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corresp

June 7, 2005

BY EDGAR AND OVERNIGHT DELIVERY

Ms. Angela Crane

Accounting Branch Chief

Division of Corporation Finance

United States Securities and Exchange Commission

450 Fifth Street N.W.

Washington, D.C. 20549-0306

    Re:

    FSI International, Inc.

    Response letter dated May 16, 2005

    Form 10-K for fiscal year ended August 28, 2004

    Filed November 9, 2004

    File No. 0-17276

Dear Ms. Crane:

On behalf of FSI International, Inc. (“the Company”), we hereby submit our
response to comments received from the Staff of the Commission by letter dated
May 16, 2005. Responses to the Staff’s comments are set forth below and are
keyed to the numbered comments in the comment letter. For your convenience, we
have included the text of the Staff’s comments.

Form 10-K for the year ended August 28, 2004

Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Page 16

Wind Down of Microlithography Business — Page 20

    1.
    Explain, supplementally and in future filings, the events and
circumstances that arose during the period allowing you to use inventory
that you had fully written-off. Discuss the total inventory written-off to
date, the amount sold, the amount discarded, and the amount still on your
books. For any inventory still held, explain when and how you intend to
dispose of it. Is there any future sales pending for the inventory? Please
explain.

We are providing the following information supplementally:

The Company’s decision to wind down the Microlithography
business was made after exploring the following options:

    1.
    Continue to fund the operating losses
of the Microlithography business with a goal to
gain marketshare with 300mm customers and
ultimately return the business to profitability.

    2.
    Establish a strategic relationship with
another semiconductor process equipment
manufacturer.

    3.
    Divestiture of the business to another
process equipment company or a financial investor
group.

June 7, 2005

Securities and Exchange Commission

Page 2

    4.
    Spin out the business to a strategic
and financial investor group.

    5.
    Discontinue strategic and new product
applications development and operate the business
in a “maintenance mode” until industry conditions
improve.

During this process, the Company had discussions with
several of our microlithography customers to see if they
would be willing to support the Company with multiple unit
orders. They were unwilling to place orders. Based on
this, we did not expect any additional orders at the time
of our announcement.

In connection with our decision to wind down the
Microlithography business, we recorded $19.0 million of
inventory reserves in the second quarter of fiscal 2003
based on the estimated future sales and recoverability of
Microlithography-related inventory. We determined the $19.0
million inventory reserve based on the inventory balance as
of March 1, 2003 as compared to the inventory balance
expected to be used for orders in backlog, anticipated
orders and anticipated cancellations. At the time that we
made the decision to wind down the Microlithography
business, we expected that customers would cancel certain
existing orders and not issue new orders.

One of the Company’s primary goals at the time of the wind
down was to satisfy its remaining Microlithography customer
obligations and support requirements. Once the official
announcement to wind down the business was made, some of
the customers who previously indicated they were not going
to be placing any orders started expressing an interest in
refurbished equipment and upgrades.

During the wind down process, the Company continued to try
to sell the impaired inventory to its customers as spares
and upgrades and utilized parts to fulfill warranty
obligations on existing systems. Subsequently, our
customers have ordered and received refurbished systems,
upgrades and spares that exceeded our expectations,
allowing us to utilize some of our inventory that was
previously written down to zero.

A rollforward of our inventory reserve as of August 28,
2004 related to the Microlithography wind down is as
follows:

    (millions)

    Reserve balance as of March 1, 2003

    $
    24.8

    Inventory
sold that was previously written down to zero and reductions in
inventory buyback requirements

    (6.2
    )

    Scrapping and disposal of inventory

    (3.0
    )

    Additional reserves

    0.2

    Reserve balance as of August 28, 2004

    $
    15.8

June 7, 2005

Securities and Exchange Commission

Page 3

As of August 28, 2004, the gross inventory approximated
$16.3 million with an inventory reserve of $15.8 million.

A rollforward of our inventory reserves from August 28,
2004 to February 26, 2005 related to the Microlithography
wind down is as follows:

    (millions)

    Reserve balance as of August 28, 2004

    $
    15.8

    Scrapping and disposal of inventory

    (3.2
    )

    Reserve balance as of February 26, 2005

    $
    12.6

As of February 26, 2005, the gross inventory approximated
$14.1 million with an inventory reserve of $12.6 million.

We continue to dispose of our inventory over time by
scrapping it. As of February 26, 2005, we had orders in
backlog for inventory previously written down to zero of
less than $200,000.

In future filings, we will explain the circumstances that
arose during the period allowing the Company to use
inventory that is fully written off.

    2.
    We note in the second quarter 2003 that you recorded an impairment of $7
million against your Texas facility. This facility was later sold in
second quarter 2005 for a gain of $7 million. Please explain how you
determined the fair market value of the facility and the impairment
recorded during the second quarter 2003.

We are providing the following information supplementally:

During the second quarter of fiscal 2003, the Company
recorded a write-down of $7.0 million against the property,
plant and equipment assets of the Microlithography
business. This write-down included a $5.0 million
impairment charge for the Microlithography business
facility. The impairment charge was based upon management’s
estimate of fair value. In estimating fair value,
management assumed the building would be marketed as office
space and the special-purpose space, such as the clean
rooms and laboratories, would be converted to office space.
This assumption was made based upon the low demand in the
area for clean room facilities and with consideration of
the electronics industry downturn that occurred in 2001 and
2002. We did not believe we would find a buyer that would
utilize the special purpose space.

As part of our analysis, management had a competitive
market overview performed by a third party appraiser and
reviewed office buildings currently on the market and
available for lease or sale. As a result of our assumptions and
analysis, management recorded a $5.0 million impairment
charge for the facility.

June 7, 2005

Securities and Exchange Commission

Page 4

During the second quarter of fiscal 2003, the Company also
recorded an impairment charge of $2.0 million on the
Microltihography business equipment based upon management’s
review of its business equipment and its estimated fair
value under SFAS 144, “Accounting for Impairment or
Disposal of Long-Lived Assets.”

After two years of marketing the building, the Company was
able to sell the building and the majority of the business
equipment for its specialty purpose clean room facility
space to an electronics industry buyer. Therefore, the sale
price was substantially in excess of the value the Company
had assumed for office space use. Accordingly, the Company
recognized a gain of $7.0 million.

Consolidated Financial Statements

Note 2. Wind Down of Microlithography Business — Page 47

    3.
    Supplementally explain why you were able to reduce certain open purchase
order commitments and inventory buyback requirements during in the fourth
quarter 2003. How did this impact your results of operations? Please
clarify in future filings.

We are providing the following information supplementally:

We worked with our distributor to reduce and clarify the
microlithography inventory buyback requirements as a result
of the wind down pursuant to the distribution agreement.
The result was a favorable impact to the results of
operations for the fourth quarter of approximately
$580,000. In addition, we worked closely with our vendors
to reduce some of the open purchase orders by approximately
$4,000. We will clarify in future filings.

Note 3. Transition Agreement with Metron Technology — Page 48

    4.
    We note that you originally agreed to pay approximately $2.8 million in
early termination fees by surrendering 1.154 million shares of Metron
Technology common stock. Instead, you delivered only 567,105 shares to
settle the early termination fee. Supplementally explain how you accounted
for this transaction. Demonstrate that your accounting complied with GAAP.

We are providing the following information supplementally:

On October 9, 2002, the Company entered into a Transition
Agreement with Metron Technology related to the early
termination of the Company’s distribution agreements with
Metron Technology for Europe

June 7, 2005

Securities and Exchange Commission

Page 5

and the Asia-Pacific regions, effective March 1, 2003
(“Closing Date”). Under the terms of the Transition
Agreement, the Company assumed direct sales, service and
applications support and logistics responsibilities for the
Company’s products in Europe and the Asia-Pacific region as
of the Closing Date.

In conjunction with this transaction, the Company agreed to
advance up to $4.0 million to Metron Technology on a
secured basis to repurchase inventory. The Company advanced
$3.0 million pursuant to a note receivable shortly after it
entered into the Transition Agreement and had a potential
obligation to advance up to an additional $1.0 million.
After completing a review of the inventory relative to the
Company’s repurchase obligations, it was determined that
the Company’s obligation to repurchase inventory was
approximately $2.0 million. The Company recorded
approximately $2.0 million of sales returns related to the
inventory repurchased from Metron Technology during the
second quarter of fiscal 2003.

Under the terms of the Transition Agreement, the Company
agreed to pay Metron Technology on the Closing Date an
early termination fee of approximately $2.8 million. The
Company originally anticipated surrendering approximately
1.154 million Metron Technology common shares owned by the
Company in payment of this early termination fee as
approved by Metron Technology’s shareholders. In accordance
with the Transition Agreement, the Company paid the early
termination fee by (i) Metron Technology retaining the
amount previously advanced for inventory repurchases in
excess of the amount actually repurchased (approximately
$1.0 million) and (ii) delivering 567,105 shares of Metron
Technology common stock.

In accordance with generally accepted accounting
principles, the Company recorded a charge of approximately
$2.8 million to selling, general and administrative
expenses in the first quarter of fiscal 2003 associated
with the early termination fee.

This information has been previously disclosed in prior SEC
filings. See our Annual Report on Form 10-K filed with the
Commission on November 26, 2003.

Note 8. Property, Plant and Equipment — Page 52

    5.
    We note that you maintain demonstration and process laboratories for use
by your customers and classify the lab equipment as fixed assets. We have
the following comments:

     (a) Do you ever sell the lab equipment in your demonstration labs to customers?

Due to the significant investment in installing the
equipment into our demonstration labs, we generally do not
sell the lab equipment. However, we have in the past sold
certain older generation lab equipment to customers on a
limited basis. Generally, the Company must make additional
investments associated with refurbishing the equipment

June 7, 2005

Securities and Exchange Commission

Page 6

in order to sell it. During the past three fiscal years,
only two lab equipment tools have been sold to customers.
The tools were fully depreciated.

     (b) Over what period are you depreciating the lab equipment?

We depreciate lab equipment over three years.

     (c) Where is the depreciation expense recorded in your income statement?

The depreciation expense associated with lab equipment is
included in research and development expense.

     (d) How do you account for evaluation systems placed with customers?

Evaluation systems are included in finished goods inventory
at our standard cost. If the evaluation systems are not
purchased and remain at the customer site after 12 months,
we begin amortizing the cost of the system over 18 months
or until purchased.

     (e) Tell us more about the increase in inventory related to “additional
demonstration tool placements” as discussed in your MD&A.

We have had a strategic initiative to place new products
with customers with a goal to expand the number of
applications for which a customer might use the product and
thereby increase future sales of such product. This
initiative resulted in an increase in demonstration tool
placements in fiscal 2004. As of August 28, 2004, there was
$6.6 million of demonstration tools included in inventory.

     We may have additional comments after reviewing your response.

Note 9. Investments in Affiliates — Page 52

    6.
    We note that you have presented summarized financial information for
m ·FSI LTD. Supplementally discuss the consideration that full financial
statements may be required under Rule 3-09 of Regulation S-X. Provide
numerical support for your conclusion.

Historically, the Company has not been required to provide
separate financial statements of our joint venture, m•FSI
LTD (m•FSI), under Regulation S-X, Rule 3-09, because none
of the conditions under the definition of “significant
subsidiary” has historically exceeded the 20% level.

The following are the calculations under Rule 3-09 of
Regulation S-X as of and for the end of the fiscal years
2004, 2003 and 2002 (in thousands):

June 7, 2005

Securities and Exchange Commission

Page 7

    2004

    2003

    2002

    The Company’s investment in m.FSI

    $
    7,744

    $
    6,306

    $
    6,121

    Advances to m.FSI

    —

    —

    —

    Total

    $
    7,744

    $
    6,306

    $
    6,121

    The Company’s total consolidated
assets

    $
    139,797

    $
    133,386

    $
    211,776

    Percentage

    5.5
    %

    4.7
    %

    2.9
    %

    The Company’s portion of m.FSI’s net
income from continuing operations
before income taxes

    $
    1,396

    $
    359

    $
    1,004

    The Company’s consolidated net loss
from continuing operations before
income taxes (absolute value)

    $
    588

    $
    74,501

    $
    35,207

    Percentage

    237.4
    %

    0.5
    %

    2.9
    %

Based upon the calculations above, we acknowledge due to
the Company’s near breakeven performance in fiscal 2004,
the Company’s equity in the income of m•FSI from continuing
operations before income taxes exceeded 20 percent of such
consolidated income from continuing operations before
income taxes for the Company. As the Company was in a loss
from continuing operations before income taxes position in
2004, no five-year income averaging is allowed for
calculation purposes.

The Company believes that the summarized financial
information for m•FSI that is included in Note 9 of the
financial statements, which was obtained from m•FSI’s
audited financial statements, was adequate disclosure to
provide our shareholders with meaningful financial
information regarding m•FSI’s financial position and
op