UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 20012002
OR

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

For the transition period from                          to                           .

Commission file number 0-16244

VEECO INSTRUMENTS INC.

(Registrant)

Registrant's telephone number, including area code  (516) 677-0200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share

        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  Xý  No  / /o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration 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 references in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

        Indicate by check mark if the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)  Yes  ý  No  o

        The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the Common Stock on March 12,June 28, 2002 as reported on The Nasdaq National Market, was approximately $624,000,000.$484,218,000. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        At March 12, 2002,20, 2003, the Registrant had 29,027,00629,225,051 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 10, 20029, 2003 are incorporated by reference into Part III of this Annual Report on Form 10-K.

SAFE HARBOR STATEMENT

        This Annual Report on Form 10-K (the "Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward-looking statements may be found in Items 1, 3, 7 and 7A hereof, as well as within this Report generally. In addition, when used in this Report, the words "believes," "anticipates," "expects," "estimates," "plans," "intends," and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. Factors that may cause these differences include, but are not limited to:

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the dependence on principal customers and the cyclical nature of the data storage, opticaltelecommunications/wireless, semiconductor, research and wireless telecommunications and semiconductorindustrial industries,



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fluctuations in quarterly operating results,



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rapid technological change and risks associated with the acceptance of new products by individual customers and by the marketplace,



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fluctuations in quarterly operating results,



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risk of cancellation or rescheduling of orders,



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risks associated with evaluating and pursuing acquisition opportunities and integrating acquired businesses into our business,



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loss of key management or our inability to attract and retain sufficient numbers of managerial, engineering and other technical persons,



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the highly competitive nature of industries in which the Company operates,



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changes in foreign currency exchange rates, and



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matters set forth in this Report generally.generally, including the risk factors set forth in "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations".

        Consequently, such forward-looking statements should be regarded solely as the Company's current plans, estimates and beliefs. The Company does not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.

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Available Information

        We file annual, quarterly and current reports, information statements and other information with the Securities and Exchange Commission (the "SEC"). The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site isPART I
http://www.sec.gov.

Internet Address

        We maintain a website where additional information concerning our business and various upcoming events can be found. The address of our website iswww.veeco.com. We provide a link on our website, under Investors—Financial Info—SEC Filings, through which investors can access our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports. These filings are posted to our internet as soon as reasonably practicable after we electronically file such material with the SEC.

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Item 1. Business.

The Company

        Veeco Instruments Inc. (together with its consolidated subsidiaries, "Veeco", the "Company" or "we") designs, manufactures, markets and services a broad line of equipment primarily used by manufacturers in the data storage, telecommunications/wireless, semiconductor and researchtelecommunications/wireless industries. These industries help create a wide range of information age products such as computer integrated circuits, personal computers, hard discdisk drives, network servers, fiber optic networks, digital cameras, wireless phones, TV set-top boxes and personal digital assistants. Our broad line of products featuring leading edge technology allows customers to improve time to market of next generation products. Veeco's products are also enabling advancements in the growing field of nanoscience and other areas of scientific and industrial research.

        Our process equipment products precisely deposit or remove (etch) various materials in the manufacturing of advanced thin film magnetic heads (TFMHs) for the data storage industry, semiconductor deposition of mask reticles, and telecommunications/wireless components.devices. Our metrology equipment is used to provide critical surface measurements on semiconductor devices thin film magnetic heads and disks used in hard drives and in telecommunications/wireless and research applications.TFMHs. This equipment allows customers to monitor their products throughout the manufacturing process in order to improve yields, reduce costs and improve product quality. Our metrology solutions are also key instruments used by many universities, scientific laboratories and industrial applications.

        Demand for our products has been driven by the increasing miniaturization of microelectronic components; the need for manufacturers to meet reduced time-to-market schedules while ensuring the quality of those components; and, in the data storage industry, the introduction of giant magnetoresistive (GMR) thin film magnetic heads (TFMHs)and tunneling magnetoresisitve (TMR) TFMHs which require additional manufacturing steps and the ability to conduct critical measurements for quality control and other purposes during the manufacturing process. The ability of Veeco's products to precisely deposit thin films, and/or etch sub-micron patterns and make critical surface measurements in these components enables manufacturers to improve yields and quality in the fabrication of advanced microelectronic devices, such as passive and active telecommunications components, wireless devices, TFMHs and semiconductor devices.

        Veeco serves its worldwide customers through the Company'sour global sales and service organization located throughout the United States, Europe, Japan and Asia Pacific. At December 31, 2001,2002, Veeco had 1,4461,067 employees, with manufacturing, research and development and engineering facilities located in New York, California, Minnesota, Colorado and Arizona.

        Veeco was organized as a Delaware corporation in 1989.

Our Strategy

        Veeco has, and will continue to pursue, the following growth strategy:Veeco's strategy is to:

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Capitalize on the long-term growth opportunities in the data storage and telecommunications/wireless industryindustries by expanding process equipment and metrology solutions;



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Pursue focused market opportunities in the semiconductor industry in which Veeco has specific technology leadership;



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StrengthenPursue market opportunities in scientific research and capitalize on the Company's position asgrowing worldwide investment in nanoscience and nanotechnology through the leading "one-stop shop" for etch, deposition andsale of Veeco's enabling metrology equipment for the data storage industry;instruments;



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Pursue internal growth, as well as strategic mergersacquisitions and, where appropriate, to further expand the Company's breadth of product line;

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Leverage Veeco's technology and strategic customer relationships and assist customers' time to market for their new products;

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Utilize the Company's industry-leading global sales and service network to further strengthen customer relationships.

Acquisition History

        A critical part of Veeco's growth strategy has been to expand its product line through acquisitions, which are identified on the following chart. Through these acquisitions, Veeco has broadened its product line of equipment and metrology solutions for its target industries.

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Recent Events

        As notedIn October 2002, the Company announced a plan designed to reduce its operating costs by approximately $24.0 million in 2003. The plan included layoffs of approximately 20% of its employees, primarily in the above table, on July 16, 2001,process equipment group, and the closure of certain facilities. As a result of these actions and due to the continued weakness in the Company's served markets and the uncertainty of their recovery, Veeco completed the acquisition of ThermoMicroscopes Corp. ("TM"), formerly a subsidiary of Thermo Electron Corporation. TM manufactures atomic force microscopes, scanning probe microscopes (AFMs and SPMs), near field optical microscopes and probes. This acquisition was accounted for using the purchase method of accounting.

        On September 17, 2001, Veeco completed its merger with Applied Epi, Inc., a world leading supplier of molecular beam epitaxy (MBE) equipment. Applied Epi's customers use its equipment and components to manufacture compound semiconductor devices for a wide variety of communications applications, including fiber optic modules and subsystems, mobile phones, wireless networks and satellites. In the merger, the former stockholders of Applied Epi received approximately 3.9 million shares of Veeco common stock and approximately $29.8 million in cash. The merger has been accounted for using the purchase method of accounting.

        The Company recorded a restructuring$124.0 million charge in the fourth quarter ended December 31, 2001 of approximately $19.0 million resulting from the restructuring of operations in response to the significant downturn in the telecommunications industry and the overall weak business environment. This2002. The charge consisted of a $13.6$15.0 million write-off of inventory (included in cost of sales) related to order cancellationsin the process equipment group for the rationalization and the rationalizationdiscontinuance of certain product lines. Also included in this charge was $2.0lines; $2.6 million of severance and business relocation costs as a result of the workforce reduction and consolidation or elimination of certain facilities; $6.4 million of costs related to plant consolidationsthe proposed merger with FEI Company ("FEI") (including investment banking, legal, accounting and other expenses related to the terminated merger agreement); $0.3 million for a 15% workforce reduction initiatedprepayment penalty on the early extinguishment of debt; and $99.7 million in asset impairment charges, primarily in the fourth quarter, as well as a $3.4process equipment group. The asset impairment charge includes $94.4 million write-down of intangibleimpairment to goodwill, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142. The Company concluded that the goodwill arising from the acquisition of Applied Epi, Inc. ("Applied Epi"), which took place in September 2001, was significantly impaired due to the severe and fixed assets.continued weakness in the telecommunications/wireless industry and the uncertainty of its recovery. In addition Veeco has classified its industrial measurement business as a discontinued operationto the goodwill impairment, asset impairment charges also included $3.5 million for the impairment of two buildings (CVC, Inc. ("CVC") and incurred $3.4Ion Tech, Inc. ("Ion Tech") facilities) and $1.8 million for the impairment of losses (netother fixed assets due primarily to the closing of taxes) in the fourth quarter.these facilities.

        In December 2001,On January 9, 2003, the Company issued $200.0 millionand FEI jointly announced the mutual termination of 4.125% convertible subordinated notes, which aretheir merger agreement that was entered into on July 11, 2002. Veeco and FEI mutually determined not to proceed with the merger due in 2008, in a private placement. The notes are convertible, at the option of the holder, at any time prior to maturity into shares of common stock at a conversion price of $38.51 per share. The Company will pay interest on these notes on June 21 and December 21 of each year, commencing on June 21, 2002. The notes will mature on December 21, 2008. On January 3, 2002, the Company issued an additional $20.0 million of convertible subordinated notes pursuant to the exercisedifficult overall market and economic conditions, and the uncertain timing of an over allotment option granted to the initial purchasers of the notes. In March 2002, the Company filed a registration statement under the Securities Act of 1933, as amended, registering the notes, the common stock issuable upon exercise of the notes and shares of common stock held by certain other holders. After the third anniversary of the issuance, the notes may be redeemed at the option of the Company, at the redemption prices set forth in the indenture.industry recovery.

Industry Background

        General Introduction:    The market for microelectronic components has grown rapidly in recent years,continues to be driven by corporate and consumer use of information age products such as networked personal computers (PCs), servers and the Internet, among others. While the Company believes that the PC and server markets are the primary driver of disk drive unit growth, disk drives are also increasingly being used for emerging applications such as television set-top boxes, video-on-demand systems, and small electronic devices such as digital cameras and personal digital assistants.

        Continued demand for smaller, faster and less expensive microelectronic components, particularly in the computer industry, has led to increasing miniaturization. This increasing miniaturization is achieved through an increased number of manufacturing steps involving greater use of precise etching and deposition equipment. In addition, metrology systems are used throughout the manufacturing process in order to monitor process accuracy, product quality, repeatability and to measure critical dimensions and other physical features such as film thickness, line width, step height, sidewall angle and surface roughness, thereby improving yields. Telecommunications/wireless components,

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semiconductor devices, thin film magnetic headsTFMHs and opticalother electronic components often consist of many intricate patterns on circuits or film layers. Depending upon the specific design of any given integrated circuit, a

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variety of film thicknesses and a number of layers and film types will be used to achieve desired performance characteristics.

        Trends in the Data Storage Industry:    In order to satisfy market demand for devices with greater storage capacity, the data storage industry developed new head designs incorporating higher areal densities which enable storage of more data. The capacity of disk drives is largely determined by the capability of the magnetic recording heads, which read and write signals onto hard disks. In November 2002, Peripheral Research forecasted that GMR head production will grow from approximately 730 million heads in 2001 to 750 million heads in 2005. In November 2002, Gartner Dataquest forecasted that the volume shipments of hard drives will increase from 200 million units in 2001 to over 250 million units by 2006. The Company believes that despite capital spending constraints within the data storage industry, substantial investment has and continues to be made in GMR and more advanced technology. Peripheral ResearchIn 2003, Veeco intends to introduce several new Process Equipment products to respond to the data storage industry's continued technology advances.

        Trends in the Semiconductor Industry:    Current semiconductor industry technology trends include smaller feature sizes (sub-0.13 micron line widths), larger substrates (i.e., the transition to 300mm wafers) and the increased use of metrology in the manufacturing process. In fact, according to VLSI the percentage of capital expenditures being devoted to metrology tools by semiconductor manufacturers is the fastest growing part of the equipment business and VLSI forecasts that GMR head production is growingthese expenditures will increase from approximately 30$1.8 billion in 2002 (or 10% of the $17.3 million GMR headswafer fab equipment market) to approximately $4.5 billion in 19982005 (or 12% of the $37.1 billion wafer fab equipment market). Semiconductor manufacturers use metrology tools in their wafer fabrication facilities to 885detect process deviations as early in the manufacturing process as possible. These tools are critical for yield enhancement resulting in cost reduction in this increasingly competitive environment. Veeco has sold over 100 automated Atomic Force Microscope (AFM) systems to be used in-line by manufacturers of semiconductor chips in their fabrication facilities.

        Another trend in the semiconductor industry is that research and development expenditures by semiconductor companies and photomask manufacturers are increasing to extend the capabilities of photomasks, which are used to create intricate patterns on semiconductor wafers. One example of this is the investment being made to develop extreme ultraviolet processes to be used in the manufacturing of photomasks. Veeco has created metrology and selected process equipment products to respond to these industry trends, including our Dimension X3D AFM for photomask metrology and our NEXUS Low Defect Density (LDD) ion beam deposition (IBD) system for advanced photomask deposition.

        Trends in the Research Industry:    A meaningful trend in the research industry is the growth in nanotechnology investment occurring at the scientific and university level. Nanotechnology is a field of science whose goal is to control individual atoms and molecules to potentially create computer chips and other devices that are thousands of times smaller than current technologies permit. Nanoscience and nanotechnology have received significant funding from the U.S. and other countries, and are beginning to impact many industries, including life sciences, data storage, semiconductor, telecommunications and materials sciences. According to the National Nanotechnology Institute (NNI) (1/03) worldwide nanotechnology funding has increased from approximately $400 million in 2004.1997 to over $2 billion in 2002. Evolution Capital, an industry research company based in the United Kingdom, forecasted in 2002 that nanotechnology would grow to be a $1.5 trillion industry by 2010. Veeco's metrology instruments are used by nanotechnology researchers and Veeco currently sells to nearly every major scientific or research organization engaged in the field of nanotechnology. In 2002 Veeco introduced several new AFMs and Scanning Probe microscopes (SPMs) to respond to the growing need for specialized scientific research metrology tools and intends to introduce additional AFM and SPM products in 2003.

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        Trends in the Telecommunications/Wireless Industry:    In the telecommunications field, there is a need for higher bandwidth caused by the expanding use of the internetBeginning in 2001 and by the increasing use of data intense file transfers, such as downloadable music, internet telephony and streaming video. In response to this demand, a technology called Dense Wavelength Division Multiplexing (DWDM) was developed. DWDM technology combines a number of wavelengths onto a single optical fiber, thereby increasing the capacity of the fiber network. The use of DWDM in telecommunications networks is challenging component manufacturers to design a variety of devices that can be integrated into DWDM systems. These include devices that can increase the number of wavelengths carried, span long distances, and develop an all-optical layer so that wavelengths do not need to be converted between optical and electrical signals. There are two major "families" of optical components, called passive and active devices. Thin film filters are the primary type of passive device, and several examples of active devices include pump and source lasers, amplifiers and modulators.

        Veeco is a leading provider of ion beam deposition systems, which are today being used to help create the optical filters which serve as a critical component of these DWDM systems. In addition, Veeco's broad range of ion beam etch, ion beam deposition and physical vapor deposition tools have applications in the manufacture of active devices as well. In 2000 Veeco introduced a new family of metrology systems designed especially to help optical component manufacturers improve their yields and time-to-market with new products.

        The growing demand for information and connectivity is driving the continued expansion of wireless and fiber optic networks. In the past, communications equipment and products relied on silicon semiconductor technology to meet performance requirements. However, fiber optic and current generations of wireless networks require higher performance and greater functionality than silicon semiconductors can provide. As a result, compound semiconductors have emerged as a key enabling technology to meet these higher performance, higher speed requirements. Compound semiconductors are composed of two or more elemental materials, usually consisting of a metal and a non-metal. The intrinsic physical properties of compound semiconductors enable electrons to move approximately five times faster thancontinuing through silicon semiconductors, allowing these semiconductors to operate at significantly higher speeds. In addition, compound semiconductors have optoelectronic properties that enable them to emit light, a fundamental requirement of fiber optic applications, and a function not achievable using silicon semiconductors. Other key advantages include lower power consumption and reduced signal distortion, which are critical to the performance of current generations of wireless technologies. Strategies Unlimited has estimated that compound semiconductor industry revenues will continue to grow at an estimated 15-33% compound annual growth rate through 2003. This growth, despite the current industry downturn, will be driven by wireless and fiber optic communications which combined account for approximately 50% of the market.

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        In 2001,2002, the telecommunications industry underwent a severe downturn caused by industry overcapacity, overly aggressive manufacturing ramps by device manufacturers, and a glut of optical components. Despite this downturn, Veeco continued to broaden its equipment solutions to this industry, expanding more into the wireless/active device segment. In September 2001 Veeco purchased Applied Epi, a leading supplier of MBE technology to the wireless device industry. Applied Epi's equipment is used to manufacture wireless devices such as power amplifiers, application specific integrated circuits (ASICs) for cell phones, PDAs and base stations. According to Micrologic Research, the worldwide wireless chip equipment market is forecasted to grow from approximately $20 billion in 2001 to over $40 billion in 2005. The Company believes that future growth in this industry will be tied to the trend toward convergence and integration of opticalsemiconductor, telecommunications and wireless devices to produce cheaper, faster integrated components. Veeco is positioning its equipment product line to offer a broad spectrum of critical technologies needed for this convergence.

        TrendsDespite the ongoing slump in the Semiconductor Industry:    Current semiconductor industrytelecommunications/wireless market in 2002, Veeco has continued to receive technology trends include smaller feature sizes (sub-0.13 micron line widths), larger substrates (i.e., the transition to 300mm wafers) and the increased use of metrology in the manufacturing process. The semiconductor industry is also undergoing trends related to advanced interconnect and chemical mechanical polishing (CMP) technologies. Semiconductor manufacturers use metrology tools in their wafer fabrication facilities to detect process deviations as early in the manufacturing process as possible. These tools are criticalbuys from worldwide customers for yield enhancement resulting in cost reduction in this increasingly competitive environment.

        Trends in the Research Industry:    A meaningful trend in the research industry is the growth in nanotechnology investment occurring at the scientific and university level. Nanotechnology is a field of science whose goal is to control individual atoms and molecules to potentially create computer chips and other devices that are thousands of times smaller than current technologies permit. Nanoscience and nanotechnology have received significant funding from the U.S. and other governments, and are beginning to impact many industries—life sciences, data storage, semiconductor, telecommunications, materials sciences, among others. Evolution Capital, an industry research company based in the United Kingdom, forecasts that nanotechnology will be a $150 trillion industry in 2010. Veeco's metrology tools are used by researchers in the nanotechnology field and Veeco currently sells to nearly every major scientific or research organization engaged in the field of nanotechnology.R&D applications.

Veeco's Products

        Veeco offers two principal product lines: process equipment and metrology. Veeco divested its leak detection business onin January 17, 2000, and its remaining industrial measurement business (NeXray) was classified as discontinued operations in December 2001.May 2002. Historical contribution to net sales by each of these product lines is shown below for the years indicated:

        See noteNote 8 to the Consolidated Financial Statements of the Company for additional information regarding the Company's reportable segments and sales by geographic location.

        Below is a matrix indicating the markets Veeco's Process Equipment and Metrology product families are primarily sold to:

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Process Equipment

        Veeco produces and sells several types of process equipment able to precisely deposit or etch thin film products used in the manufacture of opticaltelecommunications components such as filters and lasers, data storage components such as thin film magnetic headsTFMHs and

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specialty semiconductors such as GaAs (gallium arsenide) devices and MRAM (magnetic random access memory). Veeco's process equipment product line includes:

        Ion Beam Deposition (IBD) System:Systems:    Veeco's IBD systems utilize an ion beam to deposit precise layers of thin films and may be mated to Veeco's cluster system platform to allow either parallel or sequential etch/deposition processes. Ion beam deposition systems deposit high purity thin film layers and provide maximum uniformity and repeatability.

        Ion Tech SPECTOR®Beam Etch (IBE) Systems:    Ion Tech's IBD equipment is used to manufacture precise multi-layer optical filters critical to extending "bandwidth" of fiber optic telecommunication networks. Able to precisely control thicknesses, with excellent repeatability, Ion Tech's IBD systems are used to create the filters that allow multiple channels to share the same optical fiber. With its precise control of deposition ratesVeeco develops and uniformities, SPECTOR is able to produce high yields of 0.8nm bandwidths and below.

        Diamond-Like Carbon (DLC) Deposition Systems:    Veeco's DLC deposition system has been developed to deposit protective coatings on advanced TFMHs. The system consists of a single cassette vacuum loadlock and a high vacuum processing chamber with twoproduces ion beam sources.etch systems which etch precise, complex features for use primarily by data storage and telecommunications device manufacturers in the fabrication of discrete and integrated microelectronic devices.

        Physical Vapor Deposition (PVD) Systems:    Veeco believes that its PVD systemssystem, which deposits greater than 20 types of materials, offer manufacturers the most flexible platform for developing next-generation data storage applications. The NEXUS PVD systems provideprovides multiple targets, which can deposit greater than 20 materials, speeding the transition from development to high-volume production.

        Molecular Beam Epitaxy (MBE) Systems:    MBE is the process of precisely depositing epitaxially aligned atomically thin crystal layers, or epilayers, of elemental materials onto a substrate in an ultra-high vacuum environment. For many compound semiconductors, MBE is the critical first step of the fabrication process, ultimately determining device functionality and performance. MBE is the process of precisely depositing atomically thin crystal layers, or epilayers, of elemental materials onto a substrate in an ultra-high vacuum environment. After the epilayers are grown on the substrate, it is known as an epiwafer. The performance characteristics of compound semiconductors are dependent on the crystalline structure, chemical composition, number, and precise thickness of the epilayers. As a result, MBE is considered to be one of the highest value added steps in the production of compound semiconductors. Veeco provides a broad array of MBE components and systems.

        Diamond-Like Carbon (DLC) Deposition Systems:    Veeco's DLC deposition system deposits protective coatings on advanced TFMHs. The GEN2000 is the world's first high volume production MBE system integrating ultraconsists of a single cassette vacuum loadlock and a high vacuum (UHV)processing chamber with cluster tool architecture.

Etch Systems

        Veeco develops and producestwo ion beam etch systems which etch precise, complex features for use primarily by data storage and semiconductor manufacturers in the fabrication of discrete and integrated microelectronic devices such as TFMHs. Veeco's etch systems are also applicable in the active telecommunications marketplace.

The Nexus Familysources.

        In late 2000, Veeco introduced an umbrella brand name called "NEXUS™" to represent the integration of Veeco's process equipment products with those acquired as a result of the merger with CVC. NEXUS is a fully integrated cluster tool platform, combining several central wafer handlers with a variety of Physical Vapor Deposition (PVD), Ion Beam Deposition (IBD), Ion Beam Etch (IBE), Tunnel Insulator Module (TIM), Metal Organic Chemical Vapor Deposition (MOCVD) and Atomic Layer Deposition (ALD) modules to provide an advanced ultra-high vacuum processing platform.

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Metrology

        Veeco's surface metrology product line includes atomic force/scanning probe microscopes, optical metrology tools magnetic force systems and stylus profilers. These products offer a broad range of solutions to customers in the data storage semiconductor and optical telecommunicationssemiconductor industries, as well as versatile tools for use by research and development centers and universities.

Atomic Force/Scanning Probe Microscopes (AFM/SPMs)

        Through its merger with Digital Instruments, Inc., in May 1998, Veeco expanded its existing familyproduces a broad range of metrology products to include next generation AFM/SPM technology capableproducts designed for data storage, semiconductor, and research and other industrial applications. Veeco's Series Vx™ Atomic Force Profiler delivers a combination of resolving and imaging nanometer-level dimensional variations and surface properties. In 2000, Veeco signed an agreement with International Business Machines to purchase certain assets related to their atomic force microscope (AFM) technology.resolution with long-scan capability, which is ideal for monitoring specific thin film process applications in semiconductor manufacturing and specific growth applications in semiconductor metrology, such as Chemical Mechanical Planarization (CMP). The Vx-330 has been sold into all major semiconductor fabs and is an award-winning tool (Semiconductor International Magazine 2001), and in 2002 Veeco has combined their technology into our ownintroduced a next-generation 3D AFM product line.for lithography applications. Veeco's NanoScope products are widely used by leading nanotechnology research centers worldwide. In July, 20012002, Veeco acquired TM Microscopes, formerly a subsidiary of Thermo Electron Corporation. This acquisition further strengthened Veeco's AFM/SPM product portfolio, particularly in research applications.introduced several new products, including the NanoMan and PicoForce systems, designed specifically for the nanoscience market.

        Over time, the feature sizes in integrated circuits and magnetoresistive elements of data storage devices have decreased.7

        The atomic force microscope "feels" the sample surface directly using a probe consisting of a very sharp tip mounted on a microscopic spring arm (a cantilever). The interaction of the probe with the surface is detected by measuring deflections of the cantilever with an optical beam system. AFMs permit resolution at the molecular level. Veeco developed some of the first AFMs used in commercial applications and most of the SPMs manufactured and sold by Veeco are AFMs. SPMs, and particularly AFMs, can directly measure both lateral and vertical shapes with nanometer resolution and with direct 3D capability. In contrast, light-based metrology instruments, including interferometric and confocal microscopes, have limited lateral resolution for measurements of less than half the wavelength of light, or less than about 250 nanometers. Veeco's AFM products utilize its patented TappingMode™ technology, achieving the high resolution and stability previously obtainable only through destructive physical contact with the sample surface while employing a light touch previously achievable only through the less stable non-contact mode.

In addition to topography, AFMs can also directly measure magnetic field (such as magnetic bits on a hard disk); electric field; hardness (such as thin film integrity); electric charge density (such as dopant concentrations in semiconductors); temperature (such as temperature distribution in disk drive recording head elements); and various chemical properties (such as the difference in binding preference among biological molecules). AFMs make these measurements on almost any surface; in air, vacuum or under fluids; and with minimal sample preparation.

        Veeco produces a broad range of AFM/SPM products designed for data storage, semiconductor, and other industrial and research applications. These products include theDimension™ Series SPM,NanoScope™ SPMs and BioScope™ SPMs. In 1999 Veeco introduced the Series Vx™ Atomic Force Profiler which delivers a combination of atomic force resolution with long-scan capability, which is ideal for specific growth applications in semiconductor metrology, such as Chemical Mechanical Planarization (CMP). Veeco's NanoScope products are widely used by leading nanotechnology research centers worldwide. Veeco's VX-330 has been sold into all major semiconductor fabs and is an award-winning tool (Semiconductor International Magazine 2001).

Stylus Profilers

        Stylus profilers are used to produce cross-sectional representations and/or quantitative measurements, which are displayed on a video monitor. Veeco's stylus profiler systems utilize a precision translation stage which creates relative motion between the sample and a diamond tipped stylus. As the sample moves under the stylus, surface variations cause vertical translation of the stylus, which is tracked and measured. Stylus profilers are widely used for height, width, pitch and roughness

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measurements of features on semiconductor devices, magnetic and optical storage media (e.g., hard drives), flat panel displays and hybrid circuits. Veeco believes that its stylus profiler products are recognized for their accuracy, repeatability, ease of use and technology features, and are designed to meet a range of industry specifications and customer requirements.

Optical Metrology (Interferometry and Test)(Interferometry) Products

        Substantially all of Veeco's optical metrology instruments are designed to make non-contact surface measurements using interferometry technology. This process involves the use of either white light or laser sources to measure surface roughness and shape by creating interference patterns from the optical path difference between the test surface and a reference surface. Using a combination of phase shifting interferometry (PSI) and vertical scanning interferometry (VSI), these instruments are designed to rapidly and precisely measure and characterize a range of surface sizes and shapes. Veeco's major optical products include theNT family andSP3000 and theHD-Series optical profilers. TheNT family product line measures surface roughness, heights and shapes. TheHD-Series instruments are a line of microstructure measurement equipment used by manufacturers of mass memory components including manufacturers of heads,TFMHs, disks, drives and suspensions.HD-Series instruments are used for research and development, production control, process improvement, incoming parts inspection, final parts inspection and field failure analysis. Other optical metrology products include defect inspection systems for data storage and optical telecommunications applications and magnetic measurement equipment for characterizing the magnetoresistance of bulk films and patterned devices. In early 2001, Veeco launched a new family of metrology tools, Optium™, for process control and yield management in optical telecommunications component manufacturing. The Optium family includes surface measurement and defect review systems, as well as new wavelength characterization tools. This extended metrology capability helps control key processing steps for passive and active DWDM components, including laser diode sources, DWDM filters, mirror arrays, lenses and optical fibers.

Service and Sales

        Veeco recognizes that its customer service organization is a significant factor in the Company's success. The Company provides service and support on a warranty, service contract or an individual service-call basis. Veeco also offers enhanced warranty coverage and services, including preventative maintenance plans, on-call and on-site service plans and other comprehensive service arrangements, product and application training, consultation services and a 24-hour hotline service for certain products. The Company believes that offering 24 hour, 7 day per week worldwide support creates stronger relationships with customers and provides a significant competitive advantage. Approximately 2.4%

8

5.9% of Veeco's net sales for the year ended December 31, 20012002 constituted revenues from service and support. These results are included in Veeco's process equipment and metrology sales, as appropriate.

        Veeco sells its products worldwide through twenty-eightvarious strategically located sales and service facilities including fifteenlocated in the U.S., seven in Europe, four in Asia Pacific, and two in Japan. In 2001, Veeco continued to expand its direct worldwide sales and service support organization to focus on combined field service and customer support for all Veeco process equipment and metrology products. As of December 31, 2001,2002, Veeco employed 188139 sales and marketing representatives, and 264150 field service representatives and 98 product support representatives. During the years ended December 31, 2002 and 2001, Veeco recorded approximately $5.6 million and $30.6 million in revenues from independent representatives, respectively, which represented approximately 2% and 7% of total consolidated revenues, respectively. During 2002 and 2001, revenues related to the sale of process equipment's units approximated $1.7 million and $18.4 million, respectively, and revenues related to the sale of metrology's units approximated $3.9 million and $12.2 million, respectively.

Customers

        Veeco sells its products to many of the world's major data storage, semiconductor and telecommunications/wireless component manufacturers, and to customers in other industries, research centers and universities. For the year ended December 31, 2001, 31%2002, 40% of Veeco's sales were to data storage customers, 30% to telecommunications/wireless, 22% toscientific research and industrial customers, 32% to data storage customers, 15% to telecommunications/wireless, and 17%13% to semiconductor customers. We rely on certain principal customers for a significant portion of our sales including Seagate Technology, Inc., which has been one of our largest customers during the last three years. Sales to Seagate accounted for 13%, 7%, and 18% of Veeco's total net sales in the years ended December 31, 2002, 2001, and 2000, respectively. If any principal customer discontinues its relationship with us or suffers economic setbacks, our business, prospects, financial condition and operating results could be materially and adversely affected.

10

Research and Development

        Veeco believes that continued and timely development of new products and enhancements to existing products are necessary to maintain its competitive position. Veeco works collaboratively with its customers to help ensure its technology and product roadmaps are aligned with customer requirements. Veeco's research and development programs are organized by product line; new products have been introduced into each of Veeco's product lines in each of the past three years.

        Veeco's research and development expenses were approximately $53.9 million, $59.7 million $51.2 million and $41.0$51.2 million, or approximately 13.3%18.0%, 13.6%13.3% and 13.1%13.6% of net sales, for the years ended December 31, 2002, 2001 2000 and 1999,2000, respectively. These expenses consisted primarily of salaries, project material and other product development and enhancement costs.

Manufacturing

        The Company's principal manufacturing activities, which consist principally of design, assembly, integration and test operations, are organized by product and take place at itsour facilities in Plainview, New York, Rochester, New York, Santa Barbara, California, Sunnyvale, California, Tucson, Arizona, Ft. Collins, Colorado, and St. Paul, Minnesota and San Diego, California.Minnesota.

        The Company's manufacturing and research and development functions have beenare organized by product line.families. The Company believes that this organizational structure allows each product linefamily manager to more closely monitor the products for which he is responsible, resulting in more efficient sales, marketing, manufacturing and research and development. The Company seeks to emphasize customer responsiveness, customer service, high quality products and a more interactive management style. By implementing these management philosophies, the Company believes that it has increased its competitiveness and positioned itself for future growth.

9

        Certain of the components and sub-assemblies included in the Company's products are obtained from a single source or a limited group of suppliers. Although the Company does not believe it is dependent upon any supplier of the components and sub-assemblies referred to in the previous sentencethese suppliers as a sole source or limited source for any critical components, the inability of the Company to develop alternative sources, if required, or an inability to meet a demand, or a prolonged interruption in supply or a significant increase in the price of one or more components could adversely affect the Company's operating results.

Backlog

        Veeco's backlog decreased from $363.4 million at December 31, 2000 to $122.0 million at December 31, 2001.2001 to $89.1 million at December 31, 2002. Backlog adjustments for 20012002 included order cancellations of $136.3$20.9 million. The Company's backlog generally consists of product orders for which a purchase order has been received and which are scheduled for shipment within twelve months. Veeco schedules production of its systems based on order backlog and customer commitments. Because certain of the Company's orders require products to be shipped in the same quarter in which the order was received, and due to possible changes in delivery schedules, cancellations of orders and delays in shipment, the Company does not believe that the level of backlog at any point in time is an accurate indicator of the Company's future performance. Due to the current weak business environment, the Company may continue to experience cancellation and/or rescheduling of orders.

Competition

        In each of the markets that it serves, Veeco faces substantial competition from established competitors, some of which have greater financial, engineering, manufacturing and marketing resources than Veeco. In addition, many of Veeco's products face competition from alternative technologies,

11

some of which are more established than those used in Veeco products. Significant factors for customer selection of metrology and process equipment tools include system performance, accuracy, repeatability, ease of use, reliability, cost of ownership, and technical service and support. Veeco believes it competes favorably on the basis of these factors in each market Veeco serves. None of Veeco's competitors competes with Veeco across all of Veeco's product lines.

        Veeco competes with metrology product manufacturers such as KLA-Tencor, Seiko, Hitachi, Zygo Corporation and Zygo Corporation.a variety of small manufacturers. Veeco competes with process equipment manufacturers such as Anelva, Unaxis, Hitachi, Nordiko, Anelva,Riber, and Oxford Instruments.

Intellectual Property

        Veeco's success depends in part on its proprietary technology. Although Veeco attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that Veeco will be able to protect its technology adequately or that competitors will not be able to develop similar technology independently. Veeco believes that there is no single patent which is material to its operations.

        Veeco has patents and exclusive and non-exclusive licenses to patents owned by others covering certain of its products, which Veeco believes provide it with a competitive advantage. Veeco has a policy of seeking patents on inventions concerning new products and improvements as part of its ongoing research, development and manufacturing activities. Veeco believes that there are no patents which are critical to its operations, and that the success of its business depends primarily on the technical expertise, innovation, and experience of its employees.

        Veeco also relies upon trade secret protection for its confidential and propriety information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to Veeco's trade secrets or that Veeco can meaningfully protect its trade secrets. In addition, the Company cannot be certain that it will not be

10

sued by third parties alleging that the Company has infringed their patents or other intellectual property rights. If any third party sues Veeco, the Company's business, results of operations or financial condition could be materially adversely affected.

        Following the merger with Digital Instruments, in September 1998, Veeco and IBM entered into a cross license agreement providing for the grant by Veeco to IBM and the grant by IBM to Veeco of the non-exclusive right to make, use and sell AFM/SPM products utilizing technology covered by certain patents held by Veeco and IBM, respectively. The agreement terminatesis scheduled to expire in August 2003. The cross license2003, although, the Company expects to negotiate an extension of this agreement replaced awith IBM prior patent license agreement between IBM and Digital.to that time.

Employees

        At December 31, 2001,2002, the Company had 1,4461,067 employees, of which we had 439there were 259 in manufacturing and testing, 188139 in sales and marketing, 264150 in service, and98 in product support, 339260 in engineering, research and development, and 216161 in information technology, general administration and finance. The success of the Company's future operations depends in large part on the Company's ability to recruit and retain engineers, technicians and other highly-skilled professionals who are in considerable demand. There can be no assurance that the Company will be successful in retaining or recruiting key personnel. The Company believes that its relations with its employees are good.

        Other than Edward H. Braun and John F. Rein, Jr., the Company's Chairman and Chief Executive Officer and President and the Company's Executive Vice President and Chief Financial Officer, respectively, the Company's executive officers are not, in general, subject to employment agreements or non-competition agreements with the Company.

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Item 2.    Properties.

        The Company's headquarters office and its principal manufacturing, research and development and sales and service facilities, as well as the approximate size and the segments which utilize such facilities, are:

(1)

The land and building are classified as assets held for sale at December 31, 2002. See Note 7 to the Consolidated Financial Statements of the Company for further discussion.

(2)

The Company's optical metrology business utilizes approximately 60,00075,000 square feet of this facility. The balance is available for expansion.

        The Tucson, Santa Barbara Rochester and St. Paul facilities are subject to mortgages, which at December 31, 2001,2002, had outstanding balances of, $2.0 million, $6.4 million, $1.8$6.3 million and $4.3$4.2 million, respectively. The Company also leases small

11

offices in Chadds Ford, Pennsylvania and Edina, Minnesota, for sales and service. The Company's foreign subsidiaries lease space for use as sales and service centers in England, France, Germany, Ireland, Japan, Korea, Malaysia, Singapore, China and Taiwan. The Company believes its facilities are adequate to meet its current needs.

Item 3.    Legal Proceedings.

Environmental

        The Company may, under certain circumstances, be obligated to pay up to $250,000 in connection with the implementation of a comprehensive plan of environmental remediation at its Plainview, New York facility. The Company has been indemnified for any liabilities it may incur in excess of $250,000 with respect to any such remediation. No comprehensive plan has been required to date. Even without consideration of such indemnification, the Company does not believe that any material loss or expense is probable in connection with any remediation plan that may be proposed.

        The Company is aware that petroleum hydrocarbon contamination has been detected in the soil at the site of a facility leased by the Company in Santa Barbara, California. The Company has been indemnified for any liabilities it may incur which arise from environmental contamination at the site. Even without consideration of such indemnification, the Company does not believe that any material loss or expense is probable in connection with any such liabilities.

        The former owner of the land and building in which the Company's Santa Barbara, California metrology operations are located has disclosed that there are hazardous substances present in the

13

ground under the building. Management believes that the comprehensive indemnification clause that is part of the purchase contract provides adequate protection against any environmental issues that may arise.

Non-Environmental

        On August 15, 2001, a lawsuit was commenced in the Superior Court of California, County of Santa Clara, by Toyo Corporation ("Toyo") against TM,ThemoMicroscopes Corp. ("TM"), the Company, Thermo Spectra Corporation and Thermo Electron Corporation. ThisThe lawsuit relatesrelated to a Distribution Agreement between Toyo and TM under which Toyo had been appointed the exclusive distributor for the sale of TM products in Japan. In the lawsuit, Toyo claims,claimed, among other things, that TM breached the Distribution Agreement and that the Company, Thermo Spectra and Thermo Electron intentionally interfered with Toyo's contractual relationship with TM, in each case, by virtue of the sale of the outstanding shares of TM to the Company, which Toyo alleges wasconstituted an assignment of the Distribution Agreement without Toyo's consent. The suit alleges damagesIn February 2003, the parties agreed in a currently unascertained amount. Theprinciple to settle the lawsuit, with the Company intendsand Thermo Electron each making an equal payment to vigorously defend this lawsuit and has filed a counterclaim against Toyo. The Company doesadequately provided for this liability in purchase accounting for the TM acquisition and thus the settlement of this lawsuit will not expect this matter tohave an impact on the consolidated results of operations, nor will it have a material effectimpact on the Company's consolidated balance sheet or its consolidated financial condition or resultscash position. See Note 7 to the Consolidated Financial Statements of operations.the Company for further discussion.

        The Company is involved in various other legal proceedings arising in the normal course of its business. Based upon the advice of counsel, the Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

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

        None.

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PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.

        The Company's Common Stock is quoted on The NASDAQ National Market under the symbol"VECO"symbol "VECO". The 20012002 and 20002001 high and low closing prices are as follows:

        On March 12, 2002,20, 2003, the closing price for the Company's Common Stock on the NASDAQ National Market was $29.95.$17.34. As of March 12, 2002,20, 2003, the Company had approximately 206211 shareholders of record.

        On September 17, 2001, in connection with the merger with Applied Epi, Inc. (Applied Epi), the Company issued to the former shareholders of Applied Epi a total of 3,883,460 shares of Common Stock. The securities were issued without registration under the Securities Act of 1933 pursuant to Section 4(2) thereof.

        In December 2001 and January 2002, the Company issued $220.0 million of 4.125% convertible subordinated notes, which are due in 2008, in a private placement. The notes are convertible, at the option of the holder, at any time on or prior to maturity into shares of common stock at a conversion price of $38.51 per share. The Company will paypays interest on these notes on June 21 and December 21 of each year, commencing on June 21, 2002.year. The notes will mature on December 21, 2008. The total $220.0 million of convertible subordinated notes are convertible into approximately 5,712,800 shares of Veeco Common Stock, which number is subject to adjustment in the event of stock splits and certain other transactions.

        The Company has not paid dividends on the Common Stock. The Company intends to retain future earnings, if any, for the development of its business and, therefore, does not anticipate that the Board of Directors will declare or pay any dividends on the Common Stock in the foreseeable future. In addition, the provisions of the Company's current credit facility limits the Company's ability to pay dividends. The Board of Directors will determine future dividend policy based on the Company's consolidated results of operations, financial condition, capital requirements and other circumstances.

15        The following table gives information about our Common Stock that may be issued under our equity compensation plans as of December 31, 2002. See Note 5 to the Consolidated Financial Statements included herein for information regarding the material features of these plans.

(A)

Includes 82,867 stock options assumed in connection with the acquisition of CVC on May 10, 2000, which merger was approved by stockholders.

(B)

Includes 387,514 stock options assumed in connection with the acquisition of Applied Epi, Inc. on September 17, 2001.

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Item 6. Selected Consolidated Financial Data.

        The financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Company's Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.

1614

(1)

During December 2001, the Company classified its industrial measurement operating segment as a discontinued operation. The StatementsStatement of Operations and Balance Sheet data for all years presented have been restated to reflect this.accordingly. See Note 7 to the Consolidated Financial Statements.

(2)

Prior to the merger with Veeco on May 5, 2000, CVC's fiscal year end was September 30. Therefore the Statement of Operations data for all years presented through 1999 and 1998 was derived from CVC's financial statements for the respective twelve months ended September 30. In addition, the Balance Sheet data throughfor 1999 and 1998 was derived from CVC's balance sheet as of September 30 balance sheets.30.

(3)

Prior to the merger with Veeco on November 4, 1999, Ion Tech's fiscal year end was June 30. In connection with the merger, the financial results of Ion Tech were recast for 1998 to conform to Veeco's December 31 year-end. For

(4)

Veeco incurred merger, restructuring and asset impairment charges of $126.0 million during the year ended December 31, 1997, historical results include those2002. Of these charges, $99.7 million related to asset impairment charges ($94.4 million for Ion Tech's fiscal year ended June 30, 1998, thus resultinggoodwill impairment, $3.5 million for impairment of land and buildings and $1.8 million for impairment of other fixed assets), $15.0 million was associated with the write-off of inventory (included in six monthscost of 1998 activitysales), $6.4 million was due to the write-off of costs associated with the termination of the FEI merger agreement, $5.4 million was for severance and business relocation costs and $0.3 related to a prepayment penalty for the early extinguishment of debt. The merger and restructuring charges are offset in part by approximately $0.8 million of income related to the 1997 resultssettlement of operations.a post-retirement benefit plan of the process equipment segment. See Note 7 to the Consolidated Financial Statements.

(4)(5)

Veeco incurred merger and restructuring charges of $28.2 million during the year ended December 31, 2001. Of these charges, $13.6 million related to the write-off of inventory (included in cost of sales), $8.2 million related to the write-off of purchased in-process technology ($7.0 million resulting from the acquisition of Applied Epi and $1.2 million from the acquisition of TM), $3.0 million represented restructuring costs and $3.4 million was for the write-down of long-lived assets. See Note 7 to the Consolidated Financial Statements.

(5)(6)

Veeco incurred merger and reorganization charges of $33.3 million during the year ended December 31, 2000, of which $33.0 million related to the merger with CVC. Of these charges, $15.3 million related to a write-off of inventory (included in cost of sales), $14.0 million represented merger and reorganization costs (of which $9.2 million related to investment banking, legal and other one-time transaction costs and $4.8 million pertained to duplicate facility and personnel costs) and $3.7 million was for the write-off of long-lived assets. See Note 2 to the Consolidated Financial Statements.

15

(6)(7)

During 1999, the CompanyVeeco recorded charges of $2.6 million related to merger expenses in connection with the merger with Ion Tech. In 1998, the CompanyVeeco recorded merger and reorganization expenses of $7.5 million related to the merger with Digital Instruments. During 1997, the Company incurred $2.3 million of merger expenses in conjunction with the merger with Wyko.

(7)(8)

During 1999, the CompanyVeeco recorded a $2.5 million charge related to the write-off of purchased in-process technology ($1.3 million related to the acquisition of OptiMag Inc. ("OptiMag") and $1.2 million related to CVC's acquisition of Commonwealth Scientific Corporation). During 1997, the Company recorded a $4.2 million charge related to the write-off of purchased in-process technology in connection with the acquisition of PVD assets.

(8)(9)

Effective January 1, 2000, the CompanyVeeco changed its method of accounting for revenue recognition in accordance with SAB 101.

(9)(10)

The CompanyVeeco adopted SAB 101 effective January 1, 2000. Had this adoption taken place on January 1, 1998, net income, net income per common share and diluted net income per common share on a pro forma basis would have been as follows:

17

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

Overview

        Veeco is a leader in the development, manufacture, marketingdesigns, manufactures, markets and servicing ofservices a broad line of precision metrologyequipment primarily used by manufacturers in the data storage, semiconductor and telecommunications/wireless industries. Veeco's instruments are also enabling advancements in the growing field of nanoscience and other areas of scientific and industrial research. Our process equipment used to measure, test and manufacture microelectronic products precisely deposit or remove (etch) various materials in the manufacturing of advanced TFMHs for the data storage industry, semiconductor deposition of mask reticles, and telecommunications/wireless devices. Our metrology equipment is used to provide critical surface measurements on semiconductor researchdevices and TFMHs. This equipment allows customers to monitor their products throughout the manufacturing process in order to improve yields, reduce costs and improve product quality. Our metrology solutions are also key instruments used by many universities, scientific laboratories and industrial markets. Process equipment is primarily used to etch and deposit materials in the manufacture of TFMHs and optical active and passive devices that greatly expand the bandwidth (capacity) of existing fiber optic networks. Metrology equipment is primarily used to measure critical dimensions for research, optical and semiconductor devices, as well as TFMHs.applications.

        During the past several years, Veeco has strengthened both the process equipment product line and the metrology product line withthrough strategic acquisitions. See "Item 1. Business—The Company-Acquisition History" above.

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Results of Operations

        The following table sets forth, for the periods indicated, the relationship (in percentages) of selected items of Veeco's consolidated Statements of Operations to its total net sales:

Years Ended December 31, 2002 and 2001

        Net sales were $298.9 million for the year ended December 31, 2002, representing a decrease of $150.4 million, or 33%, when compared to the year ended December 31, 2001. Sales in the U.S., Europe, Japan and Asia Pacific, accounted for 47%, 17%, 18% and 18%, respectively, of the Company's net sales for the year ended December 31, 2002. Sales in the U.S. decreased by approximately $103.3 million from 2001. The decrease in U.S. sales is primarily attributable to an $87.9 million decrease in process equipment sales, due primarily to a decline of $53.8 million in sales of ion beam deposition products to the optical telecommunications industry, as well as a decrease of $45.0 million in sales of etch and deposition products to the data storage industry. The decrease in U.S. process equipment sales is offset slightly by a $10.9 million increase in the sale of molecular beam epitaxy (MBE) equipment to the telecommunications and research industries by the Company's Applied Epi subsidiary, which was acquired in September 2001, in a transaction accounted for as a purchase. U.S. metrology sales decreased by $15.4 million from 2001, primarily as a result of a $5.5 million decline in the sale of AFMs to semiconductor customers, as well as a $9.3 million decrease in the sale of SLC products to data storage customers. European sales decreased by $29.0 million when compared to the prior year, which is primarily attributable to a $28.2 million drop in process equipment sales consisting principally of a decrease in sales of etch and deposition products to data storage customers. Metrology sales in Europe decreased by 4%, or $1.3 million. Although European sales of AFMs decreased by $2.5 million, this was offset in part by a $1.2 million increase in the sale of optical

17

interferometry products to the semiconductor and optical telecommunications industries. Sales in Japan decreased by $36.6 million from 2001. The decrease is principally a result of a $30.9 million decline in process equipment sales. Sales to data storage customers dropped by $19.2 million, while sales to the telecommunications industry declined by $13.5 million. This was partially offset by a $1.8 million increase in MBE sales to telecommunications and research customers. Metrology sales in Japan decreased by $5.7 million, primarily as a result of a $4.5 million decrease in AFM sales, as well as a $1.2 million decrease in optical metrology sales, particularly to semiconductor and telecommunications customers. Sales in Asia Pacific increased by $15.7 million over the comparable 2001 period, principally as a result of a $17.0 million increase in the sale of etch and deposition products to data storage customers, offset in part by a $3.8 million decrease in sales of ion beam deposition products to telecommunications customers. Metrology sales in Asia Pacific also increased by $2.0 million over 2001, due to a $4.6 million increase in sales of optical metrology products to data storage customers, as well as a $2.6 million increase in sales of optical interferometry products to semiconductor and telecommunications customers, offset by a $5.2 million decrease in sales of AFMs, principally to the semiconductor industry. The Company believes that there will continue to be quarter-to-quarter variations in the geographic concentration of sales.

        Process equipment sales in 2002 were severely affected by the downturn in the data storage and telecommunications industries, causing a decrease of $130.5 million from prior year sales of $277.3 million. This was due to a $72.1 million drop in etch and deposition product sales, principally to the data storage market, as well as a $71.2 million decrease in optical filter deposition sales to the telecommunications industry. MBE sales, primarily to research and wireless telecommunications customers were $30.5 million during the year ended December 31, 2002, compared to $17.8 million in 2001. Metrology sales were also affected, primarily by the downturn in the semiconductor industry causing a decrease of $19.8 million from $172.0 million in the year ended December 31, 2001. This decrease is attributable to a $17.2 million decrease in the sale of AFMs, primarily to the semiconductor and research/industrial industries, as well as a $4.5 million decrease in optical interferometry sales, predominantly to the data storage and semiconductor industries. The decrease in metrology sales was partially offset by a $1.9 million increase in the sale of optical metrology products.

        Veeco received $289.1 million of orders for the year ended December 31, 2002, representing a 9% decrease from $318.9 million of orders in the comparable 2001 period. Process equipment orders decreased by $38.9 million to $135.0 million, primarily due to the continued downturn in the data storage and telecommunications industries. Orders for etch and deposition equipment, sold primarily to the data storage industry, decreased $34.1 million, from the prior year, while orders for optical filter deposition equipment decreased $27.0 million from the comparable 2001 period. The decrease in process equipment orders is offset in part by a $22.2 million increase in MBE orders, primarily to telecommunications and research customers. Metrology orders increased by $9.1 million to $154.1 million, reflecting a 6% increase in orders for AFMs as well as a 5% increase in orders for optical metrology products. The book-to-bill ratio for the year ended December 31, 2002, which is calculated by dividing orders received in a given time period by revenue recognized in that same time period, was 0.97 to 1.

        For the year ended December 31, 2002, the Company experienced order cancellations of $20.9 million, the majority of which related to the data storage and optical telecommunications market. The Company also experienced rescheduling of order delivery dates by customers. Due to the weak business environment, the Company may continue to experience cancellation and/or rescheduling of orders.

        During the years ended December 31, 2002 and 2001, the Company incurred merger and restructuring charges of $126.0 million and $28.2 million, respectively, of which $15.0 million, or 5.0% of net sales, and $13.6 million, or 3.0% of net sales, respectively, related to the write off of inventory, which is included in cost of sales. Gross profit for the year ended December 31, 2002, decreased to

18

38.8% from 42.1% in 2001. Excluding the merger and restructuring charges in both years, gross profit as a percentage of net sales decreased to 43.8% from 45.1%. The decreased gross margin is primarily due to the significant volume decrease from the prior year, particularly in process equipment sales.

        Selling, general and administrative expenses of $75.9 million, or 25.4% of sales, for the year ended December 31, 2002 represented a decrease of $6.5 million, or 8%, from $82.4 million in 2001. The expense is higher as a percentage of sales due to the 33% decrease in sales volume from 2001. The dollar decrease is principally attributable to a decrease in selling and commission expense resulting from the decreased sales volume, as well as cost reduction efforts implemented by the Company. The decrease is partially offset by a $6.1 million increase in selling, general and administrative expenses of the Applied Epi and TM subsidiaries, both of which were acquired by the Company during the third quarter of 2001.

        Research and development expense for the year ended December 31, 2002, of $53.9 million represented a decrease of $5.8 million, or 10%, from the comparable period of 2001, due primarily to cost reduction efforts implemented by the Company in all product areas, except for AFM. This decrease is offset in part by the impact of $4.3 million in research and development expense of Applied Epi and TM.

        Amortization expense for the year ended December 31, 2002, of $13.3 million represented an increase of $3.9 million from the comparable period of 2001, due primarily to the intangible assets acquired during the third quarter of 2001 in connection with the Applied Epi and TM acquisitions. This amount is offset in part by $1.5 million of reduced amortization expense related to the accounting requirement to no longer amortize goodwill, in accordance with SFAS No. 142,Goodwill and Other Intangible Assets, which became effective on January 1, 2002. Under SFAS No. 142, goodwill is to be reviewed annually for impairment. As previously mentioned, the Company recorded a goodwill impairment charge of $94.4 million in the fourth quarter of 2002.

        In conjunction with the plan announced by the Company in October 2002 to reduce operating costs by $24.0 million in 2003, as well as the continued weakness in the Company's served markets and the uncertainty of their recovery, the Company recorded merger and restructuring charges of approximately $124.0 million during the fourth quarter of 2002. The $24.0 million in future cost savings is expected to affect each of the four quarters of 2003. In addition, it is anticipated that of the $24.0 million in cost savings, approximately $8.0 million is to reduce cost of sales, and approximately $16.0 million will reduce operating expenses, including selling, general and administrative expenses. Of the $124.0 million charge, approximately $4.2 million will require future cash outlays. The $124.0 million charge consisted of a $15.0 inventory write-down (included in cost of sales) in the process equipment segment, due to rationalization and discontinuance of certain product lines, $2.6 million of personnel costs and business relocation, $6.4 million of merger-related expenses, $0.3 million for a prepayment penalty on early extinguishment of debt and $99.7 million in asset impairment charges, primarily in the process equipment segment. The $99.7 million in asset impairment charges included a $94.4 million write-down of goodwill, $3.5 million for the impairment of two buildings and $1.8 million for the impairment of other fixed assets (see Note 1 to the Consolidated Financial Statements of the Company).

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        In light of current economic conditions, as well as the significant decline in process equipment sales, the Company implemented a plan to rationalize certain product lines, which required discontinuance or modification of several products. As a result of the significant reduction in sales volume and the rationalization of product lines, excess plant capacity existed. Part of the plan to reduce future operating costs consisted of consolidation or elimination of certain facilities resulting in the reduction of excess capacity. The plan includes closing two process equipment manufacturing facilities, in Fort Collins, Colorado and Rochester, New York. The manufacturing activities of the Rochester facility ceased as of December 31, 2002, and the manufacturing activities of the Fort Collins facility are in the process of being phased out. The manufacturing at both of these sites will be transferred to the Company's Plainview, New York facility. As a result of this reorganization, the Company recorded an inventory write-down of approximately $15.0 million. In connection with these actions, certain products sold to the data storage industry were discontinued. These products include certain physical vapor deposition equipment. A portion of this product line's inventory is not useable and thus has been written-off by the Company. The $15.0 million charge also consists of the discontinuance or modification of certain telecommunications product lines, due to the continued decline in the telecommunications industry. This industry has seen a significant decline due to excess of fiber optic capacity created by telephonic carriers as well as current economic conditions, which have resulted in a significant decrease in capital spending.

        The $2.6 million charge for personnel costs and business relocation includes severance costs of approximately $1.6 million and business relocation costs of approximately $1.0 million. The severance charges relate to a workforce reduction of approximately 180 employees, located in all operations of the Company. The majority of the job classifications affected were in production, purchasing, engineering, service, sales and marketing and were concentrated in the process equipment segment. Business relocation costs of $1.0 million include costs related to rental payments and/or lease termination fees on lease agreements relating to locations vacated by the Company. In addition, the business relocation costs include operating costs of the Rochester facility that has ceased manufacturing operations. These operating costs will be incurred while the building is being marketed for sale. As of December 31, 2002, approximately $1.0 million in termination benefits has been paid and approximately $0.6 million remains accrued, which will be paid by the third quarter of 2003. As of December 31, 2002, approximately $0.1 million of business relocation costs has been paid and approximately $0.9 million remains accrued. Of the $0.9 million remaining, approximately $0.2 million is expected to be paid in the first quarter of 2003, $0.5 million is expected to be paid by the end of 2003 and approximately $0.2 million in the aggregate is anticipated to be paid monthly through the third quarter of 2005.

        On July 11, 2002, the Company entered into a merger agreement with FEI, headquartered in Hillsboro, Oregon. On January 8, 2003, the agreement was terminated. Veeco incurred approximately $6.4 million in expenses related to the proposed merger with FEI. Merger-related costs were accounted for as an asset, and the Company intended to allocate these direct costs to the purchase price of the acquisition. However, due to the termination of the merger agreement, these costs were written off. These costs include legal, accounting, tax, investment banking and regulatory fees and printing costs. As of December 31, 2002, $3.7 million of these costs have been paid and approximately $2.7 million remains accrued, which will be paid in the first quarter of 2003.

        In conjunction with the restructuring in the process equipment segment and the closure of two manufacturing facilities, the Company has classified the two facilities as held for sale as of December 31, 2002. In accordance with SFAS No. 144, these facilities are measured at the lower of their carrying amount or fair value less cost to sell. Accordingly, an impairment charge of $3.5 million was recorded by the Company. Fair value was determined by the Company based upon recent market data. Land, buildings and other fixed assets held for sale of approximately $10.2 million are included in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheet at

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December 31, 2002. The sale of these two facilities is expected to occur by the end of 2003. Certain machinery and equipment and furniture and fixtures with a net book value of $1.8 million, the majority of which is a result of the closing of the Rochester facility, were deemed to have no future value and, thus, the Company has written off those assets and has included this charge in asset impairment in the accompanying Consolidated Statement of Operations for the year ended December 31, 2002.

        As a result of the Rochester facility being available for sale, the Company paid down a term loan and mortgage related to the building. Due to the prepayment of the term loan, the Company was required to pay a penalty of approximately $0.3 million in December 2002, which is included in the merger and restructuring charge in the accompanying Consolidated Statement of Operations for the year ended December 31, 2002.

        During the three months ended September 30, 2002, the Company incurred a restructuring charge of approximately $0.9 million related to cost reduction efforts in response to continuing poor industry conditions and the decreased level of new orders. The $0.9 million charge includes severance related costs for approximately 40 management and manufacturing employees principally located in the process equipment segment. As of December 31, 2002, approximately $0.4 million has been expended and approximately $0.5 million remains accrued, which is anticipated to be paid in the first quarter of 2003. This charge is offset in part by approximately $0.8 million of income related to the settlement of a post-retirement benefit plan of the process equipment segment.

        During the three months ended June 30, 2002, the Company incurred a restructuring charge of approximately $1.1 million related to the reductions in work force announced in the fourth quarter of 2001 and the first quarter of 2002. The $1.1 million charge includes severance related costs for approximately 30 employees, which included both management and manufacturing employees principally located in the process equipment segment. As of December 31, 2002, approximately $0.6 million has been expended and approximately $0.5 million remains accrued, which is expected to be paid in the first quarter of 2003.

        During the three months ended March 31, 2002, the Company incurred a restructuring charge of $0.8 million related to the reduction in work force announced in the fourth quarter of 2001. This charge includes severance related costs for approximately 60 employees, which included both management and manufacturing employees located at the Company's Minnesota metrology and New York process equipment operations. As of December 31, 2002, this accrual was fully expended.

        Other income, net, for the year ended December 31, 2002 improved to $0.3 million over the comparable 2001 period from other expense, net, of $2.5 million, due to a decrease in foreign currency exchange losses, which occurred principally in the first quarter of 2001.

        Interest expense, net, of $6.0 million for the year ended December 31, 2002, increased $6.6 million from the comparable 2001 period as a result of the issuance of $220.0 million of 4.125% convertible subordinated notes, which occurred in December 2001 and January 2002.

        Income taxes for the year ended December 31, 2002 amounted to a benefit of $20.5 million, or 14% of loss before income taxes, as compared with income tax expense of $6.0 million, or 29% of income before income taxes in 2001. The lower effective tax rate for 2002 is due to approximately $94.4 million of non-deductible charges related to the write-down of goodwill under SFAS No. 142.

        In connection with the sale of its industrial measurement segment in May 2002, the Company recorded an additional $0.3 million loss on the disposal of the discontinued operations during the year ended December 31, 2002, net of approximately $0.2 million of taxes.

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Years Ended December 31, 2001 and 2000

        Net sales were $449.3 million for the year ended December 31, 2001, representing an increase of $73.1 million, or 19%, when compared to the year ended December 31, 2000. Sales in the U.S.,

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Europe, Japan and Asia Pacific, accounted for 54%, 18%, 20% and 8%, respectively, of the Company's net sales for the year ended December 31, 2001. Sales in the U.S. increased by approximately $53.8 million or 29%, from 2000. The increase in U.S. sales is primarily attributable to a $46.3 million increase in process equipment sales, due to increased etch and deposition equipment sales to the data storage industry, as well as increased sales of optical filter deposition products to the telecommunications industry. Sales of MBE equipment produced by Applied Epi, which we acquired in September 2001, have also contributed to the increase in U.S. process equipment sales by approximately $9.8 million over the comparable 2000 period. This acquisition was accounted for as a purchase and thus there wereperiod, which have no reportable sales for Applied Epi in the comparable 2000 period.MBE sales. European sales increased by $26.0 million, or 48%, when compared to the prior year. This increase is primarily a result of a 53% increase in process equipment andsales. The 53% increase is a 43%result of a $6.4 million increase in etch and deposition products sold primarily to the data storage industry, a $1.4 million increase in sales of optical filter deposition products sold principally to the telecommunications industry and $7.4 million of sales of MBE equipment sold mainly to the telecommunications industry. Metrology sales in Europe increased by 43%, which was principally the result of an increase of $12.3 million, or 59%, in AFM sales to the semiconductor and research/industrial industries. Of the $12.3 million, $1.6 million was attributable to sales from the Company's TM Microscopes subsidiary, which was acquired in July of 2001 using the purchase method of accounting, and therefore there were no comparable sales in 2000. The 59% increase was slightly offset by a $1.5 million decline in optical metrology sales over 2000.of interferometry products to the data storage and semiconductor industries. Sales in Japan increased by $9.9 million or 12%, over the prior year, primarily as a result of increased metrology sales.sales of 47% for AFMs and 22% for optical metrology products. Japan's process equipment sales remained relatively flat compared to the prior 2000 period. Sales in Asia Pacific decreased by $16.9 million or 32%, over the comparable 2000 period, as a result of decreased sales in optical metrology products,products. This decrease resulted from the decline in sales of the slider level crown (SLC) product line of approximately $15.6 million to data storage customers over the prior comparable period, which was partially offset by an increase in AFM sales. The Company believes that there will continue to be quarter-to-quarter variations in the geographic concentration of sales.

        Process equipment sales of $277.3 million for the year ended December 31, 2001, increased $61.0 million, or 28%, over the prior year, due partially to a $27.9 million or 45%, increase in optical filter deposition sales to the telecommunications industry. Etch and deposition product sales, principally to the data storage market, also increased by $15.3 million or 10% over the prior year. MBE sales, as a result of the Applied Epi acquisition, were $17.8 million during the year ended December 31, 2001. Metrology sales of $172.0 million for the year ended December 31, 2001 increased by $12.2 million or 8%, from the comparableyear ended December 31, 2000, period, reflecting a 37% increase in the sale of AFMs, primarily to the semiconductor and research/industrial industries, offset by a 39% decrease in sales of optical metrology products.products, which was attributable to the above mentioned decrease in sales of the SLC product line to data storage customers and a $10.0 million decrease in interferometry sales, for the most part to the data storage and semiconductor industries, from the year ended December 31, 2000.

        Veeco received $318.9 million of orders for the year ended December 31, 2001, representing a 47% decrease from $596.8 million of orders in the comparable 2000 period. Process equipment orders decreased 56% to $173.9 million, primarily due to the significant business downturn in the telecommunications industry. Orders for optical filter deposition equipment decreased 78%, or $161.4 million from the comparable 2000 period. Orders for etch and deposition equipment, sold primarily to the data storage industry, decreased by 39%, or $73.3 million from the prior year. Metrology orders decreased 28% to $145.0 million, reflecting a 16% decrease in orders for AFMs as well as a 50% decrease in orders for optical metrology products. The order declines are a result of the general economic slowdown that has

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had a very significant impact on the telecommunications, data storage and semiconductor markets that the Company serves. The book-to-bill ratio for the year ended December 31, 2001 was 0.71 to 1.

        For the year ended December 31, 2001, the Company experienced order cancellations of $136.3 million, primarily for productsof which approximately $110.0 million related to the optical telecommunications market. The Company alsomarket, for which Veeco is a significant supplier.

        From 1999 through the beginning of 2001, the telecommunications industry experienced reschedulingrapid and unprecedented growth. In connection with this growth, telecommunications companies spent billions of dollars installing long haul optical networks in order delivery datesto meet growing telecommunications needs. These networks use a technology called Dense Wavelength Division Multiplexing ("DWDM"). Certain of Veeco's Ion Beam Systems are used to manufacture DWDM filters, which create multiple optical channels that can be carried by customers. Dueoptical fiber. During this period DWDM filters were in extremely high demand, which created a worldwide shortage. In order to keep up with this demand, optical telecommunications customers placed numerous multi-unit system orders that were to be shipped over multiple quarters.

        In early 2001, it became apparent that many of these optical telecommunications customers had accumulated too much debt and constructed too many optical networks. This caused these companies to reduce their capital spending, and as a result, demand for the weak business environment,filters started to evaporate. Many customers cancelled a majority of their multi-unit orders. By the Company may continue to experience cancellation and/or reschedulingend of orders.the second quarter of 2001, a substantial amount of the backlog for systems used for manufacturing DWDM filters had been cancelled.

        During the years ended December 31, 2001 and 2000, the Company incurred merger and restructuring charges of $28.2 million and $33.0 million, respectively, of which $13.6 million, or 3.0% of net sales, and $15.3 million, or 4.1% of net sales, respectively, related to the write off of inventory, which is included in cost of sales. Gross profit for the year ended December 31, 2001 increased to 42.1% from 41.6% in 2000. Excluding the merger and restructuring charges in both years, gross profit as a percentage of net sales decreased slightly to 45.1% from 45.7% due primarily to a mix change resulting in an increase in process equipment sales with lower average gross margins, as well as a decline in optical metrology sales.

19        Selling, general and administrative expenses of $82.4 million for the year ended December 31, 2001 increased by $6.8 million compared to $75.6 million in 2000. The dollar increase is related to increased sales volume, primarily in the AFM product line and deposition equipment for optical filters.

        Research and development expense for the year ended December 31, 2001 of $59.7 million, increased by $8.5 million or 17%, over the comparable period of 2000, due primarily to additional research and development in certain Ion Tech and AFM product areas, as well as the inclusion of the newly acquired businesses of Applied Epi and TM, which were not included in Veeco's spending in 2000.

        Selling, general and administrative expenses of $82.4 million, or 18% of sales, for the year ended December 31, 2001 increased by $6.8 million, or 9%, compared to $75.6 million, or 20% of sales, in 2000. The dollar increase is related to increased sales volume, primarily in the AFM product line and and deposition equipment for optical filters.

Amortization expense for the year ended December 31, 2001, of $9.5 million, increased by $5.7 million or 153% over the comparable period of 2000, due to the intangible assets acquired in connection with Applied Epi and TM acquisitions.

        Other expense, net for the year ended December 31, 2001 increased $1.6 million or 193% over the comparable 2000 period, due to the impact of foreign currency exchange losses, principally in the first quarter of 2001.

        During the year ended December 31, 2001, the Company recorded restructuring charges of approximately $20.0 million in response to the significant downturn in the telecommunications industry and the overall weak business environment. This downturn has affected Veeco's customers' ability to purchase capital equipment and is evidenced by a significant decline in the order rate for the Company's products. The $20.0 million charge consisted of a $13.6 million write-off of inventory (included

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(included in cost of sales) related to order cancellations and the rationalization of certain product lines, $3.0 million related to personnel costs and business relocation and $3.4 million was for the write-down of long-lived assets. Of the $13.6 million write-off of inventory, approximately $9.6 million was associated with the Company's process equipment segment, which sells primarily to the telecommunications and data storage industries and approximately $4.0 million related to Veeco's metrology segment, which sells mainly to the semiconductor, research and data storage industries. During the year, Veeco experienced a significant amount of order cancellations for products for which many of the raw materials had been purchased prior to the cancellation date due to the amount of lead-time necessary to build many of these tools. The $3.0 million charge for personnel and business relocation costs was principally relatedrelates to plant consolidations and a workforce reduction of approximately 230 employees, which included both management and manufacturing employees located in all operations of the Company. The majority of the job classifications that were eliminated included manufacturing, sales and marketing, due to the downturn in the economy. As of December 31, 2001,2002, approximately $1.2$2.5 million for termination benefits hasof personnel and business relocation costs have been paid and approximately $1.8$0.5 million remains accrued. Of this $0.5 million liability, approximately $0.3 million relates to rental payments on a lease agreement for space the Company has vacated and will be paid over the next three years and $0.2 million relates to termination costs that will be paid in the first quarter of 2003. The write-down of long-lived assets to estimated net realizablefair value related primarily to the write-off of goodwill and intangible assets acquired in connection with the SLC product line of approximately $2.5 million, which has been phased out, as well as the write-down of certain machinery and equipment.equipment of approximately $0.9 million, which was deemed to have no future value.

        In connection with the Applied Epi acquisition, the Company recorded a $7.0 million write-off of the fair values of acquired in-process technology projects that had not reached technological feasibility and had no alternative uses. OnAccordingly, this amount was expensed at the date of acquisition date. Applied Epi's in-process technology value wasis comprised of programs related to research systems, production systems, performance products and MOCVDmetal organic chemical vapor deposition (MOCVD) systems that were approximately 40%, 40%, 50% and 25% complete, respectively.respectively, at the date of acquisition. The value assigned to purchased in-process technology was determined by using the income approach, which involves estimating the discounted after-tax cash flows attributable to projects, based on the projects' stage of completion. The rate used to discount net cash flows to their present value was 25%. As of December 31, 2002, programs related to both research and performance products are 100% complete. As of December 31, 2002, programs related to production systems are 59% complete, with one program being cancelled and one program being postponed due to current market and business conditions. With regard to the MOCVD systems, due to the current market and business conditions and as a result of the Company's reorganization in the process equipment segment (see Note 7), these programs have been abandoned by the Company.

In connection with the TM acquisition, approximately $1.2 million of the purchase price was allocated to in-process technology projects for projects that had not reached technological feasibility and had no alternative future uses and thus, the amounts were expensed as of the date of acquisition. On the date of acquisition, the majority of TM's in-process technology value was comprised of the Fanou project (which included the Aurora III product), which was approximately 90% complete, with the remainder completed in the first quarter of 2002. The value assigned to purchased in-process technology was determined by using the income approach and the rate used to discount net cash flows to their present value was 28%. The actual results of the Fanou project did not differ materially from the underlying assumptions used by the Company.

        Expenditures to complete both Applied Epi's and TM's projects are subject to change, given the uncertainties of the development process, and no assurances can be given that deviations from these estimates will not occur. Additionally, the projects will require maintenance R&D after they have reached a state of technological and commercial feasibility. There are risks associated with these

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projects, and there is no assurance that these projects will meet with technological or commercial success.

        TheIn May 2002, the Company signed a letter of intent to sellsold the remainder of the industrial measurement business. This segment is currentlywas comprised of the x-ray fluorescence thickness measurement systems. In January 2000, the Company sold its leak detection business, which was part of this segment. Accordingly, the Company has classified the industrial measurement business as a discontinued

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operation. Closing date for the sale is expected to take place in the second quarter of 2002. Sales for the industrial measurement business totaled $6.0 million, $10.6 million and $17.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. During the year ended 2001, the Company recorded a loss on disposal of discontinued operations of $2.1 million, which is net of income taxes of $1.5 million and includes the write-off of approximately $1.0 million of goodwill that was previously allocated to this segment. During 1999, the Company incurred a loss on disposal of its leak detection business of $1.7 million, which is net of income taxes of $0.8 million. Loss from discontinued operations for the years ended December 31, 2001, 2000 and 1999 was $2.5 million, $2.2 million and $1.4 million, respectively, which is net of income taxes of $1.7 million, $1.5 million and $0.6 million, respectively. The assets to be sold includeincluded accounts receivable, inventories, prepaid expenses and other current assets and fixed assets and includeincluded certain liabilities to be assumed by the purchaser. The net assets held for sale of approximately $4.6 million arewere included in prepaid expenses and other current assets in the accompanying Consolidated Balance SheetsSheet at December 31, 2001.

        Income taxes for the year ended December 31, 2001 amounted to $6.0 million, or 29% of income from continuing operations before income taxes discontinued operations and cumulative effect of change in accounting principle as compared with $5.8 million, or 68% in 2000. The higher effective tax rate for 2000 is due to approximately $10.0 million of non-deductible charges related to the $33.0 million merger and restructuring charges incurred in conjunction with the merger with CVC.

Liquidity and Capital Resources

        Although the Company experienced an operating cash use of $(2.2) million during 2002, funds from the sale of its industrial measurement business of $3.7 million, as well as proceeds from the sale of property, plant and equipment of $1.8 million and funds from financing activities, including the issuance of a $20.0 million over-allotment of subordinated debt and the proceeds from the exercise of stock options and stock issuances under the Company's employee stock purchase plan, were sufficient to fund capital expenditures and debt repayments. The ratio of current assets to current liabilities was 6.2 at the end of 2002, compared with 4.4 at the end of 2001. The Company's primary source of funds at December 31, 2002, consisted of $214.3 million of cash and cash equivalents. This amount represents an increase of $11.1 million from the December 31, 2001 balance of $203.2 million.

        Cash used by operations totaled $2.2 million during the year ended December 31, 2002. This amount consisted primarily of the net loss of $123.7 million plus non-cash charges for depreciation and amortization, net loss on the disposal of discontinued operations, non-cash restructuring and other expenses, and a stock option income tax benefit aggregating $144.1 million, as well as a decrease in accounts receivable and inventory of $25.0 million and $3.6 million, respectively. Accounts receivable decreased due to the decrease in sales during the fourth quarter of 2002. Receivables generally are due within 30-60 days, other than customers in Japan where payment terms range from 90-150 days. These items were offset by decreases in accounts payable and accrued expenses, deferred profit and other current liabilities and an increase in deferred taxes of $7.0 million, $28.1 million and $22.6 million, respectively. Deferred profit for the year ended December 31, 2002, decreased by $8.6 million, primarily as a result of revenue recognition on tools that received final customer acceptance, as well as a decrease in the number of tools that are deferred as of December 31, 2002, due to a lower level of sales and product mix that impacts timing of revenue recognition. Accrued expenses and other current liabilities (excluding deferred profit) decreased $19.5 million, primarily as a result of a $4.8 million decrease in customer deposits and royalties, a $3.9 million decrease in accrued installation and

25

warranty, and $3.8 million of tax payments made during the year related to sales and foreign taxes. In addition, accrued expenses decreased as a result of a $1.4 million decline in accrued bonuses and commission expense related to the decline in sales volume and orders, as well as a $1.5 million decrease in other employee benefits due to the reduction in workforce previously discussed.

        Cash flows from investing activities of $2.9 million for the year ended December 31, 2002 are a result of the proceeds from the sale of the Company's industrial measurement business of $3.7 million, which closed in May 2002, proceeds from the sale of property, plant and equipment of $1.8 million and net maturities of long-term investments of $6.0 million, offset by capital expenditures of $8.6 million.

        In December 2001, the Company issued $200.0 million of 4.125% convertible subordinated notes, and in January 2002, the Company issued an additional $20.0 million of notes pursuant to an over-allotment option. The notes are convertible, at the option of the holder, at any time on or prior to maturity into shares of common stock at a conversion price of $38.51 per share. The Company pays interest on these notes on June 21 and December 21 of each year. The notes will mature on December 21, 2008. In connection with this offering, the Company purchased approximately $25.9 million of U.S. government securities, which have been pledged to the trustee under the indenture, as security for the exclusive benefit of the holders of the notes. These securities will be sufficient to provide for the payment in full of the first six scheduled interest payments due on the notes and thus represent restricted investments. The balance of these pledged securities as of December 31, 2002 was $17.5 million. Except with respect to these pledged securities, the notes are subordinated in right of payment to all other indebtedness of the Company. The notes are repayable upon certain change of control events and upon the acceleration of certain other indebtedness for money borrowed of the Company. After the third anniversary of issuance, the notes may be redeemed at the option of the Company at the redemption prices set forth in the indenture relating to the notes.

        Cash flows provided by financing activities totaled $12.0 million. The generation of cash from financing activities in 2002 primarily resulted from the $20.0 million subordinated debt over-allotment option exercise in January 2002, as well as $1.2 million from stock issuance, offset in part by $9.8 million of repayments of long term debt and debt issuance costs.

        On April 19, 2001, the Company entered into a $100 million revolving credit facility (as amended, the "Facility"). The Facility's interest rate is a floating rate based on the prime rate of the lending banks and is adjustable to a maximum rate of¹/4% above the prime rate in the event the Company's ratio of debt to cash flows exceeds a defined amount. A LIBOR based interest rate option is also provided. The Facility has a term of four years and borrowings under the Facility may be used for general corporate purposes, including working capital and acquisitions. The Facility contains certain restrictive covenants, which among other things, impose limitations with respect to the incurrence of indebtedness, the payment of dividends, long-term leases, investments, mergers, acquisitions, consolidations and sales of assets. The Company is also required to satisfy certain financial tests and the accounts receivable of the Company and its material domestic subsidiaries are pledged to secure the Company's obligations under the Facility. In connection with a recent amendment of the Facility, certain financial covenants were amended to allow for the fourth quarter 2002 restructuring charges as well as certain definitions were amended. As of December 31, 2002, and for all prior periods, the Company was in compliance with the covenants set forth in the Facility. As of December 31, 2002, there were no borrowings outstanding under the Facility, and the Company was contingently liable for letters of credit of approximately $3.3 million issued under the Facility.

        In October 2002, the Company repaid one of its mortgages upon maturity in the amount of approximately $2.0 million.

        In February 2003, in connection with a lawsuit commenced by Toyo, the Company agreed in principle to settle the lawsuit (see Note 7 of the Consolidated Financial Statements of the Company for further discussion).

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        At December 31, 2002, Veeco's contractual cash obligations and commitments relating to its debt obligations and lease payments are as follows (in thousands):

        The Company believes that existing cash balances together with cash generated from operations and amounts available under the Company's $100.0 million Facility will be sufficient to meet the Company's projected working capital and other cash flow requirements for the next twelve months, as well as the Company's contractual obligations, detailed in the above table, over the next five years.

Application of Critical Accounting Policies

        General:    Veeco's discussion and analysis of its financial condition and results of operations are based upon Veeco's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Veeco to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, management evaluates its estimates and judgments, including those related to derivatives, bad debts, inventories, intangible assets and other long lived assets, income taxes, warranty obligations, restructuring costs and contingent litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company considers certain accounting policies related to revenue recognition, the valuation of inventories, the impairment of goodwill and indefinite-lived intangible assets and derivativesthe impairment of long lived assets to be critical policies due to the estimation processes involved in each.

        Revenue Recognition:    Effective January 1, 2000 the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101,Revenue Recognition in Financial Statements. The Company recognizes revenue when persuasive evidence of an arrangement exists, the seller's price is fixed or determinable and collectibility is reasonably assured. For products produced according to the Company's published specifications, where no installation is required or installation is deemed perfunctory and no substantive customer acceptance provisions exist, revenue is recognized when title passes to the customer, generally upon shipment. For products produced according to a particular customer's specifications, revenue is recognized when the product has been tested and it has been demonstrated that it meets the customer's specifications and title passes to the customer. The amount of revenue recorded is reduced by the amount of any customer retention (generally 10% to 20%), which is not payable by the customer until installation is completed and final customer acceptance is achieved. The amount of customer retention is recorded in accounts receivable with a corresponding liability recorded in deferred profit. At December 31, 2002 and 2001, $1.4 million and $3.3 million, respectively, are recorded in accounts receivable and deferred profit pertaining to customer retentions. Installation is not deemed to be essential to the functionality of the equipment since installation does not involve significant changes to the features or capabilities of the equipment or building complex interfaces and connections. In addition, the equipment could be installed by the customer or other vendors and generally the cost of installation approximates only 1%

21

to 2% of the sales value of the related equipment. For new applications of the Company's products, for new products or for products with substantive customer acceptance provisions where performance

27

cannot be fully assessed prior to meeting customer specifications at the customer site, revenue is recognized upon completion of installation and receipt of final customer acceptance. Since title to goods generally passes to the customer upon shipment and 80% to 90% of the contract amount becomes payable at that time, inventory is relieved and accounts receivable is recorded for the entire contract amount. The profit on these transactions is deferred and recorded as deferred profit in the accompanying balance sheets. At December 31, 2002 and 2001, $4.6 million and $11.2 million, respectively, are recorded in deferred profit pertaining to shipments where revenue recognition has been deferred. Service and maintenance contract revenues are recorded as deferred revenue, which is included in other accrued expenses, and recognized as revenue on a straight-line basis over the service period of the related contract. The Company provides for warranty costs at the time the related revenue is recognized.

        Inventory Valuation:    Inventories are stated at the lower of cost (principally first-in, first-out method) or market. Management evaluates the need to record adjustments for impairment of inventory on a quarterly basis. The Company's policy is to assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts. Obsolete inventory or inventory in excess of management's estimated usage for the next 18 to 24 month's requirements is written-down to its estimated market value, if less than its cost. Inherent in the estimates of market value are management's estimates related to Veeco's future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses and ultimate realization of excess inventory.

        Goodwill and Indefinite-Lived Intangible Asset Impairment:    The Company has significant intangible assets related to goodwill and other acquired intangibles. In assessing the recoverability of the Company's goodwill and other indefinite-lived intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If it is determined that impairment indicators are present and that the assets will not be fully recoverable, their carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Changes in strategy and/or market conditions could significantly impact these assumptions, and thus Veeco may be required to record impairment charges for these assets not previously recorded. During December 31, 2001, approximately $2.5 million of intangible assets have been written off in connection with a phased out product line. The Company will fully adopt SFAS No. 142, effective January 1, 2002. The Company will becompleted the first of the required to perform impairment tests on goodwill and indefinite lived intangible assets in the first quarter of 2002. Veeco has not yetBased upon the judgment of management, it was determined whatthat there was no impairment to goodwill or intangibles with indefinite lives as of January 1, 2002. During the effectfourth quarter of these tests will be on2002, management determined that due to the consolidated financial position or results of operationscontinued weakness in the telecommunications industry and the uncertainty of the Company.timing and speed of recovery, impairment indicators were present. Under SFAS No. 142, if impairment indicators are present, the fair value of the reporting unit must be determined. Based upon the judgment of management, goodwill arising from the September 2001 Applied Epi acquisition, which constitutes the telecommunications reporting unit, included in the process equipment operating segment, was deemed significantly impaired. As a result, the Company recorded an impairment charge of $94.4 million and has written down goodwill related to the telecommunications reporting unit to approximately $7.5 million as of December 31, 2002.

        Derivatives:Long Lived Asset Impairment:    During the year ended December 31, 2001, the Company used derivative financial instrumentsThe carrying values of long-lived assets are periodically reviewed to minimize the impact of foreign exchange rate changes on earnings and cash flows. In the normal course of business, operationsdetermine if any impairment indicators are exposed to fluctuations in foreign exchange rates. In order to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known foreign currency exposures, the Company enters into monthly forward contracts (which during the year ended December 31, 2001 included a majority of the Company's foreign subsidiaries). The Company does not use derivative financial instruments for trading or speculative purposes. The Company's forward contracts do not subjectpresent. If it to material risks due to exchange rate movements because gains and losses on these contractsis determined that such indicators are intended to offset exchange gains and losses on the underlying assets and liabilities; both the forward contractspresent and the underlyingreview indicates that the assets and liabilitieswill not be fully recoverable, based on undiscounted estimated cash flows over the remaining depreciation period, their carrying values are marked-to-market through earnings.reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic or

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Years Ended December 31, 2000anticipated decline in revenue or operating profit, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and 1999

        Net sales were $376.1 million for the year ended December 31, 2000, representing an increase of $63.7 million, or 20%, when compared to the year ended December 31, 1999. Salesa material decrease in the U.S., Europe, Japan and Asia Pacific, respectively, accounted for 50%, 15%, 21% and 14%fair value of some or all of the Company's net salesassets. Assets are grouped at the lowest level for the year ended December 31, 2000. Sales in the U.S. increased by approximately $49.3 million, or 35% from 1999. The increase in U.S. saleswhich there is principally associated with a $34.6 million increase in process equipment sales of Ion Tech to the optical telecommunications industry. European sales decreased by $5.6 million, or 9%, when compared to the prior year. Sales in Japan and Asia Pacific increased by $6.5 million, or 9%, and $16.2 million, or 44%, respectively, over the comparable 1999 period. The increase in sales in Japan principally reflects increased sales of AFM products, while Asia Pacific's increase is primarily due to the February 2000 purchaseidentifiable cash flows that are largely independent of the slider crown adjust product line. The Company believes that there will continue to be quarter-to-quarter variationscash flows generated by other asset groups. During 2002, $5.3 million in the geographic concentration of sales.

        Process equipment sales of $216.3 million for the year ended December 31, 2000, increasedfixed asset impairment charges were recorded by $16.0 million or 8% due to a $41.8 million or 205% increase in sales, principally to the optical telecommunications industry, partially offset by a decline in sales to data storage customers. Metrology sales of $159.8 million for the year ended December 31, 2000 increased by $47.7 million or 43% from the comparable 1999 period, reflecting a 55% increase in optical metrology products from the newly acquired metrology businesses of OptiMag, Monarch and the slider crown adjust product lines, as well as a 36% increase in the sale of AFMs.

        Veeco received $596.8 million of orders for the year ended December 31, 2000, representing a 79% increase from $333.3 million of orders in the comparable 1999 period. Process equipment orders increased 79% to $396.4 million primarily due to strong orders for Ion Tech's SPECTOR related equipment, principally to the optical telecommunications industry, which reflected increased orders of 457% or $169.4 million over the comparable 1999 period. Metrology orders increased 79% to $200.4 million reflecting a 75% increase in orders for AFMs as well as an 88% increase in orders for optical metrology products from the newly acquired metrology businesses of OptiMag, Monarch and the slider crown adjust product lines. The book-to-bill ratio for the year ended December 31, 2000 was 1.59 to 1.

        In connection with the merger with CVC, the Company, incurred merger and restructuring charges of $33.0 million during 2000, of which a $15.3 million non-cash charge, or 4.0% of net sales, related to the write off of inventory, which has been included in cost of sales. Gross profit for the year ended December 31, 2000 decreased to 41.6% from 47.3% in 1999. Excluding merger and restructuring charges, gross profit as a percentage of net sales decreased to 45.7%, due primarily to a 5.7% decline in data storage process equipment gross margins from 1999 levels due to the volume decline, as well as price and cost pressures. Metrology gross margin decreased to 53.7% in 2000 compared to 56.0% in 1999, due primarily to new product transition in optical metrology, primarily at the Company's Minneapolis site, which produced the slider crown adjust product line.

        Research and development expense for the year ended December 31, 2000 of $51.2 million, increased by $10.3 million or 25% over the comparable period of 1999, due primarily to the continued investment in new products and technology for both the process equipment and metrology businesses as well as investment with respect to acquired businesses which did not have comparable spending in 1999.

        Selling, general and administrative expenses of $75.6 million for the year ended December 31, 2000 increased $14.1 million or 23% over the comparable period of 1999. The 2000 increase is attributable to the expansion of direct sales and service presence in both Japan and the Asia Pacific regions, as well as the purchase of Commonwealth, OptiMag and the slider crown adjust product lines, which had lower comparable operating spending in 1999 since these acquisitions were accounted for using the purchase method of accounting.

23

        Amortization expense for the year ended December 31, 2000 of $3.7 million, increased by $3.3 million or 680% over the comparable period of 1999, due to the addition of intangible assets of businesses purchased in 1999 and 2000, including OptiMag, slider crown adjust product line and the atomic force microscope product line.

        As previously noted, during 2000, Veeco incurred merger and restructuring charges of $33.0 million in conjunction with the merger with CVC. Of these charges, a $15.3 million non-cash charge related to a write-off of inventory (includedrestructuring in cost of sales), $14.0 million represented merger and reorganization costs (of which $9.2 million related to investment banking, legal and other one-time transaction costs and $4.8 million pertained to duplicate facility and personnel costs) and $3.7 million was for the write-down of long-lived assets.process equipment segment. The Company implemented a reorganization planrecorded $0.9 million of fixed asset impairment charges in an effort to integrate CVC into the Company, consolidate duplicate manufacturing facilities and reduce other operating costs. The $4.8 million charge2001. Assumptions utilized by management in reviewing for duplicate facility and personnel costs principally related to the closing of the CVC Virginia facilities and an approximate 200-person work force reduction, which included both management and manufacturing employees. During the year, the entire accrual of $14.0 million for merger and reorganization costs was expended. The write-downimpairment of long-lived assets could be effected by changes in strategy and/or market conditions which may require Veeco to estimated net realizable value related primarily to leasehold improvements, machinery and equipment and intangiblerecord additional impairment charges for these assets, for CVC's Virginia facilities. In addition, the $15.3 million non-cash write-off of inventory principally related to CVC's Virginia facilities product line of ion beam etch and deposition equipment. The Company has integrated the technology from this product line into Veeco's existing ion beam etch and deposition products. Accordingly, the Company has determined that a portion of this product line's inventory is not useable in the future.

        During 1999, the Company recorded charges of $2.6 million related to the merger with Ion Tech. In conjunction with the OptiMag acquisition, the Company recorded a $1.3 million write-off of the fair values of acquired in-process technology projects that had not reached technological feasibility and had no alternative uses. On the date of acquisition, OptiMag's in-process technology value was comprised of the Oasis version 1.0 hardware and software component development program that was completed in 2000. In conjunction with CVC's acquisition of Commonwealth Scientific Corporation, CVC recorded a $1.2 million charge for the write-off of acquired in-process technology costs, including products in the development stage that had not reached technical feasibility and for which there is no alternative future use. Due to the merger of Veeco and CVC, the Company implemented a reorganization plan, which included the closing of CVC's Virginia facilities. Due to this restructuring, the in-process technology program has been abandoned by the Company. During 2000, approximately $0.6 million was spent on this program. During 2000 and 1999, the Company recorded a loss from discontinued operations of $2.2 million and $1.4 million, respectively, which is net of income taxes. During 1999, the Company incurred a loss on disposal of its leak detection business of $1.7 million, net of income taxes. The leak detection business was part of the industrial measurement business and thus has been classified as a loss on disposal of discontinued operations.

        Income taxes for the year ended December 31, 2000 amounted to $5.8 million or 68% of income before income taxes, discontinued operations and cumulative effect of change in accounting principle, as compared with $15.3 million or 38% in 1999. The higher effective tax rate for 2000 is due to approximately $10.0 million of non-deductible charges related to the $33.0 million merger and reorganization charges incurred in conjunction with the merger with CVC.

        As described in Note 1 to the Company's Consolidated Financial Statements, effective January 1, 2000, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101,Revenue Recognition in Financial Statements. The cumulative effect of this change on prior years resulted in a charge to income of $18.4 million (net of income taxes of $12.6 million), which is included in the Consolidated Statement of Operations for the year ended December 31, 2000.

24

Liquidity and Capital Resources

        Cash flows from operations of $21.7 million, the liquidation of short-term investments of $26.9 million, the borrowing of $25.0 million under the Company's credit facility and the proceeds from the exercise of stock options and stock issuances under the Company's employee stock purchase plan were sufficient to fund the acquisitions of Applied Epi and TM as well as capital expenditures. The ratio of currentimpairment charges on other long-lived assets to current liabilities was 4.4 at the end ofnot previously recorded. During December 2001, compared with 2.8 at the end of 2000 and 2.9 at the end of 1999. The Company's primary source of funds at December 31, 2001 consisted of $203.2approximately $2.5 million of cash and cash equivalents. This amount represents an increase of $139.7 million from the December 31, 2000 balance of $63.4 million.

        In December 2001, the Company issued $200 million of 4.125% convertible subordinated notes, andintangible assets were written off in January 2002, the Company issued an additional $20.0 million of notes pursuant to an over allotment option. The notes are convertible, at the option of the holder, at any time on or prior to maturity into shares of common stock at a conversion price of $38.51 per share. The Company will pay interest on these notes on June 21 and December 21 of each year, commencing on June 21, 2002. The notes will mature on December 21, 2008. In connection with this offering, the Company purchased approximately $23.5 million of U.S. government securities, which have been pledged to the trustee under the indenture, as security for the exclusive benefit of the holders of the notes. These securities will be sufficient to provide for the payment in full of the first six scheduled interest payments due on the notes and thus represent restricted investments. Except with respect to these pledged securities, the notes are subordinated in right of payment to all other indebtedness of the Company. The notes are repayable upon certain change of control events and upon the acceleration of certain other indebtedness for money borrowed of the Company. After the third anniversary of issuance, the notes may be redeemed at the option of the Company at the redemption prices set forth in the indenture relating to the notes. In October 2002, the Company will repay a mortgage upon maturity, which had a balance of approximately $2.0 million at December 31, 2001.

        On April 19, 2001, the Company entered into a $100 million revolving credit facility (the "Facility"), which replaced the Company's prior $40 million revolving credit facility. The Facility's interest rate is a floating rate based on the prime rate of the lending banks and is adjustable to a maximum rate of¹/4% above the prime rate in the event the Company's ratio of debt to cash flows exceeds a defined ratio. A LIBOR based interest rate option is also provided. The Facility has a term of four years and borrowings under the Facility may be used for general corporate purposes, including working capital and acquisitions. The Facility contains certain restrictive covenants, which among other things, impose limitations with respect to the incurrence of indebtedness, the payment of dividends, long-term leases, investments, mergers, acquisitions, consolidations and sales of assets. The Company is also required to satisfy certain financial tests. In connection with a recent amendment of this facility, certain financial covenants and definitions were amended and the accounts receivable of the Company and its material domestic subsidiaries were pledged to secure the Company's obligations under this facility. As of December 31, 2001, there were no borrowings outstanding under the Facility, but approximately $4.0 million of letters of credit were outstanding under the Facility.

        At December 31, 2001, Veeco's contractual cash obligations and commitments relating to its debt obligations and lease payments are as follows (in thousands):

25

        Cash provided by operations totaled $21.7 million during the year ended December 31, 2001. This amount consisted primarily of net income of $10.3 million plus non-cash charges for depreciation and amortization, net loss on the disposal of discontinued operations, non-cash restructuring and other expenses, write-off of purchased in-process technology and a stock option income tax benefit aggregating $56.1 million and a decrease in accounts receivable of $18.7 million. Accounts receivable decreased due to the decrease in sales volume during the fourth quarter of 2001. These items were partially offset by an increase in inventories, decreases in accounts payable and accrued expenses, deferred gross profit and other current liabilities and an increase in deferred taxes of $8.4 million, $15.0 million, $21.2 million and $13.4 million, respectively. Accounts payable decreased primarily as a result of reduced ordering of materials and services due to a lower level of business activity at the end of 2001 as compared to 2000. The reduction in deferred gross profit is the result of a lower level of sales andphased out product mix that impacts timing of revenue recognition.

        Net cash used in investing activities in 2001 totaled $75.4 million. During the year ended 2001, the Company's cash outflows consisted of acquisitions of approximately $59.6 million, the purchase of long-term investments of $23.5 million and capital expenditures of $19.2 million, partially offset by the liquidation of available for sale securities of $26.9 million. The Company expects investments in property, plant and equipment to be approximately $22.0 million in 2002. The Company intends to finance these investments from existing cash balances and cash flows from operations.

        Net cash provided by financing activities totaled $191.2 million. The generation of cash in 2001 primarily resulted from the $200.0 million subordinated convertible debt offering in December 2001.

        The Company believes that existing cash balances together with cash generated from operations and amounts available under the Credit Facility will be sufficient to meet the Company's projected working capital and other cash flow requirements (including the payments described in the preceding paragraphs) through 2002.line.

Risk Factors That May Impact Future Results

        In addition to the other information set forth herein, the following risk factors should be carefully considered by shareholders of and by potential investors in the Company.

We depend on the microelectronics industry. The cyclicality of the data storage, telecommunications/wireless, semiconductor, research and industrial industries directly affects our business.

        Veeco's business depends in large part upon the capital expenditures of data storage, telecommunications/wireless and semiconductor manufacturers, as well as research and industrial customers, which accounted for the following percentages of our net sales for the periods indicated:

        The data storage, telecommunications/wireless, semiconductor, research and industrial industries are cyclical. These industries have experienced significant economic downturns at various times in the last decade, characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity. A downturn in one or more 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 operating results.

        The current global downturn in general economic conditions and in the markets for our customers' products is resulting in a reduction in demand for some of our products, and duringproducts. We have experienced the effects of the global economic downturn in many areas of our business. During this downturn and

26

any subsequent downturns we cannot assure you that our sales or margins will not decline. As a capital equipment provider, our revenues depend in large part on the spending patterns of our customers, who often 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, our ability to reduce expenses quickly in response to revenue short-falls is limited. In a prolonged economic downturn, we may not be able to reduce our significant fixed costs, such as continued investment in research and development or capital equipment requirements. In addition, during an economic downturn we may experience delays in collecting receivables, which may impose constraints on our working capital.

Our quarterly operating results fluctuate significantly.29

        Our quarterly results have fluctuated significantly in the past and we expect this trend to continue. Factors which affect our quarterly results include:

•

cyclical patterns of capital spending by customers,

•

changes in the market for personal computers, network servers, telecommunication/wireless devices or other products incorporating telecommunications/wireless, data storage or semiconductor/research technology,

•

market acceptance of our systems and our customers' products,

•

specific economic conditions in the telecommunications/wireless, data storage or semiconductor/research industries,

•

our acquisitions and financings,

•

changes in product mix,

•

the timing of significant orders and customer acceptance of our products,

•

the introduction of new products and technological innovations by us and our competitors,

•

production and quality problems and resulting shipment delays,

•

changes in the cost of materials, and

•

disruption in our sources of supply.

        Many of these factors are beyond our control. If our new orders, net sales or operating results in a particular quarter do not meet expectations, our stock price may be adversely affected.

Our customers may be adversely affected by rapid technological change and we may be unable to maintain timely product introduction.

        The data storage, telecommunications/wireless, semiconductor manufacturing, research and industrial industries are subject to rapid technological change and new product introductions and enhancements. Our ability to remain competitive will depend in part upon our ability to develop in a timely and cost effective manner new and enhanced systems at competitive prices and to accurately predict technology transitions. In addition, new product introductions or enhancements by our competitors could cause a decline in sales or loss of market acceptance of our existing products. Increased competitive pressure could also lead to intensified price competition resulting in lower margins, which could materially and adversely affect our business, prospects, financial condition and operating results. Our success in developing, introducing and selling new and enhanced systems depends upon a variety of factors, including:

•

our product offerings,


•

timely and efficient completion of product design and development,


•

timely and efficient implementation of manufacturing processes,


•

effective sales, service and marketing, and

27

•

product performance in the field.

        Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both the future demand for the 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.

Our business        The process of developing new high technology capital equipment products and financialservices is complex and uncertain, and failure to anticipate customers' changing needs and emerging technological trends accurately and to develop or obtain appropriate intellectual property could significantly harm our results forof operations. We must make long-term investments and commit significant resources before knowing whether our predictions will eventually result in products that the market will accept. We have invested significant resources in the development of certain products utilizing physical vapor deposition technology, which has been slow to gain customer acceptance. Further, after a particular period couldproduct is developed, we must be materiallyable to manufacture sufficient volumes quickly and adversely affected if orders are cancelled or rescheduled or if an anticipated order for even one system isat low costs. To accomplish this, we must accurately forecast volumes, mix of products and configurations that meet customer requirements, and we may not received in time to permit shipping during the period.

        Customer purchase orders are subject to cancellation or rescheduling by the customer, generally with limited or no penalties. Therefore, backlog at any particular date is not necessarily representative of actual sales for any succeeding period. 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. As a result, the timing of recognition of revenue for a single transaction could have a material effect on our sales and operating results for a particular fiscal period.succeed.

We depend on a limited number of customers that operate in highly concentrated industries.

        We rely on ourcertain principal customers for a significant portion of our sales. Based on net sales, Seagate Technology, Inc. and International Business Machines Corporation, or IBM, areis our top two customers.customer. The following table sets forth the percentage of our net sales to Seagate and IBM (our only customerscustomer with sales greater than 10% in any of the past three years) for the following periods:

        If any principal customer discontinues its relationship with us or suffers economic setbacks, our business, prospects, financial condition and operating results could be materially and adversely affected. Our ability to increase sales in the future will depend in part upon our ability to obtain orders from new customers. We cannot be certain that we will be able to do so. In addition, because a relatively small number of large manufacturers, many of whom are our customers, dominate the industries in

30

which they operate, it may be especially difficult for us to replace these customers if we lose their business. A substantial portion of orders in our backlog are orders from our principal customers.

Because we do not have long-term contracts with our customers, our customers may cease purchasing our products at any time if we fail to meet their needs.

        We do not have long-term contracts with our customers. As a result, our agreements with our customers do not provide any assurance of future sales. Accordingly:

•

our customers can cease purchasing our products at any time without penalty,



•

our customers are free to purchase products from our competitors,



•

we are exposed to competitive price pressure on each order, and



•

our customers are not required to make minimum purchases.

        If we do not succeed in obtaining new sales orders from new or existing customers, it will have a negative impact on our results of operations.

Our quarterly operating results fluctuate significantly.

        Our quarterly results have fluctuated significantly in the past and we expect this trend to continue. Factors which affect our quarterly results include:

•

cyclical patterns of capital spending by customers,



•

changes in the market for personal computers, network servers, telecommunication/wireless devices or other products incorporating telecommunications/wireless, data storage or semiconductor/research technology,



•

market acceptance of our systems and our customers' products,



•

specific economic conditions in the telecommunications/wireless, data storage or semiconductor/research industries,



•

our acquisitions and financings,



•

changes in product mix,



•

the timing of significant orders and customer acceptance of our products,



•

the introduction of new products and technological innovations by us and our competitors,



•

production and quality problems and resulting shipment delays,



•

changes in the cost of materials, and



���

disruption in our sources of supply.

        Many of these factors are beyond our control. If our new orders, net sales or operating results in a particular quarter do not meet expectations, our stock price may be adversely affected.

Our business and financial results for a particular period could be materially and adversely affected if orders are cancelled or rescheduled or if an anticipated order for even one system is not received in time to permit shipping during the period.

        Customer purchase orders are subject to cancellation or rescheduling by the customer, generally with limited or no penalties. In addition, Veeco has, in limited circumstances, permitted major customers to return previously shipped products in order to maintain business relationships with such customers. Therefore, backlog or the amount of purchase orders at any particular date is not

31

necessarily indicative of actual sales for any succeeding period. 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. As a result, the timing of recognition of revenue for a single transaction could have a material effect on our sales and operating results for a particular fiscal period. Backlog adjustments for the year ended December 31, 2002 included order cancellations of $20.9 million.

Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results.

        Historically, we have experienced long and unpredictable sales cycles. Variations in the length of our sales cycles could cause our net sales, and therefore our business, financial condition, operating results and cash flows, to fluctuate widely from period to period. These variations often are based upon factors partially or completely outside our control. The factors that affect the length of time it takes us to complete a sale depend upon many elements, including:

•

the efforts of our sales force and our independent sales representatives,



•

the history of previous sales to a customer,



•

the complexity of the customer's fabricationmanufacturing processes,



•

the internal technical capabilities and sophistication of the customer, and



•

the capital expenditure budget cycle of our customers.

        As a result of these and a number of other factors that influence our sales cycles with particular customers, the period between our initial contact with a potential customer and the time when we recognize revenue from that customer, if ever, varies widely. Our sales cycle typically can range up to

28

twelve months. Sometimes our sales cycle can be much longer, particularly during an economic downturn or when the sales cycle involves developing new applications for our systems and technology. During these cycles, we commit substantial resources to our sales efforts before receiving any revenue, and we may never receive any revenue from a customer despite these sales efforts.

        In addition to lengthy and sometimes unpredictable sales cycles, the 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 its order, although generally it will be required to pay us a fee based on which stage of the build cycle we have completed.

        For many of our products, after a customer purchases one of our systems we provide an acceptance period during which the customer may evaluate the performance of the system and potentially reject the system. In addition, customers often evaluate the performance of one of our systems for a lengthy period before purchasing any additional systems. The number of additional products a customer may purchase from us, if any, often depends on many factors that are difficult for us to predict accurately, including a customer's capacity requirements and changing market conditions for its products. As a result of these evaluation periods and other factors, the period between a customer's initial purchase and subsequent purchases, if any, often varies widely, and variations in length of this period can cause further fluctuations in our operating results.

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Our strategy of pursuing acquisitions subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses into our business.

        We have considered numerous acquisition opportunities and completed several significant acquisitions during the past five years. In addition, we may consider acquisitions of, or significant investments in, other businesses in the future. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including:

•

difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired companies,



•

diversion of management's attention from other operational matters while evaluating and pursuing the acquisition as well as while integrating the business once acquired,



•

the inability to retain the key employees of acquired companies, especially if the acquired business is to be relocated or the responsibilities of such key employees are to be changed,



•

lack of synergy, or inability to realize expected synergies, resulting from the acquisition, and



•

acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company, which could require us to record a charge to earnings for such impairment.

        Our inability to effectively manage these acquisition risks could materially and adversely affect our business, prospects, financial condition and operating results.

        In addition, if we issue equity securities to pay for an acquisition, the ownership percentage of our then-existing shareholders would be reduced and the value of the shares held by our then-existing shareholders could be diluted, which could affect the trading price of our common stock and of the subordinated notes. If we use cash to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or to use for other purposes, including making payments on the subordinated notes. Also, acquisition financing may not be available on favorable terms or at all. Future acquisitions may also require us to assume contingent liabilities that could have a material adverse effect on our business, prospects, financial condition or operating results.

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

        Our continued success depends, in part, upon key managerial, engineering and technical personnel as well as our ability to continue to attract and retain additional personnel. In particular, we depend on our Chairman and Chief Executive Officer, Edward H. Braun. The loss of key personnel could have a material adverse effect on our business, prospects, financial condition or operating results. We may not be able to retain our key managerial, engineering and technical employees. Our growth is dependent on our ability to attract new highly skilled and qualified technical personnel, in addition to personnel that can implement and monitor our financial and managerial controls and reporting systems. Attracting qualified personnel is difficult, and we cannot assure you that our recruiting efforts to attract and retain these personnel will be successful.

We cannot be certain that we will be able to compete successfully in our highly competitive industries.

        The industries in which we operate are intensely competitive. Established companies, both domestic and foreign, compete with each of our product lines. Many of our competitors have greater financial, engineering, manufacturing and marketing resources than us. A substantial investment is required by customers to install and integrate capital equipment into a production line. As a result, once a manufacturer has selected a particular vendor's capital equipment, we believe that the manufacturer generally relies upon that equipment for the specific production line application and

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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. We believe that 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,



•

cost of ownership,



•

global technical service and support, and



•

success in developing or otherwise introducing new products.

        We cannot be certain that we will be able to compete successfully in the future.

We are exposed to the risks of operating a global business, including risks associated with exchange rate fluctuations and legal and regulatory changes.

        We are exposed to foreign currency exchange rate risks that are inherent in our anticipated sales, sales commitments and assets and liabilities that are denominated in currencies other than the United States dollar. Failure to sufficiently hedge or otherwise manage foreign currency risks properly could adversely affect our revenues and gross margins. We also are exposed to interest rate risks inherent in our debt obligations and investment portfolios.

In 2000,2002, approximately 50%53% of our total net sales were generated from sales outside the United States, and in 2001 approximately 46% of our total net sales were generated from sales outside the United States. We expect sales from non-U.S. markets to continue to represent a significant, and possibly increasing portion of our total sales in the future. Our non-U.S. sales and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including:

•

periodic economic downturns and unstable political environments,

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•

longer sales cycles,



•

multiple, conflicting and changing governmental laws and regulations,



•

protectionist laws and business practices that favor local companies,



•

price and currency exchange controls,



•

fluctuations in the relative values of currencies,



•

difficulties protecting intellectual property,



•

unexpected changes in trading policies, regulatory requirements, tariffs and other barriers, and



•

difficulties in managing a global enterprise, including staffing, collecting accounts receivable, managing distributors and representatives and repatriation of earnings.

        Changes in the relative values of currencies occur from time to time and may, in some instances, have a material effect on our results of operations. In particular, a weakening of the euro or the yen could result in a weakening of our overall financial results. Although we attempt to mitigate our exposure to fluctuations in currency exchange rates, these hedging activities may not always be available or adequate to eliminate, or even mitigate, the impact of our exchange rate exposure. As a result of

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this exchange rate exposure, as well as the other factors listed above, we may experience a material adverse effect upon our business, prospects, financial condition and operating results.

        We do not have any derivative financial instruments for speculative or trading purposes. We enter into monthly forward contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany balances and other known currency exposures. The average notional amount of such contracts was approximately $1.9 million for the year ended December 31, 2002. As of December 31, 2002, we did not have any open forward contracts. We estimate that based upon our balance sheet at December 31, 2002, a 10% change in foreign exchange rates impact operating loss by approximately $0.6 million.

Our operating results are influenced by the performance of Asian economies, which have experienced significant downturns during the past few years.

        In recent years, Asian economies (including Japan) have been highly volatile and recessionary, resulting in significant fluctuations in local currencies and other instabilities. Approximately 35%36% of our sales in 20002002 and approximately 28% of our sales in 2001 were derived from this region. Instabilities in Asian economies (including Japan) may continue and recur again in the future, which could have a material adverse effect on our business, prospects, financial condition and operating results. Our exposure to the business risks presented by Asian economies (including Japan) will increase to the extent we continue to expand our operations in that region.

We may be subject to claims of intellectual property infringement.

        Several of our competitors hold patents covering a variety of technologies included in some of our products. In addition, some of our customers may use our microelectronics products for applications that are similar to those covered by these patents. From time to time, we and our customers have received correspondence from our competitors claiming that some of our products, as used by our customers, may be infringing one or more of these patents. As of the date of this filing, none of these allegations has resulted in litigation. Competitors or others may, however, 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. 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 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, it could have a material adverse effect on our business, prospects, financial condition and operating results.

We are exposed to the risks that third parties may violate our proprietary rights and our intellectual property rights may not be well protected in foreign countries.

        Our success depends on the protection of our proprietary rights. In our industry, intellectual property is an important asset that is always at risk of infringement. We incur costs to obtain and

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maintain patents and defend our intellectual property. We rely upon the laws of the United States and of other countries in which we develop, manufacture or sell our products to protect our proprietary rights. However, these proprietary 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 in the United States. Many U.S.

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companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. We derived approximately 50%53% of our sales from foreign countries in 2000,2002, and approximately 46% of our sales from foreign countries in 2001. If we fail to adequately protect our intellectual property in these countries, it could be easier for our competitors to sell competing products.

        Infringement of our proprietary rights by a third party could result in lost market and sales opportunities, as well as increased costs of litigation.

We rely on a limited number of parts, components and equipment manufacturers. Failure of any of these suppliers to perform in a timely or quality manner could negatively impact revenues.

        Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient quantities in a timely and cost-effective manner could negatively affect our business. We currently use numerous vendors to supply parts, components and subassemblies for the manufacture and support of our products. However, some key parts may be obtained only from a single supplier or a limited group of suppliers.

        We also rely on a limited number of equipment manufacturers to develop and supply the equipment used to manufacture our products. The lossfailure of key managementthese manufacturers to develop or our inability to attract and retain sufficient numbers of managerial, engineering and other technical personneldeliver equipment on a timely basis could have a material adverse effect on our business.

        Our continued success depends, in part, upon key managerial, engineeringthe business and technical personnel as well as our ability to continue to attract and retain additional personnel.results of operations. In particular, we depend on our Chairman, President and Chief Executive Officer, Edward H. Braun. The loss of key personnel could have a material adverse effect on our business, prospects, financial condition or operating results. We may not be able to retain our key managerial, engineering and technical employees. Our growth is dependent on our ability to attract new highly skilled and qualified technical personnel, in addition, to personnel that can implement and monitor our financial and managerial controls and reporting systems. Attracting qualified personnel is difficult, and we cannot assure you that our recruiting efforts to attract and retain these personnel will be successful.

Our recent acquisitions, as well as additional acquisitions in the future, subject us to risks associated with integrating these businesses into our business.

        We have made significant acquisitions during the past five years. In addition, we may make acquisitions of, or significant investments in, other businesses in the future. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including:

•

difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired companies,



•

diversion of management's attention from other operational matters,



•

the potential loss of key employees of acquired companies,



•

lack of synergy, or inability to realize expected synergies, resulting from the acquisition, and



•

acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company.

        Our inabilitysmall number of equipment suppliers, we may be more exposed to effectively manage these acquisition risks could materially and adversely affect our business, prospects, financial condition and operating results.

        In addition, if we issue equity securities to payfuture cost increases for an acquisition, the ownership percentage of our then-existing shareholders would be reduced and the value of the shares held by our then-existing shareholders could be diluted, which could affect the trading price of our common stock and of the subordinated notes. If we use cash to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or to use for other purposes, including making payments on the notes. Also, acquisition financing may not be available on favorable terms or at all.

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Future acquisitions may also require us to assume contingent liabilities that could have a material adverse effect on our business, prospects, financial condition or operating results.this equipment.

We may not obtain sufficient affordable funds to fund our future needs for manufacturing capacity and research and development.

        We need to continue to make significant capital expenditures to continue and expand our operations and to enhance our manufacturing capability to keep pace with rapidly changing technologies. Also, our industry is characterized by the need for continued investment in research and development. If we fail to invest sufficiently in research and development, our products could become less attractive to potential customers. As a result of our emphasis on research and development and technological innovation, our operating costs may increase in the future. We expect our research and development expenses to increase as a percentage of our net sales for the foreseeable future. During the past few years, the markets for equity and debt securities have fluctuated significantly, especially with respect to technology-related companies, and during some periods offerings of those securities have been extremely difficult to complete. As a result, in the future we may not be able to obtain the additional funds required to fund our operations and invest sufficiently in research and development on reasonable terms, or at all. Such a lack of funds could have a material adverse effect on our business, prospects, financial condition and operating results.

Terrorist acts and acts of war may seriously harm our business and revenues, costs and expenses and financial condition.

        Terrorist acts or acts of war (wherever located around the world) may cause damage or disruption to our company, our employees, facilities, partners, suppliers, distributors and customers, which could significantly impact our revenues, costs and expenses and financial condition. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially harm our business and results of operations. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could adversely affect the business and results of operations in ways that cannot

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presently be predicted. We arewill be largely uninsured for losses and interruptions caused by terrorist acts and acts of war.

Unforeseen environmental costs could impact our future net earnings.

        Some of our operations will use substances regulated under various federal, state and international laws governing the environment. We could be subject to costs and other risks associated with non-compliance with environmental regulations.

        We are subject to environmental regulations related to the disposal of hazardous wastes used in the development and manufacturing of our products. The failure or inability to comply with existing or future environmental regulations could result in significantliability for remediation liabilities, the imposition of fines or the suspension or termination of production, each of which could have a material adverse effect on our business, prospects, financial condition and operating results.

Becauseif we do not have long-term contractshandle these substances in compliance with applicable laws. It is our customers, our customers may cease purchasing our products at any time ifpolicy to apply strict standards for environmental protection to sites inside and outside the United States, even when not subject to local government regulations. We will record a liability for environmental remediation and related costs when we failconsider the costs to meet their needs.

        We do not have long-term contracts with our customers. As a result, our agreements with our customers do not provide any assurancebe probable and the amount of future sales. Accordingly:

•

our customersthe costs can cease purchasing our products at any time without penalty,



•

our customers are free to purchase products from our competitors,



•

we are exposed to competitive price pressure on each order, and



•

our customers are not required to make minimum purchases.

Our articles of incorporation, by-laws, shareholder rights plan and Delaware law may have anti-takeover effects which will make an acquisition of our company by another company more difficult.

        Our board of directors has the authority to issue up to 500,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any further vote or action by the holders of our common stock. We have designated 30,000 of those shares as Series A Junior Preferred Stock for potential issuance under our shareholder rights plan described below. The rights of the holders of any preferred stock that may be issued in the future may adversely affect the rights of the holders of our common stock. The issuance of the preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control of Veeco that a holder of our

32

common stock might consider in its best interest. Furthermore, such preferred stock may have other rights, including economic rights senior to our common stock and, as a result, the issuance of the preferred stock could have a material adverse effect on the market value of our common stock.

        Our board of directors is divided into three classes of directors with staggered terms. The existence of a classified board may render certain hostile takeovers more difficult and make it more difficult for a third party to acquire control of Veeco in certain instances, thereby delaying, deferring or preventing a change in control of Veeco that a holder of our common stock might consider in its best interest. Further, if shareholders are dissatisfied with the policies and/or decisions of our board of directors, the existence of a classified board will make it more difficult for the shareholders to change the composition (and therefore the policies) of our board of directors in a relatively short period of time.

        We have adopted a shareholder rights plan, under which we have granted to our shareholders rights to purchase shares of junior participating preferred stock. These rights could generally discourage a merger or tender offer for our common stock that is not approved by our board of directors by increasing the cost of effecting any such transaction and, accordingly, could have an adverse impact on a takeover attempt that a shareholder of Veeco might consider to be in its best interest.

        Furthermore, we have adopted and may in the future adopt certain other measures that may have the effect of delaying, deferring or preventing a change in control of Veeco. Certain of such measures may be adopted without any further vote or action by the holders of our common stock. These measures may have anti-takeover effects, which may delay, defer or prevent a takeover attempt that a holder of our common stock might consider in its best interest. In addition, certain other provisions of our certificate of incorporation and bylaws relating to, without limitation, (a) actions required to be taken at a meeting of shareholders rather than by written consent, (b) the percentage of shareholders required to call a special meeting of shareholders, (c) a limitation on the maximum number of directors, (d) removal of directors only for "cause," and (e) the percentage of shareholders required to approve amendments to our bylaws, may have anti-takeover effects, which may delay, defer or prevent a takeover attempt that a holder of our common stock might consider in its best interest.

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        We are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a Delaware corporation from engaging in any "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales as well as certain transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The operation of Section 203 may have anti-takeover effects, which may delay, defer or prevent a takeover attempt that a holder of our common stock might consider in its best interest.

Item 7A.    Quantitative and Qualitative DisclosureDisclosures about Market Risk.

Market Risk

        The principal market risks (i.e. the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed are:

•

rates on debt and short-term and long-term investment portfolios, and



•

exchange rates, generating translation and transaction gains and losses.

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Interest Rates

        Veeco centrally manages its debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. Veeco's investment portfolios consist of cash equivalents and obligations of U.S. Governmentgovernment agencies. These investments in obligations of the U.S. Governmentgovernment are considered held to maturity securities. Accordingly, the amounts are carried at amortized cost. Assuming year-end 20012002 variable debt and investment levels, a one-point change in interest rates would not have a material impact on net interest expense. In December 2001 and January 2002, the Company issued $220.0 million of 4.125% convertible subordinated notes. The notes are convertible, at the option of the holder, at any time on or prior to maturity into shares of common stock at a conversion price of $38.51 per share. The Company pays interest on these notes on June 21 and December 21 of each year. Interest payments commenced on June 21, 2002 (see Note 3 to the Company's Consolidated Financial Statements). The notes will mature on December 21, 2008. After the third anniversary of the issuance, the notes may be redeemed at the option of the Company, at the redemption prices set forth in the indenture.

Foreign Operations

        Operating in international markets involves exposure to movements in currency exchange rates, which are volatile at times. The economic impact of currency exchange rate movements on Veeco is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause the Company to adjust its financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.

        Veeco's net sales to foreign customers represented approximately 46.0%53% of Veeco's total net sales in 2002, 46% in 2001 49.8%and 50% in 2000 and 55.3% in 1999.2000. The Company expects that net sales to foreign customers will continue to represent a large percentage of Veeco's total net sales. Veeco's net sales denominated in foreign currencies represented approximately 14.6%17% of Veeco's total net sales in 2002, 15% in 2001 9.0%and 9% in 2000. The aggregate foreign exchange gains (losses) included in determining consolidated results of operations were $0.1 million, $(1.9) million and $(0.8) million in 2002, 2001 and 2000, and 9.1% in 1999.respectively. In March2002 and 2001, the Company began usingforeign currency exchange gain (loss) is net of approximately ($1.0) and

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$0.4 million of realized hedging (losses) gains, respectively, which were recorded and included in other (income) expense, net. As of December 31, 2002, approximately $0.3 million of losses related to forward contracts are included in accrued expenses and have been subsequently paid in January 2003. As of December 31, 2002, there were no open forward contracts. Veeco is exposed to financial market risks, including changes in foreign currency exchange rates. To mitigate these risks, Veeco uses derivative financial instruments. Veeco does not use derivative financial instruments for speculative or trading purposes. The Company enters into monthly forward contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known currency exposures. The average notional amount of such contracts was approximately $4.0$1.9 million for the year ended December 31, 2001. As of December 31, 2001, there were no open forward contracts. The aggregate foreign exchange losses included in determining consolidated results of operations were $1.9 million, $0.8 million and $0.4 million in 2001, 2000 and 1999, respectively. In 2001, the foreign currency exchange loss is net of approximately $0.4 million of realized hedging gains.2002. The change in currency exchange rate that has the largest impact on translating Veeco's international operating (loss) profit isare the Japanese yen.Yen and the Euro. The Company estimates that based upon theits balance sheet at December 31, 2001 balance sheet,2002, a 10% change in foreign exchange rates is immaterial toimpact operating profit.loss by approximately $0.6 million. The Company believes that this quantitative measure has inherent limitations because, as discussed in the first paragraph of this section, it does not take into account any governmental actions or changes in either customer purchasing patterns or our financing and operating strategies.

Item 8.    Financial Statements and Supplementary Data.

        The consolidated financial statements of the Company are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule filed as part of this Form 10-K.

Quarterly Results of Operations

        The following table presents selected financial data for each quarter of fiscal 20012002 and 2000.2001. Although unaudited, this information has been prepared on a basis consistent with the Company's audited financial statements and, in the opinion of the Company's management, reflects all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of this information in accordance with generally accepted accounting principles. Such quarterly results are not necessarily indicative of future results of operations and should be read in conjunction with the audited financial statements of the Company and the notes thereto.

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Quarterly Statements of Operations (In thousands):