FORM 10-Q/A

~~Amendment No. 1~~10-Q

~~(Mark One)~~

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

~~For the quarterly period ended September 30, 2004~~

o~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES~~

		(Mark One)

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

For the quarterly period ended March 31, 2005
OR

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

For the transition period from to .

Commission file ~~number:~~number 0-16244

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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.~~days: Yes ý No o

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

~~29,731,824~~29,858,417 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on ~~November 8, 2004.~~April 26, 2005.

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward-looking statements may be found in Items 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. Factors that may cause these differences include, but are not limited to:

•                       The cyclicality of the microelectronics industries we serve directly affects our business.
•                       We operate in a highly competitive industry characterized by rapid technological change.
•                       We depend on a limited number of customers that operate in highly concentrated industries.
•                       Our quarterly operating results fluctuate significantly.
•                       Our acquisition strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.
•                       Our 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.
•                       Our success depends on protection of our intellectual property rights. We may be subject to claims of intellectual property infringement by others.
•                       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 rely on a limited number of suppliers.
•                       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 Company’s~~Veeco Instruments Inc. (the “Company’s”) Annual Report on Form 10-K for the year ended December 31, ~~2003.~~2004.

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

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 Info — SEC Filings, through which investors can access our filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. These filings are posted to our Internet site, as soon as reasonably practicable after we electronically file such material with the SEC.

2

~~EXPLANATORY NOTE~~VEECO INSTRUMENTS INC.

The Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 was initially filed with the Securities and Exchange Commission (“SEC”) on November 9, 2004 (the “Originally Filed 10-Q”). This Amendment No. 1 is being filed to reflect restatements of the following (unaudited) financial statements: condensed consolidated statements of operations and cash flows for the three and nine month periods ended September 30, 2004; condensed consolidated balance sheets as at September 30, 2004; and to make certain conforming changes. On March 16, 2005, we announced that we would restate our consolidated financial statements for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004 to reflect adjustments determined to be necessary as a result of ~~an internal investigation of improper accounting transactions at our TurboDisc® business unit~~. For a description of the restatements, see “Restatements” in Note 2 to the accompanying (unaudited) condensed consolidated financial statements and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Events — ~~Internal Accounting Investigation; Restatement of 2004 Financial Results~~~~” in this Amendment No. 1.~~
This Amendment No. 1 amends and restates Items 1, 2, 3, 4 and 5 of Part I and Item 6 of Part II of the Originally Filed 10-Q and, except for such items and Exhibits 31.1, 31.2, 32.1 and 32.2, no other information in the Originally Filed 10-Q is amended hereby. The explanatory caption at the beginning of each item of this Amendment No. 1 sets forth the nature of the revisions to that item.
~~For a discussion of events and developments subsequent to September 30, 2004, see:~~
•                  ~~our Annual Report on Form 10-K for the year ended December 31, 2004; and~~
•                  ~~our other filings subsequent to September 30, 2004.~~
3

~~VEECO INSTRUMENTS INC. AND SUBSIDIARIES~~
INDEX

~~Part~~PART I. FINANCIAL INFORMATION
~~Financial Information~~

Item 1.
Financial Statements (Unaudited):

Condensed Consolidated Statements of ~~Operations-Three~~Operations for the Three Months Ended ~~September 30,~~March 31, 2005 and 2004 ~~(Restated) and 2003~~
~~Condensed Consolidated Statements of Operations-Nine Months Ended September 30, 2004 (Restated) and 2003~~

Condensed Consolidated Balance ~~Sheets-September 30, 2004 (Restated)~~Sheets as of March 31, 2005 and December 31, ~~2003~~2004

Condensed Consolidated Statements of Cash ~~Flows-Nine~~Flows for the Three Months Ended ~~September 30,~~March 31, 2005 and 2004 ~~(Restated) and 2003~~

Notes to Condensed Consolidated Financial Statements

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ~~(Restated)~~

Item 3.
Quantitative and Qualitative Disclosure About Market Risk

Item 4.
Controls and Procedures

PART II. OTHER INFORMATION

Item 5.1.
~~Other Information~~Legal Proceedings
~~Part II.~~
~~Other Information~~

Item 6.
Exhibits

SIGNATURES

43

~~Part~~PART I. ~~Financial Information~~FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

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

Three Months Ended
September 30,

Three Months Ended March 31,

2004

2003

2005

2004

(Restated)

Net sales

$
97,367

$
63,144

$
93,850

$
90,863

Cost of sales

61,913

32,845

56,318

54,065

Gross profit

35,454

30,299

37,532

36,798

Costs and expenses:

Selling, general and administrative expense

19,590

15,204

20,171

19,890

Research and development expense

14,900

11,640

14,824

14,027

Amortization expense

4,336

3,262

4,490

4,896

Other expense, net

170

146

Restructuring expense, net

—

1,804

Other income, net

(98
)
(286
)
Total operating expenses

39,387

38,527

Operating loss

(3,542
)
(1,757
)

(1,855
)
(1,729
)
Interest expense, net

1,793

2,050

2,146

2,199

Loss before income taxes

(5,335
)
(3,807
)

(4,001
)
(3,928
)
Income tax benefit

(3,162
)
(1,692
)
Income tax expense (benefit)

701

(1,218
)
Net loss

$
(2,173
)
$
(2,115
)

$
(4,702
)
$
(2,710
)

Net loss per common share

$
(0.07
)
$
(0.07
)

$
(0.16
)
$
(0.09
)

Diluted net loss per common share

$
(0.07
)
$
(0.07
)

$
(0.16
)
$
(0.09
)

Weighted average shares outstanding

29,670

29,262

29,855

29,569

Diluted weighted average shares outstanding

29,670

29,262

29,855

29,569

See ~~Accompanying Notes.~~accompanying notes.

5

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

Nine Months Ended
September 30,

2004

2003

(Restated)

Net sales

$
287,476

$
202,372

Cost of sales

174,309

108,073

Gross profit

113,167

94,299

Costs and expenses:

Selling, general and administrative expense

61,166

50,017

Research and development expense

43,516

35,507

Amortization expense

13,807

9,563

Other income, net

(471
)
(749
)
Restructuring expense, net

—

3,261

Operating loss

(4,851
)
(3,300
)
Interest expense, net

6,231

5,703

Loss before income taxes

(11,082
)
(9,003
)
Income tax benefit

(4,542
)
(4,056
)
Net loss

$
(6,540
)
$
(4,947
)

Net loss per common share

$
(0.22
)
$
(0.17
)
Diluted net loss per common share

$
(0.22
)
$
(0.17
)

Weighted average shares outstanding

29,629

29,245

Diluted weighted average shares outstanding

29,629

29,245

~~See Accompanying Notes.~~
64

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

September 30,
2004

December 31,
2003

March 31, 2005

December 31, 2004

(Unaudited)

(Unaudited)

(Restated)

Assets

Current Assets:

Current assets:

Cash and cash equivalents

$
110,981

$
106,830

$
100,676

$
100,276

Accounts receivable, less allowance for doubtful accounts of $2,480 in 2004 and $2,458 in 2003

79,102

69,890

Accounts receivable, less allowance for doubtful accounts of $1,866 in 2005 and $2,420 in 2004

72,703

85,914

Inventories

117,659

97,622

106,150

110,643

Prepaid expenses and other current assets

9,606

15,823

7,603

9,039

Deferred income taxes

32,999

24,693

2,931

3,096

Total current assets

350,347

314,858

290,063

308,968

Property, plant and equipment at cost, less accumulated depreciation of $69,216 in 2004 and $62,504 in 2003

73,586

72,742

Property, plant and equipment at cost, less accumulated depreciation of $70,077 in 2005 and $67,565 in 2004

70,563

73,513

Goodwill

78,816

72,989

94,636

94,645

Purchased technology, less accumulated amortization of $35,726 in 2004 and $25,519 in 2003

75,642

85,849

Other intangible assets, less accumulated amortization of $18,446 in 2004 and $14,846 in 2003

16,717

18,842

Purchased technology, less accumulated amortization of $42,476 in 2005 and $39,181 in 2004

65,292

68,587

Other intangible assets, less accumulated amortization of $20,897 in 2005 and $19,702 in 2004

24,398

25,007

Long-term investments

8,043

12,376

3,559

3,541

Deferred income taxes

18,926

18,136

Other assets, net

2,011

672

Other assets

3,159

2,652

Total assets

$
624,088

$
596,464

$
551,670

$
576,913

Liabilities and shareholders’ equity

Current Liabilities:

Current liabilities:

Accounts payable

$
35,099

$
19,603

$
23,599

$
25,476

Accrued expenses

47,026

31,616

45,367

63,438

Deferred profit

3,182

2,140

2,289

1,196

Income taxes payable

3,587

3,700

1,532

1,702

Current portion of long-term debt

348

333

359

354

Total current liabilities

89,242

57,392

73,146

92,166

Long-term debt, net of current portion

229,671

229,935

229,489

229,581

Other non-current liabilities

2,885

2,808

2,824

2,814

Shareholders’ equity

302,290

306,329

246,211

252,352

Total liabilities and shareholders’ equity

$
624,088

$
596,464

$
551,670

$
576,913

See ~~Accompanying Notes.~~accompanying notes.

75

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

Nine Months Ended
September 30,

Three Months Ended March 31,

2004

2003

2005

2004

(Restated)

Operating Activities

Net loss

$
(6,540
)
$
(4,947
)

$
(4,702
)
$
(2,710
)
Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

23,696

17,169

7,735

8,083

Deferred income taxes

(9,134
)
(6,941
)

52

(2,435
)
Other

35

(67
)

3

(17
)
Changes in operating assets and liabilities:

Accounts receivable

(9,574
)
8,001

11,408

(2,261
)
Inventories

(20,597
)
2,619

5,372

(7,784
)
Accounts payable

15,518

989

(1,795
)
5,386

Accrued expenses, deferred profit and other current liabilities

11,584

(10,313
)

(1,815
)
4,227

Other, net

(57
)
354

(1,874
)
1,318

Net cash provided by operating activities

4,931

6,864

14,384

3,807

Investing Activities

Capital expenditures

(9,518
)
(6,464
)

(1,838
)
(1,408
)
Net assets of business acquired

(1,000
)
(5,980
)
Payment for net assets of businesses acquired

(15,038
)
—

Proceeds from sale of fixed assets

5

26

Proceeds from sale of assets held for sale

2,615

2,332

2,173

—

Proceeds from sale of property, plant and equipment

26

—

Net maturities of long-term investments

4,333

4,165

Net purchase of long-term investments

(18
)
(85
)
Net cash used in investing activities

(3,544
)
(5,947
)

(14,716
)
(1,467
)

Financing Activities

Proceeds from stock issuance

3,017

368

127

2,038

Repayment of long-term debt, net

(250
)
(237
)

(87
)
(82
)
Net cash provided by financing activities

2,767

131

40

1,956

Effect of exchange rates on cash and cash equivalents

(3
)
(184
)

692

705

Net change in cash and cash equivalents

4,151

864

400

5,001

Cash and cash equivalents at beginning of period

106,830

214,295

100,276

106,830

Cash and cash equivalents at end of period

$
110,981

$
215,159

$
100,676

$
111,831

Non-Cash Items

During the ~~first nine~~three months ofended March 31, 2005 and 2004, the Company had non-cash items excluded from the Condensed Consolidated ~~Statement~~Statements of Cash Flows of approximately ~~$7.3 million. This amount consists~~$1.5 million and $0.0 million respectively, which consisted of (1) $6.0 million for the accrual of a contingent earnout payment to Emcore, the former owner of TurboDisc, resulting from the achievement of certain revenue targets which is payable in the first quarter of 2005 and has been reflected as additional goodwill; (2) $0.9 million for the transfer of ~~other current assets to~~ property, plant and ~~equipment; and (3) $0.4 million for the transfer of inventory~~equipment to ~~property plant and equipment.~~inventory.

See ~~Accompanying Notes.~~accompanying notes.

86

~~Veeco Instruments Inc. and Subsidiaries~~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 accounting principles generally accepted in the United States 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 ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2004.~~2005.   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, ~~2003.~~2004.

As described in Note 2, the (unaudited) condensed consolidated statements of operations and cash flows for the three and nine month periods ended September 30, 2004 and the condensed consolidated balance sheet as of September 30, 2004, including the applicable notes, have been restated.
~~Loss~~Net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using the weighted average number of common shares and common equivalent shares outstanding during the period. The effect of approximately 197,000 and 755,000 common equivalent shares ~~of approximately 283,000 and 525,000~~ for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005 and 2004, respectively, and ~~329,000 and 242,000 for the three and nine months ended September 30, 2003, respectively, were antidilutive, therefore diluted loss per share is not presented for such periods.~~
~~The following table sets forth the reconciliation of diluted weighted average shares outstanding:~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2004

2003

2004

2003

(In thousands)

(In thousands)

Weighted average shares outstanding

29,670

29,262

29,629

29,245

Dilutive effect of stock options and warrants

—

—

—

—

Diluted weighted average shares outstanding

29,670

29,262

29,629

29,245

~~In addition, the effect of~~ the assumed conversion of subordinated convertible ~~notes~~debentures into approximately 5.7 million common equivalent shares is antidilutive for ~~the three~~2005 and ~~nine months ended September 30,~~ 2004, and ~~2003, respectively, and~~ therefore is not included in the ~~above~~ diluted weighted average shares outstanding.
9

The Company accounts for its stock option plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No compensation expense is reflected in net loss, as all options granted under the stock option plans had an exercise price equal to the market value of the underlying common stock on the date of grant. 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, of ~~SFAS~~Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, to stock-based employee ~~compensation:~~compensation.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2004

2003

2004

2003

(In thousands, except per share amounts)

(Restated)

(Restated)

Net loss, as reported

$
(2,173
)
$
(2,115
)
$
(6,540
)
$
(4,947
)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

(3,234
)
(3,822
)
(9,162
)
(12,451
)

Pro forma net loss

$
(5,407
)
$
(5,937
)
$
(15,702
)
$
(17,398
)

Loss per common share:

Net loss per common share, as reported

$
(0.07
)
$
(0.07
)
$
(0.22
)
$
(0.17
)
Net loss per common share, pro forma

$
(0.18
)
$
(0.20
)
$
(0.53
)
$
(0.59
)
Diluted net loss per common share, as reported

$
(0.07
)
$
(0.07
)
$
(0.22
)
$
(0.17
)
Diluted net loss per common share, pro forma

$
(0.18
)
$
(0.20
)
$
(0.53
)
$
(0.59
)

Three Months Ended
March 31,

2005

2004

(In thousands, except per share
amounts)

Net loss, as reported

$
(4,702
)
$
(2,710
)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

(4,042
)
(2,750
)
Pro forma net loss

$
(8,744
)
$
(5,460
)

Net loss per common share:

Net loss and diluted net loss per common share, as reported

$
(0.16
)
$
(0.09
)
Net loss and diluted net loss per common share, pro forma

$
(0.29
)
$
(0.19
)

Reclassifications

Certain amounts in the ~~2003~~2004 consolidated financial statements have been reclassified to conform to the ~~2004~~2005 presentation.

~~Note 2—Restatement~~
On February 11, 2005, Veeco announced the postponement of the release of audited results for the fourth quarter and year ended December 31, 2004, pending completion of an internal investigation of improper accounting transactions at its TurboDisc® business unit. Veeco acquired the assets of TurboDisc in November 2003. The investigation focused principally on the value of inventory, accounts payable and certain liabilities, as well as certain revenue transactions of TurboDisc. The investigation was commenced after Veeco’s internal audit staff and corporate financial management discovered improper accounting transactions in the course of a Veeco internal audit and transitioning the business to Veeco’s SAP accounting system during the fourth quarter of 2004. The Audit Committee of the Company’s Board of Directors supervised the accounting investigation and authorized Veeco’s outside counsel, Kaye Scholer LLP, to hire Jefferson Wells International to perform forensics and accounting reconstruction work as part of the investigation. The investigation has been completed. Conclusions reached during the investigation included that the improper accounting entries were made by a single individual at TurboDisc whose employment had been terminated prior to the commencement of the investigation, and that there was no evidence found of embezzlement or diversion of corporate assets.
On March 16, 2005, Veeco reported that it had completed its internal investigation and would be restating the financial statements previously issued for the three quarterly periods and nine months ended September 30, 2004. The pre-tax decrease to earnings previously reported is $2.8 million, $4.3 million and $3.1 million for the three month periods ended March 31, 2004, June 30, 2004 and September 30, 2004, respectively. In addition, as a result of revenue recognition adjustments, (decreases) increases to revenues previously reported will be $(3.6) million, $(3.6) million and $5.0 million for the three month periods ended March 31, 2004, June 30, 2004 and September 30, 2004, respectively. These revenue adjustments, in the aggregate, do not reduce total revenue recognized for 2004.
107

~~The table set forth below shows~~Note 2—Recent Accounting Pronouncements
On December 16, 2004, the ~~adjustments~~Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R) (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the ~~quarterly information that was previously filed on the Quarterly Report on Form 10-Q for the three and nine month periods ended September 30, 2004:~~

Three Months Ended September 30, 2004

Nine Months Ended September 30, 2004

As filed

Adjustments (1)

Restated

As filed

Adjustments (2)

Restated

Net sales

$
92,367

5,000

$
97,367

$
289,738

$
(2,262
)
$
287,476

Cost of sales

53,634

8,279

61,913

165,825

8,484

174,309

Gross profit

38,733

(3,279
)
35,454

123,913

(10,746
)
113,167

Costs and expenses

39,145

(149
)
38,996

118,558

(540
)
118,018

Operating income (loss)

(412
)
(3,130
)
(3,542
)
5,355

(10,206
)
(4,851
)
Interest expense, net

1,793

—

1,793

6,231

—

6,231

Loss before income taxes

(2,205
)
(3,130
)
(5,335
)
(876
)
(10,206
)
(11,082
)
Income tax benefit

(750
)
(2,412
)
(3,162
)
(298
)
(4,244
)
(4,542
)
Net loss

(1,455
)
(718
)
$
(2,173
)
(578
)
(5,962
)
$
(6,540
)

Loss per common share:

Net loss per common share

$
(0.05
)
$
(0.02
)
$
(0.07
)
$
(0.02
)
$
(0.20
)
$
(0.22
)

Weighted average shares outstanding

29,670

29,670

29,629

29,629

Diluted weighted average shares outstanding

29,670

29,670

29,629

29,629

~~(1) The $5.0 million increase~~approach described in ~~revenue principally relates~~SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to ~~revenue recognition adjustments for certain system shipments. Approximately $7.2 million~~employees, including grants of ~~revenue, previously~~employee stock options, to be recognized in the ~~second quarter~~income statement based on their fair values. Pro forma disclosure is no longer an alternative. On April 14, 2005 the Securities and Exchange Commission extended the adoption date of ~~2004, was reversed and properly recognized~~SFAS No. 123(R) to no later than the beginning of the first fiscal year beginning after June 15, 2005. Early adoption will be permitted in ~~the third quarter~~periods in which financial statements have not yet been issued. The Company expects to adopt SFAS No. 123(R) as of ~~2004, which was partially offset by $2.2 million~~January 1, 2006.
SFAS No. 123(R) permits public companies to adopt its requirements using one of revenue that was previously recognized in the third quarter that was reversed and properly recognized in the fourth quarter of 2004. The $8.3 million increase in cost of sales results from a $3.8 million increase related to the net increase in revenues and $4.5 million resulting from adjustments in inventory, accounts payable and accrued expenses. The decrease in costs and expenses of $0.1 million principally relates to the over accrual of certain operating expenses. The $2.4 million adjustment to the income tax benefit reflects the tax benefit resulting from the pre-tax adjustmentstwo methods:

1.               A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.
~~(2)~~ 2.               A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
The ~~$2.3 million reduction in revenue principally~~Company has not yet determined whether it will adopt SFAS No. 123(R) using the modified prospective method or the modified retrospective method.
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on the consolidated results ~~from revenue recognition adjustments for certain system shipments.~~of operations, although it will have no impact on the Company’s overall consolidated financial position. The ~~revenue for these systems was recognized~~impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the ~~fourth quarter. The $8.5 million~~future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per common share in Note 1 to Veeco’s Condensed Consolidated Financial Statements. 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 current literature. This requirement will reduce consolidated net operating cash flows and increase consolidated net financing cash flows in ~~cost~~periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the Company did not recognize an amount of ~~sales results from $9.7 million~~consolidated operating cash flows for such excess tax deductions in ~~adjustments principally~~2005 or 2004.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs- an amendment to ~~inventory, accounts payable~~ARB No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and ~~certain accrued expenses partially offset by a $1.2 million reduction due~~wasted material (spoilage). This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal,” as previously stated in ARB No. 43. In addition, this Statement requires that allocation of fixed production overheads to the ~~decrease in revenues due to~~costs of conversion be based on the ~~revenue recognition adjustments described above.~~normal capacity of the production facilities. The ~~decrease in~~provisions of this Statement shall be effective for inventory costs ~~and expenses~~incurred during fiscal years beginning after June 15, 2005. The Company does not expect that the adoption of ~~$0.2 million principally relates to~~this Statement will have a significant impact on the ~~over accrual~~Company’s consolidated financial position or results of ~~certain operating expenses. The $0.8 million adjustment to income tax benefit reflects the tax benefit resulting from the pre-tax adjustments.~~operations.

118

The table set forth below shows the adjustments to the condensed consolidated balance sheet information as of September 30, 2004 that was previously filed on the Quarterly Report on Form 10-Q for the nine month period ended September 30, 2004:

As of September 30, 2004

As filed

Adjustments (1)

Restated

Assets

Current assets

$
359,110

$
(8,763
)
$
350,347

Non-current assets

271,274

2,467

273,741

Total assets

630,384

(6,296
)
624,088

Liabilities and shareholders’ equity

Current liabilities

89,576

(334
)
89,242

Non-current liabilities

232,556

—

232,556

Shareholders’ equity

308,252

(5,962
)
302,290

Total liabilities and shareholders’ equity

630,384

(6,296
)
624,088

~~(1)~~          The $8.8 million reduction to current assets principally results from a $2.6 million decrease to accounts receivable resulting from revenue recognition adjustments, a $6.2 million decrease to inventory resulting from revenue recognition adjustments and certain inventory valuation adjustments, a net decrease to the current portion of deferred taxes of $0.3 million due to a $3.6 million shift of the deferred tax asset from short-term to long-term net of a $3.3 million increase in the asset due to the higher loss incurred, offset by an increase to prepaid expenses and other current assets of $0.3 million due to adjusted taxes receivable. The $2.5 million increase in non-current assets results from an increase to the non-current portion of deferred taxes of $3.6 million due to the shift in deferred tax assets noted above, offset by a decrease in goodwill of $1.1million which relates to a reduction in the contingent earnout payment to Emcore Corporation, the former owner of TurboDisc, resulting from the achievement of certain revenue targets which is payable in the first quarter of 2005. The $0.3 million decrease in current liabilities consists of a $0.6 million decrease to income taxes payable relating to an adjustment of state tax liabilities, and a decrease of $0.3 million to accounts payable and accrued expenses principally relating to expenses applicable to the first nine months, offset by an increase to deferred profit of $0.6 million. The $6.0 million decrease to shareholders’ equity relates to the increase in the net loss due to the various factors previously described.

Note 3—Balance Sheet Information

Inventories

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

March 31, 2005

December 31, 2004

September 30,
2004

December 31,
2003

(In thousands)

(Restated)

Raw materials

$
59,078

$
49,734

$
54,560

$
52,301

Work-in-progress

38,809

31,887

33,392

35,004

Finished goods

19,772

16,001

18,198

23,338

$
117,659

$
97,622

$
106,150

$
110,643

Accrued ~~Warranty~~Warranties

The Company estimates the costs that may be incurred under ~~its~~the warranty it provides and records 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 ~~historical~~product failure rates, material usage and ~~anticipated rates of~~labor costs incurred in correcting product failures during the warranty ~~claims and costs per claim.~~period. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. Changes in the Company’s warranty liability during the period are as ~~follows (in thousands):~~follows:

Balance as of January 1, 2004

$
3,904

Warranties issued during the period

4,015

Settlements made during the period

(1,965
)
Balance as of September 30, 2004

$
5,954

12

Three Months Ended March 31,

2005

2004

(In thousands)

Balance as of January 1

$
6,771

$
3,904

Warranties issued during the period

1,693

1,349

Settlements made during the period

(1,973
)
(838
)
Balance as of March 31

$
6,491

$
4,415

Note 4—Segment Information

~~During the quarter ended September 30, 2004, the Company changed the structure of its internal organization in a manner which caused the composition of its reportable segments to change.~~ The Company currently manages, reviews operating results and assesses performance, as well as allocates resources, based upon ~~this~~three separate reporting ~~structure. The change implemented by the Company was to split out the former process equipment segment into two separate reportable~~ segments. The first segment, called “ion beam and mechanical process ~~equipment”,~~equipment,” combines the etch, deposition and dicing and slicing products sold mostly to data storage customers. This segment includes the production facilities in Plainview, New York, Ft. Collins, Colorado and Camarillo and Ventura, California. The second segment, called “epitaxial process ~~equipment”,~~equipment,” includes the Molecular Beam Epitaxy ~~(“MBE”)~~ and Metal Organic Chemical Vapor Deposition ~~(“MOCVD”)~~ products primarily sold to high brightness light emitting ~~diodes (“HB-LED”)~~diode and wireless telecommunications customers. This segment includes the production facilities in St. Paul, Minnesota and Somerset, New Jersey. The ~~metrology~~third segment, ~~which~~called “metrology” represents equipment that is used to provide critical surface measurements on products such as semiconductor devices and thin film magnetic heads and includes Veeco’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 includes the production facilities in Santa Barbara, California and Tucson, Arizona, remains unchanged. As such, the Company has restated the segment information for prior periods as if the composition of its reportable segments described above had existed in such prior periods.Arizona.
9

The following ~~table~~ represents the reportable product segments of the Company ~~(in thousands):~~as of and for the three months ended March 31, 2005 and 2004, in thousands:

Ion Beam and
Mechanical
Process
Equipment

Epitaxial Process
Equipment

Metrology

Unallocated
Corporate
Amount

Restructuring
Charges

Total

Ion Beam
and
Mechanical
Process
Equipment

Epitaxial Process
Equipment

Metrology

Unallocated
Corporate
Amount

Total

Three Months Ended September 30, 2004 (Restated)

Three Months Ended March 31, 2005

Net sales

$
30,297

$
33,407

$
33,663

$
—

$
—

$
97,367

$
27,839

$
22,523

$
43,488

$
—

$
93,850

(Loss) income from operations before interest, taxes and amortization

(235
)
828

1,933

(1,732
)
—

794

(755
)
(1,947
)
7,762

(2,425
)
2,635

Three Months Ended September 30, 2003

Net sales

17,612

7,279

38,253

—

—

63,144

(Loss) income from operations before interest, taxes and amortization

(1,173
)
600

5,572

(1,690
)
(1,804
)
1,505

Nine Months Ended September 30, 2004 (Restated)

Total assets

170,495

135,750

134,014

111,411

551,670

Three Months Ended March 31, 2004

Net sales

103,550

66,442

117,484

—

—

287,476

35,348

13,957

41,558

—

90,863

Income (loss) from operations before interest, taxes and amortization

3,997

(3,757
)
14,386

(5,670
)
—

8,956

1,799

(2,813
)
6,062

(1,881
)
3,167

Total assets

180,549

134,040

135,830

173,669

—

624,088

$
186,283

$
122,982

$
130,083

$
166,777

$
606,125

Nine Months Ended September 30, 2003

Net sales

64,660

24,119

113,593

—

—

202,372

(Loss) income from operations before interest, taxes and amortization

(334
)
1,926

14,534

(6,602
)
(3,261
)
6,263

Total assets

$
99,506

$
60,053

$
139,291

$
296,132

$
—

$
594,982

Corporate total assets are comprised principally ~~comprised~~ of cash at March 31, 2005 and cash and deferred tax ~~assets.~~assets at March 31, 2004.
13

The following table outlines the components of goodwill by business segment at ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003~~2004 (in thousands):

September 30, 2004

December 31, 2003

March 31, 2005

December 31, 2004

(Restated)

Ion Beam and Mechanical Process Equipment

$
21,676

$
21,676

$
27,276

$
27,276

Epitaxial Process Equipment

30,771

25,944

39,141

39,091

Metrology

26,369

25,369

28,219

28,278

Total

$
78,816

$
72,989

$
94,636

$
94,645

Note ~~5 —~~ 5—Comprehensive Loss

The Company’s comprehensive loss is comprised of net loss, adjusted for foreign currency translation adjustments, the change in the fair value of forward currency contracts, and the change in the minimum pension ~~liability, and~~liability. The Company had no other sources affecting comprehensive loss. The Company had total comprehensive loss of ~~$2.3~~$6.3 million and ~~$7.0~~$2.1 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005 and 2004, ~~respectively, and $0.2 million and $2.3 million for the three and nine months ended September 30, 2003,~~ respectively.

Note 6—Restructuring

2004 Merger and Restructuring Charges
As a result of the acquisition of MTI and the resulting plan of consolidation of the two facilities in Ventura and Camarillo, California, certain long lived assets of Aii were classified as held for sale as of December 31, 2004. In ~~response~~accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, these long lived assets are measured at the lower of their carrying amount or fair value less cost to sell. Fair value was determined by the ~~significant decline~~Company based upon the actual sale proceeds, which were received in February 2005 and April 2005. Approximately $0.8 million and $2.2 million of fixed assets held for sale are included in prepaid expenses and other current assets in the ~~business environment~~accompanying Condensed Consolidated Balance Sheets at March 31, 2005 and ~~market conditions in 2001 and 2002,~~December 31, 2004, respectively.
In conjunction with the plan announced by the Company ~~restructured its business and operations. The actions giving rise~~in October 2004 to ~~the restructuring charges taken~~reduce employment levels by 10% in ~~2003 described below were implemented in order for Veeco to remain competitive and such actions have benefited Veeco by reducing future operating costs.~~
~~2003 Restructuring Charges~~
~~During the year ended December 31, 2003,~~2005, the Company ~~incurred a~~recorded restructuring ~~charge~~and other expenses of approximately ~~$4.8~~$3.6 million ~~related to the reduction in work force announced~~ in the fourth quarter of ~~2002, as a result~~2004. The $3.6 million charge consisted of $2.8 million of personnel severance costs and $0.8 million accrual for costs related to the ~~decline in the markets in which the Company operates. This~~internal investigation of improper accounting transactions at its TurboDisc business unit.
10

The $2.8 million charge ~~included~~for personnel costs includes severance related costs for approximately ~~180~~107 employees, which included management, administration and manufacturing employees located at the Company’s ~~Fort Collins, Colorado~~Plainview, New York and ~~Plainview and Rochester, New York~~Camarillo, California ion beam and mechanical process equipment operations, the ~~San Diego, Sunnyvale~~Somerset, New Jersey and St. Paul, Minnesota epitaxial process equipment operations, the Santa Barbara, California and Tucson, Arizona metrology facilities, the sales and service offices located in ~~Munich, Germany~~France, England and Singapore, and the corporate ~~office~~offices in Woodbury, New York. ~~The charge also included costs~~As of ~~vacating facilities in Sunnyvale, California, Munich, Germany, and relocating the office in Japan. During the nine months ended September 30, 2004,~~March 31, 2005, approximately ~~$1.3~~$1.9 million has been paid and approximately ~~$0.5~~$0.9 million remains accrued. The remainder is expected to be paid by the ~~third~~fourth quarter of 2005.
The $0.8 million charge for costs related to the internal investigation of improper accounting transactions at the Company’s TurboDisc business unit include accounting, legal and other auditing fees performed by external consultants who assisted with the investigation. As of March 31, 2005, $0.7 million remained accrued and will be paid by the second quarter of 2005.

A reconciliation of the liability for the restructuring ~~charge recorded~~and other charges during ~~2003~~2004 for severance and ~~relocation~~investigation costs is as follows (in millions):

Ion Beam and
Mechanical
Process
Equipment

Epitaxial
Process
Equipment

Metrology

Unallocated
Corporate

Total

Charged to accrual

$
2.3

$
—

$
2.1

$
0.4

$
4.8

Add-back from 2002 accrual

0.3

—

—

—

0.3

Total 2003 accrual

2.6

—

2.1

0.4

5.1

Cash payments during 2003

1.6

—

1.6

0.1

3.3

Cash payments during the nine months ended September 30, 2004

0.6

—

0.5

0.2

1.3

Balance as of September 30, 2004

$
0.4

$
—

$
0.0

$
0.1

$
0.5

14

Ion Beam and
Mechanical
Process
Equipment

Epitaxial
Process
Equipment

Metrology

Unallocated
Corporate

Total

Charged to accrual

$
1.0

$
0.4

$
0.4

$
1.8

$
3.6

Cash payments during 2004

0.3

—

0.1

0.3

0.7

Cash payments during the three months ended March 31, 2005

0.4

0.3

0.3

0.3

1.3

Balance as of March 31, 2005

$
0.3

$
0.1

$
—

$
1.2

$
1.6

Note 6–7—Subsequent Events

On ~~October 5, 2004,~~April 12, 2005, the ~~Company acquired substantially all~~Compensation Committee (the “Committee”) of the ~~assets~~Company’s Board of Directors approved the acceleration of vesting of unvested, out-of-the-money stock options granted prior to September 1, 2004 under Veeco’s stock option plans. An option was considered “out-of-the-money” if the option exercise price was greater than the closing price of Veeco’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 2,549,000 shares of Veeco’s common stock became immediately exercisable, including options held by Veeco’s executive officers to purchase approximately 852,000 shares. The weighted average exercise price of the options accelerated was $21.25.
The purpose of the accelerated vesting is to eliminate future compensation expense that Veeco would otherwise recognize in its statement of operations with respect to these accelerated options upon the adoption by Veeco of SFAS 123(R). In addition, because many of these options have exercise prices significantly in excess of current market values, they were not providing an effective means of employee retention and ~~assumed certain liabilities~~incentive compensation. The future compensation expense that will be avoided, based on Veeco’s implementation date for SFAS 123R of ~~Manufacturing Technology Inc., (“MTI”) for $9.5~~January 1, 2006, is approximately $8.4 million in ~~cash. The MTI business includes the assets necessary for engineering, design~~2006 and manufacturing of slicing and dicing systems ranging from R&D to high-volume production systems, and MTI’s intellectual property. Additionally, the Company entered into a lease with the former owner of MTI, to lease MTI’s 125,000 square foot manufacturing facility$3.9 million in Ventura, California. The lease period is for an initial term of 5 years with an option to renew for an additional five years. At the time of the acquisition, approximately 70 MTI employees became employees of Veeco. The acquisition will be accounted for under the purchase method of accounting. The purchase price allocation for this transaction has not yet been completed. Further information regarding this transaction will be included in the Company’s Annual Report on Form 10-K for the year ending December 31, 2004.2007.

1511

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

Executive Summary:

Veeco designs, manufactures, markets and services a broad line of equipment primarily used by manufacturers in the data storage, semiconductor, ~~HB-LED~~high brightness light emitting diode (“HB-LED”) and wireless telecommunications industries. Veeco’s products also enable advancements in the growing field of nanoscience and other areas of scientific and industrial research. Our process equipment products precisely deposit or remove (etch) various materials in the manufacturing of advanced thin film magnetic heads (“TFMHs”) for the data storage industry and HB-LED and wireless telecommunications industries. ~~During 2004, the~~The Company ~~split out the former process equipment segment into two~~currently manages, reviews operating results and assesses performance, as well as allocates resources, based upon three separate ~~reportable~~reporting segments. The first segment, called ~~“Ion Beam~~“ion beam and ~~Mechanical Process Equipment”~~mechanical process equipment” combines the etch, deposition and dicing and slicing products sold mostly to data storage customers. The second segment, called ~~“Epitaxial Process Equipment,~~“epitaxial process equipment,” includes the Molecular Beam Epitaxy (“MBE”) and Metal Organic Chemical Vapor Deposition (“MOCVD”) products primarily sold to HB-LED and wireless telecommunications customers. ~~As such, the Company has restated the~~The third segment, ~~information for prior periods as if the composition of its reportable segments described above had existed in such prior periods. Our metrology~~“metrology”, represents equipment that is used to provide critical surface measurements on products such as semiconductor devices and ~~TFMHs.~~TFMHs, and includes our broad line of atomic force microscopes (“AFMs”), optical interferometers and stylus profilers sold to semiconductor customers, data storage customers and thousands of research facilities and scientific centers. This equipment allows customers to monitor their products throughout the manufacturing process in order to improve yields, reduce costs and improve product quality. Our metrology solutions are also key research instruments used by many universities, scientific laboratories and industrial applications.

During the past several years, we have strengthened our product lines through strategic acquisitions. In our metrology business, in June 2003, we purchased the atomic force microscope probe business from ~~NanoDevices~~Nanodevices Inc. (“~~NanoDevices”~~Nanodevices”) for approximately $6.0 million, including transaction costs, plus a potential future earn-out payment of up to $4.0 million based on the achievement of certain operating measures. Through the end of the first quarter of 2005, the Company has made earn-out payments totaling $2.9 million relating to this acquisition. In our epitaxial process equipment business, in November 2003, we purchased the TurboDisc business from Emcore Corporation (“Emcore”) for approximately $63.7 million, including transaction costs, plus a potential future earn-out payment of up to $20.0 million based on the achievement of certain operating measures. Through the end of the first quarter of 2005, the Company has made earn-out payments totaling $13.1 million to Emcore. Also in November 2003, in our ion beam and mechanical process equipment business, we acquired the precision bar lapping company, Advanced Imaging, Inc. (“Aii”), for approximately $61.4 million, including transaction costs, plus a potential future earn-out payment of up to $9.0 million based on the achievement of certain operating measures. To date, the operating measures which trigger the Aii earn-out have not been achieved. Most recently, in our ion beam and mechanical process equipment business, Veeco expanded its TFMH “slider” technologies to include slicing and dicing processes, which are critical to controlling thin film head fly height, through the purchase of ~~MTI~~Manufacturing Technology, Inc. (“MTI”) for $9.5 million. While we believe these acquisitions will be accretive to both sales and profits going forward, gross margin percentages have been historically lower in ~~these~~the process equipment product lines than in the metrology business. Therefore, Veeco’s gross margin ~~percentage may be~~percentages have been adversely affected ~~in the future~~ by ~~the~~ lower concentration of metrology ~~sales.~~sales during 2004 and in early 2005. Veeco implemented an active plan to improve the gross margins in its Process Equipment product lines during 2005.

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

Highlights of the ~~Third~~First Quarter of ~~2004:~~2005:

•                       ~~Orders of $79.5~~Sales were $93.9 million, up 3% from ~~$64.0~~$90.9 million in the ~~third~~first quarter of ~~2003. The order growth included $12.3 million from companies acquired in 2003 and $3.2 million from Veeco’s historical business.~~2004.
•                       ~~Sales of $97.4~~Orders were $98.9 million, updown from ~~$63.1~~$117.1 million in the ~~third~~first quarter of ~~2003. The sales growth included $29.3 million from companies acquired in 2003 and $5.0 million from Veeco’s historical business.~~2004.
•                       Net loss of ~~$2.2~~$4.7 million, compared with a net loss of ~~$2.1 million in the third quarter of 2003.~~
•                  ~~Cash use of $6.4 million, compared with cash generation of $4.8 million in the third quarter of 2003.~~
~~Highlights of the First Nine Months of 2004:~~
•                  ~~Orders of $321.3 million, up from $200.8~~$2.7 million in the first ~~nine months~~quarter of ~~2003. The order growth included $91.3 million from companies acquired in 2003 and $29.2 million from Veeco’s historical business.~~
•                  Sales of $287.5 million, up from $202.4 million in the first nine months of 2003. The sales growth included $63.0 million from companies acquired in 2003 and $22.1 million from Veeco’s historical business.
•                  ~~Net loss of $6.5 million, compared with a net loss of $4.9 million in the first nine months of 2003.~~2004.
•                       Cash generation of ~~$4.2~~$0.4 million, despite making earn-out payments totaling $15.0 million relating to acquisitions, compared with cash generation of ~~$0.9~~$5.0 million in the ~~nine months~~first quarter of ~~2003.~~2004.

1612

Current Business Conditions/Outlook:

In the ~~third~~first quarter of ~~2004,~~2005, Veeco ~~was adversely impacted by weak industry-wide capital equipment spending conditions, particularly~~reported sales of $93.9 million, a 3% increase from the $90.9 million reported in the ~~HB-LED/wireless and data storage industries. As with many suppliers in the capital equipment industry, Veeco typically books approximately 60%~~first quarter of ~~its orders in the last several weeks of the quarter. However, in the third quarter, many of these late quarter orders did not occur. Veeco’s third quarter orders declined 36.3%~~2004. Revenues were down sequentially as anticipated from the second quarter of 2004 with orders down in all markets with the exception of scientific research.   Veeco’s orders for MOCVD equipment declined 71.4% sequentially as a result of spending freezes initiated by many Asian customers at the end of the quarter. Veeco’s orders from data storage and semiconductor customers declined approximately 28.7% sequentially as customers in those industries carefully managed their capital spending. The decline in business conditions experienced by Veeco is similar to what other companies serving the semiconductor, data storage and HB-LED/wireless markets are reporting.
~~While Veeco currently expects revenues and orders to recover~~$103.0 million reported in the fourth quarter of 2004. Veeco’s first quarter 2005 bookings of $98.9 million reflected increased demand from ~~these low third quarter levels,~~our data storage customers who are currently investing in capacity expansions for consumer micro-drive applications and advanced development programs for next generation TFMHs. Data storage orders increased 26% sequentially to $45.3 million – the highest quarterly level the Company ~~intends to reduce spending by approximately 10%~~has experienced in ~~order~~several years.
Veeco implemented an active plan to improve the Company’s profitability in ~~2005 in the event that the business environment remains challenging. Veeco expects to take a charge of between $4.5 and $5.5 million~~2005. This plan is based both on headcount reductions which were taken in the fourth quarter ~~related~~of 2004, as well as a product mix expectation for 2005 revenues that should lead to increased gross margins. The Company currently expects higher 2005 revenues in data storage products, lower 2005 revenues in epitaxial equipment products and stability in its metrology revenues as compared to 2004. This revenue mix as well as other planned actions are expected to result in increased gross margins for each subsequent quarter of 2005 and for the ~~future spending reductions, restructuring and product rationalization costs, and an in-process R&D write-off relating to the acquisition of MTI.~~
year as a whole compared with 2004.
Technology changes are continuing in all of Veeco’s markets: the continued ramp of 80 GB hard drives in data storage and investments in next generation drives (120GB); the increased use of Veeco’s automated AFMs for sub 130 nanometer semiconductor applications; the opportunity for Veeco’s MOCVD and MBE systems to further penetrate the emerging HB-LED and wireless markets; and the continued funding of nanoscience research, which is one driver of Veeco’s scientific research business. While ~~Veeco currently expects our customers’ current~~Veeco’s customers remain cautious regarding capital spending, ~~reluctance to continue~~they are also placing orders for ~~several quarters, the Company believes this reluctance will ultimately be outweighed by customers’ need to fund~~Veeco Process Equipment and Metrology products that enable their ~~2005 new product technology roadmaps and to invest in the expected high-growth of~~ next generation ~~consumer electronics.~~products. Veeco remains well positioned to provide leadership technologies for growth applications in semiconductor, data storage, HB-LED/wireless and scientific research.
~~2004 Recap Year-to-Date~~
In the first nine months of 2004, as compared to the first nine months of 2003, Veeco experienced a significant improvement in orders from its “information age” markets: data storage, semiconductor and HB-LED/wireless, driven by technology changes and increased capital expenditures across these markets. Overall, worldwide economic conditions appear to have improved. Consumer spending on many types of electronics has increased and various worldwide economies, such as those in the Asia-Pacific (“APAC”) region, are experiencing growth. In the first six months of 2004, Veeco saw strength in its epitaxial process equipment business, driven by capacity expansion and MOCVD equipment purchases by HB-LED manufacturers in North America, Europe and APAC. MOCVD products represented approximately 32.3% of Veeco’s September 2004 backlog. The data storage industry also showed strong growth for Veeco in the first six months of 2004 as compared to 2003. However, new orders overall declined 36.3% sequentially in the third quarter of 2004 indicating a weakening of the markets served by the Company. The Company reviews a number of indicators to predict the strength of our markets going forward. These include plant utilization trends, capacity requirements, and capital spending trends. While Veeco’s long-term outlook for data storage remains optimistic, this business continues to experience quarterly fluctuations due to continued capital spending management by our key customers.
Veeco expects that its business will improve in 2004 as compared to 2003, both in its historical businesses as well as its acquired businesses. Veeco currently expects that its MOCVD and precision bar lapping and slicing technologies (acquired in November 2003 and October 2004) will add approximately $90 to $95 million in revenue for 2004 compared with only a minimal contribution to Veeco’s 2003 performance due to the fact that none of these acquisitions were consummated prior to the fourth quarter of 2003. A substantial portion of this revenue growth is coming from the MOCVD business. In contrast to the growth experienced in the MOCVD business, the transition of Veeco’s lapping business from a single customer focus to a broader penetration of the data storage industry is occurring more slowly than originally estimated. The Company’s recent purchase of MTI further positions Veeco as a key “back-end” supplier to the data storage industry and Veeco expects that the combination of MTI and Aii will enable Veeco to achieve growth in its “Slider Operations”. There can be no assurance that Veeco’s performance expectations will be realized.
17

Recent Events:
Internal Accounting Investigation; Restatement of 2004 Financial Results

On February 11, 2005, Veeco announced the postponement of the release of audited results for the fourth quarter and year ended December 31, 2004, pending completion of an internal investigation of improper accounting transactions at its ~~TurboDisc®~~TurboDisc business unit. Veeco acquired the assets of TurboDisc in November 2003. The investigation focused principally on the value of inventory, accounts payable and certain liabilities, as well as certain revenue transactions of TurboDisc. The investigation was commenced after Veeco’s internal audit staff and corporate financial management discovered improper accounting transactions in the course of a Veeco internal audit and transitioning the business to Veeco’s SAP accounting system during the fourth quarter of 2004. The Audit Committee of the Company’s Board of Directors supervised the accounting investigation and authorized Veeco’s outside counsel, Kaye Scholer LLP, to hire Jefferson Wells International to perform forensics and accounting reconstruction work as part of the investigation. The investigation has been completed. ~~Conclusions reached during the~~The investigation ~~included~~concluded that the improper accounting entries were made by a single individual at TurboDisc whose employment had been terminated prior to the commencement of the investigation, and that there was no evidence found of embezzlement or diversion of corporate assets.

The results of the investigation led to the restatement of financial statements previously issued for the first three quarterly periods of 2004 and related six and nine ~~months~~month periods ended June 30, 2004 and September 30, 2004. The cumulative restatement included a $10.2 million adjustment to pre-tax earnings, comprised of $8.1 million in adjustments relating to inventory, accruals and accounts payable and $2.1 million in adjustments relating to revenue recognition issues. ~~Additional information relating to the restatement is included in Note 2 to the (unaudited) condensed consolidated financial statements.~~ Veeco has made a number of personnel changes to ~~help~~ strengthen the management of the epitaxial process equipment group and the TurboDisc business unit since the discovery of the accounting issues ~~giving~~that gave rise to the investigation, including the replacement of the General Manager of the epitaxial process equipment group, creation of the positions of General Manager of the TurboDisc business unit, General Manager of the St. Paul ~~MBE site,~~business unit, Group Controller of the epitaxial process equipment group and the appointment of a new controller of the TurboDisc business unit.

~~The adjustments included in the restatement are summarized in the tables included in Note 2 to the (unaudited) condensed consolidated financial statements.~~13

Results of Operations:

Three Months Ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~
The following tables show selected items of Veeco’s Consolidated Statements of Operations, percentages of sales and comparisons between the three months ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~ and the analysis of sales and orders for the same periods between our segments, industries and regions (in thousands):

Three Months ended
September 30,

Dollar
Incr/(Decr)
Year to Year

Three Months ended
March 31,

Dollar
Inc/(Dec)

2004

2003

2005

2004

Year to year

(Restated)

(Restated)

Net sales

$
97,367

100.0
%
$
63,144

100.0
%
$
34,223

$
93,850

100.0
%
$
90,863

100.0
%
$
2,987

Cost of sales

61,913

63.6

32,845

52.0

29,068

56,318

60.0

54,065

59.5

2,253

Gross profit

35,454

36.4

30,299

48.0

5,155

37,532

40.0

36,798

40.5

734

Operating expenses:

Selling, general and administrative expense

19,590

20.1

15,204

24.1

4,386

20,171

21.5

19,890

21.9

281

Research and development expense

14,900

15.3

11,640

18.4

3,260

14,824

15.8

14,027

15.4

797

Amortization expense

4,336

4.4

3,262

5.2

1,074

4,490

4.8

4,896

5.4

(406
)
Other expense, net

170

0.2

146

0.2

24

Restructuring expenses

—

—

1,804

2.9

(1,804
)
Other income, net

(98
)
(0.1
)
(286
)
(0.3
)
188

Total operating expenses

38,996

40.1

32,056

50.8

6,940

39,387

42.0

38,527

42.4

860

Operating loss

(3,542
)
(3.6
)
(1,757
)
(2.8
)
(1,785
)

(1,855
)
(2.0
)
(1,729
)
(1.9
)
(126
)
Interest expense, net

1,793

1.8

2,050

3.2

(257
)

2,146

2.3

2,199

2.4

(53
)
Loss before income taxes

(5,335
)
(5.5
)
(3,807
)
(6.0
)
(1,528
)

(4,001
)
(4.3
)
(3,928
)
(4.3
)
(73
)
Income tax benefit

(3,162
)
(3.3
)
(1,692
)
(2.7
)
(1470
)

Income tax expense (benefit)

701

0.7

(1,218
)
(1.3
)
1,919

Net loss

$
(2,173
)
(2.2
)%
$
(2,115
)
(3.3
)%
$
(58
)

$
(4,702
)
(5.0
)%
$
(2,710
)
(3.0
)%
$
(1,992
)

Sales

Orders

Book to Bill
Ratio

Three Months ended
March 31,

Dollar and Percentage
Inc/(Dec)
Year to Year

Three Months ended
March 31,

Dollar and Percentage
Inc/(Dec)
Year to Year

2005

2004

2005

2004

2005

2004

Segment Analysis

Ion Beam and Mechanical Process Equipment

$
27,839

$
35,348

$
(7,509
)
(21.2
)%
$
41,797

$
47,268

$
(5,471
)
(11.6
)%
1.50

1.34

Epitaxial Process Equipment

22,523

13,957

8,566

61.4

13,628

37,900

(24,272
)
(64.0
)
0.61

2.72

Metrology

43,488

41,558

1,930

4.6

43,512

31,893

11,619

36.4

1.00

0.77

Total

$
93,850

$
90,863

$
2,987

3.3
%
$
98,937

$
117,061

$
(18,124
)
(15.5
)%
1.05

1.29

Industry Analysis

Data Storage

$
25,615

$
31,456

$
(5,841
)
(18.6
)%
$
45,303

$
44,948

$
355

0.8
%
1.77

1.43

HB-LED/wireless

22,304

17,030

5,274

31.0

13,967

38,981

(25,014
)
(64.2
)
0.63

2.29

Semiconductor

17,354

13,304

4,050

30.4

14,428

10,063

4,365

43.4

0.83

0.76

Research and Industrial

28,577

29,073

(496
)
(1.7
)
25,239

23,069

2,170

9.4

0.88

0.79

Total

$
93,850

$
90,863

2,987

3.3
%
$
98,937

$
117,061

$
(18,124
)
(15.5
)%
1.05

1.29

Regional Analysis

US

$
32,760

$
30,835

$
1,925

6.2
%
$
37,264

$
44,073

$
(6,809
)
(15.4
)%
1.14

1.43

Europe

21,194

13,521

7,673

56.7

9,974

12,807

(2,833
)
(22.1
)
0.47

0.95

Japan

14,215

19,136

(4,921
)
(25.7
)
17,351

16,525

826

5.0

1.22

0.86

Asia-Pacific

25,681

27,371

(1,690
)
(6.2
)
34,348

43,656

(9,308
)
(21.3
)
1.34

1.59

Total

$
93,850

$
90,863

$
2,987

3.3
%
$
98,937

$
117,061

$
(18,124
)
(15.5
)%
1.05

1.29

1814

Sales

Orders

Three Months ended
September 30,

Dollar and Percentage
Incr/(Decr)

Three Months ended
September 30,

Dollar and Percentage
Incr/(Decr)

Book to
Bill Ratio

2004

2003

Year to Year

2004

2003

Year to Year

2004

2003

Restated

Restated

Restated

Segment Analysis

Ion Beam and Mechanical Process Equipment

$
30,297

$
17,612

$
12,685

72.0
%
$
18,728

$
24,985

$
(6,257
)
(25.0
)%
0.62

1.42

Epitaxial Process Equipment

33,407

7,279

26,128

359.0

15,545

2,200

13,345

606.6

0.47

0.30

Metrology

33,663

38,253

(4,590
)
(12.0
)
45,224

36,857

8,367

22.7

1.34

0.96

Total

$
97,367

$
63,144

$
34,223

54.2
%
$
79,497

$
64,042

$
15,455

24.1
%
0.82

1.01

Industry Analysis

Data Storage

$
27,055

$
19,341

$
7,714

39.9
%
$
18,832

$
21,247

$
(2,415
)
(11.4
)%
0.70

1.10

HB-LED/wireless

34,424

7,673

26,751

348.6

14,652

6,914

7,738

111.9

0.43

0.90

Semiconductor

10,366

8,708

1,658

19.0

15,866

9,411

6,455

68.6

1.53

1.08

Research and Industrial

25,522

27,422

(1,900
)
(6.9
)
30,147

26,470

3,677

13.9

1.18

0.97

Total

$
97,367

$
63,144

$
34,223

54.2
%
$
79,497

$
64,042

$
15,455

24.1
%
0.82

1.01

Regional Analysis

US

$
31,800

$
24,242

$
7,558

31.2
%
$
31,825

$
25,468

$
6,357

25.0
%
1.00

1.05

Europe

18,494

9,436

9,058

96.0

17,343

11,510

5,833

50.7

0.94

1.22

Japan

13,032

13,192

(160
)
(1.2
)
12,959

10,679

2,280

21.4

0.99

0.81

Asia-Pacific

34,041

16,274

17,767

109.2

17,370

16,385

985

6.0

0.51

1.01

Total

$
97,367

$
63,144

$
34,223

54.2
%
$
79,497

$
64,042

$
15,455

24.1
%
0.82

1.01

During the quarter ended September 30, 2004, the Company changed the structure of its internal organization in a manner that caused the composition of its reportable segments to change. The Company currently manages, reviews operating results, and assesses performance, as well as allocates resources, based upon this reporting structure. The change implemented by the Company was to split out the former process equipment segment into two separate reporting segments. The new ion beam and mechanical process equipment segment combines the etch, deposition, and dicing and slicing products sold mostly to data storage customers. The new epitaxial process equipment segment includes the MBE and MOCVD products sold to HB-LED and wireless customers. The metrology segment remains unchanged. Accordingly, the Company has restated the segment information for the prior periods.
Net sales of ~~$97.4~~$93.9 million for the ~~third~~first quarter of ~~2004~~2005 were up ~~54.2%~~$3.0 million or 3.3%, from the comparable ~~2003~~2004 period. By segment, ion beam and mechanical process equipment sales ~~increased by $12.7~~were down $7.5 million or ~~72.0%~~21.2%, while epitaxial process equipment sales ~~increased by $26.1~~were up $8.6 million or ~~359.0%~~61.4%, and metrology sales ~~decreased~~increased by ~~$4.6~~$1.9 million or ~~12.0%, each as compared to the third quarter of 2003.~~4.6%. The ~~improvement~~decrease in ion beam and mechanical process equipment sales is principally attributable to ~~a $12.3 million increase~~decreases in the data storage market and a $0.4 million net increase in other market segments. The increase in the data storage market for that segment included $9.3 million in deposition and etch equipment sales and $3.0 million from the Aii business.market. The improvement in epitaxial process equipment sales is ~~primarily due~~principally attributable to ~~$26.3~~increases in the HB-LED/wireless market. The $1.9 million ~~in sales from the TurboDisc business unit, partially offset by a $0.2 million net decrease in other businesses. The decrease~~improvement in metrology sales is principally attributable to ~~a $4.7 million decrease in optical metrology, particularly~~increased AFM sales to ~~data storage customers in~~ the ~~APAC region.~~semiconductor market. By region, ~~there continues to be a shift~~sales in Europe improved by 56.7%, while sales ~~from the U.S. to the APAC region. We are also beginning to see our customers shift manufacturing from~~in Japan ~~to the APAC region. APAC region sales increased~~declined by $17.8 million in the third quarter of 2004 as compared to the third quarter of 2003. This significant growth in sales was attributable to sales from the acquired companies and the manufacturing base shift noted above.25.7%. The Company believes that there will continue to be quarter-to-quarter variations in the geographic distribution of sales.

Orders of ~~$79.5~~$98.9 million for the ~~third~~first quarter of ~~2004 represented an increase of $15.5~~2005 decreased by $18.1 million, or ~~24.1%~~15.5%, ~~over~~from the comparable ~~2003~~2004 period. By segment, the 64.0% decrease in epitaxial process equipment orders was driven by a $22.8 million reduction in orders for MOCVD systems and an additional decrease in MBE orders of $1.5 million. The 11.6% reduction in ion beam and mechanical process equipment ~~orders declined by 25.0%, as a result of reductions in deposition and etch equipment orders. The $13.3 million increase in epitaxial process equipment orders~~ was ~~principally~~ due to ~~$12.1 million in~~decreased orders ~~for TurboDisc, plus an increase of $1.2 million in MBE orders.~~to data storage customers. The ~~22.7%~~36.4% increase in metrology orders was due to a ~~$6.7~~$7.8 million increase in AFM ~~orders, consisting mostly of automated AFM products sold to customers in the semiconductor business,~~ and a ~~$1.7~~$3.8 million increase in optical metrology products primarily to research and industrial customers. Orders for the third quarter of 2004 were down 36.3% sequentially from the $124.7 million reported in the second quarter of 2004. Compared to the second quarter, orders to HB-LED/wireless customers decreased 71.4%, due to a $30.3 million decrease in TurboDisc orders. This decrease in business resulted from spending freezes initiated by many Asian customers at the end of the quarter, as they paused to absorb the significant amount of Veeco equipment purchased in the first half of 2004. Data storage and semiconductor orders declined approximately 28.7% from the second quarter, while scientific research orders increased approximately 20.9% from the same period.products.

The Company’s book/bill ratio for the ~~third~~first quarter of ~~2004,~~2005, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was ~~0.82.~~1.05. During the quarter ended ~~September 30, 2004,~~March 31, 2005, the Company experienced order cancellations of ~~$7.5~~$3.0 million and the rescheduling of order delivery dates by customers. ~~The Company’s backlog as of September 30, 2004, was approximately $146.4 million.~~ Due to changing business conditions and customer requirements, the Company may continue to experience cancellations and/or rescheduling of orders.

19

Gross profit for the quarter ended ~~September 30, 2004,~~March 31, 2005, was ~~36.4%~~40.0%, as compared to ~~48.0%~~40.5% in the third quarter of 2003. This decrease was partially due to a product mix shift from the higher margin metrology segment to the lower margin ion beam and mechanical process equipment and epitaxial process equipment segments, largely due to the 2003 acquisitions in these segments. The metrology percentage of total sales declined from 60.6% in 2003 to 34.6% in 2004. Ion beam and mechanical process equipment gross margins decreased from 38.8% to 34.8%, primarily due to an unfavorable product mix. Epitaxial process equipment gross margins declined from 41.4% to 24.7% due to a 7.4% drop in MBE gross margins, as more low margin research tools were sold in 2004 than 2003 and by lower than expected margins in Veeco’s newly acquired TurboDisc business. Metrology gross margins decreased from 54.0% to 49.5%, due to a 4.7% reduction in AFM margins resulting from unfavorable mix, caused by a lower concentration of higher margin research AFM instruments, and lower volumes in Optical Metrology.
Selling, general and administrative expenses were $19.6 million, or 20.1% of sales in the third quarter of 2004, compared with $15.2 million, or 24.1% in the third quarter of 2003. Of the $4.4 million increase, $3.5 million was due to expenses of the TurboDisc and Aii businesses, with the balance attributable to higher selling expenses related to the increase in sales, higher personnel costs including incentive bonus accruals, and consulting and audit costs related to the implementation of Section 404 of Sarbanes-Oxley.
Research and development expense totaled $14.9 million in the third quarter of 2004, an increase of $3.3 million from the third quarter of 2003, of which $2.6 million was due to spending in the acquired TurboDisc and Aii businesses. As a percentage of sales, research and development decreased in the third quarter of 2004 to 15.3% from 18.4% for the third quarter of 2003.
~~There were no restructuring expenses for the third~~first quarter of 2004. ~~The restructuring expense of $1.8 million~~Gross profit in the ~~third quarter of 2003 was primarily due to severance costs for layoffs that were related to the actions announced in the fourth quarter of 2002.~~
~~Net interest expense in the third~~first quarter of 2004, was $1.8 million compared to $2.1 million in the third quarter of 2003. The change is predominantly made up of a $0.4 million of interest income on a federal income tax refund received in the third quarter of 2004.
Income taxes for the quarter ended September 30, 2004, amounted to a benefit of $3.2 million, or 59.3% of loss before income taxes as compared with a benefit of $1.7 million, or 44.4% of loss before income taxes in 2003. The higher than statutory effective benefit rate in 2004 and 2003, respectively, was a result of the impact of foreign and state tax benefits.
20

~~Nine Months Ended September 30, 2004 and 2003~~
The following tables show selected items of Veeco’s Consolidated Statements of Operations, percentages of sales, and comparisons between the nine months ended September 30, 2004 and 2003 and the analysis of sales and orders for the same periods between our segments, industries, and regions (in thousands):

Nine Months ended
September 30,

Dollar
Incr/(Decr)
Year to Year

2004

2003

(Restated)

(Restated)

Net sales

$
287,476

100.0
%
$
202,372

100.0
%
$
85,104

Cost of sales

174,309

60.6

108,073

53.4

66,236

Gross profit

113,167

39.4

94,299

46.6

18,868

Operating expenses:

Selling, general and administrative expense

61,166

21.3

50,017

24.7

11,149

Research and development expense

43,516

15.1

35,507

17.5

8,009

Amortization expense

13,807

4.8

9,563

4.7

4,244

Other income, net

(471
)
(0.1
)
(749
)
(0.3
)
278

Restructuring expenses

—

—

3,261

1.6

(3,261
)
Total operating expenses

118,018

41.1

97,599

48.2

20,419

Operating loss

(4,851
)
(1.7
)
(3,300
)
(1.6
)
(1,551
)
Interest expense, net

6,231

2.2

5,703

2.8

528

Loss before income taxes

(11,082
)
(3.9
)
(9,003
)
(4.4
)
(2,079
)
Income taxes benefit

(4,542
)
(1.6
)
(4,056
)
(2.0
)
(486
)

Net loss

$
(6,540
)
(2.3
)%
$
(4,947
)
(2.4
)%
$
(1,593
)

Sales

Orders

Nine Months ended
September 30,

Dollar and Percentage
Incr/(Decr)

Nine Months ended
September 30,

Dollar and Percentage
Incr/(Decr)

Book to
Bill Ratio

2004

2003

Year to Year

2004

2003

Year to Year

2004

2003

(Restated)

(Restated)

(Restated)

Segment Analysis

Ion Beam and Mechanical Process Equipment

$
103,550

$
64,660

$
38,890

60.1
%
$
92,934

$
78,135

$
14,799

18.9
%
0.90

1.21

Epitaxial Process Equipment

66,442

24,119

42,323

175.5

109,231

14,887

94,344

633.7

1.64

0.62

Metrology

117,484

113,593

3,891

3.4

119,133

107,766

11,367

10.5

1.01

0.95

Total

$
287,476

$
202,372

$
85,104

42.1
%
$
321,298

$
200,788

$
120,510

60.0
%
1.12

0.99

Industry Analysis

Data Storage

$
94,020

$
62,746

$
31,274

49.8
%
$
90,221

$
70,344

$
19,877

28.3
%
0.96

1.12

HB-LED/wireless

72,401

26,169

46,232

176.7

104,745

27,119

77,626

286.2

1.45

1.04

Semiconductor

39,187

30,785

8,402

27.3

48,187

28,462

19,725

69.3

1.23

0.92

Research and Industrial

81,868

82,672

(804
)
(1.0
)
78,145

74,863

3,282

4.4

0.95

0.91

Total

$
287,476

$
202,372

$
85,104

42.1
%
$
321,298

$
200,788

$
120,510

60.0
%
1.12

0.99

Regional Analysis

US

$
103,571

$
76,885

$
26,686

34.7
%
$
133,063

$
82,023

$
51,040

62.2
%
1.28

1.07

Europe

49,036

34,505

14,531

42.1

43,998

30,945

13,053

42.2

0.90

0.90

Japan

47,542

44,579

2,963

6.6

48,550

41,225

7,325

17.8

1.02

0.92

Asia-Pacific

87,327

46,403

40,924

88.2

95,687

46,595

49,092

105.4

1.10

1.00

Total

$
287,476

$
202,372

$
85,104

42.1
%
$
321,298

$
200,788

$
120,510

60.0
%
1.12

0.99

During the quarter ended September 30, 2004, the Company changed the structure of its internal organization in a manner that caused the composition of its reportable segments to change. The Company currently manages, reviews operating results, and assesses performance, as well as allocates resources, based upon this reporting structure. The change implementedreduced by the Company was to split out the former process equipment segment into two separate reporting segments. The new ion beam and mechanical process equipment segment combines the etch, deposition, and dicing and slicing products sold mostly to data storage customers. The new epitaxial process equipment segment includes the MBE and MOCVD products sold to HB-LED and wireless customers. The metrology segment remains unchanged. Accordingly, the Company has restated the segment information for the prior periods.
21

Net sales of $287.5 million for the nine months ended September 30, 2004 were up 42.1% from the comparable 2003 period. By segment, ion beam and mechanical process equipment sales were up $38.9 million, or 60.1%, due to increases of $25.6 million in etch and deposition equipment, mostly to the data storage market, and $13.3 million of Aii products, also to data storage customers, each as compared to the first nine months of 2003. Epitaxial process equipment sales were up $42.3 million, or 175.5%, due to $49.6 million of TurboDisc sales, mostly to customers in the HB-LED industry, partially offset by a $7.3 million reduction in MBE sales. Metrology sales increased by $3.9 million, or 3.4%. By region, there continues to be a shift in sales from the U.S. to the Asia-Pacific region, which experienced a $40.9 million increase in sales in the nine months ended September 30, 2004 compared to the 2003 period, due to the acquired companies and the manufacturing base shifts noted above. The Company believes that there will continue to be period-to-period variations in the geographic distribution of sales.
Orders of $321.3 million for the nine months ended September 30, 2004 represented a $120.5 million, or 60.0%, increase over the comparable 2003 period. By segment, the 18.9% improvement in ion beam and mechanical process equipment orders was driven by $5.1 million in orders for Aii systems plus a $9.7 million increase in deposition and etch product orders. The 633.7% increase in epitaxial process equipment orders was principally due to orders for TurboDisc products, which amounted to approximately $86.2 million. The 10.5% improvement in metrology orders was due to a $14.7 million increase in automated AFM orders, mainly to the semiconductor market.
The Company’s book/bill ratio for the nine months ended September 30, 2004, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 1.12.
~~Gross profit for the nine months ended September 30, 2004, was 39.4%, including a~~ $1.5 million ~~reduction in gross profit related~~due to the acquisitions of TurboDisc and Aii. This charge was the result of purchase accounting adjustments due to the required capitalization of profit in inventory and ~~the~~permanent elimination of certain deferred revenue. Excluding the impact of ~~these adjustments,~~this purchase accounting adjustment, gross profit as a percentage of net sales for the first quarter of 2004 was ~~39.9%~~42.1%. This decrease from 42.1% to 40.0% was primarily due to declines in the ~~nine months ended September 30, 2004, compared to 46.6%~~epitaxial process equipment gross margins resulting from warranty issues and competitive pricing pressure in the ~~comparable period of 2003. This decrease was mostly due to a~~MOCVD products market and the tool mix in MBE product ~~mix shift from the higher margin metrology segment to the lower margin~~market revenues. The ion beam and mechanical process equipment ~~and epitaxial process equipment segments, largely~~gross margins increased from 35.1% to 36.0% primarily due to favorable mix and cost cutting measures at the ~~2003 acquisitions. The metrology percentage of total sales declined from 56.1% in 2003 to 40.9% in 2004. Exclusive of the purchase accounting adjustments, the~~Plainview ion beam ~~and mechanical process equipment~~facility, partially offset by higher overhead costs from the newly acquired MTI business. Metrology gross margins decreased slightly from ~~40.1%~~52.9% to ~~35.0%. This reduction was principally~~51.8% due to ~~an unfavorable~~less favorable product mix including lower margins for certain advance development products. Exclusive of the purchase accounting adjustments, epitaxial process equipment margins declined from 37.0% 24.7% due to lower than expected margins in Veeco’s newly acquired TurboDisc business. The metrology gross margin for the first nine months of 2004 was consistent with 2003 at 52.7%.mix.

Selling, general and administrative expenses were ~~$61.2~~$20.2 million, or ~~21.3%~~21.5% of sales, in the ~~nine months ended September 30, 2004,~~first quarter of 2005, compared with ~~$50.0~~$19.9 million, or ~~24.7% of sales,~~21.9% in the ~~nine months ended September 30, 2003. Of the $11.1~~first quarter of 2004. The $0.3 million increase ~~$9.1 million was due to expenses of the TurboDisc and Aii businesses, with the balance~~is primarily attributable to higher ~~selling~~administrative expenses related to the ~~increase~~addition of senior level managers in ~~sales, as well as consulting and audit costs related to~~ the ~~implementation of Section 404 of Sarbanes-Oxley.~~epitaxial process equipment group.

Research and development expense totaled ~~$43.5~~$14.8 million ~~during~~in the first ~~nine months~~quarter of 2004, an increase of ~~$8.0~~$0.8 million from the first ~~nine months~~quarter of ~~2003. The increase is primarily attributable~~2004, due to ~~$6.5 million in~~increased spending in the ~~TurboDisc~~epitaxial and ~~Aii businesses.~~ion beam and mechanical process equipment segments of approximately $1.0 million, partially offset by reductions of $0.2 million in metrology. As a percentage of sales, research and development ~~decreased during~~increased in the ~~nine months ended September 30, 2004~~first quarter of 2005 to ~~15.1%~~15.8% from ~~17.5%~~15.4% for the ~~corresponding period~~first quarter of ~~2003.~~2004.

~~There were no restructuring expenses during the first nine months of 2004. The restructuring~~Amortization expense ~~of $3.3~~totaled $4.5 million in the first ~~nine months~~quarter of ~~2003 was primarily~~2005 versus $4.9 million in the first quarter of 2004, due to ~~severance costs~~reductions in amortization expense for ~~layoffs~~intangibles that were fully amortized during 2004 partially offset by approximately $0.4 million of additional amortization expense related to the ~~actions announced~~MTI acquisition.
Other income, net, of $0.1 million for the first quarter of 2005 primarily consisted of rental income for subleased facility space, compared to $0.3 million in the ~~fourth~~first quarter of ~~2002.~~2004, which was principally due to foreign exchange gains.

Net interest expense in the ~~nine months ended September 30, 2004~~first quarter of 2005 was ~~$6.2~~$2.1 million compared to ~~$5.7~~$2.2 million in the nine months ended September 30, 2003. The change is due to the reduction in interest income resulting from lower cash balances as a result of the acquisitions completed in the fourth quarter of 2003, partially offset by $0.4 million in interest income on a federal income tax refund received in the thirdfirst quarter of 2004.

15

Income taxes for the ~~nine months~~quarter ended ~~September 30, 2004, amounted to~~March 31, 2005, consisted of a ~~benefit~~foreign income tax provision of ~~$4.5~~$0.7 million, ~~or 41.0% of loss before income taxes,~~ as compared with a benefit of ~~$4.1~~$1.2 million, or ~~45.1%~~31.0% of loss before income taxes in ~~2003. The higher than statutory effective benefit rate~~2004. For the year ended December 31, 2004, in ~~2004~~accordance with the provisions of Statement of Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, the Company recorded a charge of approximately $54.0 million to establish a valuation allowance against the balance of its domestic net deferred tax assets, which consist of net operating loss and ~~2003, respectively, was~~tax credit carryforwards, as well as temporary deductible differences.   For the quarter ended March 31, 2005, the Company incurred a ~~result~~domestic net loss and, accordingly, established a valuation allowance to offset the domestic deferred tax asset. If the Company is able to realize part or all of the ~~impact~~deferred tax assets in future periods, it will reduce its provision for income taxes with a release of ~~foreign and state~~the valuation allowance in an amount that corresponds with the income tax ~~benefits.~~liability generated.
22

Liquidity and Capital Resources

The Company had a net increase in cash of ~~$4.2~~$0.4 million for the ~~nine~~three months ended ~~September 30, 2004.~~March 31, 2005. Cash provided by operations was ~~$4.9~~$14.4 million for this period, as compared to cash provided by operations of ~~$6.9~~$3.8 million for the comparable ~~2003~~2004 period. Net loss adjusted for non-cash items provided operating cash flows of ~~$8.1~~$3.1 million for the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, compared to ~~$5.2~~$2.9 million for the comparable ~~2003~~2004 period. ~~The amount of~~Included in the net ~~loss adjusted for non-cash items~~cash provided by operations for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005 was ~~partially offset by~~ a decrease in net operating assets and liabilities of ~~$3.2~~$11.3 million. Accounts receivable for the ~~nine~~three months ended ~~September 30, 2004 increased~~March 31, 2005, decreased by ~~$9.6~~$11.4 million, primarily as a result of ~~higher~~lower sales ~~volume.~~volumes and favorable timing of collections in Japan and Asia-Pacific. During the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, inventories ~~increased~~decreased by approximately ~~$20.6~~$5.4 million, principally ~~related~~due to ~~shipment delays~~an inventory reduction in the epitaxial process equipment ~~segments~~business from the shipment of tools and ~~the build up~~a reduction of ~~raw materials and work-in-process for products to be shipped in~~purchases during the ~~fourth quarter of 2004 and~~ first quarter of 2005. During the ~~nine~~three months ended ~~September 30, 2004,~~March 31, 2005, accounts payable ~~increased~~decreased by ~~$15.5~~$1.8 million ~~principally as a result~~due to the timing of ~~increased inventory levels.~~payment of certain invoices. Accrued expenses and other current liabilities ~~increased $11.6~~decreased $1.8 million during the ~~nine~~three months ended ~~September 30, 2004. This increase is~~March 31, 2005, due to ~~a $3.8~~$5.2 million ~~increase~~total reductions in ~~customer deposits, a $3.8~~payroll, restructuring, warranty and other accruals, partially offset by $3.4 million ~~increase~~ in ~~accrued personnel costs including salaries, benefits, bonus~~increases for the required semi-annual interest payment of the subordinated notes and ~~commissions, accrued interest costs of $2.3 million, and accrued installation and warranty costs of $1.5 million, plus smaller items that amounted to an net increase of $0.2 million.~~deferred gross profit.

Cash used byin investing activities of ~~$3.5~~$14.7 million for the ~~nine~~three months ended ~~September 30, 2004~~March 31, 2005, resulted from aggregate earn-out payments of $15.0 million to Emcore, the former owner of TurboDisc, and to the previous shareholders of Nanodevices, and capital expenditures of ~~$9.5~~$1.8 million, ~~and $1.0 million for the payment to Nanodevices for the earn-out provision related to production targets achieved by the acquired business~~ partially offset by ~~cash received~~$2.2 million in proceeds from the sale of ~~a building and other~~ assets ~~of $2.7 million and the utilization of long-term investments of $4.3 million.~~
~~Cash provided by financing activities of $2.8 million~~held for ~~the nine months ended September 30, 2004 resulted from proceeds received from stock issuance of $3.0 million partially offset by $0.2 million in net repayments of long-term debt.~~sale.

The Company believes that existing cash balances together with cash generated from operations and amounts available under the Company’s ~~$100.0~~$50.0 million revolving credit facility ~~(“the 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 years. Amounts available for borrowing under the Facility are subject to certain financial tests. At September 30, 2004, the amount available for borrowing under the facility was approximately $100.0 million. The Facility expires on March 31, 2005. The Company is currently in negotiations with the banks who are parties to the Facility and expects to be able to secure a similar facility prior to the expiration of the current Facility. The Company believes it will be able to meet its obligation to repay the outstanding ~~$220.0~~$220 million ~~convertible~~ subordinated notes that mature on December 21, 2008, through a combination of conversion of the notes outstanding, refinancing, cash generated from operations and/or other means. The Company is required to pay interest on the outstanding convertible subordinated notes in June and December of each year until the notes mature. Based on the full outstanding value of the notes as of September 30, 2004, the semi-annual interest obligation is approximately $4.5 million. The Company believes it will be able to meet its obligation to pay the interest required through existing cash balances and cash generated from operations. In connection with the issuance of these notes, the Company purchased U.S government securities to secure the first six scheduled interest payments due on the notes. The last of these securities will be used for the interest payment due in December 2004.

The Company is potentially liable for payment of earn-out ~~provisions~~features to the former owners of the businesses acquired in 2003 based on ~~operating~~revenue targets achieved by ~~those~~the acquired businesses. The maximum ~~amount~~remaining amounts of these contingent liabilities is ~~$32.0 million consisting of~~ $9.0 million to the former shareholders of Aii ~~$3.0~~over a two-year period, $1.1 million to ~~the former shareholders of~~ Nanodevices, ~~Inc.,~~over a two-year period and ~~$20.0~~$6.9 million to Emcore Corporation, the former owner of ~~TurboDisc.  Earn-out~~TurboDisc, over a one-year period.  Any amounts ~~would be paid~~payable are to ~~Nanodevices, Inc., during each of the first quarters of 2005, 2006 and 2007, if revenue targets are reached during the proceeding year. Earn-out amounts would~~ be paid during ~~each of~~ the first ~~quarters~~quarter of ~~2005,~~ 2006 and 2007 to the former owners of Aii and Nanodevices and during ~~each of~~ the first ~~quarters~~quarter of ~~2005 and~~ 2006 to ~~Emcore, if revenue targets are met. Payments to the former shareholders of Aii and to Emcore~~Emcore. These payments are based on a set percentage of revenues in excess of certain targets for the preceding fiscal year. ~~The Company paid $1.0 million of~~Therefore, it is not possible to calculate the amount potentially payable to Nanodevices, Inc., during the third quarter of 2004 and, based on the Company’s current projections, expects to pay Nanodevices approximately $1.5 million during the first quarter of 2005. Additionally, the Company expects to pay a substantial portion ($15.0 million to $18.0 million) of the amount potentially payable to Emcore during the first quarter of 2005, based upon revenue achieved through September 30, 2004 and projections for the fourth quarter of 2004. Except as noted herein, the Company does not have an estimate of how much, or when, amounts, if any, that may be due ~~to the former owners of Aii, Nanodevices or Emcore~~ for each ~~fiscal~~ year.

23On March 15, 2005, the Company terminated its $100.0 million revolving credit facility which had been established on April 19, 2001 and entered into a new revolving credit facility which provides for borrowings of up to $50.0 million (the “Facility”). The Facility’s annual interest rate is a floating rate equal to the prime rate of the agent bank plus ¹¤₄% and in the event the Company’s ratio of debt to cash flow is below a defined amount, is adjustable to a minimum rate equal to the prime rate. A LIBOR based interest rate option is also provided. The Facility has a term of three years and borrowings under the Facility may be used for general corporate purposes, including working capital and acquisitions. The Facility contains certain restrictive covenants, which among other requirements, impose limitations with respect to the incurrence of indebtedness, the payment of dividends, long-term leases, investments, mergers, acquisitions, consolidations and sales of assets. The Company is required to satisfy certain financial tests under the Facility and 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 Facility. As of March 31, 2005, no borrowings were outstanding under the Facility.
16

Application of Critical Accounting Policies

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

Revenue Recognition: ~~Effective January 1, 2000, the~~The Company ~~changed its method for accounting for~~recognizes revenue ~~recognition~~ in accordance with Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, which superseded the earlier related guidance in SAB No. 101, Revenue Recognition in Financial ~~Statements.~~Statements ~~In December 2003, the SEC issued SAB No. 104,~~. Certain of our product sales are accounted for as multiple-element arrangements in accordance with EITF 00-21, Revenue ~~Recognition,~~Arrangements with Multiple Deliverables. A multiple-element arrangement is a transaction which ~~updates~~may involve the ~~guidance provided~~delivery or performance of multiple products, services, or rights to use assets, and performance may occur at different points in ~~SAB No. 101, integrates the related Frequently Asked Questions, and recognizes the role~~time or over different periods of the FASB’s Emerging Issues Task Force (“EITF”) consensus on Issue 00-21. SAB No. 104 deletes certain interpretive material no longer necessary, and conforms the remaining interpretative material retained to the pronouncements issued by the EITF on various revenue recognition topics, including EITF 00-21. It further clarifies that a company should first refer to EITF 00-21 in order to determine if there is more than one unit of accounting and then to refer to SAB No. 104 for revenue recognition for the unit of accounting.time. The Company recognizes revenue when persuasive evidence of an arrangement exists, the seller’s price is fixed or determinable and collectibility is reasonably assured. For products produced according to the Company’s published specifications, where no installation is required or installation is deemed perfunctory and no substantive customer acceptance provisions exist, revenue is recognized when title passes to the customer, ~~which~~ generally ~~occurs~~ upon shipment. For products produced according to a particular customer’s specifications, revenue is recognized when the product has been tested and it has been demonstrated that it meets the customer’s specifications and title passes to the customer. The amount of revenue recorded is reduced by the amount of any customer retention (generally 10% to 20%), which is not payable by the customer until installation is completed and final customer acceptance is achieved. Installation is not deemed to be essential to the functionality of the equipment since installation does not involve significant changes to the features or capabilities of the equipment or building complex interfaces and connections. In addition, the equipment could be installed by the customer or other vendors and generally the cost of installation approximates only 1% 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 balance sheets. At ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003, $3.2~~2004, $2.3 million and ~~$2.1~~$1.2 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. ~~The Company provides for warranty costs at the time the related revenue is recognized.~~

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

Goodwill and Indefinite-Lived Intangible Asset Impairment: The Company has significant intangible assets related to goodwill and other acquired intangibles. In assessing the recoverability of the Company’s goodwill and other indefinite-lived intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If it is determined that impairment indicators are present and that the assets will not be fully recoverable, their carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments 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 the assets not previously recorded.

2417

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 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 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 ~~Taxes:~~ Tax Valuation Allowance:As part of the process of preparing Veeco’s ~~consolidated financial statements, we are~~Consolidated Financial Statements, the Company is required to estimate ~~our~~its income taxes in each of the jurisdictions in which ~~we operate.~~it operates. This process involves estimating ~~our~~the actual current tax ~~exposure,~~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 ~~our~~Veeco’s condensed consolidated balance sheet. The ~~measurement~~carrying value of deferred tax assets is adjusted by a valuation allowance to recognize the extent to which ~~more likely than not,~~ the future tax benefits will be ~~recognized.~~
~~At September 30, 2004, we have deferred tax assets, net of valuation allowances, of $48.0 million. We believe it is~~recognized on a more likely than not ~~that we will be able~~basis. Our 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 our ability to ~~realize these assets through the reduction of~~generate future taxable income.

We record valuation allowances in order to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, we consider a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. ~~Should we determine that we~~Under SFAS No. 109, factors such as current and previous operating losses are ~~unable~~given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.
For the year ended December 31, 2004, the Company recorded a charge of approximately $54.0 million to ~~use all or part~~establish a valuation allowance against the balance of ~~our~~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 ~~future, an adjustment~~provisions of SFAS No. 109, which places 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 losses and losses incurred during 2004 represented 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 ~~would be charged to~~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 ~~expense, thereby reducing~~liability generated.
At March 31, 2005, we have foreign deferred tax assets, net ~~income~~of valuation allowances, of $2.9 million. We believe it is more likely than not that we will be able to realize these assets through the reduction of future taxable income.
Other Recent Accounting Pronouncements: On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123(R) (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. 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 ~~period such determination was made.~~income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) must be adopted no later than the beginning of the first fiscal year beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt SFAS No. 123(R) on January 1, 2006.

2518

SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:
1.               A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.
2.               A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
The Company has not yet determined whether it will adopt SFAS No. 123(R) using the modified prospective method or the modified retrospective method.
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on consolidated results of operations, although it will have no impact on the Company’s overall consolidated financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per common share in Note 1 to Veeco’s Condensed Consolidated Financial Statements. 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 current literature. This requirement will reduce consolidated net operating cash flows and increase consolidated net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the Company did not recognize an amount of consolidated operating cash flows for such excess tax deductions in 2005 or 2004.
19

Item 3. Quantitative and Qualitative ~~Disclosures~~Disclosure About Market Risk.

Veeco’s net sales to foreign customers represented approximately ~~67% and 64%~~65.1% of Veeco’s total net sales for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005, and 66.1% for the comparable 2004 ~~respectively, and 62% for both the three and nine months ended September 30, 2003, respectively.~~period. 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 ~~18% and 20%~~21.4% of Veeco’s total net sales for the three ~~and nine~~ months ended ~~September 30, 2004, respectively,~~March 31, 2005, and ~~25% and 26% of Veeco’s total net sales~~24.0% for the ~~three and nine months ended September 30, 2003, respectively.~~comparable 2004 period. The aggregate foreign currency exchange ~~(losses)~~gain included in determining the consolidated results of operations was approximately $0.0 and $0.1 million, net of approximately $0.0 and $0.2 million of hedging gains on forward exchange contracts, for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005 and 2004, were $(0.3) million and $(0.1) million, respectively, compared to $0.1 million and $0.3 million for the three and nine months ended September 30, 2003. Included in the aggregate foreign currency exchange (losses) gains were (losses) gains relating to forward contracts of $(0.1) million and $0.1 million for the three and nine months ended September 30, 2004, respectively, compared to $0.4 million and $(0.1) million for the three and nine months ended September 30, 2003.respectively. Veeco is exposed to financial market risks, including changes in foreign currency exchange rates. The changes in currency exchange rates that have ~~had~~ the largest impact on translating Veeco’s international operating profit ~~related to exchange rates for~~are the Japanese Yen and the Euro. ~~To mitigate these risks,~~ Veeco uses derivative financial ~~instruments.~~instruments to mitigate these risks. Veeco does not use derivative financial instruments for speculative or trading purposes. The Company ~~entered~~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 ~~$3.8 million and $4.4~~approximately $3.6 million for the three ~~and nine~~ months ended ~~September 30, 2004, respectively.~~March 31, 2005. As of ~~September 30, 2004,~~March 31, 2005, the Company had entered into forward contracts for the month of ~~October~~April for the notional amount of approximately ~~$4.2~~$18.7 million, which approximates the fair market value ~~of the contracts~~ on September 30, 2004. In addition, the Company enters into derivative contracts designed to hedge exposure to forecasted cash flows for certain transactions. The Company entered into a forward contract on April 21, 2004, for the notional amount of $0.5 million, which will be settled on or about November 1, 2004. On April 22, 2004 the company entered into an additional forward contract for the notional amount of $0.5 million, which will be settled on or about March 1,31, 2005. ~~Due to a decline in value of these contracts the Company has included $0.1 million in other comprehensive loss, to account for the fair value of these contracts in accordance with SFAS 133,~~ ~~Accounting for Derivative Instruments and Hedging Activities~~.

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.

~~As required by SEC Rule 13a-15(b), Veeco conducted an~~Subsequent to that evaluation ~~under~~there have been no significant changes in our internal controls or other factors that could significantly affect these controls after such evaluation.
20

Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
On February 11, 2005, the ~~supervision and with~~Company issued a press release announcing, among other things (a) the ~~participation of Veeco’s management, including Veeco’s Chief Executive Officer and Chief Financial Officer,~~postponement of the ~~effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end~~release of its ~~fiscal year. As a result~~financial results for the fourth quarter and full year ended December 31, 2004 pending completion of ~~the discovery by management~~an internal investigation of improper accounting ~~entries made~~transactions at its TurboDisc business unit ~~which led~~and (b) Veeco’s expectation that this investigation would lead to adjustments requiring the restatement of the Company’s financial statements previously issued for the three quarterly periods and nine months ended ~~March 31, 2004, June 30, 2004 and~~ September 30, ~~2004, management has now determined that a deficiency existed~~2004.
Following the February 11 announcement, ten putative class action shareholder lawsuits were filed in federal court in the ~~internal control over financial reporting at the end~~Southern District of such quarterly periods. Since November 10, 2003, the date of the acquisition of the assets constituting the TurboDisc business unit, the business unit was operating under a legacy accounting system which was under the supervision of one individual and did not provide management with the depth of information Veeco is typically accustomed to. Management determined to institute a new accounting system at the business unitNew York and in the ~~course~~Eastern District of New York asserting claims for violation of federal securities laws on behalf of persons who acquired the Company’s securities during the period beginning November 3, 2003 or April 26, 2004 and ending February 10, 2005. The lawsuits name Veeco, its Chairman and Chief Executive Officer, and its Executive Vice President and Chief Financial Officer as defendants, and seek unspecified damages. The lawsuits allege claims against all defendants for violations of Section 10(b) of the ~~final implementation~~Securities Exchange Act of ~~such system~~1934 (the “Exchange Act”) and claims against the individual defendants for violations of Section 20(b) of the Exchange Act. Although these proceedings are in the ~~quarter ended December 31, 2004,~~preliminary stages, the Company expects that these lawsuits will be consolidated into a single action in which an amended and consolidated complaint will be filed. Although the Company believes these lawsuits are without merit and intends to defend vigorously against the claims the lawsuits could result in substantial costs, divert management’s attention and resources from our operations and negatively affect our public image and reputation.
In addition, during March 2005, three shareholder derivative lawsuits were filed in federal court in the Eastern District of New York against the Company’s directors and certain of its officers for breaches of fiduciary duties relating to the improper accounting ~~entries were discovered. Management believes that the new accounting system and attendant control process, together with the replacement of financial personnel~~transactions at the TurboDisc business ~~unit~~unit. Each of these lawsuits is a shareholder derivative action that purports to assert claims on behalf of the Company, but as to which no demand was made on the Board of Directors and no decision had been made on whether the Company can or should pursue such claims. In addition, the Company has ~~remedied~~received a letter on behalf of a shareholder demanding that the ~~deficiency~~Company commence legal action against its directors and certain of its officers for these same matters. The letter states that, if the Board does not commence such an action within a reasonable period of time, the shareholder will commence a derivative action on the Company’s behalf. These lawsuits seek damages allegedly sustained by the Company and the return of all bonuses, restricted stock, stock options and other incentive compensation. An unfavorable outcome or prolonged litigation in ~~control over financial reporting that lead to~~these matters could materially harm the ~~restatement.~~Company’s business.

~~Subsequent to~~The Company is involved in various other legal proceedings arising in the normal course of its business. The Company does not believe that ~~evaluation there~~the ultimate resolution of these matters will have ~~been no changes in our internal control over~~a material adverse effect on the Company’s consolidated financial ~~reporting that have materially affected,~~position, results of operations or ~~are reasonably likely to materially affect, these controls after such evaluation.~~cash flows.

2621

~~Item 5. Other Information~~
On October 5, 2004, the Company acquired substantially all of the assets and assumed certain liabilities of Manufacturing Technology Inc., (“MTI”) for $9.5 million in cash. The MTI business includes the assets necessary for engineering, design and manufacturing of slicing and dicing systems ranging from R&D to high-volume production systems, and MTI’s intellectual property. Additionally, the Company entered into a lease with the former owner of MTI, to lease MTI’s 125,000 square foot manufacturing facility in Ventura, California. The lease period is for an initial term of 5 years with an option to renew for an additional five years. At the time of the acquisition, approximately 70 MTI employees became employees of Veeco. The acquisition will be accounted for under the purchase method of accounting. The purchase price allocation for this transaction has not yet been completed. Further information regarding this transaction will be included in the Company’s Annual Report on Form 10-K for the year ending December 31, 2004.
27

~~Part II.~~

Item 6. Exhibits.
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

~~Eighth Amendment~~Credit Agreement, dated as of ~~August 25, 2004 to the Credit Agreement, dated April 19, 2001~~March 15, 2005, among Veeco Instruments Inc., ~~Fleet National Bank, as administrative agent, JPMorgan Chase Bank, as syndication agent,~~ HSBC Bank USA, National Association, as ~~documentation~~administrative agent, and the lenders named therein.

~~Current Report on Form 8-K, filed August 31, 2004, Exhibit 10.1~~*
10.2
Security Agreement, dated as of March 15, 2005, among Veeco Instruments Inc., the subsidiaries of Veeco named therein and HSBC Bank USA, National Association, as administrative agent.
*

31.1

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

*

31.2

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

*

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 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 Act of 2002

*

*                                         Filed herewith

2822

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: ~~March 31,~~April 29, 2005

Veeco Instruments Inc.

By:
/s/ EDWARD H. BRAUN

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

2923

~~EXHIBIT~~ 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:
10.1

~~Eighth Amendment~~Credit Agreement, dated as of ~~August 25, 2004 to the Credit Agreement, dated April 19, 2001~~March 15, 2005, among Veeco Instruments Inc., ~~Fleet National Bank, as administrative agent, JPMorgan Chase Bank, as syndication agent,~~ HSBC Bank USA, National Association, as ~~documentation~~administrative agent, and the lenders named therein.

~~Current Report on Form 8-K, filed August 31, 2004, Exhibit 10.1~~*
10.2
Security Agreement, dated as of March 15, 2005, among Veeco Instruments Inc., the subsidiaries of Veeco named therein and HSBC Bank USA, National Association, as administrative agent.
*

31.1

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

*

31.2

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

*

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 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 Act of 2002

*

*                                         Filed herewith

24

~~Part~~PART I. FINANCIAL INFORMATION		~~Financial Information~~

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Statements of ~~Operations-Three~~Operations for the Three Months Ended ~~September 30,~~March 31, 2005 and 2004 ~~(Restated) and 2003~~

	~~Condensed Consolidated Statements of Operations-Nine Months Ended September 30, 2004 (Restated) and 2003~~

	Condensed Consolidated Balance ~~Sheets-September 30, 2004 (Restated)~~Sheets as of March 31, 2005 and December 31, ~~2003~~2004

	Condensed Consolidated Statements of Cash ~~Flows-Nine~~Flows for the Three Months Ended ~~September 30,~~March 31, 2005 and 2004 ~~(Restated) and 2003~~

	Notes to Condensed Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations ~~(Restated)~~

Item 3.	Quantitative and Qualitative Disclosure About Market Risk

Item 4.	Controls and Procedures
		PART II. OTHER INFORMATION
Item 5.1.	~~Other Information~~Legal Proceedings

~~Part II.~~	~~Other Information~~

Item 6.	Exhibits

SIGNATURES

	Three Months Ended September 30,						Three Months Ended March 31,
	2004			2003			2005			2004
	(Restated)
Net sales	$	97,367		$	63,144		$	93,850		$	90,863
Cost of sales	61,913			32,845			56,318			54,065
Gross profit	35,454			30,299			37,532			36,798
Costs and expenses:
Selling, general and administrative expense	19,590			15,204			20,171			19,890
Research and development expense	14,900			11,640			14,824			14,027
Amortization expense	4,336			3,262			4,490			4,896
Other expense, net	170			146
Restructuring expense, net	—			1,804
Other income, net							(98		)	(286		)
Total operating expenses							39,387			38,527
Operating loss	(3,542		)	(1,757		)	(1,855		)	(1,729		)
Interest expense, net	1,793			2,050			2,146			2,199
Loss before income taxes	(5,335		)	(3,807		)	(4,001		)	(3,928		)
Income tax benefit	(3,162		)	(1,692		)
Income tax expense (benefit)							701			(1,218		)
Net loss	$	(2,173	)	$	(2,115	)	$	(4,702	)	$	(2,710	)

Net loss per common share	$	(0.07	)	$	(0.07	)	$	(0.16	)	$	(0.09	)

Diluted net loss per common share	$	(0.07	)	$	(0.07	)	$	(0.16	)	$	(0.09	)

Weighted average shares outstanding	29,670			29,262			29,855			29,569
Diluted weighted average shares outstanding	29,670			29,262			29,855			29,569

	Nine Months Ended September 30,
	2004			2003
	(Restated)
Net sales	$	287,476		$	202,372
Cost of sales	174,309			108,073
Gross profit	113,167			94,299
Costs and expenses:
Selling, general and administrative expense	61,166			50,017
Research and development expense	43,516			35,507
Amortization expense	13,807			9,563
Other income, net	(471		)	(749		)
Restructuring expense, net	—			3,261
Operating loss	(4,851		)	(3,300		)
Interest expense, net	6,231			5,703
Loss before income taxes	(11,082		)	(9,003		)
Income tax benefit	(4,542		)	(4,056		)
Net loss	$	(6,540	)	$	(4,947	)

Net loss per common share	$	(0.22	)	$	(0.17	)
Diluted net loss per common share	$	(0.22	)	$	(0.17	)

Weighted average shares outstanding	29,629			29,245
Diluted weighted average shares outstanding	29,629			29,245

	September 30, 2004		December 31, 2003		March 31, 2005		December 31, 2004
	(Unaudited)				(Unaudited)
	(Restated)
Assets
Current Assets:
Current assets:
Cash and cash equivalents	$	110,981	$	106,830	$	100,676	$	100,276
Accounts receivable, less allowance for doubtful accounts of $2,480 in 2004 and $2,458 in 2003	79,102		69,890
Accounts receivable, less allowance for doubtful accounts of $1,866 in 2005 and $2,420 in 2004					72,703		85,914
Inventories	117,659		97,622		106,150		110,643
Prepaid expenses and other current assets	9,606		15,823		7,603		9,039
Deferred income taxes	32,999		24,693		2,931		3,096
Total current assets	350,347		314,858		290,063		308,968
Property, plant and equipment at cost, less accumulated depreciation of $69,216 in 2004 and $62,504 in 2003	73,586		72,742
Property, plant and equipment at cost, less accumulated depreciation of $70,077 in 2005 and $67,565 in 2004					70,563		73,513
Goodwill	78,816		72,989		94,636		94,645
Purchased technology, less accumulated amortization of $35,726 in 2004 and $25,519 in 2003	75,642		85,849
Other intangible assets, less accumulated amortization of $18,446 in 2004 and $14,846 in 2003	16,717		18,842
Purchased technology, less accumulated amortization of $42,476 in 2005 and $39,181 in 2004					65,292		68,587
Other intangible assets, less accumulated amortization of $20,897 in 2005 and $19,702 in 2004					24,398		25,007
Long-term investments	8,043		12,376		3,559		3,541
Deferred income taxes	18,926		18,136
Other assets, net	2,011		672
Other assets					3,159		2,652
Total assets	$	624,088	$	596,464	$	551,670	$	576,913

Liabilities and shareholders’ equity
Current Liabilities:
Current liabilities:
Accounts payable	$	35,099	$	19,603	$	23,599	$	25,476
Accrued expenses	47,026		31,616		45,367		63,438
Deferred profit	3,182		2,140		2,289		1,196
Income taxes payable	3,587		3,700		1,532		1,702
Current portion of long-term debt	348		333		359		354
Total current liabilities	89,242		57,392		73,146		92,166
Long-term debt, net of current portion	229,671		229,935		229,489		229,581
Other non-current liabilities	2,885		2,808		2,824		2,814
Shareholders’ equity	302,290		306,329		246,211		252,352
Total liabilities and shareholders’ equity	$	624,088	$	596,464	$	551,670	$	576,913

	Nine Months Ended September 30,						Three Months Ended March 31,
	2004			2003			2005			2004
	(Restated)
Operating Activities
Net loss	$	(6,540	)	$	(4,947	)	$	(4,702	)	$	(2,710	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	23,696			17,169			7,735			8,083
Deferred income taxes	(9,134		)	(6,941		)	52			(2,435		)
Other	35			(67		)	3			(17		)
Changes in operating assets and liabilities:
Accounts receivable	(9,574		)	8,001			11,408			(2,261		)
Inventories	(20,597		)	2,619			5,372			(7,784		)
Accounts payable	15,518			989			(1,795		)	5,386
Accrued expenses, deferred profit and other current liabilities	11,584			(10,313		)	(1,815		)	4,227
Other, net	(57		)	354			(1,874		)	1,318
Net cash provided by operating activities	4,931			6,864			14,384			3,807

Investing Activities
Capital expenditures	(9,518		)	(6,464		)	(1,838		)	(1,408		)
Net assets of business acquired	(1,000		)	(5,980		)
Payment for net assets of businesses acquired							(15,038		)	—
Proceeds from sale of fixed assets							5			26
Proceeds from sale of assets held for sale	2,615			2,332			2,173			—
Proceeds from sale of property, plant and equipment	26			—
Net maturities of long-term investments	4,333			4,165
Net purchase of long-term investments							(18		)	(85		)
Net cash used in investing activities	(3,544		)	(5,947		)	(14,716		)	(1,467		)

Financing Activities
Proceeds from stock issuance	3,017			368			127			2,038
Repayment of long-term debt, net	(250		)	(237		)	(87		)	(82		)
Net cash provided by financing activities	2,767			131			40			1,956
Effect of exchange rates on cash and cash equivalents	(3		)	(184		)	692			705
Net change in cash and cash equivalents	4,151			864			400			5,001
Cash and cash equivalents at beginning of period	106,830			214,295			100,276			106,830
Cash and cash equivalents at end of period	$	110,981		$	215,159		$	100,676		$	111,831

	Three Months Ended March 31,
	2005			2004
	(In thousands, except per share amounts)

Net loss, as reported	$	(4,702	)	$	(2,710	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(4,042		)	(2,750		)
Pro forma net loss	$	(8,744	)	$	(5,460	)

Net loss per common share:
Net loss and diluted net loss per common share, as reported	$	(0.16	)	$	(0.09	)
Net loss and diluted net loss per common share, pro forma	$	(0.29	)	$	(0.19	)

	Three Months Ended September 30, 2004									Nine Months Ended September 30, 2004
	As filed			Adjustments (1)			Restated			As filed			Adjustments (2)			Restated

Net sales	$	92,367		5,000			$	97,367		$	289,738		$	(2,262	)	$	287,476
Cost of sales	53,634			8,279			61,913			165,825			8,484			174,309
Gross profit	38,733			(3,279		)	35,454			123,913			(10,746		)	113,167
Costs and expenses	39,145			(149		)	38,996			118,558			(540		)	118,018
Operating income (loss)	(412		)	(3,130		)	(3,542		)	5,355			(10,206		)	(4,851		)
Interest expense, net	1,793			—			1,793			6,231			—			6,231
Loss before income taxes	(2,205		)	(3,130		)	(5,335		)	(876		)	(10,206		)	(11,082		)
Income tax benefit	(750		)	(2,412		)	(3,162		)	(298		)	(4,244		)	(4,542		)
Net loss	(1,455		)	(718		)	$	(2,173	)	(578		)	(5,962		)	$	(6,540	)

Loss per common share:

Net loss per common share	$	(0.05	)	$	(0.02	)	$	(0.07	)	$	(0.02	)	$	(0.20	)	$	(0.22	)

Weighted average shares outstanding	29,670						29,670			29,629						29,629
Diluted weighted average shares outstanding	29,670						29,670			29,629						29,629

	As of September 30, 2004
	As filed		Adjustments (1)			Restated
Assets
Current assets	$	359,110	$	(8,763	)	$	350,347
Non-current assets	271,274		2,467			273,741
Total assets	630,384		(6,296		)	624,088

Liabilities and shareholders’ equity
Current liabilities	89,576		(334		)	89,242
Non-current liabilities	232,556		—			232,556
Shareholders’ equity	308,252		(5,962		)	302,290
Total liabilities and shareholders’ equity	630,384		(6,296		)	624,088

Balance as of January 1, 2004	$	3,904
Warranties issued during the period	4,015
Settlements made during the period	(1,965		)
Balance as of September 30, 2004	$	5,954

	Ion Beam and Mechanical Process Equipment			Epitaxial Process Equipment			Metrology		Unallocated Corporate Amount			Restructuring Charges			Total		Ion Beam and Mechanical Process Equipment			Epitaxial Process Equipment			Metrology		Unallocated Corporate Amount			Total
Three Months Ended September 30, 2004 (Restated)
Three Months Ended March 31, 2005
Net sales	$	30,297		$	33,407		$	33,663	$	—		$	—		$	97,367	$	27,839		$	22,523		$	43,488	$	—		$	93,850
(Loss) income from operations before interest, taxes and amortization	(235		)	828			1,933		(1,732		)	—			794		(755		)	(1,947		)	7,762		(2,425		)	2,635
Three Months Ended September 30, 2003
Net sales	17,612			7,279			38,253		—			—			63,144
(Loss) income from operations before interest, taxes and amortization	(1,173		)	600			5,572		(1,690		)	(1,804		)	1,505
Nine Months Ended September 30, 2004 (Restated)
Total assets																	170,495			135,750			134,014		111,411			551,670
Three Months Ended March 31, 2004
Net sales	103,550			66,442			117,484		—			—			287,476		35,348			13,957			41,558		—			90,863
Income (loss) from operations before interest, taxes and amortization	3,997			(3,757		)	14,386		(5,670		)	—			8,956		1,799			(2,813		)	6,062		(1,881		)	3,167
Total assets	180,549			134,040			135,830		173,669			—			624,088		$	186,283		$	122,982		$	130,083	$	166,777		$	606,125
Nine Months Ended September 30, 2003
Net sales	64,660			24,119			113,593		—			—			202,372
(Loss) income from operations before interest, taxes and amortization	(334		)	1,926			14,534		(6,602		)	(3,261		)	6,263
Total assets	$	99,506		$	60,053		$	139,291	$	296,132		$	—		$	594,982

	September 30, 2004		December 31, 2003		March 31, 2005		December 31, 2004
	(Restated)
Ion Beam and Mechanical Process Equipment	$	21,676	$	21,676	$	27,276	$	27,276
Epitaxial Process Equipment	30,771		25,944		39,141		39,091
Metrology	26,369		25,369		28,219		28,278

Total	$	78,816	$	72,989	$	94,636	$	94,645

	Ion Beam and Mechanical Process Equipment		Epitaxial Process Equipment		Metrology		Unallocated Corporate		Total

Charged to accrual	$	2.3	$	—	$	2.1	$	0.4	$	4.8
Add-back from 2002 accrual	0.3		—		—		—		0.3
Total 2003 accrual	2.6		—		2.1		0.4		5.1
Cash payments during 2003	1.6		—		1.6		0.1		3.3
Cash payments during the nine months ended September 30, 2004	0.6		—		0.5		0.2		1.3
Balance as of September 30, 2004	$	0.4	$	—	$	0.0	$	0.1	$	0.5

	Three Months ended September 30,										Dollar Incr/(Decr) Year to Year			Three Months ended March 31,										Dollar Inc/(Dec)
	2004					2003					Dollar Incr/(Decr) Year to Year			2005					2004					Year to year
	(Restated)										(Restated)
Net sales	$	97,367		100.0	%	$	63,144		100.0	%	$	34,223		$	93,850		100.0	%	$	90,863		100.0	%	$	2,987
Cost of sales	61,913			63.6		32,845			52.0		29,068			56,318			60.0		54,065			59.5		2,253
Gross profit	35,454			36.4		30,299			48.0		5,155			37,532			40.0		36,798			40.5		734
Operating expenses:
Selling, general and administrative expense	19,590			20.1		15,204			24.1		4,386			20,171			21.5		19,890			21.9		281
Research and development expense	14,900			15.3		11,640			18.4		3,260			14,824			15.8		14,027			15.4		797
Amortization expense	4,336			4.4		3,262			5.2		1,074			4,490			4.8		4,896			5.4		(406		)
Other expense, net	170			0.2		146			0.2		24
Restructuring expenses	—			—		1,804			2.9		(1,804		)
Other income, net														(98		)	(0.1	)	(286		)	(0.3	)	188
Total operating expenses	38,996			40.1		32,056			50.8		6,940			39,387			42.0		38,527			42.4		860
Operating loss	(3,542		)	(3.6	)	(1,757		)	(2.8	)	(1,785		)	(1,855		)	(2.0	)	(1,729		)	(1.9	)	(126		)
Interest expense, net	1,793			1.8		2,050			3.2		(257		)	2,146			2.3		2,199			2.4		(53		)
Loss before income taxes	(5,335		)	(5.5	)	(3,807		)	(6.0	)	(1,528		)	(4,001		)	(4.3	)	(3,928		)	(4.3	)	(73		)
Income tax benefit	(3,162		)	(3.3	)	(1,692		)	(2.7	)	(1470		)

Income tax expense (benefit)														701			0.7		(1,218		)	(1.3	)	1,919
Net loss	$	(2,173	)	(2.2	)%	$	(2,115	)	(3.3	)%	$	(58	)	$	(4,702	)	(5.0	)%	$	(2,710	)	(3.0	)%	$	(1,992	)

	Sales									Orders									Book to Bill Ratio
	Three Months ended March 31,				Dollar and Percentage Inc/(Dec) Year to Year					Three Months ended March 31,				Dollar and Percentage Inc/(Dec) Year to Year					Book to Bill Ratio
	2005		2004		Dollar and Percentage Inc/(Dec) Year to Year					2005		2004		Dollar and Percentage Inc/(Dec) Year to Year					2005	2004

Segment Analysis
Ion Beam and Mechanical Process Equipment	$	27,839	$	35,348	$	(7,509	)	(21.2	)%	$	41,797	$	47,268	$	(5,471	)	(11.6	)%	1.50	1.34
Epitaxial Process Equipment	22,523		13,957		8,566			61.4		13,628		37,900		(24,272		)	(64.0	)	0.61	2.72
Metrology	43,488		41,558		1,930			4.6		43,512		31,893		11,619			36.4		1.00	0.77
Total	$	93,850	$	90,863	$	2,987		3.3	%	$	98,937	$	117,061	$	(18,124	)	(15.5	)%	1.05	1.29

Industry Analysis
Data Storage	$	25,615	$	31,456	$	(5,841	)	(18.6	)%	$	45,303	$	44,948	$	355		0.8	%	1.77	1.43
HB-LED/wireless	22,304		17,030		5,274			31.0		13,967		38,981		(25,014		)	(64.2	)	0.63	2.29
Semiconductor	17,354		13,304		4,050			30.4		14,428		10,063		4,365			43.4		0.83	0.76
Research and Industrial	28,577		29,073		(496		)	(1.7	)	25,239		23,069		2,170			9.4		0.88	0.79
Total	$	93,850	$	90,863	2,987			3.3	%	$	98,937	$	117,061	$	(18,124	)	(15.5	)%	1.05	1.29

Regional Analysis
US	$	32,760	$	30,835	$	1,925		6.2	%	$	37,264	$	44,073	$	(6,809	)	(15.4	)%	1.14	1.43
Europe	21,194		13,521		7,673			56.7		9,974		12,807		(2,833		)	(22.1	)	0.47	0.95
Japan	14,215		19,136		(4,921		)	(25.7	)	17,351		16,525		826			5.0		1.22	0.86
Asia-Pacific	25,681		27,371		(1,690		)	(6.2	)	34,348		43,656		(9,308		)	(21.3	)	1.34	1.59
Total	$	93,850	$	90,863	$	2,987		3.3	%	$	98,937	$	117,061	$	(18,124	)	(15.5	)%	1.05	1.29

Number	Description	Incorporated by Reference to the Following Document:

10.1	~~Eighth Amendment~~Credit Agreement, dated as of ~~August 25, 2004 to the Credit Agreement, dated April 19, 2001~~March 15, 2005, among Veeco Instruments Inc., ~~Fleet National Bank, as administrative agent, JPMorgan Chase Bank, as syndication agent,~~ HSBC Bank USA, National Association, as ~~documentation~~administrative agent, and the lenders named therein.	~~Current Report on Form 8-K, filed August 31, 2004, Exhibit 10.1~~*

10.2	Security Agreement, dated as of March 15, 2005, among Veeco Instruments Inc., the subsidiaries of Veeco named therein and HSBC Bank USA, National Association, as administrative agent.	*

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

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

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 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 Act of 2002	*

	Veeco Instruments Inc.

	By:	/s/ EDWARD H. BRAUN

		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

FORM 10-Q/A

2003 Restructuring Charges

Current Business Conditions/Outlook:

Three Months Ended September 30,March 31, 2005 and 2004 and 2003

Edward H. Braun

Chairman and Chief Executive Officer