UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

		For the quarterly period ended September 30, 2007

		OR

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

~~(Mark One)~~

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

~~For the quarterly period ended September 30, 2006~~

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.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		11-2989601
(State or Other Jurisdiction of		~~(I.R.S. Employer~~
Incorporation or Organization)		(I.R.S. Employer Identification Number)

100 Sunnyside Boulevard, Suite B Woodbury, New York		11797-2902 (Zip Code)
(Address of Principal Executive Offices)		~~(Zip Code)~~

Registrant’s telephone number, including area code: (516) 677-0200

Website: www.veeco.com

~~Registrant’s telephone number, including area code:~~ ~~(516) 677-0200~~

~~Website:~~ ~~www.veeco.com~~

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

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

~~Large accelerated filer~~ o

~~Accelerated filer~~ x

Large accelerated filer x Accelerated filer oNon-accelerated filer o

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

~~31,076,375~~

31,767,392 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on October ~~30, 2006.~~29, 2007.

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Discussions containing such forward-looking statements may be found in Items 2 and 3 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. These risks and uncertainties include, without limitation, the following:

·• The cyclicality of the microelectronics industries we serve directly affects our business.

·• We operate in an industry characterized by rapid technological change.

·• We face significant competition.

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

·• Our quarterly operating results fluctuate significantly.

·• Our outsourcing strategy could adversely affect our results of operations.

• We ~~face securities class action and shareholder derivative lawsuits which could result in substantial costs, diversion~~rely on a limited number of ~~management’s attention and resources and negative publicity.~~suppliers.

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

·• Any difficulty or inability to attract, retain and motivate key employees could have a material adverse effect on our business.

·• We are exposed to the risks of operating a global business and the requirement to comply with laws and regulations of various jurisdictions such as import/export controls, which may not apply to our non-U.S. competitors.

·• We are subject to foreign currency exchange risks.

·• Our success depends on protection of our intellectual property rights.

·• We may be subject to claims of intellectual property infringement by others.

· ~~We rely on a limited number of suppliers.~~

·• Our ~~outsourcing~~acquisition strategy ~~could adversely affect our results of operations.~~subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.

·• Changes in accounting standards for stock-based compensation may adversely affect our stock price and our ability to attract, motivate and retain key employees.

·• The implementation of a new information technology system may disrupt our operations.

·• We face securities class action and shareholder derivative lawsuits which could result in substantial costs, diversion of management’s attention and resources and negative publicity.

• We may not obtain sufficient affordable funds to finance our future needs.

·• We are subject to risks of non-compliance with environmental and safety regulations.

·• We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our company by another company more difficult.

·• The other matters discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Report and in the Annual Report on Form 10-K for the year ended December 31, ~~2005~~2006 of Veeco Instruments Inc. (“Veeco” or the “Company”).

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

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 is 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 is www.veeco.com. We provide a link on our website, under Investors — Financial Information — SEC Filings, through which investors can access our filings with the SEC, including our Annual Reports 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 site, as soon as reasonably practicable after we electronically file such material with the SEC.

VEECO INSTRUMENTS INC.

INDEX

				~~Page~~
~~PART I. FINANCIAL INFORMATION~~

~~Item 1~~.		~~Financial Statements (Unaudited):~~

PART I. FINANCIAL INFORMATION			Page

Item 1.	Financial Statements (Unaudited):

		Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, ~~2006~~2007 and ~~2005~~2006				5

		~~Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2006 and 2005~~			6

		Condensed Consolidated Balance Sheets as of September 30, ~~2006~~2007 and December 31, ~~2005~~2006				7	6

		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2006~~2007 and ~~2005~~2006				8	7

		Notes to Condensed Consolidated Financial Statements (Unaudited)				10	8

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations				19	16

Item 3.		Quantitative and Qualitative Disclosures About Market Risk				30	27

Item 4.			Controls and Procedures			30	28

PART II. OTHER INFORMATION

Item 1.			Legal Proceedings			31	28

Item 1A.			Risk Factors			31	29

Item 6.			Exhibits			32	29

SIGNATURES			30
	33

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements ~~(Unaudited)~~(Unaudited)

Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

Three Months Ended
September 30,

2006

2005

Net sales

$
112,369

$
100,078

Cost of sales

64,513

55,816

Gross profit

47,856

44,262

Costs and expenses:

Selling, general and administrative expense

22,296

21,210

Research and development expense

15,716

14,388

Amortization expense

4,025

4,038

Write-off of purchased in-process technology

1,160

—

Other (income) expense, net

(310
)
413

Total operating expenses

42,887

40,049

Operating income

4,969

4,213

Interest expense, net

1,056

1,815

Income before income taxes and noncontrolling interest

3,913

2,398

Income tax provision

612

832

Noncontrolling interest

(1,207
)
—

Net income

$
4,508

$
1,566

Net income per common share

$
0.15

$
0.05

Diluted net income per common share

$
0.14

$
0.05

Weighted average shares outstanding

30,693

29,965

Diluted weighted average shares outstanding

31,393

30,360

	Three Months Ended September 30,									Nine Months Ended September 30,
	2007					2006				2007				2006

Net sales	$		97,718			$	112,369			$	295,653			$	317,922
Cost of sales	61,824					64,513				173,819				178,585
Gross profit	35,894					47,856				121,834				139,337
Costs and expenses:
Selling, general and administrative expense	22,723					22,296				69,347				68,622
Research and development expense	15,049					15,716				46,341				45,554
Amortization expense	1,959					4,025				8,236				12,029
Restructuring expense	529					—				1,974				—
Write-off of purchased in-process technology	—					1,160				—				1,160
Other income, net	(179				)	(310			)	(605			)	(243			)
Total operating expenses	40,081					42,887				125,293				127,122
Operating (loss) income	(4,187				)	4,969				(3,459			)	12,215
Interest expense, net	665					1,056				2,256				3,583
Gain on extinguishment of debt	—					—				(738			)	(330			)
(Loss) income before income taxes and noncontrolling interest	(4,852				)	3,913				(4,977			)	8,962
Income tax provision	954					612				3,490				2,878
Noncontrolling interest	(123				)	(1,207			)	(482			)	(1,207			)
Net (loss) income	$			(5,683	)	$		4,508		$		(7,985	)	$	7,291

Net (loss) income per common share	$	(0.18			)	$		0.15		$		(0.26	)	$		0.24
Diluted net (loss) income per common share	$	(0.18			)	$		0.14		$		(0.26	)	$		0.23

Weighted average shares outstanding	31,100					30,693				30,975				30,369
Diluted weighted average shares outstanding	31,100					31,393				30,975				31,100

See accompanying notes.

Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)

	September 30, 2007		December 31, 2006
	(Unaudited)

Assets
Current assets:
Cash and cash equivalents	$	108,402	$	147,046
Accounts receivable, less allowance for doubtful accounts of $2,728 in 2007 and $2,683 in 2006	68,603		86,589
Inventories	105,659		100,355
Prepaid expenses and other current assets	10,254		9,378
Deferred income taxes	2,605		2,565
Total current assets	295,523		345,933
Property, plant and equipment at cost, less accumulated depreciation of $93,559 in 2007 and $88,087 in 2006	69,505		73,510
Goodwill	100,898		100,898
Purchased technology, less accumulated amortization of $71,119 in 2007 and $64,736 in 2006	37,469		43,852
Other intangible assets, less accumulated amortization of $28,936 in 2007 and $26,740 in 2006	23,754		25,053
Other assets	215		354
Total assets	$	527,364	$	589,600

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	35,619	$	40,588
Accrued expenses	50,369		48,714
Deferred profit	1,342		251
Income taxes payable	1,382		2,723
Current portion of long-term debt	5,434		5,597
Total current liabilities	94,146		97,873
Deferred income taxes	3,470		2,423
Long-term debt	146,450		203,607
Other non-current liabilities	1,716		2,304

Noncontrolling interest	1,160		1,642

Shareholders’ equity	280,422		281,751
Total liabilities and shareholders’ equity	$	527,364	$	589,600

See accompanying notes.

Veeco Instruments Inc. and Subsidiaries
Condensed Consolidated Statements of ~~Operations~~Cash Flows
(In ~~thousands, except per share data)~~thousands)
(Unaudited)

Nine Months Ended
September 30,

2006

2005

Net sales

$
317,922

$
297,343

Cost of sales

178,585

172,123

Gross profit

139,337

125,220

Costs and expenses:

Selling, general and administrative expense

68,622

62,816

Research and development expense

45,554

45,075

Amortization expense

12,029

12,554

Write-off of purchased in-process technology

1,160

—

Other (income) expense, net

(243
)
385

Total operating expenses

127,122

120,830

Operating income

12,215

4,390

Interest expense, net

3,583

5,920

Gain on extinguishment of debt

(330
)
—

Income (loss) before income taxes and noncontrolling interest

8,962

(1,530
)
Income tax provision

2,878

2,055

Noncontrolling interest

(1,207
)
—

Net income (loss)

$
7,291

$
(3,585
)

Net income (loss) per common share

$
0.24

$
(0.12
)
Diluted net income (loss) per common share

$
0.23

$
(0.12
)

Weighted average shares outstanding

30,369

29,894

Diluted weighted average shares outstanding

31,100

29,894

	Nine Months Ended September 30,
	2007			2006
Operating activities
Net (loss) income	$	(7,985	)	$	7,291
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	19,288			22,426
Deferred income taxes	1,111			291
Gain on extinguishment of debt	(738		)	(330		)
Non-cash compensation expense for share-based payments	3,490			1,443
Noncontrolling interest in net loss of subsidiary	(482		)	(1,207		)
Gain on sale of property, plant and equipment	(79		)	(27		)
Write-off of purchased in-process technology	—			1,160
Changes in operating assets and liabilities:
Accounts receivable	19,972			3,103
Inventories	(4,801		)	(14,691		)
Accounts payable	(5,042		)	5,025
Accrued expenses, deferred profit and other current liabilities	524			3,159
Other, net	(2,481		)	(5,119		)
Net cash provided by operating activities	22,777			22,524

Investing activities
Capital expenditures	(6,854		)	(12,473		)
Proceeds from sale of property, plant and equipment	311			35
Payments for net assets of businesses acquired	—			(3,068		)
Net maturities of investments	—			(128		)
Net cash used in investing activities	(6,543		)	(15,634		)

Financing activities
Proceeds from stock issuance	2,781			15,082
Repayments of long-term debt	(55,407		)	(19,680		)
Payments for debt issuance costs	(1,503		)	—
Other	(314		)	—
Net cash used in financing activities	(54,443		)	(4,598		)
Effect of exchange rates on cash and cash equivalents	(435		)	(226		)
Net change in cash and cash equivalents	(38,644		)	2,066
Cash and cash equivalents at beginning of period	147,046			124,499
Cash and cash equivalents at end of period	$	108,402		$	126,565

Supplemental disclosure of non-cash investing and financing activities
Exchange of convertible subordinated notes	$	118,766		$	—
Transfers from property, plant and equipment to inventory	473			1,515
Transfers from inventory to property, plant and equipment	78			743
Acquisition of assets in connection with the consolidation of a variable interest entity	—			3,550
Assumption of liabilities in connection with the consolidation of a variable interest entity	—			643

See accompanying notes.

~~Veeco Instruments Inc. and Subsidiaries~~
~~Condensed Consolidated Balance Sheets~~
~~(In thousands)~~

September 30, 2006

December 31, 2005

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$
126,565

$
124,499

Accounts receivable, less allowance for doubtful accounts of $2,331 in 2006 and $1,860 in 2005

87,049

89,230

Inventories

104,689

88,904

Prepaid expenses and other current assets

13,107

9,640

Deferred income taxes

3,531

2,870

Total current assets

334,941

315,143

Property, plant and equipment at cost, less accumulated depreciation of $84,857 in 2006 and $77,954 in 2005

71,684

69,806

Goodwill

100,898

99,622

Purchased technology, less accumulated amortization of $61,548 in 2006 and $51,992 in 2005

47,045

55,776

Other intangible assets, less accumulated amortization of $25,539 in 2006 and $22,274 in 2005

25,543

26,899

Other assets

428

614

Total assets

$
580,539

$
567,860

Liabilities and shareholders’ equity

Current liabilities:

Accounts payable

$
36,429

$
31,289

Accrued expenses

51,617

51,169

Deferred profit

758

537

Income taxes payable

2,054

2,123

Current portion of long-term debt

393

375

Total current liabilities

91,251

85,493

Deferred income taxes

2,418

1,048

Long-term debt

208,907

229,205

Other non-current liabilities

3,097

3,527

Noncontrolling interest

1,793

—

Shareholders’ equity

273,073

248,587

Total liabilities and shareholders’ equity

$
580,539

$
567,860

~~See accompanying notes.~~

~~Veeco Instruments Inc. and Subsidiaries~~
~~Condensed Consolidated Statements of Cash Flows~~
~~(In thousands)~~
~~(Unaudited)~~

Nine Months Ended
September 30,

2006

2005

Operating activities

Net income (loss)

$
7,291

$
(3,585
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

22,426

22,403

Deferred income taxes

291

(254
)
Gain on extinguishment of debt

(330
)
—

Non-cash compensation expense for share-based payments

1,443

72

Noncontrolling interest in net loss of subsidiary

(1,207
)
—

Write-off of purchased in-process technology

1,160

—

(Gain) loss on sale of property plant and equipment

(27
)
346

Changes in operating assets and liabilities:

Accounts receivable

3,103

(4,876
)
Inventories

(14,691
)
10,177

Accounts payable

5,025

7,642

Accrued expenses, deferred profit and other current liabilities

3,159

1,179

Other, net

(5,119
)
(3,645
)
Net cash provided by operating activities

22,524

29,459

Investing activities

Capital expenditures

(12,473
)
(8,553
)
Payments for net assets of businesses acquired

(3,068
)
(15,038
)
Proceeds from sale of property, plant and equipment and assets held for sale

35

2,260

Net maturities of investments

(128
)
(70
)
Net cash used in investing activities

(15,634
)
(21,401
)

Financing activities

Proceeds from stock issuance

15,082

1,820

Repayments of long-term debt

(19,680
)
(264
)
Net cash (used in) provided by financing activities

(4,598
)
1,556

Effect of exchange rates on cash and cash equivalents

(226
)
1,813

Net change in cash and cash equivalents

2,066

11,427

Cash and cash equivalents at beginning of period

124,499

100,276

Cash and cash equivalents at end of period

$
126,565

$
111,703

~~Non-Cash Items~~

During the nine months ended September 30, 2006, the Company had non-cash items excluded from the Condensed Consolidated Statements of Cash Flows of approximately $6.3 million. This amount consisted of (1) $1.5 million reflecting the transfer of demonstration and lab equipment from property, plant and equipment to inventory; (2) $0.7 million for the transfer of inventory to property, plant and equipment; and (3) $3.5 million fair value of assets acquired and $0.6 million of liabilities assumed in connection with the consolidation of a variable interest entity (See Note 7 — Business Acquisition and Related Party Transaction).

~~During the nine months ended September 30, 2005,~~ the Company had non-cash items excluded from the Condensed Consolidated Statements of Cash Flows of approximately $4.2 million. This amount consists of (1) $1.8 million of additional purchase price relating to the acquisition of Manufacturing Technology Inc., which resulted in a corresponding increase to goodwill; (2) $1.3 million for the transfer of property, plant and equipment to inventory; and (3) $1.1 million for the accrual of a contingent earn-out payment to the former shareholders of Nanodevices Inc. related to the achievement of certain revenue targets during the third quarter of 2005, which was paid in the second quarter of 2006, and has been reflected as additional goodwill.

~~See accompanying notes.~~

VEECO INSTRUMENTS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1—Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the three and nine months ended September 30, ~~2006,~~2007, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2006.~~2007. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2005.~~2006.

Consistent with prior years, the Company reports interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2007 interim quarter ends are April 1, July 1, and September 30. The 2006 interim quarter ends were April 2, July 2, and October 1. For ease of reference, the Company reports these interim quarter ends as March 31, June 30, and September 30 in its interim condensed consolidated financial statements.

~~Earnings~~Net (Loss) Income Per Common Share

The following table sets forth the reconciliation of weighted average shares outstanding and diluted weighted average shares outstanding:

					Three Months Ended September 30,		Nine Months Ended September 30,
	Three months ended September 30,		Nine months ended September 30,		2007	2006	2007	2006
	2006	2005	2006	2005	(In thousands )
	(In thousands)
Weighted average shares outstanding	30,693	29,965	30,369	29,894	31,100	30,693	30,975	30,369
Dilutive effect of stock options and restricted stock awards and units	700	395	731	—
Dilutive effect of stock options and restricted stock awards					—	700	—	731
Diluted weighted average shares outstanding	31,393	30,360	31,100	29,894	31,100	31,393	30,975	31,100

Net (loss) income and diluted net (loss) income per common share are computed using the weighted average number of common and common equivalent shares outstanding during the period. ~~The effect of approximately 212,000 common equivalent shares for~~

During the three and nine ~~months~~month periods ended September 30, ~~2005,~~2007, options to purchase 5.7 million shares of common stock (at prices ranging from $0.27 to $72.00 per share) that were ~~anti-dilutive~~outstanding were excluded from the computation of diluted earnings per share. During the comparable 2006 periods, options to purchase 2.9 million shares (at prices ranging from $23.11 to $72.00 per share) and ~~therefore, are not included in~~3.0 million shares (at prices ranging from $22.63 to $72.00 per share) of common stock that were outstanding were excluded from the ~~weighted~~computation of diluted earnings per share. In the 2007 periods, the Company recorded net losses, so the effect of all options outstanding was anti-dilutive. In 2006, the exercise price of these options exceeded the average ~~shares outstanding.~~market price of the Company’s common stock, thereby causing their effect to be anti-dilutive.

During the second quarter of 2007, the Company issued a new series of 4.125% convertible subordinated notes due April 15, 2012 (the "New Notes") pursuant to privately negotiated exchange agreements with certain holders of its outstanding 4.125% convertible subordinated notes due 2008 (the "Old Notes"). In ~~addition,~~total, the Company exchanged $118.8 million of Old Notes for $117.8 million of New Notes.

The effect of the assumed conversion of ~~convertible subordinated notes into~~the Old Notes is approximately 0.7 million and 2.2 million common equivalent shares for the three and nine months ended September 30, 2007, respectively, and 5.2 million and 5.3 million ~~common equivalent~~for the comparable periods of 2006, respectively. The converted shares ~~is antidilutive~~are anti-dilutive and, therefore, isare not

included in the weighted shares outstanding for the three and nine months ended September 30, 2007 and 2006, respectively. The second quarter 2007 debt exchange, together with the $56 million in debt repurchases of Old Notes during the first quarter of 2007 reduced the effect on earnings per share of the assumed conversion of the Old Notes, which was calculated using the “if converted” method of accounting.

The New Notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of convertible subordinated notes into approximately 5.7 million common equivalent shares is antidilutive and therefore, is not included in the weighted average shares outstanding for the comparable prior year periods.

~~Share-Based Compensation~~

~~As of September 30, 2006,~~accounting, as long as the Company has ~~stock option~~the ability and ~~restricted stock plans, which are described more fully~~the intent to settle the principal amount of the New Notes in ~~Note 2.~~cash. Under the terms of the New Notes, the Company may pay the principal amount of converted New Notes in cash or in shares of common stock. The Company ~~also assumed certain~~has indicated that it intends to pay such amounts in cash. Using the treasury stock ~~option plans and agreements in connection with various acquisitions, as also discussed in Note 2. Prior to 2006,~~method, the ~~Company accounted for these stock option plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25,~~ ~~Accounting for Stock Issued to Employees,~~ ~~and related interpretations and generally, no compensation expense was reflected in net income as options granted under those plans had an exercise price equal to the market value~~impact of the ~~underlying common stock on~~assumed conversion of the ~~date of grant. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R),~~ ~~Share-Based Payment~~~~, which~~New Notes is ~~a revision of SFAS No. 123,~~ ~~Accounting for Stock-Based Compensation~~~~, supersedes APB No. 25 and amends SFAS No. 95,~~ ~~Statement of Cash Flows~~. SFAS No. 123(R) requires all share-based payments to employees and non-employee directors, including grants of stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) was adopted using the modified prospective method of application, which requires Veeco to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based awards, expense

is also recognized to reflect the remaining service period of awards that had been included in the pro forma disclosures in prior periods. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under previous accounting literature, which has the effect of reducing consolidated cash flows from operations and increasing cash flows from financing activities in periods after adoption. For the three and nine months ended September 30, 2006, ~~the Company did not recognize any amount of consolidated financing cash flows for such excess tax deductions.~~

Total share-based compensation expense is attributable to the remaining requisite service periods of stock options and restricted common stock awards and units. For the three months ended September 30, 2006, the Company granted 9,900 restricted common stock awards and units to its employees. For the nine months ended September 30, 2006, the Company granted 146,200 stock options and 208,150 restricted common stock awards and units to its directors, officers and employees. As a result of adopting SFAS No. 123(R), the Company’s net incomeanti-dilutive for the three and nine months ended September 30, ~~2006~~2007, as the average stock price was $0.1 million and $0.4 million lower, respectively, than if it had continued to account for share-based compensation under APB No. 25. Net income per common share and diluted net income per common share forbelow the ~~three and nine months ended September 30, 2006, are approximately $0.01 lower~~conversion price of $27.23 for both ~~periods, than if~~periods. The effect of the ~~Company had continued to account for share-based compensation under APB No. 25. As~~assumed converted shares is dependent on the stock price at the time of ~~September 30, 2006,~~ the ~~total unrecognized compensation cost related to nonvested stock awards and option awards is $4.2 million and $1.4 million, respectively, and~~conversion. The maximum number of common equivalent shares issuable upon conversion inclusive of the ~~related weighted average period over which it is expected that such unrecognized compensation costs will be recognized~~maximum make whole provision is approximately ~~2.3 years for the nonvested stock awards and 2.2 years for option awards.~~ ~~Future share-based compensation expense will depend on levels of share-based awards granted in the future and, therefore, cannot be predicted at this time.~~6.0 million.

~~Prior to the Company’s adoption of~~ SFAS No. 123(R), SFAS No. 123 required that the Company provide pro forma information regarding net loss and loss per share as if compensation cost for the Company’s stock-based awards had been determined in accordance with the fair value method prescribed therein. In accordance with SFAS No. 123, the following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions, under which compensation expense would be recognized as incurred, to stock-based employee compensation.

Three months ended
September 30, 2005

Nine months ended
September 30, 2005

(In thousands, except per share amounts)

Net income (loss), as reported

$
1,566

$
(3,585
)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

(3,904
)
(29,121
)
Pro forma net loss

$
(2,338
)
$
(32,706
)

Net income (loss) per common share:

Net income (loss) and diluted net income (loss) per common share, as reported

$
0.05

$
(0.12
)
Net loss and diluted net loss per common share, pro forma

$
(0.08
)
$
(1.09
)

~~Recent Accounting Pronouncements~~Income Taxes

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation ~~No. (“FIN”)~~Number 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109 ~~Accounting~~ (“SFAS 109”), which became effective for ~~Income Taxes.~~ Veeco on January 1, 2007. FIN 48 ~~clarifies~~addresses the ~~accounting and disclosure for income taxes by defining the threshold for recognizing the~~determination of how tax benefits ofclaimed or expected to be claimed on a tax return ~~positions~~should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements ~~as “more-likely-than-not” to be sustained by~~from such uncertain tax positions are measured based on the ~~taxing authority. It also provides guidance on derecognition, measurement and classification~~largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The application of income tax ~~uncertainties, along with any related interest~~law is inherently complex. Laws and ~~penalties, accounting~~regulations in ~~interim periods, disclosure~~this area are voluminous and ~~transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.~~are often ambiguous. The Company is ~~currently assessing~~required to make many subjective assumptions and judgments regarding its income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time and changes in assumptions and judgments can materially affect the amounts recognized in the Company’s condensed consolidated financial statements. The impact of the Company’s reassessment of its tax positions in accordance with FIN 48 during the first quarter of 2007 resulted in a $0.8 million reduction to the January 1, 2007 retained earnings balance. For additional information regarding the adoption of FIN 48, ~~on its consolidated financial position and results of operations.~~see Note 5, Income Taxes.

Recent Accounting Pronouncements

establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. ~~Statement No.~~SFAS 157 is effective for fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position ~~and~~or results of operations.

In ~~September 2006,~~February 2007, the FASB issued ~~FASB~~ Statement of Financial Accounting Standards No. ~~158,~~159, ~~Employers’ Accounting~~The Fair Value Option for ~~Defined Benefit Pension~~Financial Assets and ~~Other Postretirement Plans~~Financial Liabilities (“SFAS 159”). ~~Statement No. 158 improves~~SFAS 159 permits entities to choose to measure financial ~~reporting by requiring an employer~~assets and liabilities (except for those that are specifically scoped out of the Statement) at fair value. The election to ~~recognize the overfunded or underfunded status of~~measure a ~~defined benefit postretirement plan as an~~financial asset or liability ~~in its statement of financial position~~at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as an adjustment to ~~recognize~~opening retained earnings. Subsequent changes in ~~that funded status~~fair value are recognized in the year in which the changes occur through comprehensive income. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The recognition and disclosure provisions of Statement No. 158 are effective for fiscal years ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial positionearnings. SFAS 159 is effective for fiscal years ~~ending~~beginning after ~~December~~November 15, ~~2008.~~2007. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position ~~and~~or results of operations.

~~Reclassifications~~

~~Certain amounts in the 2005 condensed consolidated financial statements have been reclassified to conform to the 2006 presentation.~~

Note 2—Share-Based Payments

Stock Option and Restricted ~~Stock Plans~~Stock-Based Compensation

Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period The ~~Company has several stock option and restricted stock plans. The Veeco Instruments Inc. 2000 Stock Incentive Plan, as amended, (the “2000 Plan”),~~following compensation expense was ~~approved by~~ included in

the ~~Board~~condensed consolidated statement of ~~Directors and shareholders in May 2000. The 2000 Plan provides~~operations for the ~~grant to officers~~three and key employees of up to 8,530,000 options (2,114,174 options are available for future grants as of September 30, 2006) to purchase shares of common stock of the Company. Stock options granted pursuant to the 2000 Plan expire after seven years and generally become exercisable over a three-year period following the grant date. However, grants made under the 2000 Plan between June 17, 2005 and December 23, 2005 became exercisable on or before December 31, 2005, and are subject to a resale restriction which provides that the shares issuable upon exercise of the option may not be transferred prior to the second anniversary of the option grant date. In addition, the 2000 Plan provides for automatic annual grants of 5,000 shares of restricted stock to each member of the Board of Directors of the Company who is not an employee of the Company. Up to 1,700,000 of the awards authorized under the 2000 Plan may be issued in the form of restricted stock (1,471,650 shares are available for future grants as of September 30, 2006). For the nine months ended September 30, 2007 and 2006 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006

Share-based compensation expense	$	1,505	$	722	$	3,490	$	1,442

As of September 30, 2007, the ~~Company granted 164,650 shares of restricted common~~total unrecognized compensation cost related to nonvested stock awards is $10.3 million and ~~3,500 restricted~~to stock ~~units to key employees,~~option awards is $3.7 million. The related weighted average period over which ~~vest over three~~it is expected that such unrecognized compensation costs will be recognized is approximately 2.4 years for the nonvested stock awards and ~~in May 2006, granted 40,000 shares of restricted common stock to the non-employee members of the Board of Directors, which vest over a period of one year.~~2.5 years for option awards.

A summary of the Company’s restricted stock awards including restricted stock units as of September 30, ~~2006,~~2007, is presented below:

Shares
(000’s)

Weighted-
Average Grant-Date
Fair Value

Nonvested at beginning of year

45

$
15.60

Granted

208

24.22

Vested

—

—

Forfeited

(25
)
23.61

Nonvested at September 30, 2006

228

$
22.60

The Veeco Instruments Inc. 2000 Stock Option Plan for Non-Officer Employees (the “Non-Officer Plan”) was approved by the Board of Directors in October 2000. The Non-Officer Plan provided for the grant of stock options to non-officer employees to purchase shares of common stock of the Company. Stock options granted pursuant to the Non-Officer Plan become exercisable over a three-year period following the grant date and expire after seven years.

The Veeco Instruments Inc. Amended and Restated 1992 Employees’ Stock Option Plan (the “1992 Plan”) provided for the grant to officers and key employees of stock options to purchase shares of common stock of the Company. Stock options granted pursuant to the 1992 Plan become exercisable over a three-year period following the grant date and expire after ten years.

The Veeco Instruments Inc. 1994 Stock Option Plan for Outside Directors, as amended, (the “Directors’ Option Plan”), provided for automatic annual grants of stock options to each member of the Board of Directors of the Company who is not an employee of the Company. Such options are exercisable immediately and expire after ten years.

~~The Non-Officer Plan, the 1992 Plan and the Directors’ Option Plan have been frozen; and, thus, there are no options available for future grant as of September 30, 2006 under these plans.~~

In addition to the plans described above, the Company assumed certain stock option plans and agreements relating to the merger in September 2001 with Applied Epi, Inc. (“Applied Epi”). These stock option plans do not have options available for future grants and expire after ten years from the date of grant. Options granted under two of the plans vested over three years and options granted under one of the plans vested immediately. As of September 30, 2006, there are 197,192 options outstanding under the various Applied Epi plans. In addition, Veeco assumed certain warrants related to Applied Epi, which were in effect prior to the merger with Veeco. These warrants expired in February 2006.

In May 2000, the Company assumed certain stock option plans and agreements related to CVC, Inc. and Commonwealth Scientific Corporation, a subsidiary of CVC, Inc., which were in effect prior to the merger with Veeco. These plans do not have options available for future grants, the options granted thereunder generally vested over a three to five year period and expire five to ten years from the date of grant. As of September 30, 2006, there are 6,965 options outstanding under the various CVC, Inc. and Commonwealth Scientific Corporation plans.

With the adoption of SFAS No. 123(R) on January 1, 2006, the Company is required to record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, the Company applies the Black-Scholes option-pricing model. Inherent in the model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which make them critical accounting estimates.

Beginning in the fourth quarter of 2005, the Company used an expected stock-price volatility assumption that is a combination of both historical and implied volatilities of the underlying stock, which are obtained from public data sources. Prior to that time, the Company based this assumption solely on historical volatility.

~~With regard to the weighted-average option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises.~~

~~The fair value of each option granted during the nine months ended September 30, 2006, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:~~

~~Weighted-average expected stock-price volatility~~	40	%
~~Weighted-average expected option life~~	~~3 years~~
~~Average risk-free interest rate~~	~~4.99~~	%
~~Average dividend yield~~	0	%

~~No options were granted in the third quarter of 2006.~~

~~The fair value of each option grant that was unvested as of January 1, 2006, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:~~

~~Weighted-average expected stock-price volatility~~	60	%
~~Weighted-average expected option life~~	~~4 years~~
~~Average risk-free interest rate~~	~~3.64~~	%
~~Average dividend yield~~	0	%

			Weighted-
	Shares		Average
	(In		Grant-Date
	thousands)		Fair Value
Nonvested at beginning of year	244		$	22.50
Granted	505		19.25
Vested	(93	)	25.08
Forfeited	(50	)	18.17
Nonvested as of September 30, 2007	606		19.75

A summary of the Company’s stock option plans as of and for the nine months ended September 30, ~~2006,~~2007, is presented below:

Shares
(000’s)

Weighted-
Average
Exercise
Price

Aggregate
Intrinsic
Value (000s)

Weighted-
Average
Remaining
Contractual Life
(in years)

Outstanding at beginning of year

7,834

$
24.81

Granted

146

23.61

Exercised

(822
)
18.23

Forfeited (including cancelled options)

(639
)
24.98

Outstanding at September 30, 2006

6,519

$
25.59

$
7,868

3.3

Options exercisable at September 30, 2006

6,312

$
25.73

$
7,655

3.2

The weighted-average grant date fair value of stock options granted for the nine months ended September 30, 2006 was $7.61 per option. The weighted-average grant date fair value of stock options granted for the three and nine months ended September 30, 2005 was $9.54 and $8.08 per option, respectively. The total intrinsic value of stock options exercised during the three and nine months ended September 30, 2006 was $1.2 million and $4.4 million, respectively. The total intrinsic value of stock options exercised during the three and nine months ended September 30, 2005 was $0.5 million and $0.6 million, respectively.

~~The following table summarizes information about stock options outstanding at September 30, 2006:~~

Options Outstanding

Options Exercisable

Range of Exercise Prices

Number
Outstanding at
September 30, 2006
(000’s)

Weighted-
Average
Remaining
Contractual Life
(in years)

Weighted-
Average
Exercise Price

Number
Outstanding at
September 30, 2006
(000’s)

Weighted-
Average
Exercise Price

$0.27

93

4.3

$
0.27

93

$
0.27

10.26-15.35

150

4.9

14.50

125

14.52

15.45-23.11

3,363

4.2

19.44

3,307

19.44

23.61-35.00

2,063

2.6

29.57

1,937

29.95

35.75-50.60

790

1.1

44.22

790

44.22

54.35-72.00

60

2.7

55.92

60

55.92

6,519

3.3

$
25.59

6,312

$
25.73

							Weighted-
					Aggregate		Average
			Weighted-		Intrinsic		Remaining
	Shares		Average		Value		Contractual
	(In		Exercise		(In		Life
	thousands)		Price		thousands)		(in years)
Outstanding at beginning of year	6,363		$	25.58
Granted	603		19.58
Exercised	(169	)	15.72
Forfeited (including cancelled options)	(1,079	)	35.46
Outstanding at September 30, 2007	5,718		$	23.37	$	6,049	3.1
Options exercisable at September 30, 2007	5,011		$	23.86	$	5,748	2.6

On April 12, 2005, the Compensation Committee (the “Committee”) of the Company’s Board of Directors approved the acceleration of vesting for unvested, out-of-the-money stock options granted under the Company’s stock option plans prior to September 1, 2004. An option was considered out-of-the-money if the option exercise price was greater than the closing price of the Company’s common stock on the NASDAQ National Market on April 11, 2005 ($15.26), the last trading day before the Committee approved the acceleration. As a result of this action, options to purchase approximately 2,522,000 shares of the Company’s common stock became immediately exercisable, including options held by the Company’s executive officers to purchase approximately 852,000 shares of common stock. The weighted average exercise price of the options for which vesting was accelerated was $21.24.

The purpose of the accelerated vesting was to avoid future compensation expense of approximately $7.9 million in 2006 and $3.6 million in 2007 associated with these options that the Company would otherwise have

~~recognized in its Consolidated Statements of Operations upon the adoption of~~ ~~SFAS No. 123(R) (see Note 1). In addition, many of these options had exercise prices significantly in excess of current market values and were not providing an effective means of employee retention and incentive compensation.~~

~~Employee Stock Purchase Plan~~

Under the Veeco Instruments Inc. Amended and Restated Employee Stock Purchase Plan (the “ESP Plan”), the Company is authorized to issue up to 2,000,000 shares of common stock to its full-time U.S. employees, nearly all of whom are eligible to participate. Under the terms of the ESP Plan, employees can choose to have up to 10% of their annual base earnings withheld to purchase the Company’s common stock. The purchase price of the stock as of September 30, 2006 was 95% of the end-of-offering period market price and ~~qualifies as a noncompensatory employee stock purchase plan under Section 423 of the Internal Revenue Code.~~

~~Shares Reserved for Future Issuance~~

~~As of September 30, 2006, the Company has reserved the following shares for future issuance related to:~~

~~Issuance upon exercise of stock options and issuance of restricted stock~~		~~8,636,213~~
~~Issuance upon conversion of subordinated debt~~		~~5,193,456~~
~~Issuance of shares pursuant to the ESP Plan~~		~~1,453,582~~
~~Total shares reserved~~		~~15,283,251~~

~~Preferred Stock~~

The Board of Directors of the Company has authority under the Company’s Certificate of Incorporation to issue shares of preferred stock with voting and economic rights to be determined by the Board or Directors.

Note 3—Balance Sheet Information

Inventories

Inventories have been determined by lower of cost (principally first-in, first-out) or market. Inventories consist of:

	September 30, 2007		December 31, 2006
	(In thousands )

Parts and components (1)	$	60,121	$	60,249
Work in process (1)	32,192		27,961
Finished goods	13,346		12,145
	$	105,659	$	100,355

September 30, 2006

December 31, 2005

(In thousands)

Raw materials

$
50,788

$
45,357

Work in progress

39,478

33,307

Finished goods

14,423

10,240

$
104,689

$
88,904

(1) The prior period has been reclassified to conform to current period presentation.

Accrued Warranty

The Company estimates the costs that may be incurred under the warranty it provides and recognizes a

liability in the amount of such costs at the time the related revenue is recognized. Factors that affect the Company’s warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. The Company periodically assesses the adequacy of its recognized warranty liability and adjusts the amount as necessary. Changes in the Company’s warranty liability during the ~~period~~nine months ended September 30, 2007 and 2006 are as follows:

	Nine Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2007			2006
	(In thousands)						(In thousands)

Balance as of January 1	$	6,671		$	6,771		$	7,118		$	6,671
Warranties issued during the period	5,088			4,085			4,170			5,088
Settlements made during the period	(4,602		)	(4,493		)	(4,788		)	(4,602		)
Balance as of September 30	$	7,157		$	6,363		$	6,500		$	7,157

Note 4—Segment Information

~~As of January 1, 2006, the Company changed its management structure in a manner that caused the composition of its reportable segments to change.~~

The Company ~~currently~~ manages the business, reviews operating results, and assesses performance, as well as allocates resources, based upon two separate reporting segments. The ~~Company merged the former Ion Beam and Mechanical Process Equipment segment and the Epitaxial Process Equipment segment into one reporting segment. The new~~ Process Equipment segment combines the etch, deposition, dicing and slicing products sold mostly to data storage customers and the molecular beam epitaxy (“MBE”) and metal organic chemical vapor deposition (“MOCVD”) products primarily sold to ~~high brightness~~high-brightness light emitting diode, solar, and wireless telecommunications customers. This segment has production facilities in Plainview, New York, Ft. Collins, Colorado, Camarillo, California, St. Paul, Minnesota and Somerset, New Jersey. The Metrology segment ~~remains unchanged and~~ represents ~~equipment~~products that isare used to provide critical surface measurements on ~~products~~items such as semiconductor devices and thin film magnetic heads, as well as biological, nanoscience, and material science samples, and includes ~~Veeco’s~~the Company’s broad line of atomic force microscopes, optical interferometers and stylus profilers sold to semiconductor customers, data storage customers and thousands of research facilities and scientific centers. This segment has production facilities in Camarillo and Santa Barbara, California and Tucson, Arizona. ~~Accordingly, the Company has restated segment information for the prior periods presented.~~

The Company evaluates the performance of its reportable segments based on income ~~or loss~~(loss) from operations before interest, income taxes, amortization and ~~amortization~~certain items (“EBITA”)., which is the primary indicator used to plan and forecast future periods. The presentation of this financial measure facilitates meaningful comparison with prior periods, as management of the Company believes EBITA reports baseline performance and thus provides useful information. Certain items include charges for purchased in-process technology, restructuring, and debt-related costs or gains. The accounting policies of the reportable segments are the same as those described in the summary of ~~significant~~critical accounting policies. Items excluded from segment profit primarily consist of interest, amortization, income taxes, corporate expenses, as well as other unusual charges for purchased in-process technology, restructuring and asset impairment charges and merger-related costs. Corporate expenses are comprised primarily of general and administrative expenses.

The following tables present certain data pertaining to the reportable product segments of the Company and a reconciliation of EBITA to income (loss) before income taxes and noncontrolling interest for the three and nine months ended September 30, ~~2006~~2007 and ~~2005,~~2006 and goodwill and total assets as of September 30, ~~2006~~2007 and December 31, ~~2005~~2006 (in thousands):

	Process Equipment			Metrology		Unallocated Corporate Amount			Total		Process Equipment		Metrology			Unallocated Corporate Amount			Total
Three Months Ended September 30, 2006
Three Months Ended September 30, 2007
Net sales	$	71,375		$	40,994	$	—		$	112,369	$	62,923	$	34,795		$	—		$	97,718
Income (loss) before interest, taxes, amortization and certain items (EBITA)	7,482			4,352		(1,680		)	10,154		$	2,249	$	(395	)	$	(3,553	)	$	(1,699	)
Interest expense, net	—			—		1,056			1,056		—		—			665			665
Amortization expense	3,333			433		259			4,025		1,444		399			116			1,959
Write-off of purchased in-process technology	1,160			—		—			1,160
Restructuring expense											159		46			324			529
Income (loss) before income taxes and noncontrolling interest	2,989			3,919		(2,995		)	3,913		$	646	$	(840	)	$	(4,658	)	$	(4,852	)

Three Months Ended September 30, 2005
Net sales	$	49,381		$	50,697	$	—		$	100,078
(Loss) income before interest, taxes, amortization and certain items (EBITA)	(691		)	11,692		(2,750		)	8,251
Interest expense, net	—			—		1,815			1,815
Amortization expense	3,293			457		288			4,038
(Loss) income before income taxes and noncontrolling interest	(3,984		)	11,235		(4,853		)	2,398

	Process Equipment		Metrology		Unallocated Corporate Amount			Total
Three Months Ended September 30, 2006
Net sales	$	71,375	$	40,994	$	—		$	112,369
Income (loss) before interest, taxes, amortization and certain items (EBITA)	$	7,482	$	4,352	$	(1,680	)	$	10,154
Interest expense, net	—		—		1,056			1,056
Amortization expense	3,333		433		259			4,025
Write-off of purchased in-process technology	1,160		—		—			1,160
Income (loss) before income taxes and noncontrolling interest	$	2,989	$	3,919	$	(2,995	)	$	3,913

	Process Equipment		Metrology		Unallocated Corporate Amount			Total
Nine Months Ended September 30, 2007
Net sales	$	181,028	$	114,625	$	—		$	295,653
Income (loss) before interest, taxes, amortization and certain items (EBITA)	$	11,842	$	4,015	$	(9,106	)	$	6,751
Interest expense, net	—		—		2,256			2,256
Amortization expense	6,628		1,135		473			8,236
Restructuring expense	159		1,398		417			1,974
Gain on extinguishment of debt	—		—		(738		)	(738		)
Income (loss) before income taxes and noncontrolling interest	$	5,055	$	1,482	$	(11,514	)	$	(4,977	)

	Process Equipment		Metrology		Unallocated Corporate Amount			Total
Nine Months Ended September 30, 2006
Net sales	$	191,927	$	125,995	$	—		$	317,922
Income (loss) before interest, taxes, amortization and certain items (EBITA)	$	17,159	$	16,280	$	(8,035	)	$	25,404
Interest expense, net	—		—		3,583			3,583
Amortization expense	9,909		1,328		792			12,029
Write-off of purchased in-process technology	1,160		—		—			1,160
Gain on extinguishment of debt	—		—		(330		)	(330		)
Income (loss) before income taxes and noncontrolling interest	$	6,090	$	14,952	$	(12,080	)	$	8,962

Nine Months Ended September 30, 2006

Net sales

$
191,927

$
125,995

$
—

$
317,922

Income (loss) before interest, taxes, amortization and certain items (EBITA)

17,159

16,280

(8,035
)
25,404

Interest expense, net

—

—

3,583

3,583

Amortization expense

9,909

1,328

792

12,029

Write-off of purchased in-process technology

1,160

—

—

1,160

Gain on extinguishment of debt

—

—

(330
)
(330
)
Income (loss) before income taxes and noncontrolling interest

6,090

14,952

(12,080
)
8,962

Nine Months Ended September 30, 2005

Net sales

$
160,900

$
136,443

$
—

$
297,343

(Loss) income before interest, taxes, amortization and certain items (EBITA)

(1,124
)
25,971

(7,903
)
16,944

Interest expense, net

—

—

5,920

5,920

Amortization expense

10,181

1,495

878

12,554

(Loss) income before income taxes and noncontrolling interest

(11,305
)
24,476

(14,701
)
(1,530
)

Process
Equipment

Metrology

Unallocated
Corporate
Amount

Total

As of September 30, 2006

Goodwill

$
71,530

$
29,368

$
—

$
100,898

Total assets

299,080

147,313

134,146

580,539

As of December 31, 2005

Goodwill

$
70,254

$
29,368

$
—

$
99,622

Total assets

300,617

132,928

134,315

567,860

~~Corporate total assets are comprised principally of cash at September 30, 2006 and December 31, 2005.~~12

	Process Equipment		Metrology		Unallocated Corporate Amount		Total
As of September 30, 2007
Goodwill	$	71,530	$	29,368	$	—	$	100,898
Total assets	272,842		127,069		127,453		527,364

As of December 31, 2006
Goodwill	$	71,530	$	29,368	$	—	$	100,898
Total assets	285,661		138,140		165,799		589,600

Note 5—Income Taxes

The provision for income taxes of $1.0 million for the three months ended September 30, 2007 included $0.6 million relating to Veeco’s foreign operations, which continue to be profitable, and $0.4 million relating to the Company’s domestic operations. The provision for income taxes of $3.5 million for the nine months ended September 30, 2007 included $2.5 million relating to Veeco’s foreign operations and $1.0 million relating to the Company’s domestic operations. Due to significant domestic net operating loss carry forwards, which are fully reserved by a valuation allowance, Veeco’s domestic operations are not expected to incur significant income taxes for the foreseeable future.

The Company adopted FIN 48 on January 1, 2007. As a result of adopting FIN 48, the Company recognized a $0.8 million increase to its reserves for uncertain tax positions during the first quarter of 2007, which was recorded as a reduction to the January 1, 2007 retained earnings balance. At the adoption date of January 1, 2007, the Company had approximately $2.3 million of unrecognized tax benefits, including the cumulative effect increase to its reserve for uncertain tax positions. For the three and nine months ended September 30, 2007, the Company recorded $0.1 million and $0.6 million, respectively, related to unrecognized tax benefits. As a result, the Company had $3.0 million of unrecognized tax benefits at September 30, 2007, all of which relate to positions taken on its foreign tax returns and represent the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in future periods.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions. All material federal, state, local, and foreign income tax matters have been concluded for years through 2002 subject to subsequent utilization of net operating losses generated in such years.

The Company is continuing its practice of recognizing interest and penalties related to income tax matters in income tax expense. The total accrual for interest and penalties related to uncertain tax positions was approximately $1.1 million as of September 30, 2007, which included $0.2 million accrued during the nine months ended September 30, 2007, the impact of which was to reduce net income by $0.2 million and earnings per diluted share by less than $0.01 for the nine months ended September 30, 2007.

Note 6—Comprehensive (Loss) Income ~~(Loss)~~

Total comprehensive ~~income~~ (loss) ~~was $3.5 million and $8.0 million~~income for the three and nine months ended September 30, 2007 and 2006 was as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006

Net (loss) income	$	(5,683	)	$	4,508		$	(7,985	)	$	7,291
Foreign currency translation	1,481			(1,065		)	1,387			672
Total comprehensive (loss) income	$	(4,202	)	$	3,443		$	(6,598	)	$	7,963

Note 7—Debt

Convertible Debt

During the first quarter of 2007, the Company repurchased $56.0 million of its 4.125% convertible

subordinated notes (the “Old Notes”) for $54.8 million, reducing the amount of the Old Notes outstanding from $200.0 million to $144.0 million. As a result of these repurchases, the Company recorded a net gain from the extinguishment of debt of $0.7 million.

On April 20, 2007, the Company issued new convertible subordinated notes (the “New Notes”) pursuant to privately negotiated exchange agreements with certain holders of the Old Notes. Under these agreements, such holders agreed to exchange $106.4 million aggregate principal amount of the Old Notes for approximately $105.5 million aggregate principal amount of New Notes. On May 1, 2007, the Company issued an additional $12.3 million aggregate principal amount of New Notes in a second round of exchange transactions with the holders of $12.4 million of Old Notes. Following the exchange transactions, approximately $25.2 million of the Old Notes, with a conversion price of $38.51 per common share, remained outstanding. No net gain or loss was recorded on the exchange transactions since the carrying value of the Old Notes including unamortized deferred financing costs approximated the exchange value of the New Notes.

The New Notes initially will be convertible into 36.7277 shares of common stock per $1,000 principal amount of New Notes (equivalent to a conversion price of $27.23 per share or a premium of 38% over the closing market price for Veeco’s common stock on April 16, 2007). Holders may convert the New Notes at any time during the period beginning on January 15, 2012 through the close of business on the second day prior to April 15, 2012 and ~~$0.9~~earlier upon the occurrence of certain events including the Company’s common stock trading at prices 130% over the conversion price for a specified period.

Credit Agreement

During the third quarter of 2007, the Company entered into a Credit Agreement with HSBC Bank USA, National Association, as administrative agent (“HSBC”), and the lenders named therein (the “New Credit Agreement”). The New Credit Agreement amends and restates, and effectively replaces, the prior Credit Agreement, dated as of March 15, 2005, among the Company, HSBC and the lenders named therein (the “Prior Credit Agreement”). The Prior Credit Agreement was set to expire on March 15, 2008.

The New Credit Agreement provides for revolving credit borrowings of up to $100.0 million. The annual interest rate under the New Credit Agreement is a floating rate equal to the prime rate of the agent bank. A LIBOR-based interest rate option is also provided. Borrowings may be used for general corporate purposes, including working capital requirements and acquisitions. The New Credit Agreement contains certain restrictive covenants substantially similar to those of the Prior Credit Agreement. These include 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 required to satisfy certain financial tests under the new Credit Agreement substantially similar to those of the prior Credit Agreement. Substantially all of the assets of the Company and its material domestic subsidiaries, other than real estate, have been pledged to secure the Company’s obligations under the New Credit Agreement. The revolving credit facility under the New Credit Agreement expires on March 31, 2012. In connection with the New Credit Agreement, the Company paid approximately $0.2 million in fees, which will be amortized over the term of the agreement, along with the remaining deferred financing fees of less than $0.1 million associated with the Prior Credit Agreement. As of September 30, 2007 and ~~($7.8) million~~December 31, 2006, there were no borrowings outstanding. Interest expense associated with the credit agreement recorded during the period was nominal and is included in accrued expenses as of September 30, 2007.

Note 8—Commitments, Contingencies and Other Matters

Litigation

As previously reported in Veeco’s Annual Report on Form 10-K for the ~~three~~year ended December 31, 2006, Veeco and certain of its officers have been named as defendants in a securities class action lawsuit consolidated in August 2005 that is pending in federal court in the Southern District of New York (“the Court”). The lawsuit arises out of the restatement in March 2005 of Veeco’s financial statements for the quarterly periods and nine months ended September 30, ~~2005, respectively. The Company’s comprehensive income (loss) is comprised of net income (loss) and foreign currency translation adjustments.~~

~~Note 6—Other Matters~~

~~As of September 30, 2006, the Company has outstanding $200.0 million of 4.125% convertible subordinated notes.~~ During the first quarter of 2006, the Company repurchased $20.0 million of its notes, reducing the amount outstanding from $220.0 million to $200.0 million. The repurchase amount was $19.5 million in cash, of which $19.4 million related to principal and $0.1 million related to accrued interest. As2004 as a result of the ~~repurchase,~~Company’s discovery of certain improper accounting transactions at its TurboDisc business unit. On July 5, 2007, Veeco entered into a Memorandum of Understanding to settle and fully resolve this lawsuit for a payment of $5.5 million. Veeco expects that insurance proceeds will cover the ~~Company recorded~~settlement amount and any significant legal expenses related to the settlement. The settlement agreement is subject to court approval and would dismiss all pending claims against Veeco and the other defendants with no admission or finding of wrongdoing by Veeco or any of the other defendants, and Veeco and the other defendants would receive a ~~gain from the early extinguishment~~full release of ~~debt~~all claims pending in the ~~amount of $0.6 million, offset by a $0.3 million proportionate reduction in the related deferred financing costs for a net gain of $0.3 million.~~litigation.

2007 Restructuring Expenses

In conjunction with a cost reduction plan, ~~announced by the Company in October 2005,~~ the Company recognized a restructuring charge of approximately ~~$1.2~~$0.5 million and $2.0 million during the three months and nine months ended September 30, 2007, respectively, which was recorded as restructuring expense in the ~~fourth quarter~~condensed consolidated statements of ~~2005.~~operations. The ~~$1.2 million~~ charge consisted of personnel severance costs for approximately 3740 employees, or approximately 3% of total employees, which included management, administration and manufacturing employees ~~located at the Company’s Plainview, New York, Camarillo, California and Somerset, New Jersey Process Equipment operations and the Santa Barbara, California Metrology operations.~~companywide. As of September 30, ~~2006, the entire accrual~~2007, approximately $0.9 million has been ~~expended.~~paid and approximately $1.1 million remains accrued. The remainder is expected to be paid over the next twelve to eighteen months.

The following is a reconciliation of the liability for the ~~2005~~ restructuring charge ~~for severance costs is as follows~~ (in ~~millions)~~thousands):

Process
Equipment

Metrology

Total

Charged to accrual

$
0.8

$
0.4

$
1.2

Cash payments during 2005

0.2

0.1

0.3

Balance as of December 31, 2005

0.6

0.3

0.9

Cash payments during the nine months ended September 30, 2006

0.6

0.3

0.9

Balance as of September 30, 2006

$
0.0

$
0.0

$
0.0

	Process Equipment			Metrology			Corporate			Total
Charged to accrual	$	159		$	1,398		$	417		$	1,974
Cash payments during 2007	(93		)	(692		)	(70		)	(855		)
Balance as of September 30, 2007	$	66		$	706		$	347		$	1,119

Note ~~7—Business Acquisition and Related Party Transaction~~9—Subsequent Events

In 2006, Veeco invested $0.5 million to purchase 19.9% of the common stock of Fluens Corporation (“Fluens”). Approximately 31% of Fluens is owned by a business unit Vice President of Veeco. Veeco and Fluens plan to jointly develop a next-generation process for high-rate deposition of aluminum oxide for data storage applications. If this development is successful and upon the satisfaction of certain additional conditions by May 2009, Veeco will be obligated to purchase the balance of the outstanding stock of Fluens for $3.0 million together with an earn-out payment to Fluens’ other stockholders based on future performance.

During the ~~third~~fourth quarter of ~~2006,~~2007, the Company’s Board of Directors approved a cost reduction plan that included a reduction in staff (employees, consultants and temporary workers), a reduction of discretionary expenses, realignment of the Company’s sales organization to more closely match current market and regional opportunities, and consolidation of certain engineering groups. As a result, during the fourth quarter of 2007, the Company ~~finalized~~expects to reduce its ~~purchase accounting~~employment level by approximately 100 employees and will recognize a restructuring charge of $5.0 million, comprised predominantly of severance costs for ~~Fluens determining that Fluens is a variable interest entity and~~ the ~~Company is its primary beneficiary as defined by FIN 46R,~~ ~~Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51.~~ As such, the Company has consolidated the results of Fluens’ operations from the acquisition date, and has attributed the 80.1% portion that is not owned by Veeco to noncontrolling interest in the Company’s consolidated financial statements. As part of that acquisition accounting, the Company recorded $1.2 million of in-process technology, which was written off during the third quarter of 2006.related employees.

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

Executive ~~Summary:~~Summary

Veeco designs, manufactures, markets and services a broad line of equipment primarily used by manufacturers in the data storage, scientific and industrial research, semiconductor, high-brightness light emitting diode (“HB-LED”) and wireless industries. These industries help create a wide range of information age products such as computer integrated circuits, personal computers, LEDs for backlighting and automotive applications, hard disk drives, network servers, digital cameras, wireless phones, TV set-top boxes, personal music/video players, and personal digital assistants. ~~The Company’s~~Veeco’s broad line of products features leading edge technology and allows customers to improve time-to-market of their next generation products. Veeco’s products are also enabling advancements in the growing fields of nanoscience, nanobiology, and other areas of scientific and industrial research.

The Company currently manages the business, reviews operating results and assesses performance, as well as allocates resources, based upon two separate reporting segments. As of January 1, 2006, the Company merged the former Ion Beam and Mechanical

Veeco’s Process Equipment ~~segment and~~products precisely deposit or remove (etch) various materials in the ~~Epitaxial Process Equipment segment into one reporting segment. The new Process Equipment segment combines~~manufacturing of thin film magnetic heads (“TFMHs”) for the ~~etch, deposition, dicing and slicing products sold mostly to~~ data storage ~~customers~~industry, HB-LED/wireless devices (such as power amplifiers and ~~the molecular beam epitaxy (“MBE”)~~laser diodes), and ~~metal organic chemical vapor deposition (“MOCVD”) products primarily sold to HB-LED and wireless telecommunications customers. The~~semiconductor mask reticles. Veeco’s Metrology ~~segment remains unchanged and represents~~ equipment ~~that~~ is used to provide critical surface measurements on ~~products such as~~ semiconductor devices and ~~thin film magnetic heads~~TFMHs. This equipment allows customers to monitor their products throughout the manufacturing process in order to improve yields, reduce costs and ~~includes~~improve product quality. Veeco’s Metrology solutions are also used by many universities, scientific laboratories, and industrial applications. Veeco sells its broad line of atomic force microscopes (“AFMs”), optical interferometers, and stylus profilers ~~sold~~ to ~~semiconductor customers, data storage customers and~~ thousands of universities, research facilities, and scientific ~~centers.~~centers worldwide.

Veeco currently maintains manufacturing facilities in Arizona, California, Colorado, Minnesota, New Jersey, and New York, with sales and service locations around the world.

Highlights of the Third Quarter of ~~2006:~~2007

·• Revenue was ~~$112.4~~$97.7 million, a ~~12% increase over the third quarter of 2005.~~

· ~~Orders were $114.8 million, up 36%~~13% decrease from the third quarter of ~~2005.~~2006.

·• Orders were $118.3 million, an increase of 3% from the third quarter of 2006.

•Net ~~income~~loss was ~~$4.5~~$(5.7) million, or ~~$0.14~~$(0.18) per share, compared to net income of ~~$1.6~~$4.5 million, or ~~$0.05~~$0.14 per share, in the third quarter of ~~2005~~2006.

•Gross margins were 36.7%, compared to 42.6% in the third quarter of 2006.

Highlights of the First Nine Months of ~~2006:~~2007

·• Revenue was ~~$317.9~~$295.7 million, a 7% ~~increase over~~decrease from the ~~comparable 2005 period.~~first nine months of 2006.

·• Orders were ~~$384.8~~$336.7 million, ~~up 27%~~a decrease of 13% from the ~~comparable 2005 period.~~first nine months of 2006.

·• ~~Gross margin~~Net loss was ~~43.8%, up from 42.1% for the comparable 2005 period.~~

· ~~Net~~$(8.0) million, or $(0.26) per share, compared to net income ~~was~~of $7.3 million, or $0.23 per share, in the first nine months of 2006.

•Gross margins were 41.2%, compared to ~~a loss of ($3.6) million, or ($0.12) per share~~43.8% in the ~~comparable 2005 period.~~first nine months of 2006.

Current Business Conditions/Outlook:Conditions

Veeco reported revenue of ~~$112.4~~$97.7 million infor the ~~third quarter of 2006,~~three months ended September 30, 2007, a ~~12% increase~~13% decrease from the prior year, but flat with the second quarter of 2006 and below the Company’s expectations. Third quarter 2006 orders were $114.8 million, up 36% from the third quarter of 2005, but down 20% sequentially from the $143.2 million in the second quarter of 2006. Veeco’s third quarter results were impacted by a slowdown of data storage customers’ production ramps, causing shipment delays from the third to fourth quarter, as well as third quarter seasonal buying patterns that have historically impacted Veeco’s overall order rate.year. Veeco expects continued ~~adjustments~~fluctuations in data storage and semiconductor capital expenditure purchases as customers reassess their production ramps and timing of new technology transition plans. ~~Due to this slowdown~~Veeco’s revenues were in ~~overall business conditions, Veeco has lowered its 2006 revenue~~line with guidance ~~from approximately $460~~of $92 million to ~~approximately $440 million.~~$97 million; however, the Company continued to experience field acceptance delays of new data storage systems. In addition to the challenges in data storage, weakness in Veeco’s semiconductor business also negatively impacted revenue and profitability.

Veeco’s ~~nine month 2006 revenues were $317.9 million, up $20.6 million, or 6.9%, from $297.3 million in the first nine months of 2005. Operating income~~orders for the ~~nine~~three months ended September 30, 2006 was $12.2 million, compared to $4.4 million in the prior year period. Net income for the first nine months of 2006 was $7.3 million, or diluted net income of $0.23 per share, compared to a net loss of ($3.6) million, or diluted net loss of ($0.12) per share, for the first nine months of 2005.

Veeco’s orders for the nine months ended September 30, 20062007 were $384.8$118.3 million, an increase of 27.4%3% from the $302.1$114.8 million reported in the first nine monthssame three-month period of 2005, reflecting double digit2006. Third quarter orders in the HB-LED/wireless segment remain strong at $43.6 million, up 26% sequentially and 49% from last year’s third quarter. This increased order rate compared to the prior year reflects positive customer interest in Veeco’s next generation “K-Series” metal organic chemical vapor deposition (“MOCVD”) tools, which were introduced in December 2006 and provide significant
16

advantages in uniformity and throughput to Veeco’s older tools and those of its competitors. End market ~~growth in data storage~~demand for this product line remains strong due to emerging LED applications such as PC backlighting and ~~in HB-LED/wireless.~~ automotive applications. Veeco’s data storage orders ~~increased 34%~~decreased 15% sequentially and 22% from the prior year period to $187.2 million. Another area of strength was in HB-LED/wireless, which reported orders of $80.9 million, up 93% from the prior year period. The increased order rate for the first nine months of 2006 versus the prior year reflects the introduction of new consumer HB-LED backlighting for emerging applications such as personal computers and flat panel televisions.

~~Despite the current delay in~~last year’s third quarter. While Veeco’s data storage ~~production ramps,~~customers are undergoing a period of consolidation and Veeco often has limited visibility to their spending patterns, the Company believes that ~~longer term~~longer-term industry requirements for increased areal density and consumer electronic expansion will drive future investment in perpendicular head technology ~~transition to smaller femto slider formats~~ and conversion to larger wafer size. The weakest order segment for Veeco during the third quarter was semiconductor, down 22% sequentially and 54% from last year’s third quarter. Veeco is in the process of beta testing its next generation automated AFM product, and currently expects the introduction of this product to help improve Veeco’s semiconductor order and revenue stream in 2008.

Technology changes are continuing in all of Veeco’s ~~markets including:~~markets: the continued increase of 80 GB hard drives, ~~and~~the investment in 120 GB hard drives, and the transition to perpendicular recording in data storage; the increased ~~use~~usage of “mini” drives in consumer electronic applications; the ~~increased use~~reduction of ~~Veeco’s automated AFMs for 65~~feature sizes in the semiconductor industry to 45 nanometer and ~~below semiconductor applications;~~below; the ~~opportunity~~growing applications in HB-LED such as automotive, architectural lighting, and backlighting for laptops; and emerging opportunities in the solar industry, which utilize Veeco’s ~~MOCVD~~existing deposition and ~~MBE products to further penetrate the emerging wireless and HB-LED markets.~~metrology technologies. Veeco believes that these ~~changes,~~trends, together with the continued funding of nanoscience research, will prompt customers to seek ~~the Company’s~~its next-generation solutions to address their manufacturing and technology challenges. ~~Veeco’s research~~In addition, consumer spending on many types of electronics has increased, and ~~development efforts~~various worldwide economies, such as those in the Asia-Pacific region, are ~~resulting~~experiencing growth.

Outlook

The Company reviews a number of indicators to evaluate the strength of its markets going forward, such as plant utilization trends, capacity requirements and capital spending trends. Veeco is currently forecasting an increase in ~~several significant new products, including physical vapor deposition (PVD), atomic layer deposition (ALD), next generation MOCVD~~revenues on a sequential basis for the ~~HB-LED growth opportunity and new metrology products~~fourth quarter of 2007, with expectations for revenues to be in the ~~semiconductor scientific research~~range of approximately $104 million to $112 million, with bookings of $105 million to $115 million. Fourth quarter 2007 profitability is forecasted to improve from the weak third quarter levels on improved volume and ~~life sciences.~~ ~~The Company will continue to introduce new~~pricing in both Process Equipment and ~~Metrology products across all~~Metrology. Additionally, management has initiated the first phase of a multi-quarter turn-around plan to improve Veeco’s ~~end markets.~~

~~In 2006,~~profitability through a combination of increased focus on its best growth opportunities, gross margin improvement and expense reduction and containment. While Veeco has ~~focused on improving gross margins. For~~a strong pipeline of new products for the data storage, HB-LED, semiconductor and scientific research markets, many of these are in the early stages of shipments and there is uncertainty associated with customer acceptance and the Company’s ability to recognize revenue upon shipment of the products. The Company’s current expectations for the fourth quarter, which are subject to uncertainties such as the timing of customer acceptance of shipped products, would bring revenue for the full year to approximately $400 million to $408 million, down approximately 10% from 2006.

The Company anticipates ending the year ~~to date period, Veeco’s overall gross margin increased to 43.8% from 42.1%~~with significant backlog, which will set the stage for an improved 2008. This forecast is supported by favorable growth trends specifically in the ~~comparable prior year period. This increase reflects~~HB-LED/wireless market driven by the Company’s unique MOCVD and MBE technologies and LED applications, as well as early penetration in specific solar applications. The Company also anticipates the positive trend in scientific research to continue due to strong customer acceptance of several new instrumentation products.

During the fourth quarter of 2007, the Company engaged in a cost reduction plan that included a reduction in staff (employees, consultants and temporary workers), a reduction of discretionary expenses, the realignment of the Company’s sales organization to more closely match current market and regional opportunities, and consolidation of certain engineering groups. As a result, during the fourth quarter of 2007, the Company expects to reduce its employment level by approximately 100 employees and will recognize a restructuring charge of $5.0 million, comprised predominantly of severance costs for the related employees. Additional restructuring charges in the range of $8.0 million to 13.0 million could potentially impact fourth quarter 2007 and first quarter 2008 earnings, depending upon the timing and extent of additional actions under consideration. Management expects that these potential additional charges will not result in a significant ~~improvement in Process Equipment margin and steady margin~~outlay of cash in the Metrology business. However, Veeco is experiencing a shift in sales mix from generally higher margin Metrology business to generally lower margin Process Equipment business. This mix shift negatively impacted Veeco’s overall gross margins in the third quarter, and may continue to impact gross margin improvements in future periods. Nonetheless, Veeco will continue to focus on improving its gross margins within its Process Equipment and Metrology businesses.near term.

Results of Operations:

Three Months Ended September 30, 20062007 and 20052006

Consistent with prior years, the Company reports interim quarters, other than fourth quarters which end on December 31, on a 13-week basis ending on the last Sunday within such period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2007 interim quarter ends are April 1, July 1, and September 30. The 2006 interim quarter ends were April 2, July 2, and October 1. For ease of reference, the Company reports these interim quarter ends as March 31, June 30, and September 30 in its interim condensed consolidated financial statements.

The following tables show ~~selected items~~the details of Veeco’s ~~Consolidated Statements~~condensed consolidated statements of ~~Operations,~~operations, percentages of sales and comparisons between the three months ended September 30, ~~2006~~2007 and ~~2005~~2006 and the analysis of sales and orders for the same periods by segment, industry, and ~~regions~~region (in thousands):

Three Months ended
September 30,

Dollar

2006

2005

Change

Net sales

$
112,369

100.0
%
$
100,078

100.0
%
$
12,291

Cost of sales

64,513

57.4

55,816

55.8

8,697

Gross profit

47,856

42.6

44,262

44.2

3,594

Operating expenses:

Selling, general and administrative expense

22,296

19.9

21,210

21.2

1,086

Research and development expense

15,716

14.0

14,388

14.4

1,328

Amortization expense

4,025

3.6

4,038

4.0

(13
)
Write-off of purchased in-process technology

1,160

1.0

—

—

1,160

Other (income) expense, net

(310
)
(0.3
)
413

0.4

(723
)
Total operating expenses

42,887

38.2

40,049

40.0

2,838

Operating income

4,969

4.4

4,213

4.2

756

Interest expense, net

1,056

0.9

1,815

1.8

(759
)
Income before income taxes and noncontrolling interest

3,913

3.5

2,398

2.4

1,515

Income tax provision

612

0.5

832

0.8

(220
)
Noncontrolling interest

(1,207
)
(1.0
)
—

—

(1,207
)
Net income

$
4,508

4.0
%
$
1,566

1.6
%
$
2,942

Sales

Orders

Three Months
ended

Dollar and
Percentage

Three Months
ended

Dollar and
Percentage

Book to Bill

September 30,

Change

September 30,

Change

Ratio

2006

2005

Year to Year

2006

2005

Year to Year

2006

2005

Segment Analysis

Process Equipment

$
71,375

$
49,381

$
21,994

44.5
%
$
74,806

$
47,147

$
27,659

58.7
%
1.05

0.95

Metrology

40,994

50,697

(9,703
)
(19.1
)
40,042

37,408

2,634

7.0

0.98

0.74

Total

$
112,369

$
100,078

$
12,291

12.3
%
$
114,848

$
84,555

$
30,293

35.8
%
1.02

0.84

Industry Analysis

Data Storage

$
45,410

$
50,116

$
(4,706
)
(9.4
)%
$
45,345

$
33,554

$
11,791

35.1
%
1.00

0.67

HB-LED/wireless

27,657

9,433

18,224

193.2

29,207

14,647

14,560

99.4

1.06

1.55

Semiconductor

15,978

12,226

3,752

30.7

14,193

11,271

2,922

25.9

0.89

0.92

Research and Industrial

23,324

28,303

(4,979
)
(17.6
)
26,103

25,083

1,020

4.1

1.12

0.89

Total

$
112,369

$
100,078

$
12,291

12.3
%
$
114,848

$
84,555

$
30,293

35.8
%
1.02

0.84

Regional Analysis

US

$
40,608

$
36,833

$
3,775

10.2
%
$
42,804

$
30,498

$
12,306

40.4
%
1.05

0.83

Europe

14,882

15,976

(1,094
)
(6.8
)
15,558

18,231

(2,673
)
(14.7
)
1.05

1.14

Japan

7,718

12,353

(4,635
)
(37.5
)
13,226

16,798

(3,572
)
(21.3
)
1.71

1.36

Asia-Pacific

49,161

34,916

14,245

40.8

43,260

19,028

24,232

127.3

0.88

0.54

Total

$
112,369

$
100,078

$
12,291

12.3
%
$
114,848

$
84,555

$
30,293

35.8
%
1.02

0.84

	Three Months Ended September 30,										Dollar Change
	2007					2006

Net sales	$	97,718		100.0	%	$	112,369		100.0	%	$	(14,651	)
Cost of sales	61,824			63.3		64,513			57.4		(2,689		)
Gross profit	35,894			36.7		47,856			42.6		(11,962		)
Operating expenses:
Selling, general and administrative expense	22,723			23.3		22,296			19.9		427
Selling, general and administrative expense	22,723			23.3		22,296			19.9		427
Research and development expense	15,049			15.4		15,716			14.0		(667		)
Amortization expense	1,959			2.0		4,025			3.6		(2,066		)
Write-off of purchased in-process technology	—			—		1,160			1.0		(1,160		)
Write-off of purchased in-process technology	—			—		1,160			1.0		(1,160		)
Restructuring expense	529			0.5		—			—		529
Other income, net	(179		)	(0.2	)	(310		)	(0.3	)	131
Total operating expenses	40,081			41.0		42,887			38.2		(2,806		)
Operating (loss) income	(4,187		)	(4.3	)	4,969			4.4		(9,156		)
Interest expense, net	665			0.7		1,056			0.9		(391		)
(Loss) income before income taxes and noncontrolling interest	(4,852		)	(5.0	)	3,913			3.5		(8,765		)
Income tax provision	954			0.9		612			0.5		342
Noncontrolling interest	(123		)	(0.1	)	(1,207		)	(1.0	)	1,084
Net (loss) income	$	(5,683	)	(5.8	)%	$	4,508		4.0	%	$	(10,191	)

	Sales									Orders
	Three Months Ended				Dollar and					Three Months Ended				Dollar and					Book to Bill
	September 30,				Percentage					September 30				Percentage					Ratio
					Change									Change
	2007		2006		Year to Year					2007		2006		Year to Year					2007	2006

Segment Analysis
Process Equipment	$	62,923	$	71,375	$	(8,452	)	(11.8	)%	$	80,918	$	74,806	$	6,112		8.2	%	1.29	1.05
Metrology	34,795		40,994		(6,199		)	(15.1	)	37,399		40,042		(2,643		)	(6.6	)	1.08	0.98
Total	$	97,718	$	112,369	$	(14,651	)	(13.0	)%	$	118,317	$	114,848	$	3,469		3.0	%	1.21	1.02

Industry Analysis
Data Storage	$	29,340	$	45,410	$	(16,070	)	(35.4	)%	$	35,207	$	45,345	$	(10,138	)	(22.4	)%	1.20	1.00
HB-LED/wireless	31,495		27,657		3,838			13.9		43,636		29,207		14,429			49.4		1.39	1.06
Semiconductor	11,804		15,978		(4,174		)	(26.1	)	6,489		14,193		(7,704		)	(54.3	)	0.55	0.89
Research and Industrial	25,079		23,324		1,755			7.5		32,985		26,103		6,882			26.4		1.32	1.12
Total	$	97,718	$	112,369	$	(14,651	)	(13.0	)%	$	118,317	$	114,848	$	3,469		3.0	%	1.21	1.02

Regional Analysis (1)
North America	$	29,014	$	41,921	$	(12,907	)	(30.8	)%	$	48,196	$	45,349	$	2,847		6.3	%	1.66	1.08
Europe	18,244		14,882		3,362			22.6		22,220		15,558		6,662			42.8		1.22	1.05
Japan	12,585		7,718		4,867			63.1		12,330		13,226		(896		)	(6.8	)	0.98	1.71
Asia-Pacific	37,875		47,848		(9,973		)	(20.8	)	35,571		40,715		(5,144		)	(12.6	)	0.94	0.85
Total	$	97,718	$	112,369	$	(14,651	)	(13.0	)%	$	118,317	$	114,848	$	3,469		3.0	%	1.21	1.02

(1) The prior period has been reclassified to conform to the current period presentation.

Net sales of ~~$112.4~~$97.7 million for the third quarter of ~~2006~~2007 were ~~up $12.3~~down $14.7 million, or ~~12.3%~~13.0%, compared to the third quarter of ~~2005.~~2006. By segment, ~~process equipment~~Process Equipment sales were ~~up $22.0~~down $8.5 million, or ~~44.5%~~11.8%. The ~~increase~~decrease in ~~process equipment~~Process Equipment sales is primarily due to ana decrease in sales to the data storage market. Partially offsetting this decline was a continued increase in sales to the HB-LED/wireless market. Metrology sales ~~decreased $9.7~~declined $6.2 million, or 15.1%, primarily due to decreased purchases of optical metrology products in the data storage market and automated AFM ~~sales to~~products in the ~~research and industrial markets.~~semiconductor market. By region, in the third quarter of 2007, net sales increased by ~~40.8%~~63.1% and ~~10.2%~~22.6% in ~~Asia-Pacific~~Japan and ~~the U.S.,~~Europe, respectively, while sales in ~~Japan~~North America and ~~Europe~~Asia-Pacific declined by ~~37.5%~~30.8% and ~~6.8%~~20.8%, respectively. The Company believes that ~~there will continue to be~~ quarter-to-quarter

variations in the geographic distribution of ~~sales.~~sales will continue.

Orders of ~~$114.8~~$118.3 million for the third quarter of ~~2006 increased by $30.3~~2007 represented an increase of $3.5 million, or ~~35.8%~~3.0%, from the comparable ~~2005~~2006 period. By segment, the ~~58.7%~~8.2% increase in ~~process equipment~~Process Equipment orders was primarily due to a $9.8 million increase in orders for MBE equipment and $9.1 million for MOCVD equipment, driven by ~~continued market~~the high growth currently being seen in the HB-LED/wireless, solar, and scientific research markets, offset by a decrease in orders for other process equipment as a result of a decrease in customer demand in the data storage ~~sectors reflecting growth~~industry. The 6.6% decrease in ~~embedded storage in consumer electronics, continued investment in perpendicular recording technology, and HB-LED backlighting of small area flat panel displays. The 7.0% increase in metrology~~Metrology orders was ~~due to~~driven by a ~~$5.4 million increase~~22% decrease in orders for optical metrology products, ~~partially offset by a $2.8 million decrease in orders for AFM products.~~principally to data storage customers.

The Company’s book-to-bill ratio for the third quarter of ~~2006,~~2007, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was ~~1.02. The Company’s~~ ~~backlog as of September 30,~~1.21, an increase from the comparable 2006 ~~was $160.2 million, compared to $114.1 million as of December 31, 2005.~~ period. During the quarter ended September 30, ~~2006,~~2007, the Company experienced no significant net backlog adjustments ~~and~~or order ~~cancellations of $1.4 million. The~~cancellations. However, the Company ~~also experienced~~did experience rescheduling of order delivery dates by customers. Due to changing business conditions and customer requirements, the Company may continue to experience cancellations and/or rescheduling of orders.

Gross profit for the quarter ended September 30, ~~2006,~~2007 was ~~42.6%~~36.7%, as compared to ~~44.2%~~42.6% in the third quarter of ~~2005. This decrease was primarily attributable to a shift in sales mix from the generally higher margin metrology business to the generally lower margin process equipment business.~~2006. Process ~~equipment~~Equipment sales represented ~~64%~~64.4% of total sales for the third quarter of ~~2006,~~2007, up slightly from ~~49%~~63.5% in the prior year period. Metrology sales accounted for ~~36%~~35.6% of total sales for the third quarter of ~~2006,~~2007, down from ~~51%~~36.5% in the prior year period. ~~The impact of the changing sales mix~~Process Equipment gross margins decreased to 33.5% from 38.1% in the ~~third quarter~~prior year period, primarily due to a decline in the margin for Ion Beam products resulting from a lower volume of ~~2006 was partially offset by~~products sold and an ~~increase in process equipment gross margins~~unfavorable product mix as compared to ~~38.1% from 35.6% in~~ the prior year period. This ~~increase~~decrease is ~~primarily~~partially offset by an improvement in MOCVD product gross margins to 33.6% from 26.9% in the prior year period due to ~~an increase~~favorable pricing of new products sold in ~~sales volume of $22.0 million, improved product mix, cost reductions and improved supply chain management, which included outsourcing in this segment. However,~~the current period. Metrology gross margins decreased to ~~50.3%~~42.6% from ~~52.6%~~50.3%, principally due to lower sales volume of optical metrology and automated AFM products ~~partially offset by~~and less favorable ~~product mix in~~pricing of and overhead spending on the ~~Optical Metrology business~~AFM products sold to scientific and research customers.

Selling, general and administrative expenses ~~were $22.3~~increased to $22.7 million, or ~~19.9%~~23.3% of net sales, in the third quarter of ~~2006,~~2007, compared with ~~$21.2~~$22.3 million, or ~~21.2%,~~19.9% of net sales, in the comparable prior year period. The ~~$1.1 million~~ increase is ~~primarily~~ attributable to ~~the expansion of field~~executive stay and sign-on bonuses and an increase in non-cash stock-based compensation expense, offset by a decrease in sales ~~and marketing personnel~~commissions related to ~~support the Company’s new product introductions and the Company’s Asia-Pacific operations.~~a reduction in domestic sales.

Research and development expense totaled ~~$15.7~~$15.0 million in the third quarter of ~~2006, an increase~~2007, a decrease of ~~$1.3~~$0.7 million from the third quarter of ~~2005,~~2006, primarily due to ~~new~~prior year product development efforts ~~in Ion Beam and MOCVD.~~for Process Equipment products that were released during 2007. As a percentage of sales, research and development ~~decreased~~increased to 15.4% in the third quarter of ~~2006 to~~2007, from 14.0% ~~from 14.4% for~~in the ~~comparable prior year period.~~third quarter of 2006.

Amortization expense ~~remained flat at~~was $2.0 million in the third quarter of 2007, compared to $4.0 million in the third quarter of ~~2006 compared with~~2006. The decrease was principally due to certain technology-based intangibles becoming fully amortized during the ~~third~~second quarter of ~~2005.~~2007.

During the third quarter of 2006, the Company finalized its purchase accounting for its acquisition of 19.9% of the stock of Fluens Corporation (“Fluens”), determining that Fluens is a variable interest entity and the Company is its primary beneficiary as defined by Financial Accounting Standards Board (“FASB”) Financial Interpretation (“FIN”) 46R, Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51. As such, the Company has consolidated the results of Fluens’ operations from the acquisition date, and has attributed

the 80.1% portion that is not owned by Veeco to noncontrolling interest in the Company’s consolidated financial ~~statements.~~statements (see below). As part of this acquisition accounting, the Company recorded $1.2 million of in-process technology, which was ~~written-off~~written off during the third quarter of 2006. No such costs were recorded during the third quarter of 2007.

The restructuring expense of $0.5 million for the quarter ended September 30, 2007, consisted of personnel severance costs incurred throughout the Company.

Net interest expense in the third quarter of ~~2006~~2007 was ~~$1.1~~$0.7 million, compared to ~~$1.8~~$1.1 million in the third quarter of ~~2005.~~2006. This reduction ~~was due to an increase~~ in net interest ~~rates and higher cash balances invested~~expense is the result of less net debt outstanding during the ~~third quarter of 2006 compared to the comparable prior year period, as well as the reduction in interest expense related to the early extinguishment of debt.~~period.

~~Income~~

The income tax provision for the quarter ended September 30, ~~2006~~2007 was ~~$0.6~~$1.0 million compared to ~~$0.8~~$0.6 million in the third quarter of ~~2005.~~2006. The ~~2006~~2007 provision for income taxes included ~~$0.2~~$0.6 million relating to Veeco’s foreign operations, which continue to be profitable, and $0.4 million relating to the Company’s domestic operations. Due to significant domestic net operating loss ~~carryforwards,~~carry forwards, which are fully reserved by a valuation allowance, Veeco’s

domestic operations are not expected to incur significant income taxes for the foreseeable future. ~~During the third quarter, the Company released $1.5 million of its valuation allowance due to the utilization of net operating loss carryforwards.~~ The ~~2005~~2006 provision for income taxes ~~of $0.9~~included $0.2 million ~~primarily related~~relating to Veeco’s foreign operations ~~which were profitable.~~and $0.4 million relating to the Company’s domestic operations. The increase to the income tax provision is due to an increase in taxable income relating to the Company’s foreign operations.

Noncontrolling interest was a credit to income of ~~$1.2~~$0.1 million for the three months ended September 30, ~~2006.~~2007, and a credit of $1.2 million for the comparable period in the prior year. As the Company is the primary beneficiary of Fluens, a variable interest entity, ~~as defined by FIN46(R), Veeco~~it is required to consolidate Fluens and eliminate the portion of its results attributable to noncontrolling interests. As a result, the Company ~~eliminated~~eliminates from its net income 80.1% of Fluens’ operating losses. The credit in the prior comparable period includes the elimination of 80.1% of the write-off of ~~Fluens’~~ in-process technology ~~and Fluens’ operating losses since~~recorded in the ~~acquisition date.~~2006 third quarter.

Nine Months Ended September 30, 20062007 and 20052006

The following tables show ~~selected items~~the details of Veeco’s ~~Consolidated Statements~~condensed consolidated statements of ~~Operations,~~operations, percentages of sales and comparisons between the nine months ended September 30, ~~2006~~2007 and ~~2005,~~2006 and the analysis of sales and orders for the same periods by segment, industry and ~~regions~~region (in thousands):

Nine Months ended
September 30,

Dollar

2006

2005

Change

Net sales

$
317,922

100.0
%
$
297,343

100.0
%
$
20,579

Cost of sales

178,585

56.2

172,123

57.9

6,462

Gross profit

139,337

43.8

125,220

42.1

14,117

Operating expenses:

Selling, general and administrative expense

68,622

21.5

62,816

21.1

5,806

Research and development expense

45,554

14.3

45,075

15.2

479

Amortization expense

12,029

3.8

12,554

4.2

(525
)
Write-off of purchased in-process technology

1,160

0.4

—

—

1,160

Other (income) expense, net

(243
)
—

385

0.1

(628
)
Total operating expenses

127,122

40.0

120,830

40.6

6,292

Operating income

12,215

3.8

4,390

1.5

7,825

Interest expense, net

3,583

1.1

5,920

2.0

(2,337
)
Gain on extinguishment of debt

(330
)
(0.1
)
—

—

(330
)
Income (loss) before income taxes and noncontrolling interest

8,962

2.8

(1,530
)
(0.5
)
10,492

Income tax provision

2,878

0.9

2,055

0.7

823

Noncontrolling interest

(1,207
)
(0.4
)
—

—

(1,207
)
Net income (loss)

$
7,291

2.3
%
$
(3,585
)
(1.2
)%
$
10,876

Sales

Orders

Nine Months
ended
September 30,

Dollar and
Percentage
Change

Nine Months
ended
September 30,

Dollar and
Percentage
Change

Book to Bill
Ratio

2006

2005

Year to Year

2006

2005

Year to Year

2006

2005

Segment Analysis

Process Equipment

$
191,927

$
160,900

$
31,027

19.3
%
$
252,608

$
170,959

$
81,649

47.8
%
1.32

1.06

Metrology

125,995

136,443

(10,448
)
(7.7
)
132,142

131,086

1,056

0.8

1.05

0.96

Total

$
317,922

$
297,343

$
20,579

6.9
%
$
384,750

$
302,045

$
82,705

27.4
%
1.21

1.02

Industry Analysis

Data Storage

$
138,598

$
123,101

$
15,497

12.6
%
$
187,177

$
139,248

$
47,929

34.4
%
1.35

1.13

HB-LED/wireless

61,177

45,642

15,535

34.0

80,939

41,892

39,047

93.2

1.32

0.92

Semiconductor

39,735

46,476

(6,741
)
(14.5
)
44,288

44,665

(377
)
(0.8
)
1.11

0.96

Research and Industrial

78,412

82,124

(3,712
)
(4.5
)
72,346

76,240

(3,894
)
(5.1
)
0.92

0.93

Total

$
317,922

$
297,343

$
20,579

6.9
%
$
384,750

$
302,045

$
82,705

27.4
%
1.21

1.02

Regional Analysis

US

$
105,053

$
99,435

$
5,618

5.6
%
$
131,192

$
99,122

$
32,070

32.4
%
1.25

1.00

Europe

49,332

60,176

(10,844
)
(18.0
)
42,374

50,933

(8,559
)
(16.8
)
0.86

0.85

Japan

34,016

47,337

(13,321
)
(28.1
)
44,400

53,209

(8,809
)
(16.6
)
1.31

1.12

Asia-Pacific

129,521

90,395

39,126

43.3

166,784

98,781

68,003

68.8

1.29

1.09

Total

$
317,922

$
297,343

$
20,579

6.9
%
$
384,750

$
302,045

$
82,705

27.4
%
1.21

1.02

	Nine Months Ended September 30,										Dollar Change
	2007					2006

Net sales	$	295,653		100.0	%	$	317,922		100.0	%	$	(22,269	)
Cost of sales	173,819			58.8		178,585			56.2		(4,766		)
Gross profit	121,834			41.2		139,337			43.8		(17,503		)
Operating expenses:
Selling, general and administrative expense	69,347			23.4		68,622			21.5		725
Research and development expense	46,341			15.7		45,554			14.3		787
Amortization expense	8,236			2.8		12,029			3.8		(3,793		)
Restructuring expense	1,974			0.7		—			—		1,974
Write-off of purchased in-process technology	—			—		1,160			0.4		(1,160		)
Other income, net	(605		)	(0.2	)	(243		)	(0.0	)	(362		)
Total operating expenses	125,293			42.4		127,122			40.0		(1,829		)
Operating income	(3,459		)	(1.2	)	12,215			3.8		(15,674		)
Interest expense, net	2,256			0.7		3,583			1.1		(1,327		)
Gain on extinguishment of debt	(738		)	(0.2	)	(330		)	(0.1	)	(408		)
(Loss) income before income taxes and noncontrolling interest	(4,977		)	(1.7	)	8,962			2.8		(13,939
	(4,977		)	(1.7	)	8,962			2.8		(13,939		)
Income tax provision	3,490			1.2		2,878			0.9		612
Noncontrolling interest	(482		)	(0.2	)	(1,207		)	(0.4	)	725
Net (loss) income	$	(7,985	)	(2.7	)%	$	7,291		2.3	%	$	(15,276	)

	Sales									Orders

	Nine Months Ended				Dollar and					Nine Months Ended				Dollar and					Book to Bill
	September 30,				Percentage					September 30,				Percentage					Ratio
					Change									Change
	2007		2006		Year to Year					2007		2006		Year to Year					2007	2006

Segment Analysis
Process Equipment	$	181,028	$	191,927	$	(10,899	)	(5.7	)%	$	227,285	$	252,608	$	(25,323	)	(10.0	)%	1.26	1.32
Metrology	114,625		125,995		(11,370		)	(9.0	)	109,392		132,142		(22,750		)	(17.2	)	0.95	1.05
Total	$	295,653	$	317,922	$	(22,269	)	(7.0	)%	$	336,677	$	384,750	$	(48,073	)	(12.5	)%	1.14	1.21

Industry Analysis
Data Storage	$	96,006	$	138,598	$	(42,592	)	(30.7	)%	$	105,944	$	187,177	$	(81,233	)	(43.4	)%	1.10	1.35
HB-LED/wireless	78,240		61,177		17,063			27.9		117,008		80,939		36,069			44.6		1.50	1.32
Semiconductor	32,755		39,735		(6,980		)	(17.6	)	26,562		44,288		(17,726		)	(40.0	)	0.81	1.11
Research and Industrial	88,652		78,412		10,240			13.1		87,163		72,346		14,817			20.5		0.98	0.92
Total	$	295,653	$	317,922	$	(22,269	)	(7.0	)%	$	336,677	$	384,750	$	(48,073	)	(12.5	)%	1.14	1.21

Regional Analysis (1)
North America	$	95,516	$	109,180	$	(13,664	)	(12.5	)%	$	121,696	$	138,251	$	(16,555	)	(12.0	)%	1.27	1.27
Europe	53,199		49,332		3,867			7.8		63,396		42,374		21,022			49.6		1.19	0.86
Japan	43,732		34,016		9,716			28.6		42,125		44,400		(2,275		)	(5.1	)	0.96	1.31
Asia-Pacific	103,206		125,394		(22,188		)	(17.7	)	109,460		159,725		(50,265		)	(31.5	)	1.06	1.27
Total	$	295,653	$	317,922	$	(22,269	)	(7.0	)%	$	336,677	$	384,750	$	(48,073	)	(12.5	)%	1.14	1.21

(1) The prior period has been reclassified to conform to the current period presentation.

Net sales of ~~$317.9~~$295.7 million for the nine months ended September 30, ~~2006~~2007 were ~~up $20.6~~down $22.3 million, or ~~6.9%~~7.0%, compared to the nine months ended September 30, ~~2005.~~2006. By segment, ~~process equipment~~Process Equipment sales were ~~up $31.0~~down $10.9 million, or ~~19.3%~~5.7%. The ~~increase~~decrease in ~~process equipment~~Process Equipment sales is primarily due to a decrease in sales to ~~HB-LED/wireless and~~customers in the data storage ~~customers. The increases~~industry. Partially offsetting this decline was an increase in ~~these areas were driven by the increased use of hard drives in consumer electronics and improved conditions within~~sales to the HB-LED/wireless market. Metrology sales decreased ~~$10.4~~$11.4 million, or 9.0%, primarily due to ~~a $13.9 million decrease in AFM sales to research and industrial markets, partially offset by a $3.5 million increase in~~decreased purchases of optical metrology ~~sales.~~products in the data storage market and automated AFM products in the semiconductor market. By region, in the nine months ended September 30, 2007, net sales increased by 28.6% in Japan and 7.8% in Europe, while sales in Asia-Pacific ~~increased by 43.3%, while sales in Japan~~ and ~~Europe~~North America declined ~~by 28.1%~~17.7% and ~~18.0%~~12.5%, respectively. The Company believes that there will continue to be period-to-period variations in the geographic distribution of sales.

Orders of ~~$384.8~~$336.7 million for the nine months ended September 30, ~~2006 increased by $82.7~~2007 represented a decrease of $48.1 million, or ~~27.4%~~12.5%, from the comparable ~~2005~~2006 period. By segment, the ~~47.8% increase~~10.0% decrease in ~~process equipment~~Process Equipment orders was primarily ~~driven by strong~~due to a $49.5 million decrease in orders for Ion Beam equipment as a result of a decrease in customer demand in the data storage industry, ~~conditions~~partially offset by a $30.8 million increase in MOCVD orders resulting from ~~technology changes requiring increases~~an increase in ~~equipment capital expenditures, as well as improved conditions~~purchases in the HB-LED/wireless market. The ~~0.8% increase~~17.2% decrease in ~~metrology~~Metrology orders was primarily due to a ~~$4.0~~$13.5 million ~~increase~~decrease in orders for optical metrology products, ~~partially offset by~~principally to data storage customers, and a ~~$2.9~~$10.8 million decrease in orders for automated AFM ~~products.~~products, principally to semiconductor customers.

The Company’s book-to-bill ratio for the nine months ended September 30, ~~2006,~~2007, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was ~~1.21.~~1.14, a decrease from the comparable 2006 period. The Company’s backlog as of September 30, ~~2006 is $160.2~~2007 was $181.6 million, compared to ~~$114.1~~$140.8 million as of December 31, ~~2005.~~2006. During the nine months ended September 30, ~~2006,~~2007, the Company ~~experienced~~did not experience significant net backlog adjustments ~~and~~or order ~~cancellations of $20.7 million, primarily in~~cancellations. However, the ~~HB-LED/wireless industry for MOCVD products. The~~ Company ~~also experienced~~did experience rescheduling of order delivery dates by customers. Due to changing business conditions and customer requirements, the Company may continue to experience cancellations and/or rescheduling of orders.

Gross profit for the nine months ended September 30, ~~2006,~~2007 was ~~43.8%~~41.2%, as compared to ~~42.1%~~43.8% in the comparable prior year period. ~~The increase is primarily~~Process Equipment sales represented 61.2% of total sales for the nine months ended September 30, 2007, up from 60.4% in the prior year period. Metrology sales accounted for 38.8% of total sales for the nine months ended September 30, 2007, down from 39.6% in the comparable prior year period. Process Equipment gross margin was consistent with the prior year period. However, included in the margin was a significant improvement in MOCVD product gross margins from 23.0% in the prior year to 37.2% in the current year due to an increase in sales volume, as well as ~~continued cost reductions~~a significant improvement in mix and ~~improved supply chain management, which included outsourcing.~~price. This was offset by a decrease in the margin for Ion Beam products from 46.9% in the 2006 period to 41.2% in the current comparable period due to an unfavorable product mix, as well as the decrease in sales to customers in the data storage market. Metrology gross margins decreased to 45.6% from

51.4%, principally due to less favorable product mix in AFM products sold to scientific and research customers and lower sales volume of automated AFM and optical metrology products.

Selling, general and administrative expenses were ~~$68.6~~$69.3 million, or ~~21.5%~~23.4% of sales, in the nine months ended September 30, ~~2006,~~2007, compared with ~~$62.8~~$68.6 million, or ~~21.1%~~21.5% of sales, in the comparable prior year period. The $0.7 million increase is primarily attributable to an increase in non-cash compensation expense related to stock options and restricted shares and an increase in selling expense due primarily to an investment in the AFM product line for life sciences applications. This is partially offset by a reduction in management incentive bonus expense and legal fees, as well as reduced sales commissions related to the reduction in domestic sales.

Research and development expense totaled $46.3 million in the nine months ended September 30, 2005. The $5.8 million increase is primarily attributable to higher selling and commission expenses resulting from the increase in sales and the expansion of the Company’s Asia Pacific operations. In addition, selling, general and administrative expenses increased due to higher compensation expenses and litigation related expenses for the securities class action and consolidated derivative action lawsuits.

~~Research and development expense totaled $45.6 million in the~~ ~~nine months ended September 30,~~ ~~2006,~~2007, an increase of ~~$0.5~~$0.8 million from the comparable prior year period, ~~of 2005, primarily due to~~driven by an investment in life sciences applications in AFM as well as new product development ~~efforts.~~efforts in the Company’s MOCVD product platform for HB-LED/wireless applications and automated AFM products for the semiconductor industry. This is partially offset by a decrease in research and development expense in Ion Beam products from the prior comparable period, due to the release of these products during 2007. As a percentage of sales, research and development ~~decreased during~~expense increased to 15.7% in the ~~2006 period to~~nine months ended September 30, 2007, from 14.3% ~~from 15.2% of sales for~~in the comparable ~~2005~~prior year period.

Amortization expense ~~totaled $12.0~~was $8.2 million in the nine months ended September 30, ~~2006,~~2007, compared ~~with $12.6~~to $12.0 million in the comparable prior year ~~period,~~period. The decrease was due to certain ~~intangible assets~~technology-based intangibles becoming fully ~~amortized.~~amortized during the second quarter of 2007.

The restructuring expense of $2.0 million for the nine months ended September 30, 2007, consisted of personnel severance costs incurred throughout the Company during the second and third quarters of 2007.

During the third quarter of 2006, the Company finalized its purchase accounting for its acquisition of 19.9% of the stock of Fluens determining that Fluens is a variable interest entity and the Company is its primary ~~beneficiary as defined by FIN 46R,~~ ~~Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51.~~beneficiary. As such, the Company has consolidated the results of Fluens’ operations from the acquisition date, and has attributed the 80.1% portion that is not owned by Veeco to noncontrolling interest in the Company’s consolidated financial statements. As part of this acquisition accounting, the Company recorded $1.2 million of in-process technology, which was ~~written-off~~written off during the ~~nine months ended September 30,~~third quarter of 2006. No such costs were recorded during 2007.

~~During the nine months ended September 30, 2006, the Company repurchased $20.0 million aggregate~~

principal amount of its 4.125% convertible subordinated notes. As a result of this repurchase, the amount of convertible subordinated notes outstanding was reduced to $200.0 million, and the Company recorded a gain from the early extinguishment of debt in the amount of $0.6 million, offset by a $0.3 million proportionate reduction in the related deferred financing costs, for a net gain of $0.3 million.

Net interest expense in the nine months ended September 30, ~~2006~~2007 was ~~$3.6~~$2.3 million compared to ~~$5.9~~$3.6 million in the comparable prior year period. This reduction ~~was due to higher~~in net interest ~~rates and cash balances invested~~expense is the result of less net debt outstanding during the period.

During the nine months ended September 30, ~~2006, compared~~2007, the Company repurchased $56.0 million of its convertible subordinated notes, reducing the amount outstanding from $200.0 million to ~~the nine months ended September 30, 2005, as well as the reduction~~$144.0 million. The repurchase amount was $55.1 million in ~~interest expense~~cash, of which $54.8 million related to principal and $0.3 million related to accrued interest. As a result of the ~~early~~repurchase, the Company recorded a net gain from the extinguishment of ~~debt.~~debt in the amount of $0.7 million. In the comparable 2006 period, the Company repurchased $20.0 million of its convertible subordinated notes reducing the amount outstanding from $220.0 million to $200.0 million. As a result of these repurchases, the Company recorded a net gain from the extinguishment of debt in the amount of $0.3 million.

~~Income~~

The income tax provision for the nine months ended September 30, ~~2006~~2007 was ~~$2.9~~$3.5 million compared to ~~$2.1~~$2.9 million in the comparable prior year period. The ~~2006~~2007 provision for income taxes included ~~$1.9~~$2.5 million relating to Veeco’s foreign operations, which continue to be profitable, and $1.0 million relating to the Company’s domestic operations. Due to significant domestic net operating loss ~~carryforwards,~~carry forwards, which are fully reserved by a valuation allowance, Veeco’s domestic operations are not expected to incur significant income taxes for the foreseeable future. ~~During the nine months ended September 30,~~The 2006 ~~the Company released $1.5 million of its valuation allowance due to the utilization of net operating loss carryforwards. The 2005~~ provision for income taxes ~~of $2.1~~included $1.9 million ~~primarily related~~relating to Veeco’s foreign operations ~~which were profitable.~~and $1.0 million relating to the Company’s domestic operations.

Noncontrolling interest was a credit to income of ~~$1.2~~$0.5 million for the nine months ended September ~~30. 2006.~~30, 2007 and a credit of $1.2 million in the comparable prior year period. As the Company is the primary beneficiary of Fluens, a variable interest entity ~~as defined by FIN46(R)~~, ~~Veeco~~it is required to consolidate Fluens and eliminate the portion of its results attributable to noncontrolling interests. As a result, the Company ~~eliminated~~eliminates from its net income 80.1% of Fluens’ operating losses. The credit in the prior comparable period includes the elimination of 80.1% of the write-off of ~~Fluens’~~ in-process technology ~~and Fluens’ operating losses since~~recorded in the ~~acquisition date.~~2006 third quarter.

Liquidity and Capital Resources

Historically, Veeco’s principal capital requirements have included the funding of acquisitions and capital expenditures. The Company ~~historically~~traditionally has generated cash from operations and debt and stock issuances. Veeco’s ability to generate sufficient cash flows from operations is dependent on the continued demand for the Company’s products and services. A summary of the current period cash flow activity is as follows (in thousands):

	Nine Months Ended September 30,
	2007			2006
Net (loss) income	$	(7,985	)	$	7,291

Net cash provided by operating activities	$	22,777		$	22,524
Net cash used in investing activities	(6,543		)	(15,634		)
Net cash used in financing activities	(54,443		)	(4,598		)
Effect of exchange rates on cash and cash equivalents	(435		)	(226		)
Net change in cash and cash equivalents	(38,644		)	2,066
Cash and cash equivalents at beginning of period	147,046			124,499
Cash and cash equivalents at end of period	$	108,402		$	126,565

The Company had a net ~~increase~~decrease in cash of ~~$2.1~~$38.6 million for the nine months ended September 30, ~~2006~~2007 from December 31, ~~2005.~~2006, primarily due to the repurchase of $56.0 million of its 4.125% convertible subordinated notes due 2008 (the “Old Notes”). Cash provided by operations was ~~$22.5~~$22.8 million for this period, as compared to cash provided by operations of ~~$29.5~~$22.5 million for the comparable ~~2005~~2006 period. Net (loss) income ~~(loss)~~ adjusted for non-cash items provided operating cash flows of ~~$31.0~~$14.6 million for the nine months ended September 30, ~~2006,~~2007, compared to ~~$19.0~~$31.0 million for the comparable ~~2005~~2006 period. Net cash provided by operations for the nine months ended September 30, ~~2006~~2007 was favorably impacted by ~~an increase~~a decrease in net operating assets and liabilities of ~~$8.5~~$8.2 million. Accounts receivable decreased ~~$3.1~~$20.0 million during the nine months ended September 30, ~~2006,~~2007, due to ~~an improvement~~a $25.4 million reduction in ~~days~~ sales ~~outstanding.~~when comparing the fourth quarter of 2006 to the third quarter of 2007, and favorable cash collections during 2007. Inventories increased by approximately ~~$14.7~~$4.8 million during the same period, principally due to ~~shipment delays~~an increase in ~~the~~work in process ~~equipment segment~~ and ~~the build up of work-in-process~~finished goods inventories for ~~products~~systems to be shipped induring the fourth quarter of ~~2006. In addition, inventories increased due primarily~~ ~~to revenue recognition being deferred on certain tools shipped, where title~~ ~~does not transfer to~~2007 and the ~~end customer until final customer acceptance.~~first quarter of 2008 in the Process Equipment segment. Accounts payable ~~increased by~~decreased $5.0 million, as the Company managed its payables to increase days payable outstanding, as well as the timing of payments processed at the end of the quarter. Accrued expenses and other current liabilities increased $3.2 million during the nine months ended September 30, ~~2006,~~2007, due to ~~an increase in customer deposits received on shipments to occur in~~ the ~~fourth quarter~~timing of 2006 and accrued interest for the required semi-annual interest payment on the convertible subordinated notes, offset in part by a reduction in incentive compensation under the Company’s annual bonus plans. The increase in net other current assets and liabilities is mainly a result of increased VAT (value added tax) related to Veeco’s foreign subsidiaries, other receivables relating to grant programs, prepaid licensing costs and capitalized software.payments.

Cash used in investing activities of ~~$15.6~~$6.5 million for the nine months ended September 30, ~~2006 resulted primarily from~~2007, was driven by capital expenditures of ~~$12.5~~$6.8 million, partially offset by $0.3 million in proceeds from the sale of property, plant and ~~earn-out payments totaling $3.2 million to~~equipment. During the ~~former owners~~fourth quarter of ~~TurboDisc and Nanodevices Inc. The~~2007, the Company expects to invest ~~approximately $21.0~~an additional $5.3 million in ~~total during 2006 in~~ capital ~~projects~~equipment primarily related to engineering equipment and lab tools used in ~~producing,~~enhancing, testing and process development ~~for~~of Veeco’s ~~products, enhanced manufacturing facilities and the continuing implementation of SAP and related computer systems.~~

products.

Cash used in financing activities for the nine months ended September 30, ~~2006~~2007, totaled ~~$4.6~~$54.4 million, primarily consisting of ~~cash~~$55.4 million used ~~in the~~to repurchase of a portion of the Company’s ~~outstanding convertible subordinated notes, as discussed below,~~Old Notes and pay down other existing long-term debt and $1.5 million in payments for debt issuance costs, partially offset by ~~$15.1~~$2.8 million from the issuance of common stock ~~issuances~~ resulting from the exercise of employee stock options. The debt repurchase reduced the amount of Old Notes outstanding to $144.0 million and the Company recorded a net gain of $0.7 million.

In April and May of 2007, the Company issued new notes pursuant to privately negotiated exchange agreements with certain holders of the Old Notes. Under these agreements, such holders agreed to exchange $118.8 million aggregate principal amount of the Old Notes for approximately $117.8 million aggregate principal amount of a new series of 4.125% convertible subordinated notes due April 15, 2012 (the "New Notes"). Following the exchange transactions, approximately $25.2 million of the Old Notes, with a conversion price of $38.51 per common share, remained outstanding. No net gain or loss was recorded on the exchange transactions since the carrying value of the Old Notes, including unamortized deferred financing costs, approximated the exchange value of the New Notes.

The New Notes initially will be convertible into 36.7277 shares of common stock per $1,000 principal amount of New Notes (equivalent to a conversion price of $27.23 per share or a premium of 38% over the closing market price for Veeco's common stock on April 16, 2007). Holders may convert the New Notes at any time during the period beginning on January 15, 2012 through the close of business on the second day prior to April 15, 2012 and

earlier upon the occurrence of certain events including Veeco's common stock trading at prices 130% over the conversion price for a specified period.

During the third quarter of 2007, the Company entered into a Credit Agreement with HSBC. The New Credit Agreement amends and restates, and effectively replaces, the Prior Credit Agreement, dated as of March 15, 2005, with HSBC, which was set to expire on March 15, 2008. The New Credit Agreement provides for revolving credit borrowings of up to $100.0 million. The annual interest rate under the New Credit Agreement is a floating rate equal to the prime rate of the agent bank. A LIBOR-based interest rate option is also provided. Borrowings may be used for general corporate purposes, including working capital requirements and acquisitions. The New Credit Agreement contains certain restrictive covenants substantially similar to those of the Prior Credit Agreement. These include 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 required to satisfy certain financial tests under the new Credit Agreement substantially similar to those of the prior Credit Agreement. Substantially all of the assets of the Company and its material domestic subsidiaries, other than real estate, have been pledged to secure the Company’s obligations under the New Credit Agreement. The revolving credit facility under the New Credit Agreement expires on March 31, 2012. As of September 30, ~~2006,~~2007, there were no borrowings outstanding under the ~~Company has outstanding $200.0 million of 4.125% convertible subordinated notes.~~ New Credit Agreement.During the first quarter of 2006, the Company repurchased $20.0 million of its notes, reducing the amount outstanding from $220.0 million to $200.0 million. The repurchase amount was $19.5 million in cash, of which $19.4 million related to principal and $0.1 million related to accrued interest. As a result of the repurchase, the Company recorded a gain from the early extinguishment of debt in the amount of $0.6 million, offset by a $0.3 million proportionate reduction in the related deferred financing costs, for a net gain of $0.3 million. The Company may engage in similar transactions in the future depending on market conditions, its cash position and other factors.

The Company believes that existing cash balances together with cash generated from operations and amounts available under the Company’s new revolving credit 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, over the next ~~three~~two years. The Company believes it will be able to meet its obligation to repay the outstanding ~~$200.0~~$25.2 million ~~convertible subordinated notes~~of the Old Notes that mature on December 21, 2008 through cash on hand and cash generated from operations. The Company believes it will be able to meet its obligation to repay the outstanding $117.8 million of the New Notes due in April 2012 through a combination of ~~conversion of the notes outstanding,~~ refinancing, cash generated from operations and/or other means.

The Company is potentially liable for earn-out payments to the former owners of certain acquired businesses based on revenue targets achieved by the acquired businesses. The Company is potentially liable for an earn-out payment to the former shareholders of Advanced Imaging, Inc. based on achieving revenue in excess of certain targets for 2006, which currently do not appear achievable. During the first quarter of 2006, the Company paid an earn-out payment of $2.0 million to the former owner of TurboDisc. During the second quarter of 2006, the Company paid approximately $1.2 million to the former shareholders of Nanodevices Inc. Both amounts were accrued at December 31, 2005. No additional payments will be required in the future to either set of former owners.

In 2006, Veeco ~~invested $0.5 million to purchase~~purchased 19.9% of the common stock of ~~Fluens Corporation. Approximately 31% of Fluens is owned by a related party who is a business unit Vice President of Veeco.~~Fluens. Veeco and Fluens ~~plan to~~are jointly ~~develop~~developing a next-generation process for high-rate deposition of aluminum oxide for data storage applications. If this development is successful and upon the satisfaction of certain additional conditions by May 2009, Veeco will be obligated to purchase the balance of the outstanding stock of Fluens for ~~$3.0~~$3.5 million and pay an earn-out. Approximately 31% of Fluens is owned by a Vice President of one of Veeco’s business units.

During the ~~third~~fourth quarter of ~~2006,~~2007, the Company ~~finalized its purchase accounting for~~expects to recognize $5.0 million of severance charges related to a cost reduction plan. Of this total amount, approximately $1.4 million will be paid out during the ~~Fluens acquisition determining that Fluens is a variable interest entity and as such, has consolidated~~fourth quarter of 2007, with the ~~results of Fluens’ operations from~~remainder paid out over the ~~acquisition date.~~next twelve months.

Application of Critical Accounting Policies

General: Veeco’s discussion and analysis of its financial condition and results of operations are based upon the Company’s ~~Condensed Consolidated Financial Statements,~~condensed consolidated financial statements, which have been prepared in accordance with ~~U.S~~accounting principles generally accepted ~~accounting principles.~~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 bad debts, inventories, intangible assets and other ~~long lived~~long-lived assets, income taxes, warranty obligations, restructuring costs and contingent liabilities, including potential 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, the impairment of long-lived assets, warranty costs, the accounting for ~~deferred~~ taxes and share-based compensation to be critical policies due to the estimation processes involved in each.

Revenue Recognition: The Company recognizes revenue in accordance with the ~~SEC~~Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition. Certain of ~~Veeco’s~~our product sales are accounted for as multiple-element arrangements in accordance with Emerging Issues Task Force (“EITF”) 00-21, Revenue Arrangements with Multiple Deliverables. A multiple-element arrangement is a transaction which may involve the delivery or performance of multiple products, services, or rights to use assets, and performance may occur at different points in time or over different periods of time. The Company recognizes revenue when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectibility is reasonably assured.

For products ~~produced~~manufactured according to the ~~Company’s~~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~~customer's specifications, revenue is recognized when the product has been tested, it has been demonstrated that it meets the ~~customer’s~~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. 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 ~~require the~~ building of 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% to 2% of the sales value of the related equipment.

For new products, new applications of existing products, or for products with substantive customer acceptance provisions where performance 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 amount billed at the time of shipment. The profit on the amount billed for these transactions is deferred and recorded as deferred profit in the accompanying condensed consolidated balance ~~sheets.~~sheets. At September 30, ~~2006~~2007 and December 31, ~~2005, $0.8~~2006, $1.3 million and ~~$0.5~~$0.3 million, respectively, are recorded in deferred profit.

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.

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~~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~~management's estimated usage for the next ~~18 to 24 month’s~~12 month's requirements is ~~written-down~~written down to its estimated market value, if less than its cost. Inherent in the estimates of market value are ~~management’s~~management's estimates related to ~~Veeco’s~~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~~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, 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 those assets not previously ~~recorded.~~recorded.

Long-Lived Asset Impairment: The carrying values of long-lived assets are periodically reviewed to determine if any impairment indicators are present. If it is determined that such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining depreciation period, 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, and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Assumptions utilized by management in reviewing for impairment of long-lived assets could be ~~affected~~effected by changes in strategy and/or market conditions which may require Veeco to record additional impairment charges for these assets, as well as impairment charges on other long-lived assets not previously recorded.

Warranty Costs: The Company estimates the costs that may be incurred under the warranty it provides and records a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. The Company’s warranty obligation is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. As the ~~Company’s~~Company's customer engineers and process support engineers are highly trained and deployed globally, labor availability is a significant factor in determining labor costs. The quantity and availability of critical replacement parts is another significant factor in estimating warranty costs. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from the Company’s estimates, revisions to the estimated warranty liability would be required.

~~Deferred Tax Valuation Allowance:~~ Income Taxes: As part of the process of preparing Veeco’s ~~Consolidated Financial Statements,~~condensed consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves

estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within ~~its Consolidated Balance Sheets.~~the Company’s condensed consolidated balance sheets. The carrying value of deferred tax assets is adjusted by a valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Veeco’s net deferred tax assets consist primarily of net operating loss and tax credit carryforwards, and timing differences between the book and tax treatment of inventory and other asset valuations. Realization of these net deferred tax assets is dependent upon the Company’s ability to generate future taxable income.

~~Veeco~~

The Company records valuation allowances in order to reduce ~~the Company’s~~its deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, ~~management~~it considers a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under Statement of Financial Accounting Standards ~~(“SFAS”)~~ No. 109,Accounting for Income Taxes (“SFAS 109”), factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.

At September 30, ~~2006,~~2007, the Company had ~~estimated~~ a valuation allowance of approximately ~~$70.0~~$68.5 million against substantially all of its domestic net deferred tax assets, which consist of net operating loss and tax credit carryforwards, as well as temporary deductible differences. The valuation allowance was calculated in accordance with the provisions of SFAS ~~No.~~ 109, which ~~places~~place primary importance on the Company’s historical results of operations. Although the Company’s results in prior years were significantly affected by restructuring and other charges, the Company’s historical ~~loss~~losses and the losses incurred in 2005 and 2004 represent negative evidence sufficient to require a full valuation allowance under the provisions of SFAS ~~No.~~ 109. If the Company is able to realize part or all of the deferred tax assets in future periods, it will reduce its provision for income taxes with a release of the valuation allowance in an amount that corresponds with the income tax liability generated.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109, which became effective for Veeco on January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. The Company is required to make many subjective assumptions and judgments regarding its income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time and changes in assumptions and judgments can materially affect the amounts recognized in the Company’s condensed consolidated financial statements. The impact of the Company’s reassessment of its tax positions in accordance with FIN 48 during the first quarter of 2007 resulted in a $0.8 million reduction to the January 1, 2007 retained earnings balance.

Share-Based Compensation:~~Prior to~~ In 2006, the Company ~~accounted~~adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”), which is a revision of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for ~~its stock option plans under the recognition and measurement principles of~~Stock-Based Compensation, supersedes Accounting Principles Board ~~(“APB”) Opinion~~ No. 25, Accounting for Stock Issued to Employees and related interpretations and generally, no compensation expense was reflected in net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted SFAS No. 123(R), ~~Share-Based Payment~~~~, which is a revision of SFAS No. 123,~~ ~~Accounting for Stock-Based Compensation~~~~, supersedes~~ (“APB ~~No. 25~~25”) and amends ~~SFAS~~Statement of Financial Accounting Standards No. 95, Statement of Cash Flows (“SFAS 95”). Generally, the approach in SFAS ~~No.~~ 123(R) is similar to the approach described in SFAS ~~No.~~ 123. However, SFAS ~~No.~~ 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS ~~No.~~ 123(R) was adopted using the modified prospective method of application, which requires ~~Veeco to recognize~~the recognition of compensation expense on a prospective basis. ~~Therefore, prior period financial statements have not been restated.~~ Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been included in the pro forma disclosures in periods reported prior ~~periods. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost~~ to be reported as a financing cash flow, rather than as an operating cash flow as required under previous accounting literature, which has the effect of reducing consolidated net operating cash flows and increasing consolidated net financing cash flows in periods after adoption. For the three and nine months ended September 30, 2006, ~~the Company did not recognize any amount of consolidated financing cash flows for such excess tax deductions.~~

Total share-based compensation expense is attributable to the remaining requisite service periods of stock options and restricted common stock awards and units. For the three months ended September 30, 2006, the Company granted 9,900 restricted common stock awards and units to its employees. For the nine months ended September 30, 2006, the Company granted 146,200 stock options and 208,150 restricted common stock awards and units to its directors, officers and employees. As a result of adopting SFAS No. 123(R), the Company’s net income for the three and nine months ended September 30, 2006 was $0.1 million and $0.4 million lower, respectively, than if it had continued to account for share-based compensation under APB No. 25. Net income per common share and diluted net income per common share for the three and nine months ended September 30, 2006 are approximately $0.01 lower for both periods, than if the Company had continued to account for share-based compensation under APB No. 25. As of September 30, 2006, the total unrecognized compensation cost related to nonvested stock awards and option awards is $4.2 million and $1.4 million, respectively, and the related weighted average period over which it is expected that such unrecognized compensation costs will be recognized is approximately 2.3 years for the nonvested stock awards and 2.2 years for option awards. ~~Future share-based compensation expense will depend on levels of share-based awards granted in the future and, therefore, cannot be predicted at this time.~~

~~With~~ the adoption of SFAS ~~No.~~ 123(R) ~~on January 1, 2006,~~.

Under SFAS 123(R), the Company is required to record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the grant date, ~~of grant,~~ the Company applies the Black-Scholes option-pricing model. Inherent in the model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which make them critical accounting estimates. ~~Beginning in~~Since the fourth quarter of 2005, the Company has used an expected stock-price volatility assumption that is a combination of both historical and implied volatilities of the underlying stock, which ~~are~~is obtained from public data sources. Prior to that time, the Company based this assumption solely on historical volatility. ~~With regard to the weighted-average option life assumption, the~~ The Company considers the exercise behavior of past grants and models the pattern of aggregate ~~exercises.~~exercises in determining the expected weighted-average option life.

~~Other~~ Recent Accounting ~~Pronouncements:~~Pronouncements

~~In July 2006, the FASB issued FIN 48,~~ ~~Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes.~~ FIN 48 clarifies the accounting and disclosure for income taxes by defining the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. It also provides guidance on derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently assessing the impact of FIN 48 on its consolidated financial position and results of operations.

In September 2006, the FASB issued ~~FASB~~ Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). ~~Statement No.~~SFAS 157 establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. ~~Statement No.~~SFAS 157 is effective for fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position ~~and~~or results of operations.

In July 2007, the FASB issued an Exposure Draft on Proposed FASB Staff Position (FSP) No. APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (including partial cash settlement). The FSP will impact the accounting for certain structured convertible debt instruments that allow settlement in any combination of cash and shares at the issuer’s option. The FSP would require bifurcation of a component of the debt associated with the conversion feature, reclassification of that component to stockholders’ equity, and then accretion of the resulting discount on the debt over the remaining life of the obligation resulting in interest expense equal to the issuer’s nonconvertible debt borrowing rate. The intent is that the amount allocated to equity represents the interest cost that was “paid” for the conversion option. The proposed FSP would make any final guidance effective for fiscal years beginning after December 15, 2007, would not permit early application, and would be applied retrospectively to all periods presented. The Company has reviewed the impact of the proposed FSP and has determined that if the guidance is issued as currently proposed, it would result in a non-cash increase in interest expense, which could have a material impact on net income.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Veeco’s net sales to foreign customers represented approximately ~~63.9%~~71.1% and ~~67.0%~~68.4% of Veeco’s total net sales for the three and nine months ended September 30, ~~2006,~~2007, respectively, and ~~63.2%~~63.9% and ~~66.6%~~67.0% for the comparable ~~2005~~2006 periods, respectively. 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 ~~12.5%~~21.1% and ~~15.1%~~20.7% of Veeco’s total net sales for the three and nine months ended September 30, ~~2006,~~2007, respectively, and ~~20.2%~~12.5% and ~~19.5%~~15.1% for the comparable ~~2005~~2006 periods, respectively.

The ~~aggregate foreign currency exchange impact included in determining the~~condensed consolidated results of operations ~~was~~for the three and nine months ended September 30, 2007 include aggregate foreign currency losses of less than $0.1 million and approximately $0.3 million, respectively. Included in those losses were losses of less than $0.1 million and approximately $0.1 million, respectively, related to forward contracts. The 2006 condensed consolidated results of operations include aggregate foreign currency impact of a gain of approximately $0.1 million and a loss of approximately $0.3 million for the three and nine months ended September 30, 2006, ~~respectively, and losses of $0.3 million and $0.5 million for the comparable 2005 periods,~~ respectively. Included in ~~the aggregate foreign currency exchange~~this impact were ~~hedging related~~ losses of approximately $0.3 million and ~~approximately~~ $0.2 million, ~~for the three and nine months ended September 30, 2006,~~

respectively, ~~and a loss of approximately $0.1 million and a gain of less than $0.1 million~~ related to ~~hedging for each of the comparable 2005 periods.~~ forward hedge contracts.
Veeco is exposed to financial market risks, including changes in foreign currency exchange rates. The changes in currency exchange rates that have the largest impact on translating Veeco’s international operating profit are the Japanese Yen and the Euro. Veeco uses derivative financial instruments to mitigate these risks. Veeco does not use derivative financial instruments for speculative or trading purposes. The Company generally 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 ~~$6.0~~$3.0 million ~~and $4.6 million~~ for both the three and nine months ended September 30, ~~2006, respectively.~~2007. As of September 30, ~~2006,~~2007, the Company had entered into aone forward contract for the month of ~~October for~~October.
Assuming third quarter 2007 variable debt and investment levels, the ~~notional amount~~effect of ~~approximately $2.8 million, which approximates the fair market value~~a one-point change in interest rates would not have a material effect on ~~September 30, 2006.~~net interest expense.
Item 4. Controls and Procedures.
The Company’s senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures under the supervision of and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings.
The Company is presently in the process of implementing new company-wide integrated applications software and, ~~to date,~~as of September 30, 2007, has completed the conversion to this new platform in ~~approximately 70%~~ten of Veeco’s ~~businesses~~business locations with the remainder expected to be completed inby the first half of ~~2007.~~2008. As a result, certain changes have been made to the Company’s internal controls, which management believes will strengthen the Company’s internal control structure. There have been no other significant changes in our internal controls or other factors during the fiscal quarter ended September 30, ~~2006~~2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
30

Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
In re Veeco Instruments Inc. Securities Litigation and Shareholder Derivative Litigation

As previously reported, Veeco and certain of its officers have been named as defendants in a consolidated securities class action lawsuit consolidated in August 2005 that is pending in federal court in the Southern District of New York (the “Court”(“the Court”). The lawsuit arises out of the restatement in March 2005 of Veeco’s financial statements for the quarterly periods and nine months ended September 30, 2004 as a result of the Company’s discovery of certain improper accounting transactions at its TurboDisc business unit. On July 5, 2007, Veeco entered into a Memorandum of Understanding to settle and fully resolve this lawsuit for a payment of $5.5 million. Veeco expects that insurance proceeds will cover the settlement amount and any significant legal expenses related to the settlement. The plaintiffssettlement agreement is subject to court approval and would dismiss all pending claims against Veeco and the other defendants with no admission or finding of wrongdoing by Veeco or any of the other defendants, and Veeco and the other defendants would receive a full release of all claims pending in the lawsuit seek unspecified damages and assert claims against all defendants for violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and claims against the individual defendants for violations of Section 20(b) of the Exchange Act. The Court has certified a plaintiff class for the lawsuit consisting of all persons who acquired the Company’s securities during the period from April 26, 2004 through February 10, 2005. The parties are currently involved in the discovery process. Although the Company believes this lawsuit is without merit and intends to defend vigorously against the claims, the lawsuit could result in substantial costs, divert management’s attention and resources from our operations and negatively affect our public image and reputation.litigation.
28

In addition, three shareholder derivative lawsuits have been consolidated and are also pending before the Court. The plaintiffs in the consolidated derivative action assert that the Company’s directors and certain of its officers breached fiduciary duties in connection with the improper accounting transactions at the TurboDisc business unit. The plaintiffs in the consolidated derivative action seek unspecified damages allegedly sustained by the Company and the return of all bonuses, restricted stock, stock options and other incentive compensation. The parties are currently involved in the discovery process on this action. An unfavorable outcome or prolonged litigation in these matters could materially harm the Company’s business.
Item 1A. Risk Factors.
Information regarding risk factors appears in the “Safe Harbor Statement” at the beginning of this Quarterly Report on Form 10-Q and in Part ~~I —~~ I—Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2005.~~2006. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

Item 6. Exhibits.
Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.
Number

Description

Incorporated by Reference to the
Following
Document:
10.1

Credit Agreement, dated as of August 20, 2007, by and among Veeco Instruments Inc. ~~Amended~~, HSBC Bank USA, National Association, as administrative agent, and ~~Restated 2000 Stock Incentive Plan, effective July 20, 2006.~~the lenders named therein.

~~Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.4~~*

10.2

~~Form~~Amendment and Reaffirmation dated August 20, 2007 of ~~Directors Restricted Stock~~Security Agreement ~~pursuant to the~~dated as of March 15, 2005 among Veeco Instruments Inc. ~~2000 Stock Incentive Plan, effective May 2006.~~, the subsidiaries of Veeco named therein and HSBC Bank USA, National Association, as administrative agent.

*
~~10.3~~
~~Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco Instruments Inc. 2000 Stock Incentive Plan, effective June 2006.~~
*
~~10.4~~
~~Form of Indemnification Agreement entered into between Veeco Instruments Inc. and each of its directors and executive officers.~~
~~Current Report on Form 8-K filed on October 23, 2006, Exhibit 10.1~~

31.1

Certification of Chief Executive Officer pursuant to Rule ~~13a—14(a)~~13a-14(a) or Rule ~~15d—14(a)~~15d-14(a) of the Securities and Exchange Act of 1934.

*

31.2

Certification of Chief Financial Officer pursuant to Rule ~~13a—14(a)~~13a-14(a) or Rule ~~15d—14(a)~~15d-14(a) of the Securities and Exchange Act of 1934.

*

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the ~~Sarbanes- Oxley~~Sarbanes-Oxley Act of 2002.

*

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the ~~Sarbanes- Oxley~~Sarbanes-Oxley Act of 2002.

*
* Filed herewith
29

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: ~~November 3, 2006~~October 30, 2007

Veeco Instruments Inc.

By:
/s/ JOHN R. PEELER

~~By:~~
~~/s/ EDWARD H. BRAUN~~
John R. Peeler
~~Edward H. Braun~~
~~Chairman and~~ Chief Executive Officer

By:
/s/ JOHN F. REIN, JR.

John F. Rein, Jr.

Executive Vice President, Chief Financial Officer
and Secretary

30

INDEX TO EXHIBITS
Unless otherwise indicated, each of the following exhibits has been previously filed with the Securities and Exchange Commission by the Company under File No. 0-16244.
Number

Description

Incorporated by Reference to the ~~Following~~
~~Document:~~
Following Document:
10.1

Credit Agreement, dated as of August 20, 2007, by and among Veeco Instruments Inc. ~~Amended~~, HSBC Bank USA, National Association, as administrative agent, and ~~Restated 2000 Stock Incentive Plan, effective July 20, 2006.~~the lenders named therein.

~~Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.4~~*

10.2

~~Form~~Amendment and Reaffirmation dated August 20, 2007 of ~~Directors Restricted Stock~~Security Agreement ~~pursuant to the~~dated as of March 15, 2005 among Veeco Instruments Inc. ~~2000 Stock Incentive Plan, effective May 2006.~~, the subsidiaries of Veeco named therein and HSBC Bank USA, National Association, as administrative agent.

*
~~10.3~~
~~Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco Instruments Inc. 2000 Stock Incentive Plan, effective June 2006.~~
*
~~10.4~~
~~Form of Indemnification Agreement entered into between Veeco Instruments Inc. and each of its directors and executive officers.~~
~~Current Report on Form 8-K filed on October 23, 2006, Exhibit 10.1~~

31.1

Certification of Chief Executive Officer pursuant to Rule ~~13a—14(a)~~13a-14(a) or Rule ~~15d—14(a)~~15d-14(a) of the Securities and Exchange Act of 1934.

*

31.2

Certification of Chief Financial Officer pursuant to Rule ~~13a—14(a)~~13a-14(a) or Rule ~~15d—14(a)~~15d-14(a) of the Securities and Exchange Act of 1934.

*

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the ~~Sarbanes- Oxley~~Sarbanes-Oxley Act of 2002.

*

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the ~~Sarbanes- Oxley~~Sarbanes-Oxley Act of 2002.

*
*Filed herewith
34

	September 30, 2006		December 31, 2005
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	126,565	$	124,499
Accounts receivable, less allowance for doubtful accounts of $2,331 in 2006 and $1,860 in 2005	87,049		89,230
Inventories	104,689		88,904
Prepaid expenses and other current assets	13,107		9,640
Deferred income taxes	3,531		2,870
Total current assets	334,941		315,143
Property, plant and equipment at cost, less accumulated depreciation of $84,857 in 2006 and $77,954 in 2005	71,684		69,806
Goodwill	100,898		99,622
Purchased technology, less accumulated amortization of $61,548 in 2006 and $51,992 in 2005	47,045		55,776
Other intangible assets, less accumulated amortization of $25,539 in 2006 and $22,274 in 2005	25,543		26,899
Other assets	428		614
Total assets	$	580,539	$	567,860

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	36,429	$	31,289
Accrued expenses	51,617		51,169
Deferred profit	758		537
Income taxes payable	2,054		2,123
Current portion of long-term debt	393		375
Total current liabilities	91,251		85,493
Deferred income taxes	2,418		1,048
Long-term debt	208,907		229,205
Other non-current liabilities	3,097		3,527

Noncontrolling interest	1,793		—

Shareholders’ equity	273,073		248,587
Total liabilities and shareholders’ equity	$	580,539	$	567,860

	Three months ended September 30, 2005			Nine months ended September 30, 2005
	(In thousands, except per share amounts)

Net income (loss), as reported	$	1,566		$	(3,585	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(3,904		)	(29,121		)
Pro forma net loss	$	(2,338	)	$	(32,706	)

Net income (loss) per common share:
Net income (loss) and diluted net income (loss) per common share, as reported	$	0.05		$	(0.12	)
Net loss and diluted net loss per common share, pro forma	$	(0.08	)	$	(1.09	)

	Shares (000’s)		Weighted- Average Grant-Date Fair Value
Nonvested at beginning of year	45		$	15.60
Granted	208		24.22
Vested	—		—
Forfeited	(25	)	23.61
Nonvested at September 30, 2006	228		$	22.60

	Shares (000’s)		Weighted- Average Exercise Price		Aggregate Intrinsic Value (000s)		Weighted- Average Remaining Contractual Life (in years)
Outstanding at beginning of year	7,834		$	24.81
Granted	146		23.61
Exercised	(822	)	18.23
Forfeited (including cancelled options)	(639	)	24.98
Outstanding at September 30, 2006	6,519		$	25.59	$	7,868	3.3
Options exercisable at September 30, 2006	6,312		$	25.73	$	7,655	3.2

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at September 30, 2006 (000’s)	Weighted- Average Remaining Contractual Life (in years)	Weighted- Average Exercise Price		Number Outstanding at September 30, 2006 (000’s)	Weighted- Average Exercise Price
$0.27	93	4.3	$	0.27	93	$	0.27
10.26-15.35	150	4.9	14.50		125	14.52
15.45-23.11	3,363	4.2	19.44		3,307	19.44
23.61-35.00	2,063	2.6	29.57		1,937	29.95
35.75-50.60	790	1.1	44.22		790	44.22
54.35-72.00	60	2.7	55.92		60	55.92
	6,519	3.3	$	25.59	6,312	$	25.73

	Three Months ended September 30,									Dollar
	2006					2005				Change
Net sales	$	112,369		100.0	%	$	100,078	100.0	%	$	12,291
Cost of sales	64,513			57.4		55,816		55.8		8,697
Gross profit	47,856			42.6		44,262		44.2		3,594
Operating expenses:
Selling, general and administrative expense	22,296			19.9		21,210		21.2		1,086
Research and development expense	15,716			14.0		14,388		14.4		1,328
Amortization expense	4,025			3.6		4,038		4.0		(13		)
Write-off of purchased in-process technology	1,160			1.0		—		—		1,160
Other (income) expense, net	(310		)	(0.3	)	413		0.4		(723		)
Total operating expenses	42,887			38.2		40,049		40.0		2,838
Operating income	4,969			4.4		4,213		4.2		756
Interest expense, net	1,056			0.9		1,815		1.8		(759		)
Income before income taxes and noncontrolling interest	3,913			3.5		2,398		2.4		1,515
Income tax provision	612			0.5		832		0.8		(220		)
Noncontrolling interest	(1,207		)	(1.0	)	—		—		(1,207		)
Net income	$	4,508		4.0	%	$	1,566	1.6	%	$	2,942

	Sales									Orders
	Three Months ended				Dollar and Percentage					Three Months ended				Dollar and Percentage					Book to Bill
	September 30,				Change					September 30,				Change					Ratio
	2006		2005		Year to Year					2006		2005		Year to Year					2006	2005
Segment Analysis
Process Equipment	$	71,375	$	49,381	$	21,994		44.5	%	$	74,806	$	47,147	$	27,659		58.7	%	1.05	0.95
Metrology	40,994		50,697		(9,703		)	(19.1	)	40,042		37,408		2,634			7.0		0.98	0.74
Total	$	112,369	$	100,078	$	12,291		12.3	%	$	114,848	$	84,555	$	30,293		35.8	%	1.02	0.84

Industry Analysis
Data Storage	$	45,410	$	50,116	$	(4,706	)	(9.4	)%	$	45,345	$	33,554	$	11,791		35.1	%	1.00	0.67
HB-LED/wireless	27,657		9,433		18,224			193.2		29,207		14,647		14,560			99.4		1.06	1.55
Semiconductor	15,978		12,226		3,752			30.7		14,193		11,271		2,922			25.9		0.89	0.92
Research and Industrial	23,324		28,303		(4,979		)	(17.6	)	26,103		25,083		1,020			4.1		1.12	0.89
Total	$	112,369	$	100,078	$	12,291		12.3	%	$	114,848	$	84,555	$	30,293		35.8	%	1.02	0.84

Regional Analysis
US	$	40,608	$	36,833	$	3,775		10.2	%	$	42,804	$	30,498	$	12,306		40.4	%	1.05	0.83
Europe	14,882		15,976		(1,094		)	(6.8	)	15,558		18,231		(2,673		)	(14.7	)	1.05	1.14
Japan	7,718		12,353		(4,635		)	(37.5	)	13,226		16,798		(3,572		)	(21.3	)	1.71	1.36
Asia-Pacific	49,161		34,916		14,245			40.8		43,260		19,028		24,232			127.3		0.88	0.54
Total	$	112,369	$	100,078	$	12,291		12.3	%	$	114,848	$	84,555	$	30,293		35.8	%	1.02	0.84

	Sales									Orders
	Nine Months ended September 30,				Dollar and Percentage Change					Nine Months ended September 30,				Dollar and Percentage Change					Book to Bill Ratio
	2006		2005		Year to Year					2006		2005		Year to Year					2006	2005
Segment Analysis
Process Equipment	$	191,927	$	160,900	$	31,027		19.3	%	$	252,608	$	170,959	$	81,649		47.8	%	1.32	1.06
Metrology	125,995		136,443		(10,448		)	(7.7	)	132,142		131,086		1,056			0.8		1.05	0.96
Total	$	317,922	$	297,343	$	20,579		6.9	%	$	384,750	$	302,045	$	82,705		27.4	%	1.21	1.02

Industry Analysis
Data Storage	$	138,598	$	123,101	$	15,497		12.6	%	$	187,177	$	139,248	$	47,929		34.4	%	1.35	1.13
HB-LED/wireless	61,177		45,642		15,535			34.0		80,939		41,892		39,047			93.2		1.32	0.92
Semiconductor	39,735		46,476		(6,741		)	(14.5	)	44,288		44,665		(377		)	(0.8	)	1.11	0.96
Research and Industrial	78,412		82,124		(3,712		)	(4.5	)	72,346		76,240		(3,894		)	(5.1	)	0.92	0.93
Total	$	317,922	$	297,343	$	20,579		6.9	%	$	384,750	$	302,045	$	82,705		27.4	%	1.21	1.02

Regional Analysis
US	$	105,053	$	99,435	$	5,618		5.6	%	$	131,192	$	99,122	$	32,070		32.4	%	1.25	1.00
Europe	49,332		60,176		(10,844		)	(18.0	)	42,374		50,933		(8,559		)	(16.8	)	0.86	0.85
Japan	34,016		47,337		(13,321		)	(28.1	)	44,400		53,209		(8,809		)	(16.6	)	1.31	1.12
Asia-Pacific	129,521		90,395		39,126			43.3		166,784		98,781		68,003			68.8		1.29	1.09
Total	$	317,922	$	297,343	$	20,579		6.9	%	$	384,750	$	302,045	$	82,705		27.4	%	1.21	1.02

Number	Description	Incorporated by Reference to the Following Document:

10.1	Credit Agreement, dated as of August 20, 2007, by and among Veeco Instruments Inc. ~~Amended~~, HSBC Bank USA, National Association, as administrative agent, and ~~Restated 2000 Stock Incentive Plan, effective July 20, 2006.~~the lenders named therein.	~~Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.4~~*

10.2	~~Form~~Amendment and Reaffirmation dated August 20, 2007 of ~~Directors Restricted Stock~~Security Agreement ~~pursuant to the~~dated as of March 15, 2005 among Veeco Instruments Inc. ~~2000 Stock Incentive Plan, effective May 2006.~~, the subsidiaries of Veeco named therein and HSBC Bank USA, National Association, as administrative agent.	*

~~10.3~~	~~Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco Instruments Inc. 2000 Stock Incentive Plan, effective June 2006.~~	*

~~10.4~~	~~Form of Indemnification Agreement entered into between Veeco Instruments Inc. and each of its directors and executive officers.~~	~~Current Report on Form 8-K filed on October 23, 2006, Exhibit 10.1~~

31.1	Certification of Chief Executive Officer pursuant to Rule ~~13a—14(a)~~13a-14(a) or Rule ~~15d—14(a)~~15d-14(a) of the Securities and Exchange Act of 1934.	*

31.2	Certification of Chief Financial Officer pursuant to Rule ~~13a—14(a)~~13a-14(a) or Rule ~~15d—14(a)~~15d-14(a) of the Securities and Exchange Act of 1934.	*

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the ~~Sarbanes- Oxley~~Sarbanes-Oxley Act of 2002.	*

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the ~~Sarbanes- Oxley~~Sarbanes-Oxley Act of 2002.	*

	Veeco Instruments Inc.

By:	/s/ JOHN R. PEELER
	~~By:~~	~~/s/ EDWARD H. BRAUN~~
	John R. Peeler	~~Edward H. Braun~~ ~~Chairman and~~ Chief Executive Officer

	By:	/s/ JOHN F. REIN, JR.
		John F. Rein, Jr. Executive Vice President, Chief Financial Officer and Secretary

Number	Description	Incorporated by Reference to the ~~Following~~ ~~Document:~~ Following Document:

10.1	Credit Agreement, dated as of August 20, 2007, by and among Veeco Instruments Inc. ~~Amended~~, HSBC Bank USA, National Association, as administrative agent, and ~~Restated 2000 Stock Incentive Plan, effective July 20, 2006.~~the lenders named therein.	~~Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.4~~*

10.2	~~Form~~Amendment and Reaffirmation dated August 20, 2007 of ~~Directors Restricted Stock~~Security Agreement ~~pursuant to the~~dated as of March 15, 2005 among Veeco Instruments Inc. ~~2000 Stock Incentive Plan, effective May 2006.~~, the subsidiaries of Veeco named therein and HSBC Bank USA, National Association, as administrative agent.	*

~~10.3~~	~~Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco Instruments Inc. 2000 Stock Incentive Plan, effective June 2006.~~	*

~~10.4~~	~~Form of Indemnification Agreement entered into between Veeco Instruments Inc. and each of its directors and executive officers.~~	~~Current Report on Form 8-K filed on October 23, 2006, Exhibit 10.1~~

31.1	Certification of Chief Executive Officer pursuant to Rule ~~13a—14(a)~~13a-14(a) or Rule ~~15d—14(a)~~15d-14(a) of the Securities and Exchange Act of 1934.	*

31.2	Certification of Chief Financial Officer pursuant to Rule ~~13a—14(a)~~13a-14(a) or Rule ~~15d—14(a)~~15d-14(a) of the Securities and Exchange Act of 1934.	*

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the ~~Sarbanes- Oxley~~Sarbanes-Oxley Act of 2002.	*

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the ~~Sarbanes- Oxley~~Sarbanes-Oxley Act of 2002.	*