities	$	639	$	17,734
Other liabilities		6,517		2,416
Unrecognized tax benefits	$	7,156	$	20,150

The entire balance of unrecognized tax benefits, if recognized, would reduce our effective tax rate. We believe it is reasonably possible that our unrecognized tax benefits could decrease, in the next 12 months, between zero and $0.6 million due to lapses of statutes of limitations and as the result of settlements with taxing authorities.

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We recognize interest and penalties related to unrecognized tax benefits in income tax expense. The liability for unrecognized tax benefits included accruals for interest and penalties of $1.2 million and $2.2 million as of December 31, 2010 and 2009, respectively.

Tax expense included the following relating to interest and penalties (in thousands):

	Year Ended December 31,
	2010			2009			2008
Benefit for lapses of statutes of limitations and settlement with taxing authorities	$	(1,583	)	$	(433	)	$	(684	)
Accruals for current and prior periods		626			944			936
	$	(957	)	$	511		$	252

For our major tax jurisdictions, the following years were open for examination by the tax authorities as of December 31, 2010:

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

NOTE 13. RESTRUCTURING, REORGANIZATION, RELOCATION AND SEVERANCE

April 2008 Restructuring

In 2010, 2009 and 2008, we incurred $3.8 million, $3.5 million and $4.3 million, respectively, under our April 2008 restructuring plan related to improving the efficiency of our operations and improving the currency balance in our supply chain so that more of our costs are denominated in dollar or dollar-linked currencies. Also included in these costs were amounts related to IT system upgrades, which are expected to increase the efficiency of our manufacturing operations. Total costs incurred related to this plan were $11.6 million as of December 31, 2010 and we do not expect to incur any additional costs in 2011 related to this plan. These actions are expected to reduce operating expenses, improve our factory utilization and help offset the effect of currency fluctuations on our cost of goods sold. The main activities and related costs are described in the table below. All of the costs resulted in cash expenditures.

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

Type of Expense	Total Costs
Severance costs related to work force reduction of 3% (approximately 60 employees)	$	3.3 million
Transfer of manufacturing and other activities	$	0.3 million
Shift of supply chain	$	5.9 million
IT system upgrades	$	2.1 million

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April 2010 Restructuring

On April 12, 2010, we announced a restructuring program to consolidate the manufacturing of our small DualBeam product line by relocating manufacturing activities currently performed at our facility in Eindhoven, The Netherlands to our facility in Brno, Czech Republic. The balance of our small DualBeam product line is already based in Brno. The planned move, which is expected to be implemented over the next six months, will result in the termination of approximately 30 positions in Eindhoven, The Netherlands. This expectation is down from our original estimate of 50 positions and is driven by improved business conditions in The Netherlands. The move will include severance costs, expected costs to transfer the product line, costs to train Brno employees and costs to build-out the existing Brno facility to add capacity for the additional small DualBeam production. Severance costs were accrued as of July 4, 2010, as such amounts were probable and reasonably estimable. We adjusted our severance accrual in the second half of 2010 to reflect the reduced estimate of employees subject to the severance agreement. The principal goal of the product line move is to reduce manufacturing costs for the small DualBeam product. In addition to the product line move, the April 2010 restructuring involves organizational changes designed to improve the efficiency of our finance, research and development and other corporate programs and improve our market focus.

We incurred a total of $7.3 million of costs related to the April 2010 restructuring plan in 2010 and expect to incur an additional $1.0 million to $1.7 million as detailed in the table below. Presently, all of the costs described are expected to result in cash expenditures and we currently expect the total cost of the restructuring to be approximately $8.3 million to $9.0 million.

A summary of the expenses related to our April 2010 restructuring plan is as follows:

Restructuring Activity Expense Type	Approximate Range of Expected Costs	Expected Timing
Severance costs related to work force reduction and reorganization (approximately 30 employees)	$7.2 million – $7.7 million in cash expense	$6.4 million incurred. Remainder through the second quarter of 2011
Product line transfer, training of Brno employees and facility build-out in Brno	$1.1 million - $1.3 million in cash expense	$0.9 million incurred. Remainder through the second quarter of 2011

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

Year Ended December 31, 2010	Beginning Accrued Liability		Charged to Expense, Net		Expend- itures			Write-Offs and Adjust- ments		Ending Accrued Liability
Severance, outplacement and related benefits for terminated employees	$	—	$	6,777	$	(2,342	)	$	397	$	4,832
Transfer of manufacturing and related activities and shift of supply chain		—		1,312		(1,312	)		—		—
IT system upgrades		—		2,106		(2,086	)		—		20
Abandoned leases, leasehold improvements and facilities		32		—		—			—		32
Product line transfer, training of Brno employees and facility build-out in Brno		—		872		(872	)		—		—
	$	32	$	11,067	$	(6,612	)	$	397	$	4,884

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Year Ended December 31, 2009	Beginning Accrued Liability		Charged to Expense, Net		Expend- itures			Write-Offs and Adjust- ments			Ending Accrued Liability
Severance, outplacement and related benefits for terminated employees	$	221	$	94	$	(288	)	$	(27	)	$	—
Transfer of manufacturing and related activities and shift of supply chain		—		3,336		(3,339	)		3			—
Abandoned leases, leasehold improvements and facilities		19		26		(10	)		(3	)		32
	$	240	$	3,456	$	(3,637	)	$	(27	)	$	32

Year Ended December 31, 2008	Beginning Accrued Liability		Charged to Expense, Net			Expend- itures			Write-Offs and Adjust- ments			Ending Accrued Liability
Severance, outplacement and related benefits for terminated employees	$	—	$	2,787		$	(2,456	)	$	(110	)	$	221
Transfer of manufacturing and related activities and shift of supply chain		—		1,620			(1,620	)		—			—
Abandoned leases, leasehold improvements and facilities		580		(140	)		(389	)		(32	)		19
	$	580	$	4,267		$	(4,465	)	$	(142	)	$	240

NOTE 14. SHAREHOLDERS’ EQUITY

Preferred Stock Rights Plan

On July 21, 2005, the Board of Directors adopted a Preferred Stock Rights Plan. Pursuant to the Preferred Stock Rights Plan, we distributed Rights as a dividend at the rate of one Right for each share of our common stock held by shareholders of record as of the close of business on August 12, 2005. The Rights expire on August 12, 2015, unless redeemed or exchanged.

The Rights are not exercisable until the earlier of: (1) 10 days (or such later date as may be determined by the Board of Directors) following an announcement that a person or group has acquired beneficial ownership of 20% of our common stock or (2) 10 days (or such later date as may be determined by the Board of Directors) following the announcement of a tender offer which would result in a person or group obtaining beneficial ownership of 20% or more of our outstanding common stock, subject to certain exceptions (the earlier of such dates being called the Distribution Date). The Rights are initially exercisable for one-thousandth of a share of our Series A Preferred Stock at a price of $120 per one-thousandth share, subject to adjustment. However, if: (1) after the Distribution Date we are acquired in certain types of transactions, or (2) any person or group (with limited exceptions) acquires beneficial ownership of 20% of our common stock, then holders of Rights (other than the 20% holder) will be entitled to receive, upon exercise of the Right, common stock (or in case we are completely acquired, common stock of the acquirer) having a market value of two times the exercise price of the Right. Philips Business Electronics International B.V., or any of its affiliates, shall not be considered for the 20% calculation so long as it does not acquire 30% or more of our common shares.

We are entitled to redeem the Rights, for $0.001 per Right, at the discretion of the Board of Directors, until certain specified times. We may also require the exchange of Rights, at a rate of one share of common stock for each Right, under certain circumstances. We also have the ability to amend the Rights, subject to certain limitations.

PEO Combination

On February 21, 1997, we acquired substantially all of the assets and liabilities of the electron optics business of Koninklijke Philips Electronics N.V. (the “PEO Combination”), in a transaction accounted for as a reverse acquisition. As part of the PEO Combination, we agreed to issue to Philips additional shares of our common stock whenever stock options that were outstanding on the date of the closing of the PEO Combination are exercised. Any such additional shares are issued at a rate of approximately 1.22 shares

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to Philips for each share issued on exercise of these options. We receive no additional consideration for these shares issued to Philips under this agreement. We did not issue any shares in 2010, 2009 or 2008 to Philips under this agreement. As of December 31, 2010, 165,000 shares of our common stock are potentially issuable and reserved for issuance as a result of this agreement.

Share Repurchases

On September 20, 2010, our Board of Directors authorized a stock repurchase program (“The Repurchase Plan") that enables us to purchase up to 4.0 million shares of our outstanding common stock in the open market. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The purchases are funded from existing cash resources and may be suspended or discontinued at any time at our discretion without prior notice. The Repurchase Plan continues in effect until terminated by the Board of Directors. During the year ended December 31, 2010, we repurchased $4.9 million, or 205,300 shares, of our common stock through open market purchases and, as of December 31, 2010, 3,794,700 shares remained available for purchase.

Stock Incentive Plans

As of December 31, 2010, a total of 4,996,286 shares of our common stock were reserved for issuance pursuant to our stock incentive plans.

NOTE 15. STOCK INCENTIVE PLANS AND STOCK-BASED COMPENSATION

Stock-Based Compensation Information

Certain information regarding our stock-based compensation was as follows (in thousands):

Year Ended December 31,	2010		2009		2008
Weighted average grant-date fair value of stock options granted	$	6,516	$	6,479	$	—
Weighted average grant-date fair value of restricted stock units		7,830		7,939		11,013
Total intrinsic value of stock options exercised		554		653		3,064
Fair value of restricted stock units vested		7,587		6,829		4,594
Cash received from stock options exercised and shares purchased under all stock-based arrangements		7,983		6,871		14,097
Tax benefit realized for stock options		12,084		—		329

1995 Stock Incentive Plan and 1995 Supplemental Stock Incentive Plan

Our 1995 Stock Incentive Plan, as amended (the “1995 Plan”) allows for the issuance of a maximum of 10,250,000 shares of our common stock and our 1995 Supplemental Stock Incentive Plan (the “1995 Supplemental Plan”) allows for the issuance of a maximum of 500,000 shares of our common stock.

We maintain stock incentive plans for selected directors, officers, employees and certain other parties that allow the Board of Directors to grant options (incentive and nonqualified), stock and cash bonuses, stock appreciation rights, restricted stock units (“RSUs”) and restricted shares. The Board of Directors’ ability to grant options under either the 1995 Plan or the 1995 Supplemental Plan will terminate, if the plans are not amended, when all shares reserved for issuance have been issued and all restrictions on such shares have lapsed, or earlier, at the discretion of the Board of Directors. At December 31, 2010, there were 2,676,485 shares available for grant under these plans and 4,996,286 shares of our common stock were reserved for issuance.

Activity under these plans was as follows (share amounts in thousands):

	Shares Subject to Options			Weighted Average Exercise Price
Balances, December 31, 2009		1,611		$	23.71
Granted		274			23.81
Forfeited		(19	)		25.41
Expired		(211	)		29.59
Exercised		(156	)		19.93
Balances, December 31, 2010		1,499			23.27

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	Restricted Stock  Units			Weighted Average Grant Date Per Share Fair Value
Balances, December 31, 2009		832		$	25.86
Granted		329			23.83
Forfeited		(48	)		26.60
Vested		(292	)		25.96
Balances, December 31, 2010		821			24.97

Summary

Certain information regarding all options outstanding as of December 31, 2010 was as follows (share amounts in thousands):

	Options Outstanding		Options Exercisable
Number		1,498,534		1,043,949
Weighted average exercise price	$	23.27	$	22.76
Aggregate intrinsic value	$	5.7 million	$	4.8 million
Weighted average remaining contractual term		3.4 years		2.1 years

As of December 31, 2010, unrecognized stock-based compensation related to outstanding, but unvested stock options and RSUs was $21.2 million, which will be recognized over the weighted average remaining vesting period of 2.0 years.

Employee Share Purchase Plan

In 1998, we implemented an Employee Share Purchase Plan (“ESPP”). A total of 3,200,000 shares of our common stock may be issued pursuant to the ESPP, as amended. Under the ESPP, employees may elect to have compensation withheld and placed in a designated stock subscription account for purchase of our common stock. Each ESPP offering period consists of one six-month purchase period. The purchase price in a purchase period is set at a 15% discount to the lower of the market price on either the first day of the applicable offering period or the purchase date. The ESPP allows a maximum purchase of 1,000 shares by each employee during any two consecutive offering periods. A total of 280,761 shares were purchased pursuant to the ESPP during 2010 at a weighted average purchase price of $17.31 per share, which represented a weighted average discount of $4.99 per share compared to the fair market value of our common stock on the dates of purchase. At December 31, 2010, 731,352 shares of our common stock remained available for purchase and were reserved for issuance under the ESPP.

NOTE 16. EMPLOYEE BENEFIT PLANS

Pension Plans

Employee retirement plans have been established in some foreign countries in accordance with the legal requirements and customs in the countries involved. The majority of employees in Europe, Asia and Canada are covered by defined benefit, multi-employer or defined contribution pension plans. The benefits provided by these plans are based primarily on years of service and employees’ compensation near retirement. Employees in the U.S. are covered by a profit sharing 401(k) plan, which is a defined contribution plan.

Employees in The Netherlands participate with other companies in making collectively-bargained payments to the Metal-Electro Industry pension fund. Pension costs relating to this multi-employer plan were $6.0 million in 2010, $6.8 million in 2009 and $7.8 million in 2008.

Outside the U.S. and The Netherlands, employees are covered under various defined contribution and defined benefit plans as required by local law.

Plan costs for our defined contribution plans outside the U.S. and The Netherlands totaled $1.4 million in 2010, $1.5 million in 2009 and $1.3 million in 2008.

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Plan costs for our defined benefit pension plans were $0.1 million in 2010, $0.5 million in 2009 and insignificant in 2008. Obligations under the defined benefit pension plans are not funded. A liability for the projected benefit obligations of these plans of $1.8 million and $2.0 million was included in other non-current liabilities as of December 31, 2010 and 2009, respectively. Unrealized gains recorded in other comprehensive income related to the additional minimum pension liability for these plans totaled $0 in 2010 and 2009 and $0.5 million in 2008. Due to the immateriality of these defined benefit pension plan costs, we have not included all required disclosures.

Profit Share and Variable Compensation Programs

We maintain an Employee Profit Share Plan and a Management Variable Compensation Plan for management-level employees to reward achievement of corporate and individual objectives. The Compensation Committee of the Board of Directors generally determines the structure of the overall incentive program at the beginning of each year. In setting the structure and the amount of the overall target incentive pool, the Compensation Committee considers potential size of the pool in relation to our earnings and other financial estimates, the achievability of the corporate targets under the plan, historical payouts under the plan and other factors. The total cost of these plans was $12.5 million in 2010, $6.1 million in 2009 and $4.2 million in 2008.

Profit Sharing 401(k) Plan

We maintain a profit sharing 401(k) plan that covers substantially all U.S. employees. Employees may elect to defer a portion of their compensation, and we may contribute an amount approved by the Board of Directors. We match 100% of employee contributions to the 401(k) plan up to 3% of each employee’s eligible compensation. Employees must meet certain requirements to be eligible for the matching contribution. We contributed $1.5 million in 2010, $1.3 million in 2009 and $1.3 million in 2008 to this plan. Our 401(k) plan does not allow for the investment in shares of our common stock.

Deferred Compensation Plan

We maintain a deferred compensation plan (the “Plan”), which permits certain employees to defer payment of a portion of their annual compensation. We do not match deferrals or make any additional contributions to the Plan. Distributions from the Plan are generally payable as a lump sum payment or in multi-year installments as directed by the participant according to the Plan provisions. Undistributed amounts under the Plan are subject to the claims of our creditors. As of December 31, 2010 and 2009, the invested amounts under the Plan totaled $2.9 million and $2.8 million, respectively, and were recorded on our balance sheets as non-current investments in marketable securities and as a long-term liability to recognize undistributed amounts due to employees.

NOTE 17. RELATED-PARTY ACTIVITY

We sold products and services to Applied Materials, Inc. A director of Applied Materials, Inc. is a member of our Board of Directors. We also sold services to Cascade Microtech, Inc. Our Chief Financial Officer is on the Board of Directors of Cascade Microtech, Inc. Sales to Applied Materials, Inc. and Cascade Microtech, Inc. were as follows (in thousands):

	Year Ended December 31,
	2010		2009		2008
Product sales:
Applied Materials, Inc.	$	343	$	578	$	2,123
Total product sales		343		578		2,123
Service sales:
Applied Materials, Inc.		390		266		332
Cascade Microtech, Inc.		31		14		27
Total service sales		421		280		359
Total sales	$	764	$	858	$	2,482

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As of December 31, 2010, Applied Materials, Inc. and Cascade Microtech, Inc. owed us $134,000 and $8,000, respectively, related to their purchases.

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

We purchased products and services from Schneeberger, Inc., TMC BV and EasyStreet Online Services as follows (in thousands):

	Year Ended December 31,
	2010		2009		2008
Schneeberger, Inc.	$	2,958	$	3,223	$	2,463
TMC BV		77		227		439
EasyStreet Online Services		62		110		150

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

	As of December 31, 2010
Schneeberger, Inc.	$	378
TMC BV		80
EasyStreet Online Services		—

NOTE 18. DERIVATIVE INSTRUMENTS

In the normal course of business, we are exposed to foreign currency risk and we use derivatives to mitigate financial exposure from movements in foreign currency exchange rates. As of December 31, 2010 and 2009, the aggregate notional amount of our outstanding derivative contracts designated as cash flow hedges was $133.0 million and $50.0 million, respectively and the aggregate notional amount of our outstanding derivative contracts for our balance sheet positions was $106.9 million and $88.9 million, respectively. The outstanding contracts at December 31, 2010 have varying maturities through the second quarter of 2012. We do not enter into derivative financial instruments for speculative purposes.

We attempt to mitigate derivative credit risk by transacting with highly rated counterparties. We have evaluated the credit and nonperformance risks associated with our derivative counterparties and believe them to be insignificant and not warranting a credit adjustment at December 31, 2010. In addition, there are no credit contingent features in our derivative instruments.

Balance Sheet Related

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

Foreign currency losses recorded in other income (expense), inclusive of the impact of derivatives, totaled $1.2 million, $3.6 million and $4.9 million, respectively, in 2010, 2009 and 2008.

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Cash Flow Hedges

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

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

Summary

At December 31, 2010 and 2009, the fair value carrying amount of our derivative instruments was included in our balance sheet as follows:

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

Balance Sheet Information (in thousands)	Fair Value of Asset Derivatives at December 31,				Fair Value of Liability Derivatives at December 31,
	2010		2009		2010		2009
Derivatives Designated as Hedging Instruments
Foreign Exchange Contracts	$	3,763	$	671	$	2,010	$	549
Derivatives Not Designated as Hedging Instruments
Foreign Exchange Contracts	$	333	$	183	$	1,992	$	2,591

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The effect of derivative instruments on our Consolidated Statements of Operations during 2010, 2009 and 2008 was as follows (in thousands):

Derivatives in Cash Flow Hedging Relationships	Amount of Gain/(Loss) Recognized in OCI (Effective Portion)			Location of Gain/ (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Year Ended December 31, 2010
Foreign Exchange Contracts	$	(1,278	)	Cost of Goods Sold	$	(1,939	)	Other, net	$	(117	)
Year Ended December 31, 2009
Foreign Exchange Contracts	$	(765	)	Cost of Goods Sold	$	426		Other, net	$	(1,270	)
Year Ended December 31, 2008
Foreign Exchange Contracts	$	(1,225	)	Cost of Goods Sold	$	6,062		Other, net	$	(1,302	)

Derivatives Not Designated as Hedging Instruments	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
Year Ended December 31, 2010
Foreign Exchange Contracts	Other, net	$	(2,482	)
Year Ended December 31, 2009
Foreign Exchange Contracts	Other, net	$	(1,667	)
Year Ended December 31, 2008
Foreign Exchange Contracts	Other, net	$	(8,179	)

The unrealized losses at December 31, 2010 are expected to be reclassified to net income during the next 18 months as a result of the underlying hedged transactions also being recorded in net income.

NOTE 19. COMMITMENTS AND CONTINGENT LIABILITIES

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

In November 2009, Hitachi High-Technologies Corporation (“Hitachi”) filed a complaint against our subsidiary, FEI Company Japan Ltd. (“FEI Japan”), in the District Court in Tokyo alleging infringement of five patents. Hitachi’s complaint seeks a permanent injunction requiring us to cease the sale of our allegedly infringing products in Japan, and legal costs. Two of the patents in the infringement case expired in June and September 2010, respectively, and, as a consequence, Hitachi dropped those

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patents from the infringement case. Hitachi filed two new complaints in the District Court of Tokyo for past damages on the expired patents in the amount of 2.5 billion yen in July 2010 and 1.3 billion yen in October 2010. Hitachi has also brought ancillary claims to bar the importation of certain of our products into Japan. One of these customs proceedings has been concluded and the other is on-going. FEI Japan has filed actions with the Japanese Patent Office to invalidate two of the patents that were the subject of the first customs proceeding, and to invalidate one of the patents from the infringement case, which is also the subject of the second customs proceeding. To date, FEI Japan has successfully invalidated two patents. Hitachi will have an opportunity to amend their patents to preserve some claims. Overall, the resolution of these proceedings is not expected to have any material effect on our business. We believe that we have meritorious defenses to Hitachi’s claims, and intend to vigorously defend our interests in these matters.

In management’s opinion, the resolution of the Hitachi case, as well as other matters, is not expected to have a material adverse effect on our financial condition, but it could be material to the net income or cash flows of a particular period.

We have commitments under non-cancelable purchase orders, primarily relating to inventory, totaling $52.0 million at December 31, 2010. These commitments expire at various times through the fourth quarter of 2011.

NOTE 20. SEGMENT AND GEOGRAPHIC INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer.

We report our segments based on a market-focused organization. Our segments are: Electronics, Research and Industry, Life Sciences and Service and Components.

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

Year Ended December 31, 2010	Electronics		Research and Industry		Life Sciences		Service and Com- ponents		Corporate and Eliminations			Total
Sales to external customers	$	222,795	$	182,430	$	74,555	$	154,442	$	—		$	634,222
Gross profit		111,925		74,718		30,566		52,055		—			269,264
Year Ended December 31, 2009
Sales to external customers	$	126,417	$	231,462	$	81,824	$	137,641	$	—		$	577,344
Gross profit		61,656		97,317		28,422		42,109		—			229,504
Year Ended December 31, 2008
Sales to external customers	$	152,076	$	238,615	$	70,815	$	137,673	$	—		$	599,179
Gross profit		72,258		97,023		26,683		38,577		—			234,541
December 31, 2010
Total assets	$	174,512	$	111,874	$	40,604	$	143,080	$	514,352		$	984,422
Goodwill		18,122		17,998		3,624		5,056		—			44,800
December 31, 2009
Total assets	$	99,091	$	127,938	$	59,897	$	137,207	$	529,836		$	953,969
Goodwill		18,139		17,785		3,628		5,064		(1	)		44,615

Market segment disclosures are presented to the gross profit level as this is the primary performance measure for which the segment general managers are responsible. Selling, general and administrative,

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research and development and other operating expenses are managed and reported at the corporate level and, given allocation to the market segments would be arbitrary, have not been allocated to the market segments. See our Consolidated Statements of Operations for reconciliations from gross profit to income before income taxes. These reconciling items are not included in the measure of profit and loss for each reportable segment.

Our long-lived assets were geographically located as follows (in thousands):

December 31,	2010		2009
United States	$	50,747	$	55,342
The Netherlands		18,817		18,888
Other		17,264		15,111
Total	$	86,828	$	89,341

The following table summarizes sales by geographic region (in thousands):

	U.S. and Canada		Europe		Asia- Pacific and Rest of World		Total
2010
Product sales	$	131,283	$	160,927	$	187,570	$	479,780
Service and component sales		72,719		46,467		35,256		154,442
Total sales	$	204,002	$	207,394	$	222,826	$	634,222
2009
Product sales	$	134,919	$	166,581	$	138,203	$	439,703
Service and component sales		63,718		45,226		28,697		137,641
Total sales	$	198,637	$	211,807	$	166,900	$	577,344
2008
Product sales	$	150,443	$	157,493	$	153,570	$	461,506
Service and component sales		65,739		43,635		28,299		137,673
Total sales	$	216,182	$	201,128	$	181,869	$	599,179

None of our customers represented 10% or more of our total sales in 2010, 2009 or 2008.

Sales to countries which totaled 10% or more of our total sales were as follows (dollars in thousands):

	Dollar Amount		% of Total Sales
2010
United States	$	200,845		31.7	%
2009
United States	$	189,596		32.8	%
2008
United States	$	194,740		32.5	%

NOTE 21. FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES

Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:

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

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

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

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

Following are the disclosures related to our financial assets and liabilities (in thousands):

December 31, 2010	Level 1		Level 2			Level 3
Available for sale marketable securities:
U.S. Treasury and Agency securities	$	68,497	$	—		$	—
Certificates of deposit		—		11,322			—
Trading securities:
Equity securities – mutual funds		2,869		—			—
Derivative contracts, net		—		94			—
	$	71,366	$	11,416		$	—
December 31, 2009
Available for sale marketable securities:
U.S. Government-backed securities	$	128,170	$	—		$	—
Certificates of deposit and commercial paper		33,575		—			—
Trading securities:
Equity securities – mutual funds		2,848		—			—
ARS		—		—			87,188
Derivative contracts, net		—		(2,286	)		—
Put Right		—		—			11,711
	$	164,593	$	(2,286	)	$	98,899

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

	Auction Rate Securities			Put Right
Balance, December 31, 2008	$	91,680		$	17,917
Call of ARS		(11,200	)		—
Increase in fair value of ARS included as a component of other income, net		6,708			—
Decrease in fair value of Put Right included as a component of other income, net		—			(6,206	)
Balance, December 31, 2009		87,188			11,711
Call and redemption of ARS		(98,925	)		—
Losses due to the change in fair value of ARS included as a component of other income, net		(626	)		—
Gains due to the change in fair value of Put Right included as a component of other income, net		—			637
Gains due to the settlement of ARS included as a component of other income, net		12,363			—
Loss due to the write-off of Put Right as a result of the settlement of the ARS included as a component of other income, net		—			(12,348	)
Balance, December 31, 2010	$	—		$	—

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

We use an income approach to value the assets and liabilities for outstanding derivative contracts using current market information as of the reporting date, such as spot rates, interest rate differentials and implied volatility. We mitigate derivative credit risk by transacting with highly rated counterparties. We have evaluated the credit and non-performance risks associated with our derivative counterparties and believe them to be insignificant and not warranting a credit adjustment at December 31, 2010.

There were no changes to our valuation techniques during 2010.

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

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At December 31, 2010, we had $89.0 million of fixed rate convertible debt outstanding. Based on open market trades, we have determined that the fair value of our fixed rate convertible debt was approximately $99.6 million at December 31, 2010.

NOTE 22. ADOPTION OF NEW ACCOUNTING GUIDANCE FOR CONVERTIBLE DEBT

On January 1, 2009, we adopted accounting guidance for debt instruments that may be settled in cash upon conversion. The issuer of these instruments should separately account for the liability and equity components in a manner that reflects the entity’s non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. This guidance was retrospectively applied, effective January 1, 2009, to our $150.0 million principal amount of zero coupon subordinated convertible notes. In accordance with the guidance, we recognized both the liability and equity component of our notes at fair value. The liability component was recognized as the fair value of a similar instrument that did not have a conversion feature at issuance. The equity component, which was the conversion feature at issuance, was recognized as the difference between the proceeds from the issuance of the notes and the fair value of the liability component. We recognized an effective interest rate of 8.874% on the carrying value of the debt.

The retrospective application of this guidance increased interest expense and reduced net income and earnings per share in 2008 as indicated in the following table (in thousands, except per share amounts):

	Year Ended December 31, 2008
	Interest Expense		Net Income			Basic Net Income Per Share			Diluted Net Income Per Share
Reported	$	7,906	$	24,302		$	0.66		$	0.61
Adjustment		6,314		(6,314	)		(0.17	)		(0.13	)
Revised	$	14,220	$	17,988		$	0.49		$	0.48

Amortization of the debt discount during 2008 was $6.5 million. Given that these notes were repaid in 2008, there was no impact on our consolidated statement of operations, statement of cash flows or statement of comprehensive income in 2009, nor will there be any impact in future years.

NOTE 23. SUBSEQUENT EVENTS

We have considered all events that have occurred subsequent to December 31, 2010 and through February 18, 2011, the date the financial statements as of and for the year ended December 31, 2010 were issued.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation and under the supervision of our President and Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our last fiscal year that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, we used the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment using those criteria, our management concluded that, as of December 31, 2010, our internal control over financial reporting was effective.

KPMG LLP has audited this assessment of our internal control over financial reporting and their report is included below.

Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

FEI Company:

We have audited FEI Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). FEI Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, FEI Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FEI Company and subsidiaries as of December 31, 2010, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year ended December 31, 2010, and our report dated February 18, 2011 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Portland, Oregon

February 18, 2011

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Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information required by this item will be included under the captions Governance, Code of Ethics, Proposal No. 1 Election of Directors, Meetings and Committees of the Board of Directors, Executive Officers, Membership of the Audit Committee and Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement for our 2011 Annual Meeting of Shareholders and is incorporated by reference herein.

On September 9, 2003, we adopted a code of business conduct and ethics that applies to all directors, officers and employees. We posted our code of business conduct and ethics on our website at www.fei.com. We intend to disclose any amendment to the provisions of the code of business conduct and ethics that apply specifically to directors or executive officers by posting such information on our website. We intend to disclose any waiver to the provisions of the code of business conduct and ethics that apply specifically to directors or executive officers by filing such information on a Current Report on Form 8-K with the SEC, to the extent such filing is required by the NASDAQ Global Market’s listing requirements; otherwise, we will disclose such waiver by posting such information on our website.

Item 11. Executive Compensation

Information required by this item will be included under the captions Director Compensation, Executive Compensation, Compensation Discussion and Analysis for Named Executive Officers, Compensation Committee Report, Summary Compensation Table, Grants of Plan-Based Awards for Fiscal Year Ended 2010, Outstanding Equity Awards at Fiscal Year End for Fiscal Year Ended 2010, Option Exercises and Stock Vested for Fiscal Year Ended 2010, Nonqualified Deferred Compensation for Fiscal Year Ended 2010, Potential Payments Upon Termination of Employment and Compensation Committee Interlocks and Insider Participation in our Proxy Statement for our 2011 Annual Meeting of Shareholders and is incorporated by reference herein.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item will be included under the captions Security Ownership of Certain Beneficial Owners and Management and Securities Authorized for Issuance Under Equity Compensation Plans in our Proxy Statement for our 2011 Annual Meeting of Shareholders and is incorporated by reference herein.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information required by this item will be included under the captions Certain Relationships and Related Transactions and Director Independence in our Proxy Statement for our 2011 Annual Meeting of Shareholders and is incorporated by reference herein.

Item 14. Principal Accountant Fees and Services

Information required by this item will be included under the caption Proposal No. 4 Advisory Vote on the Approval of Appointment of Public Accounting Firm in our Proxy Statement for our 2011 Annual Meeting of Shareholders and is incorporated by reference herein.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

Financial Statements and Schedules

The Consolidated Financial Statements, together with the report thereon of our independent registered public accounting firm, are included on the pages indicated below:

	Page
Report of KPMG LLP, Independent Registered Public Accounting Firm		50
Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm		51
Consolidated Balance Sheets as of December 31, 2010 and 2009		52
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008		53
Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008		54
Consolidated Statements of Shareholders’ Equity for the years ended December  31, 2010, 2009 and 2008		55
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008		56
Notes to Consolidated Financial Statements		57

There are no schedules required to be filed herewith.

Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index. A plus sign (+) beside the exhibit number indicates the exhibits containing a management contract, compensatory plan or arrangement, which are required to be identified in this report.

Exhibit No.	Description
3.1(6)	Third Amended and Restated Articles of Incorporation
3.2(8)	Articles of Amendment to the Third Amended and Restated Articles of Incorporation
3.3(14)	Amended and Restated Bylaws, as amended on February 18, 2009
4.1(9)	Indenture, dated as of May 19, 2006, between the Company and The Bank of New York Trust Company, as trustee
4.2	Form of 2.875% Convertible Subordinated Note due 2013 (incorporated by reference to Annex A of Exhibit 4.1)
4.3(10)	Registration Rights Agreement, dated as of May 19, 2006, among FEI Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Needham & Company, LLC, Thomas Weisel Partners LLC, D.A. Davidson & Co. and Merriman Curhan Ford & Co.
4.4(8)	Preferred Stock Rights Agreement dated July 21, 2005, between FEI and Mellon Investor Services, LLC
10.1+(20)	1995 Stock Incentive Plan, as amended
10.2+(2)	1995 Supplemental Stock Incentive Plan
10.3+(1)	Form of Incentive Stock Option Agreement
10.4+(22)	Form of Nonstatutory Stock Option Agreement

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Exhibit No.	Description
10.5+(21)	Employee Share Purchase Plan, as amended
10.6+(15)	Amended and Restated Executive Severance Agreement by and between Dr. Don Kania and FEI Company
10.7+(10)	Stand-alone Non-statutory Stock Option Agreement (for grant of 100,000 option shares outside of 1995 Stock Incentive Plan as a material inducement for Dr. Kania to accept employment)
10.8+(10)	Stand-alone Restricted Stock Unit Agreement (for grant of 25,000 units outside the 1995 Stock Incentive Plan as a material inducement for Dr. Kania to accept employment)
10.9+(10)	Form of Restricted Stock Unit grant (for grant of 75,000 units to Dr. Kania within the 1995 Stock Incentive Plan)
10.10+(3)	FEI Company Nonqualified Deferred Compensation Plan
10.11(4)	Lease Agreement, dated December 11, 2002, by and among FEI, Technologicky Park Brno, a.s. and FEI Czech Republic, s.r.o.
10.12(5)	Master Agreement for the Acht facility, dated January 14, 2003
10.13+(7)	Form of Indemnity Agreement for Directors and Executive Officers of FEI
10.14+(12)	Description of Compensation of Non-Employee Directors
10.15+(18)	2009 and 2010 FEI Management Variable Compensation Plan Program Summary Description
10.16+(11)	Employment Agreement with Robert H. J. Fastenau, dated November 28, 2006
10.17+(11)	Settlement Agreement by and between Robert H.J. Fastenau and FEI Company, dated April 20, 2010.
10.18+(19)	Amendment to Offer Letter of Employment to Benjamin Loh, dated December 19, 2008
10.19(13)	Credit Agreement, dated as of June 4, 2008, by and among FEI Company, the Guarantors party thereto from time to time, JPMorgan Chase Bank, N.A., as Administrative Agent, J.P. Morgan Europe Limited, as Alternative Currency Agent, and each of the Lenders party thereto from time to time
10.20(13)	Security and Pledge Agreement, dated as of June 4, 2008, by and among FEI Company, the Guarantors party thereto from time to time and JPMorgan Chase Bank, N.A., as Administrative Agent
10.21(16)	First Amendment to Credit Agreement, Security and Pledge Agreement and Disclosure Letter, dated as of March 3, 2009, by and among FEI Company, the Guarantors identified on the signature pages thereto, the Lenders identified on the signature pages thereto and JPMorgan Chase Bank, N.A., as Administrative Agent
10.22+(15)	Form of Amended and Restated Executive Severance Agreement
10.23+(15)	Amendment to Offer Letter of Employment to Ray Link, dated December 10, 2008
10.24(17)	Form of Credit Line Account Application and Agreement, dated as of March 25, 2009, by and between UBS Bank USA and FEI Company
10.25(17)	Form of First Addendum to Credit Line Account Application and Agreement, dated as of March 25, 2009 by and among UBS Bank USA, FEI Company and UBS Financial Services, Inc.
10.26(17)	Form of Addendum to Credit Line Account Application and Agreement, dated as of March 25, 2009, executed by FEI Company
10.27(17)	Form of Second Addendum to Credit Line Account Application and Agreement, dated as of March 25, 2009, by and among UBS Bank USA, FEI Company and UBS Financial Services Inc.

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Exhibit No.	Description
10.28(17)	Form of Important Notice on Interest Rates and Payments, dated as of March 25, 2009, executed by FEI Company
14(8)	Code of Ethics
21	Subsidiaries
23.1	Consent of KPMG LLP
23.2	Consent of Deloitte & Touche LLP
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

(1) Incorporated by reference to our Registration Statement of Form S-1, as amended, effective May 31, 1995 (Commission Registration No. 33-71146).

(2) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1995.

(3) Incorporated by reference to our Registration Statement on Form S-3, filed on April 23, 2001.

(4) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2002.

(5) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 30, 2003.

(6) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended September 28, 2003.

(7) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2003.

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

(9) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2006.

(10) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended July 2, 2006.

(11) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2006.

(12) Incorporated by reference to our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007.

(13) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2008.

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

(15) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2008.

(16) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on March 5, 2009.

(17) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended April 5, 2009.

(18) Incorporated by reference to our Current Reports on Form 8-K filed with the Securities and Exchange Commission on January 21, 2009, June 25, 2009 and December 22, 2009.

(19) Incorporated by reference to our Current Report on Form 8-K/A filed with the Securities and Exchange Commission on April 23, 2010.

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

(21) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended October 4, 2010.

(22) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2009.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: February 18, 2011	FEI COMPANY
	By	/s/ DON R. KANIA
	Don R. Kania
	Director, President and
	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 18, 2011:

Signature	Title
/s/ DON R. KANIA Don R. Kania	Director, President and Chief Executive Officer (Principal Executive Officer)
/s/ RAYMOND A. LINK Raymond A. Link	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ LAWRENCE A. BOCK Lawrence A. Bock	Director
/s/ WILFRED J. CORRIGAN Wilfred J. Corrigan	Director
/s/ Arie Huijser	Director
/s/ THOMAS F. KELLY Thomas F. Kelly	Director
/s/ WILLIAM W. LATTIN William W. Lattin	Director
/s/ JAN C. LOBBEZOO Jan C. Lobbezoo	Director
/s/ GERHARD H. PARKER Gerhard H. Parker	Chairman of the Board
/s/ JAMES T. RICHARDSON James T. Richardson	Director
/s/ RICHARD H. WILLS Richard H. Wills	Director

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