In order to satisfy market demand for devices with greater storage capacity, the data storage industry has developed new head designs by incorporating higher areal densities, which enable storage of more data. The capacity of disk drives is largely determined by the capability of the magnetic recording heads, which read and write signals onto hard disks. The data storage industry continues to fund the development of new high-density thin film head technology, increasing areal density by approximately 30% every year.

Most importantly, the industry will be movinghas begun to move to perpendicular recording technology beginning in 2006, a technology which allows hard drive manufacturers to put more bits of data on each square inch of disk space because of changes in the magnetic geometry. The industry’s transition to perpendicular recording will require thinner films, more layers and more complicated process equipment and metrology solutions from companies such as Veeco. According to Trend Focus, the industry’s transition to perpendicular recording is early—approximately 14% of all hard drives shipped in 2006 benefited from perpendicular technology and about 30% of 2007 shipments are currently expected to be perpendicular. The industry is also shrinking the dimensions of its thin film magnetic heads (i.e. “sliders”) to a technology node known as “Femto”, which is also early in its adoption.

In April 2005,August 2006, Peripheral Research, a data storage research organization, forecasted that thin film head production will grow approximately 12% from approximately 885 million heads in 2004 to 1.7 billion heads in 2009, a CAGR of 14%.2005 through 2009. Disk drive manufacturers are now increasing production of new 80 GB platters and funding development of 120 GB and beyond technology. Veeco believes that the data storage technology roadmap is more aggressive than the semiconductor industry’s requirements for critical dimensions, film thickness, interface control and material selections.

Next generation HDDs will require new magnetic materials, smaller dimensional tolerances and increased automation in manufacturing. The Company believes that despite capital spending constraints within the data storage industry, substantial investment continues to be made in TMR and perpendicular recording technology. Furthermore, consolidation in the disk drive industry has led to fewer manufacturers that have greater financial stability. Veeco has and will continue to introduce important new process equipment products (including its NEXUS ® Ion Beam Etch, Physical Vapor Deposition and Atomic Layer Deposition, Optium Lapping and Dicing products) to respond to the data storage industry’s continued technology advances. In 2006, Veeco made a small investment in a technology company called Fluens Corporation (“Fluens”) that is developing aluminadeposition technology. Veeco anticipates that its data storage customers will need to upgrade their alumina tools over the next two years. Additionally, the Company’s creation of Slider Process Equipment enables Veeco to produce more components of the TFMH manufacturing process including “back-end” lapping, and dicing products, than ever before. This expanded product footprint makes Veeco well positioned to continue to capitalize on growth opportunities in the HDD industry.

Another trend in the hard drive industry which has the potential to impact Veeco is the increasing percentage of industry revenues being required for capital investment. According to research firm Coughlin Associates, the hard drive industry’s percentage of sales spent on capital expenditures is increasing from approximately 8% in 2005 to over 10% by 2010.

While the data storage industry remains volatile on a quarterly basis due to its limited visibility, small customer base and customer management of quarterly capital expenditures, Veeco remains confident that these long-term technology changes and industry fundamentals offer the Company continued year-over-year growth opportunities.

Trends in the Semiconductor Industry:   Current semiconductor industry technology trends include smaller feature sizes (sub-0.10 micron line widths), larger substrates (i.e., 300 mm wafers) and the increased use of metrology in the manufacturing process. According to VLSI, a semiconductor research organization, the percentage of capital expenditures devoted to metrology tools by semiconductor manufacturers is among the fastest growing part of the equipment business, and VLSI forecasts that these expenditures will increase from approximately $4 billion in 2004 to approximately $5 billion in 2008, a CAGR of over 8%.business. Semiconductor manufacturers use metrology tools in their wafer fabrication facilities to detect process deviations as early in the manufacturing process as possible. These tools are critical for yield enhancement resulting in cost reduction in this increasingly competitive environment.

Veeco has sold over 350450 automated AFM systems used in-line by manufacturers of semiconductor chips in their fabrication facilities. Veeco’s AFMs are used by all of the top 10 integrated device manufacturers worldwide. Veeco’s family of non-destructive AFM products includeincludes our Vx Series ™

Atomic Force Profilers, (“AFP”), which combine AFM resolution with long-scan capability and are well suited for CMPchemical-mechanical polishing (“CMP”) and etch depth measurements; our X3D ™ AFM for advanced lithography and photomask applications; and our Dimension ® X AFM for advanced etch measurements. In 2005,2006, semiconductor manufacturers continued to place Veeco AFMs in-line for critical process measurements. In fact, Veeco’s automated AFM revenues grew approximately 25% in 2005, significantly surpassing the growth of the overall semiconductor industry.

Researchmeasurements and development expenditures by semiconductor companies and photomask manufacturers to extend the capabilities of photomasks are increasing. Photomasks are used to create intricate patterns

on semiconductor wafers. One example of this is the investment being made to develop extreme ultraviolet processes for use in the manufacturing of photomasks. In addition to our Dimension X3D AFM, in 2005 Veeco sold aNEXUS Low Defect Density (“LDD”) Ion Beam Deposition (“IBD”) system for advanced photomask deposition to a leading photomask manufacturer and continues to advance development efforts through our relationship with Sematech North in Albany, New York.instruments as critical reference metrology tools.

Trends in the HB-LED/Wireless Industries:   In 2003, the International Technology Roadmap for Semiconductors voted to include non-silicon, wireless components (gallium arsenide and indium phosphide) on its roadmap. Veeco believes that compound semiconductor and traditional silicon materials ultimately will be used to create tomorrow’s “systems on a chip” devices. The Company believes that future growth in this industry will be tied to the trend toward convergence and integration of semiconductor, compound semiconductor and wireless devices to produce cheaper and faster integrated components.

Veeco intends to position itself as a leading supplier of process equipment and metrology solutions to be used to create a broad range of compound semiconductor based devices such as mobile cell phones, wireless local area networks, and high-brightness blue/green/whitered/orange/yellow LEDs for backlighting applications.applications such as general illumination and backlighting. Veeco is the only supplier of both MOCVD and MBE systems, the two key epitaxial deposition technologies used for wireless and HB-LED applications: MOCVD and MBE.applications. MOCVD and MBE technologies are used to grow compound semiconductor materials (such as GaAs (gallium arsenide), GaN (gallium nitride), As/P (arsenic phosphide) and InP (indium phosphide)) at the atomic scale. Epitaxy is the critical first step in compound semiconductor wafer fabrication and is considered to be the highest value added process, ultimately determining device functionality and performance. The combination of MOCVD and MBE increases Veeco’s customer base and total available market, and provides us with unique market positioning opportunities. In its July 2005 market report, Strategies Unlimited, an LED industry research organization, forecastedforecasts that the market for HB-LEDs will nearly doublegrow from $3.6$12.5 billion in 2004 to $6.8$25 billion in 2009, a CAGR of 13%.2010. LEDs are becoming increasingly more prevalent in automotive applications, flat panel displays and other backlighting applications.

During 2005, Veeco experienced a slowdownThe HB-LED market is in its MOCVD businessinfancy, and as a result of the overcapacity of equipment purchased by LED customers in 2004. However, by the fourth quarter of 2005, Veeco began to see a recovery in this business resulting in part from new system orders from customers in Taiwan and Korea. Whilesuch Veeco expects the HB-LED business to remain highly cyclical for the foreseeable future Veeco anticipateswith some unpredictability in customers’ buying patterns. However, the Company believes that futurethis market represents a high-growth opportunity for the company due to the expanding applications for HB-LEDs, such as backlighting for large screen flat panel TVs (laser crystal diodes—diodes - LCDs), automotive applications and general illumination, will spurillumination. In fact, the HB-LED/wireless portion of Veeco’s business experienced the fastest revenue growth of this business.rate in 2006. According to Strategies Unlimited, (July 2005), “in 2006 and beyond, growth rates (for LEDs) are forecast to increase as several emerging high-growth applications, such as LCD display backlighting and automotive forward lighting, begin to impact overall market growth.”The research firm went on to forecast that while only 2% of today’s LCD displays are currently backlit with HB-LEDs, this number would grow to 13% by 2009, particularly in small-screen applications (i.e. laptop computers) and large screen (i.e. TVs).

In order to gain market share in light of this growth opportunity, Veeco has introduced a next-generation system, GaNzilla II,several generations of MOCVD tools, most recently its TurboDisc K-Series ™ MOCVD systems in late 2006. By introducing new systems, Veeco is focused on delivering higher brightness LEDs and better uniformity than older generation systems.and repeatability, helping its customers make higher-brightness HB-LEDs. Veeco also intends to continue to invest heavily in R&Dresearch and development and engineering in order to continue to deliver more advanced MOCVD solutions to its customers. The Company remains optimistic about the growth opportunity resulting from providing enabling equipment to the HB-LED industry.

Trends in the Research Industry:   Veeco’s broad based research business has historically tracked the growth of the economy and GDP,Gross Domestic Product, as our equipment and instruments are used in a wide range of industrial applications. A meaningful trend in the research industry is the growth in nanotechnology investment occurring at the scientific and university level. Nanotechnology is the ability to design and control the structure of an object at all lengths from the atom up to the macro scale.

Nanotechnology may lead to molecular level assembly allowing for the ability to build structures from the molecular level up, potentially eliminating waste, creating new compositions and materials, and enhancing the properties of materials.

These innovations may lead to the creation of computer chips and other devices that are thousands of times smaller than current technologies permit.

Nanoscience and nanotechnology have received significant funding from the U.S. government and other countries, and are beginning to impact many industries, including life sciences, data storage, semiconductor, telecommunications and materials sciences. According to the National Nanoscience Initiative (NNI: http://www.nano.gov)Lux Research Inc., President Bush’s 2007 budget provides over $1.2global nanotechnology spending reached approximately $12 billion for the multi-agency National Nanotechnology Initiative (“NNI”), bringing the total U.S. investment in nanotechnology since the NNI was established in 2001 to over $6.5 billion2006, consisting of a combination of government, industry and nearly tripling the annual investment of the first year of the Initiative. In addition, Asian countries, including Japan, China and Korea, as well as several European countries, have made leadership in nanotechnology national priorities.venture capital funding. Veeco’s metrology instruments are used by nanotechnology researchers, and Veeco currently sells to most major scientific and research organizations engaged in the field of nanotechnology. Veeco continues to introduce new AFMs and Scanning Probe Microscopes (“SPMs”)SPMs to respond to the growing need for specialized scientific research metrology tools.

In 2004, Veeco and The Dow Chemical Company (NYSE: DOW) announced that the U.S. Commerce Department’s National Institute of Standards and Technology (“NIST”) Advanced Technology Program (“ATP”)  awarded them $6.6 million in funding for a three-year project to develop a quantitative nano-mechanical measurement instrument. Veeco and Dow’s proposal was one of 32 selected for award funding from a total of 870 proposals following a rigorous peer-review selection process. Veeco and Dow proposed to jointly develop and validate the world’s first platform for high speed, high bandwidth, quantitative nano-mechanical measurements (“QNM”) on length scales smaller than 50nm, on a wide range of materials. Successful completion of this proposal would lead to the creation of a new measurement platform enabling the development of nanomaterials. The QNM is being developed at Veeco. The platform will be based on recently demonstrated advancements in atomic force microscopy. Veeco currently anticipates that new instruments created as a result of this project will begin to emerge from R&Dresearch and development in the 2006/2007 time frame.

In 2005, Veeco announced a strategy to focus on growth opportunities in its scientific research business aligned to specific applications for nanotechnology that the Company has identified and may have higher growth than traditionally seen in this business. Under new management leadership and marketing direction, in 2005 Veeco identified the “nanomaterials” and “nanobiotechnology” marketplaces as key potential areas for future growth. It is Veeco’s intention to continue to develop and introduce specific new products aligned to these market opportunities. In 2006, Veeco began to introduce new products to enable the Company to expand this market, including the BioScope ™ II for life science applications and its next generation V Series SPMs. Veeco is also focused on expanding its served available market for atomic force microscopy, by introducing tools at new price-points, such as its Caliber ® “low cost/high value” SPM as well as introducing new ease-of-use and fast scan features in 2007 and beyond.

Veeco’s Products

Veeco has three primarytwo business segments, Ion Beam and Mechanical Process Equipment, Epitaxial Process Equipment and Metrology. Historical netNet sales for each of these business segments is shown below for the years indicated:

Stylus Profilers:   Stylus profilers are used to produce cross-sectional representations and/or quantitative measurements, which are displayed on a video monitor. Veeco’s stylus profiler systems utilize a precision translation stage which creates relative motion between the sample and a diamond tipped stylus. As the sample moves under the stylus, surface variations cause vertical translation of the stylus, which is tracked and measured. Stylus profilers are widely used for height, width, pitch and roughness measurements of features on semiconductor devices, magnetic and optical storage media (such as hard drives), flat panel displays and hybrid circuits. Stylus profilers are often used for direct contact measurements and to measure larger feature sizes than Veeco’s AFMs. Veeco believes that its stylus profiler products are recognized for their accuracy, repeatability, ease of use and technology features, and are designed to meet a range of industry specifications and customer requirements.

Optical Metrology (Interferometry) Products:   Substantially all of Veeco’s optical metrology instruments are designed to make non-contact surface measurements using interferometry technology. This process involves the use of either white light or laser sources to measure surface roughness and shape by creating interference patterns from the optical path difference between the test surface and a reference surface. Using a combination of phase shifting interferometry and vertical scanning interferometry, these instruments are designed to rapidly and precisely measure and characterize a range of surface sizes and shapes. Veeco’s major optical products include the NT ™ family and SP3000 ™ and the HD-Series ™optical profilers. The NT family product line measures surface roughness, heights and shapes. The HD-Series instruments are a line of microstructure measurement equipment used by manufacturers of mass memory components including manufacturers of TFMHs, disks, drives and suspensions. HD-Series instruments are used for research and development, production control, process improvement, incoming parts inspection, final parts inspection and field failure analysis.

Service and Sales

Veeco sells its products and services worldwide through various strategically located sales and service facilities located in the U.S., Europe, Asia Pacific and Japan, and recognizesbelieves that its customer service organization is a significant factor in the Company’s success. The Company provides service and support on a warranty, service contract or an individual service-call basis. Veeco also offers enhanced warranty coverage and services, including preventative maintenance plans, on-call and on-site service plans and other comprehensive service arrangements, product and application training, consultation services and a 24-hour hotline service for certain products. The Company believes that offering 24 hour, 7 day per week worldwide support creates stronger relationships with customers and provides it with a significant competitive advantage. ApproximatelyRevenues from sales of parts, service and support represented approximately 20%, 19%, and 17% and 18% of Veeco’s net sales for the years ended December 31, 2006, 2005 and 2004, and 2003, respectively, constituted revenues from partrespectively. Parts sales (15%represented approximately 17%, 14%15% and 14%, respectively), of Veeco’s net sales for those periods, respectively, and service and support (4%sales were 3%, 3%4% and 4%3%, respectively).respectively.

Customers

Veeco sells its products to many of the world’s major data storage, semiconductor and HB-LED/wireless component manufacturers, and to customers in other industries, research centers and universities. For the year ended December 31, 2005, 41%2006, 42% of Veeco’s sales were to data storage customers, 17%20% to HB-LED/wireless customers, 13% to semiconductor customers, 15% to HB-LED/wireless customers and 27%25% to scientific research and

industrial customers. We rely on certain principal customers for a significant portion of our sales including Seagate Technology, Inc., and Hitachi, Ltd. which hashave been onetwo of our largest customers during the last three years. Sales to Seagate accounted for 15%18%, 10%15% and 11%10% of Veeco’s total net sales in  the years ended December 31,2006, 2005 and 2004, respectively. Sales to Hitachi accounted for 10%, 9% and 2003,6% of Veeco’s total net sales in 2006, 2005 and 2004, respectively. If any principal customer discontinues its relationship with us or suffers economic difficulties, our business, prospects, financial condition and operating results could be materially and adversely affected.

Research and Development

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

Veeco’s research and development expenses were approximately $61.9 million, $60.4 million $58.3 million and $48.9$58.3 million, or approximately 14.7%14.0%, 14.9%14.7% and 17.5%14.9% of net sales for the years ended December 31, 2006, 2005 2004 and 2003,2004, respectively. These expenses consisted primarily of salaries, project material and other product development and enhancement costs.

Manufacturing

The Company’s principal manufacturing activities, which consist principally of design, assembly, integration and test operations, are organized by product and take place at our facilities in Plainview, New York; Santa Barbara and Camarillo, California; Tucson, Arizona; Ft. Collins, Colorado; Somerset, New Jersey; and St. Paul, Minnesota.

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

Certain of the Company’s products are fully outsourced to one or more suppliers. In addition, certain of the components and sub-assemblies included in the Company’s products are obtained from a single source or a limited group of suppliers. Although the Company does not believe it is dependent upon any of these suppliers as a sole source or limited source for any critical components, the inability of the Company to develop alternative sources, if necessary, a prolonged interruption in supply or a significant increase in the price of one or more components could adversely affect the Company’s operating results and Consolidated StatementStatements of Operations.

Backlog

Veeco’s backlog decreasedincreased from $142.0 million at December 31, 2004 to $114.1 million at December 31, 2005.2005 to $140.8 million at December 31, 2006. Backlog adjustments of $20.6$26.0 million during 20052006 included order cancellations of $16.7 million andprimarily in the impact of foreign currency exchange differences.HB-LED/wireless industry for MOCVD products, as well as cancellations for AFM products. The Company’s backlog generally consists of product orders for which a purchase order has been received and which are scheduled for shipment within twelve months. Veeco schedules production of its systems based on order backlog and customer commitments. Because certain of the Company’s orders require products to be shipped in the same quarter in which the order is received, and because changes in delivery schedules, cancellations of orders and delays in shipment are possible, the Company does not believe that the level of backlog at any

point in time is an accurate indicator of the Company’s future performance. Due to changing business conditions and customer requirements, the Company may continue to experience cancellation and/or rescheduling of orders.

Competition

In each of the markets that it serves, Veeco faces substantial competition from established competitors, some of which have greater financial, engineering, manufacturing and marketing resources

than Veeco as well as from smaller competitors. In addition, many of Veeco’s products face competition from alternative technologies, some of which are more established than those used in Veeco’s products. Significant factors for customer selection of metrology and process equipment tools include system performance, accuracy, repeatability, ease of use, reliability, cost of ownership and technical service and support. Veeco believes that it is competitive based on the customer selection factors in each market Veeco serves. None of Veeco’s competitors compete with Veeco across all of Veeco’s product lines.

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

Intellectual Property

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

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

Veeco also relies upon trade secret protection for its confidential and propriety information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to Veeco’s trade secrets or that Veeco can meaningfully protect its trade secrets. In addition, the Company cannot be certain that it will not be sued by third parties alleging that the Company has infringed their patents or other intellectual property rights. If any third party sues Veeco, the Company’s business, results of operations or financial condition could be materially adversely affected. Veeco has brought a patent infringement lawsuit against Asylum Research. See “Legal Proceedings—Non-Environmental.”

Employees

At December 31, 2005,2006, the Company had 1,2191,279 employees, of which there were 347367 in manufacturing and test, 230197 in sales and marketing, 164176 in service, 6050 in product support, 260333 in engineering, research and development, and 158156 in information technology, general administration and finance. The success of the Company’s future operations depends in large part on the Company’s ability to recruit and retain engineers, technicians and other highly-skilled professionals who are in considerable demand. There can be no assurance that the Company will be successful in recruiting or retaining key personnel. The Company believes that its relations with its employees are good.

13Available 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 100 F Street, NE, 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.

Veeco is subject to the business cycles of these industries, the timing, length and volatility of which are difficult to predict. These industries have historically been highly cyclical and have experienced significant economic downturns in the last decade. As a capital equipment provider, our revenues depend in large part on the spending patterns of these customers, who often delay expenditures or cancel or reschedule orders in reaction to variations in their businesses or general economic conditions. In downturns, we must be able to quickly and effectively align our costs with prevailing market conditions, as well as motivate and retain key employees. However, because a high proportion of our costs are fixed, our ability to reduce expenses quickly in response to revenue shortfalls is limited. A downturn in one or more of these industries could have a material adverse effect on our business, financial condition and operating results. During periods of rapid growth, we must be able to acquire and/or develop sufficient manufacturing capacity to meet customer demand, and attract, hire, assimilate and retain a sufficient number of qualified people. We cannot give assurances that our net sales and operating results will not be adversely affected if our customers experience economic downturns or slowdowns in their businesses.

We operate in an industry characterized by rapid technological change.

The data storage, HB-LED/wireless, semiconductor and scientific research and industrial industries are subject to rapid technological change. Our ability to remain competitive depends on our ability to enhance existing products and develop and manufacture new products in a timely and cost effective manner and to accurately predict technology transitions. Because new product development commitments must be made well in advance of sales, we must anticipate the future demand for products in selecting which development programs to fund and pursue. Our financial results for 20062007 will depend to a great extent on the successful introduction of several new products, many of which require achieving increasingly

stringent technical specifications. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products.

We face significant competition.

We face significant competition throughout the world in each of our reportable segments. Many of our competitors have greater financial, engineering, manufacturing and marketing resources than us. In addition, we face competition from smaller emerging equipment companies whose strategy is to provide a portion of the products and services we offer, using innovative technology to sell products into specialized markets. New product introductions or enhancements by our competitors could cause a decline in sales or loss of market acceptance of our existing products. Increased competitive pressure could also lead to

intensified price competition resulting in lower margins. Our failure to compete successfully with these other companies would seriously harm our business.

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

Our customer base is and has been highly concentrated. Orders from a relatively limited number of customers have accounted for, and likely will continue to account for, a substantial portion of our net sales, which may lead customers to demand pricing and other terms less favorable to us. Based on net sales, Seagate Technology, Inc. is our largest customer, with 15%18%, 10%15% and 11%10% of total net sales in 2006, 2005 and 2004, respectively. Our next largest customer is Hitachi Ltd., with 10%, 9% and 2003,6% of total net sales in 2006, 2005 and 2004, respectively (our only customercustomers with sales greater than 10% in any of the past three years).

If a principal customer discontinues its relationship with us or suffers economic setbacks, our business, financial condition and operating results could be materially and adversely affected. Our ability to increase sales in the future will depend in part upon our ability to obtain orders from new customers. We cannot be certain that we will be able to do so. In addition, because a relatively small number of large manufacturers, many of whom are our customers, dominate the industries in which they operate, it may be especially difficult for us to replace these customers if we lose their business. A substantial portion of orders in our backlog are orders from our principal customers.

In addition, a substantial investment is required by customers to install and integrate capital equipment into a production line. As a result, once a manufacturer has selected a particular vendor’s capital equipment, we believe that the manufacturer generally relies upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, if a customer selects a competitor’s product over ours for technical superiority or other reasons, we could experience difficulty selling to that customer for a significant period of time.

Furthermore, we do not have long-term contracts with our customers. As a result, our agreements with our customers do not provide any assurance of future sales and we are exposed to competitive price pressure on each new order we attempt to obtain. Our failure to obtain new sales orders from new or existing customers, would have a negative impact on our results of operations.

The timing of our orders, shipments and revenue recognition may cause our quarterly operating results to fluctuate significantly.

We derive a substantial portion of our net sales in any fiscal period from the sale of a relatively small number of high-priced systems. As a result, the timing of recognition of revenue for a single transaction could have a material effect on our sales and operating results for a particular fiscal period. As is typical in our industry, orders, shipments and customer acceptances often occur during the last few weeks of a quarter. As a result, delay of only a week or two can often shift the related booking or net sales into the next quarter, which could adversely affect our reported results for the prior quarter.  Our quarterly results

have fluctuated significantly in the past and we expect this trend to continue. If our orders, shipments, net sales or operating results in a particular quarter do not meet expectations, our stock price may be adversely affected.

Changes in our product mix may cause our quarterly operating results to fluctuate significantly.

Certain of our business segments have historically had lower gross margins than other segments. We expect this trend to continue. If a greater portion of our overall business in the future comes from business segments operating at lower gross margins, then our overall gross margins will decline. This could have an adverse effect on our stock price.

Our customers may cancel or reschedule their orders with us.

Customer purchase orders are subject to cancellation or rescheduling by the customer, generally with limited or no penalties. In limited circumstances,Often, we have permitted major customersincurred expenses prior to return previously shipped products in order to maintain business relationships with such customers.cancellation without adequate monetary compensation. Backlog adjustments forduring the year ended December 31, 2005 of $20.6 million included2006, including order cancellations, of $16.7were $26.0 million.

Our sales cycle is long and unpredictable.

Historically, we have experienced long and unpredictable sales cycles (the period between our initial contact with a potential customer and the time when we recognize revenue from that customer). Our sales cycle can range up to twelve months. The timing of an order often depends on the capital expenditure budget cycle of our customers, which is completely out of our control. In addition, the time it takes us to build a product to customer specifications (the “build cycle”) typically ranges from one to six months, followed in certain cases by a period of customer acceptance during which the customer evaluates the performance of the system and may potentially reject the system. As a result of the build cycle and evaluation periods, the period between a customer’s initial purchase decision and revenue recognition on an order often varies widely, and variations in length of this period can cause further fluctuations in our operating results. As a result of our lengthy sales cycle, we may incur significant research and development expenses, and selling and general and administrative expenses before we generate the related revenues for these products. We may never generate the anticipated revenues if a customer cancels or changes plans. Variations in the length of our sales cycle could also cause our net sales and therefore our cash flow and net income to fluctuate widely from period to period.

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.

The Company,Veeco and certain of its Chairman and Chief Executive Officer, its Executive Vice President and Chief Financial Officer, and its Senior Vice President and Chief Accounting Officer wereofficers have been named as defendants in a putativeconsolidated securities class action lawsuit which asserts claimspending in federal court in the Southern District of New York (the “Court”). The lawsuit arises out of the restatement in March 2005 of Veeco’s financial statements for violationthe quarterly periods and nine months ended September 30, 2004 as a result of federal securities laws on behalf of persons who acquired the Company’s securities duringdiscovery of certain improper accounting transactions at its TurboDisc business unit. The plaintiffs in the period beginning November 3, 2003 and ending February 10, 2005. The lawsuit seeksseek unspecified damages and allegesassert claims against all defendants for violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and claims against the individual defendants for violations of Section 20(b) of the Exchange Act. The Court has certified a plaintiff class for the lawsuit consisting of all persons who acquired the Company’s securities during the period from April 26, 2004 through February 10, 2005. The parties are currently involved in the discovery process. Although the Company believes thethis lawsuit is without merit and intends to defend vigorously against the claims, the lawsuit could result in substantial costs, divert management’s attention and resources from our operations and negatively affect our public image and reputation.

In addition, athree shareholder derivative lawsuit islawsuits have been consolidated and are also pending againstbefore the Court. The plaintiffs in the consolidated derivative action assert that the Company’s directors and certain of its executive officers for breaches ofbreached fiduciary duties relating toin connection with the improper accounting transactions at the TurboDisc business unit. This lawsuit purports to assert claims on behalf ofThe plaintiffs in the Company, but no demand was made on the Board of Directors to bring suchconsolidated derivative action and no decision had been made on whether the Company can or should pursue such claims. This lawsuit seeksseek unspecified damages allegedly sustained by the Company and the return of all bonuses, restricted stock, stock options and other incentive compensation. The parties are currently involved in the discovery process on this action. An unfavorable outcome or prolonged litigation in these matters could materially harm the Company’s business.

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

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

·       difficulties and increased costs in integrating the personnel, operations, technologies and products of acquired companies,

·       diversion of management’s attention while evaluating, pursuing and integrating the business to be acquired,

·       potential loss of key employees of acquired companies, especially if a relocation or change in responsibilities is involved,

·       difficulties in managing geographically dispersed operations in a cost-effective manner,

·       lack of synergy or inability to realize expected synergies,

·       increased amortization expense relating to goodwill and other intangibles; and

·       possible write-down of acquired intangible assets as a result of technological advancements or worse-than-expected performance by the acquired company.

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

In addition, if we issue equity securities to pay for an acquisition, the ownership percentage of our then-existing shareholders would be reduced and the value of the shares held by these shareholders could be diluted, which could adversely affect the price of our stock and convertible subordinated notes. If we use cash to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or other purposes, including making payments on the convertible subordinated notes. There can be no assurance that financing for future acquisitions will be available on favorable terms or at all.

Our inability to attract, retain and motivate key employees could have a material adverse effect on our business.

Our success depends upon our ability to attract, retain and motivate key employees, including those in managerial, engineering, marketing and other roles. Our growth is dependent on our ability to attract, retain and motivate highly skilled and qualified technical personnel, in addition to personnel that can implement and monitor our financial and managerial controls and reporting systems. Attracting, retaining and motivating qualified personnel may be difficult due to challenging industry conditions, competition for such personnel by other technology companies, consolidations and relocations of operations and workforce reductions. Our inability to attract, retain and motivate key personnel could have a material adverse effect on our business, financial condition or operating results.

We are exposed to the risks of operating a global business.

Approximately 67% of our 2005 net sales and 63% of our 2004 net sales were generated from sales outside the United States. We expect sales from non-U.S. markets to continue to represent a significant, and possibly increasing, portion of our sales in the future. Our non-U.S. sales and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including:

·       difficulties in managing a global enterprise, including staffing, managing distributors and representatives and repatriation of earnings,

·       difficulties in obtaining U.S. export licenses in connection with sales of products to customers in certain geographic regions, including China and Asia Pacific, a particular disadvantage relative to our non-U.S. competitors who are not required to comply with U.S. export controls,

·       periodic regional economic downturns and unstable political environments,

·       longer sales cycles and difficulty in collecting accounts receivable, and

·       multiple, conflicting and changing governmental laws and regulations, including import/export controls and other trade barriers.

Many of these challenges are present in China, a large potential market for the Company’s products and an area that we anticipate will present a significant opportunity for growth. Instability in China and other foreign economies may continue and recur again in the future, which could have a material adverse effect on our business. In addition, political instability, terrorism, acts of war or epidemics in regions where we operate may adversely affect our business and results of operations.

We are subject to foreign currency exchange risks.

We are exposed to foreign currency exchange rate risks that are inherent in our anticipated sales, sales commitments and assets and liabilities that are denominated in currencies other than the United States dollar. Although we attempt to mitigate our exposure to fluctuations in currency exchange rates, these hedging activities may not always be available or adequate to eliminate, or even mitigate, the impact of our exchange rate exposure. Failure to sufficiently hedge or otherwise manage foreign currency risks properly could materially and adversely affect our revenues and gross margins. We also are exposed to interest rate risks inherent in our debt obligations and investment portfolios.

Our success depends on protection of our intellectual property rights.

Our success depends in part upon the protection of our intellectual property rights. We own various United States and international patents and have additional pending patent applications relating to certain of our products and technologies. The process of seeking patent protection is lengthy and expensive, and we cannot be certain that pending or future applications will actually result in issued patents or that issued patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage. In addition, our intellectual property rights may be circumvented, invalidated or rendered obsolete by the rapid pace of technological change. Furthermore, the laws of other countries may less effectively protect our proprietary rights, compared to U.S. laws. Infringement of our rights by a third party could result in uncompensated lost market and revenue opportunities.

On September 17, 2003, we commenced a lawsuit against Asylum Research Inc., a privately-held company founded by former Veeco employees. The lawsuit alleges infringement of five patents relating to our AFM technologies. We are seeking monetary damages and a permanent injunction to stop infringement. Asylum has asserted that the patents we are suing on are invalid and unenforceable and has filed a counterclaim for infringement of a patent licensed by Asylum and payment of royalties it believes it is owed. Cross motions for summary judgment related to the issues of infringement and/or validity of the

patents in the suit are pending. The court has held hearings on the summary judgment motions and has referred many of the issues to a Special Master. We believe Asylum’s claims are without merit and intend to vigorously pursue our claims. Nonetheless, the costs of pursuing this matter are significant and there can be no assurance that we will be successful in this matter. Costs to defend the patents are being capitalized by the Company. If the Company is not successful in defending the patents, these costs may need to be written down.

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

From time to time we have received communications from other parties asserting the existence of patent or other rights which they believe cover certain of our products. We also periodically receive notice from customers who believe that we are required to indemnify them for damages they may incur related to infringement claims made against these customers by third parties. Our customary practice is to evaluate such assertions and to consider the available alternatives, including whether to seek a license, if appropriate. However, we cannot ensure that licenses can be obtained or, if obtained, will be on acceptable terms or that costly litigation or other administrative proceedings will not occur. If we are not able to resolve a claim, negotiate a settlement of the matter, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defend our position, our business, financial condition and results of operations could be materially and adversely affected.

We rely on a limited number of suppliers.

Failure of the suppliers of critical parts, components and manufacturing equipment to deliver sufficient quantities in a timely and cost-effective manner could adversely affect our business. We generally do not have guaranteed supply or pricing arrangements with our suppliers. As a result, we risk increased cost of materials and difficulty in procuring the parts we need to fill customer orders. We currently use numerous suppliers, however, some key parts may be obtained only from a single supplier or a limited group of suppliers. Failure of any of these suppliers to perform in a timely or quality manner could negatively impact our revenues and results of operations.

Our outsourcing strategy could adversely affect our results of operations.

To better align our costs with market conditions and to increase productivity and operational efficiency, we have outsourced, and plan to increase the outsourcing of, certain functions to third parties. While outsourcing may reduce our cost of operations, it also reduces our direct control over the services rendered. Although we attempt to select reputable providers, it is possible that one or more of these providers could fail to perform as we expect. In addition, the expanded role of third party providers has required and will continue to require us to implement changes to our existing operations and adopt new procedures and processes for retaining and managing these providers. If we do not timely and effectively develop and implement our outsourcing strategy or if third party providers do not perform as anticipated, we may not realize gross margin or productivity improvements and we may experience operational difficulties, increased costs, or even manufacturing delays, which could materially and adversely affect our business, financial condition and results of operations.

We rely on a limited number of suppliers.

Failure of the suppliers of critical parts, components and manufacturing equipment to deliver sufficient quantities in a timely and cost-effective manner could adversely affect our business. We generally do not have guaranteed supply or pricing arrangements with our suppliers. As a result, we risk increased cost of materials and difficulty in procuring the parts we need to fill customer orders. We currently use numerous suppliers, however, some key parts may be obtained only from a single supplier or a limited group of suppliers. Failure of any of these suppliers to perform in a timely or quality manner could negatively impact our revenues and results of operations.

Our inability to attract, retain and motivate key employees could have a material adverse effect on our business.

Our success depends upon our ability to attract, retain and motivate key employees, including those in executive, managerial, engineering, marketing and other roles. Our growth is dependent on our ability to attract, retain and motivate highly skilled and qualified technical personnel, in addition to personnel that can implement and monitor our financial and managerial controls and reporting systems. Attracting, retaining and motivating qualified personnel may be difficult due to challenging industry conditions, competition for such personnel by other technology companies, consolidations and relocations of operations and workforce reductions. Our inability to attract, retain and motivate key personnel could have a material adverse effect on our business, financial condition or operating results.On November 15, 2006, Edward H. Braun announced his intention to transition during 2007 from his current role as Veeco’s Chairman and Chief Executive Officer to the position of Chairman. Mr. Braun will continue to serve as Chief Executive Officer until a successor has been appointed. A succession committee of the Board of Directors has been formed to search for a new Chief Executive Officer and the committee has been actively conducting a search. There can be no assurance that a suitable replacement for Mr. Braun in his role as Chief Executive Officer will be found in a timely manner or upon terms and conditions that are acceptable.

We are exposed to the risks of operating a global business.

Approximately 67% of our 2006 and 2005 net sales were generated from sales outside the United States. We expect sales from non-U.S. markets to continue to represent a significant, and possibly increasing, portion of our sales in the future. Our non-U.S. sales and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including:

·       difficulties in managing a global enterprise, including staffing, managing distributors and representatives and repatriation of earnings,

·       difficulties in obtaining U.S. export licenses in connection with sales of products to customers in certain geographic regions, including China and Asia Pacific, a particular disadvantage relative to our non-U.S. competitors who are not required to comply with U.S. export controls,

·       periodic regional economic downturns and unstable political environments,

·       longer sales cycles and difficulty in collecting accounts receivable,

·       multiple, conflicting and changing governmental laws and regulations, including import/export controls and other trade barriers, and

·       different customs and ways of doing business.

Many of these challenges are present in China, a large potential market for the Company’s products and an area that we anticipate will present a significant opportunity for growth. Instability in China and other foreign economies may continue and recur again in the future, which could have a material adverse effect on our business. In addition, political instability, terrorism, acts of war or epidemics in regions where we operate may adversely affect our business and results of operations.

We are subject to foreign currency exchange risks.

We are exposed to foreign currency exchange rate risks that are inherent in our anticipated sales, sales commitments and assets and liabilities that are denominated in currencies other than the United States dollar. Although we attempt to mitigate our exposure to fluctuations in currency exchange rates, these hedging activities may not always be available or adequate to eliminate, or even mitigate, the impact of our exchange rate exposure. Failure to sufficiently hedge or otherwise manage foreign currency risks properly could materially and adversely affect our revenues and gross margins.

Our success depends on protection of our intellectual property rights.

Our success depends in part upon the protection of our intellectual property rights. We own various United States and international patents and have additional pending patent applications relating to certain of our products and technologies. The process of seeking patent protection is lengthy and expensive, and we cannot be certain that pending or future applications will actually result in issued patents or that issued patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage. In addition, our intellectual property rights may be circumvented, invalidated or rendered obsolete by the rapid pace of technological change. Furthermore, the laws of other countries may less effectively protect our proprietary rights than U.S. laws. Infringement of our rights by a third party could result in uncompensated lost market and revenue opportunities.

17

On September 17, 2003, we commenced a lawsuit against Asylum Research Inc. (“Asylum”), a privately-held company founded by former Veeco employees. The lawsuit alleges infringement of five patents relating to our AFM technologies. We are seeking monetary damages and a permanent injunction to stop infringement. Asylum has asserted that the patents we are suing on are invalid and unenforceable and has filed a counterclaim for infringement of a patent licensed by Asylum and payment of royalties it believes it is owed. Cross motions for summary judgment related to the issues of infringement and/or validity of the patents in the suit are pending. The court has held hearings on the summary judgment motions and has referred many of the issues to a Special Master. We believe Asylum’s claims are without merit and intend to vigorously pursue our claims. Nonetheless, the costs of pursuing this matter are significant and there can be no assurance that we will be successful in this matter. Costs to defend the patents are being capitalized by the Company. If the Company is not successful in defending the patents, these costs may be required to be written down under U.S. generally accepted accounting policies.

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

From time to time we have received communications from other parties asserting the existence of patent or other rights which they believe cover certain of our products. We also periodically receive notice from customers who believe that we are required to indemnify them for damages they may incur related to infringement claims made against these customers by third parties. Our customary practice is to evaluate such assertions and to consider the available alternatives, including whether to seek a license, if appropriate. However, we cannot ensure that licenses can be obtained or, if obtained, will be on acceptable terms or that costly litigation or other administrative proceedings will not occur. If we are not able to resolve a claim, negotiate a settlement of the matter, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defend our position, our business, financial condition and results of operations could be materially and adversely affected.

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

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

·       difficulties and increased costs in integrating the personnel, operations, technologies and products of acquired companies,

·       diversion of management’s attention while evaluating, pursuing and integrating the business to be acquired,

·       potential loss of key employees of acquired companies, especially if a relocation or change in responsibilities is involved,

·       difficulties in managing geographically dispersed operations in a cost-effective manner,

·       lack of synergy or inability to realize expected synergies,

·       increased amortization expense relating to intangible assets, and

·       possible write-down of acquired intangible assets as a result of technological advancements or worse-than-expected performance by the acquired company.

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

In addition, if we issue equity securities to pay for an acquisition, the ownership percentage of our then-existing shareholders would be reduced and the value of the shares held by these shareholders could

be diluted, which could adversely affect the price of our stock and convertible subordinated notes. If we use cash to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or other purposes, including making payments on the convertible subordinated notes. There can be no assurance that financing for future acquisitions will be available on favorable terms or at all.

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

We have historically used broad based stock option programs and other forms of equity-related incentives as a key component of our employee compensation packages. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 123(R) “Share Based Payment”, beginning in our first fiscal quarter of 2006, we will bewere required to recognize compensation expense in our statement of operations for the fair value of unvested employee stock options outstanding on the date of adoption and new stock options granted to our employees after the adoption date over the related vesting periods of the stock options. The change in accounting treatment has resulted in and will in the future result in our reporting

increased expenses, which has decreased and will decrease our net earnings, and could also adversely affect the market price of our common stock. The requirement to expense stock options granted to employees reduces the attractiveness of granting stock options. However, stock options remain an important employee retention tool, and we may not be able to attract and retain key personnel if we reduce the scope of our employee stock option program.

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

Our ability to design, manufacture, market and service our products is dependent on information technology systems that encompass all of our major business functions. We are in the process of implementing a comprehensive enterprise resource planning (“ERP”) software system. This new ERP system will cover many areas of our business. System failure or malfunctioning may result in disruption of operations and the inability to process transactions and could adversely affect our financial results. If we encounter unforeseen delays or difficulties or significant increased costs in implementing our system, we could be adversely affected.

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

We may need to make significant capital expenditures to continue our operations and to enhance our manufacturing capability to keep pace with rapidly changing technologies. Also, our industry is characterized by the need for continued investment in research and development. If we fail to invest sufficiently in research and development, our products could become less attractive to potential customers. As a result of our emphasis on research and development and technological innovation, our operating costs may increase in the future. In addition, our 4.125% convertible subordinated notes come due in December 2008. As of February 15, 2007, we had $154 million of these notes outstanding.  If cash flow from our operations is not sufficient to repay these notes, we may have to borrow funds to do so. During the past few years, the markets for equity and debt securities have fluctuated significantly, especially with respect to technology-related companies, and during some periods offerings of those securities have been extremely difficult to complete. As a result, in the future we may not be able to obtain the additional funds required to fund our operations, and invest sufficiently in research and development and repay or refinance our convertible subordinated notes on reasonable terms, or at all. Such a lack of funds could have a material adverse effect on our business, financial condition and operating results.

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

We are subject to environmental and safety regulations in connection with our business operations, including but not limited to regulations related to the development, manufacture and use of our products.

Failure or inability to comply with existing or future environmental and safety regulations could result in significant remediation liabilities, the imposition of fines and/or the suspension or termination of development, manufacture or use of certain of our products, each of which could have a material adverse effect on our business, financial condition and results of operations.

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

We have adopted, and may in the future adopt, certain measures that may have the effect of delaying, deferring or preventing a takeover or other change in control of Veeco that a holder of our common stock might not consider in its best interest. These measures include:

·       “blank check” preferred stock,

·       classified board of directors,

·       shareholder rights plan or “poison pill,” and

·       certain certificate of incorporation and bylaws provisions.

Our board of directors has the authority to issue up to 500,000 shares of preferred stock and to fix the rights (including voting rights), preferences and privileges of these shares (“blank check” preferred). Such

preferred stock may have rights, including economic rights, senior to our common stock. As a result, the issuance of the preferred stock could have a material adverse effect on the price of our common stock and could make it more difficult for a third party to acquire a majority of our outstanding common stock.

Our board of directors is divided into three classes with each class serving a staggered three-year term. The existence of a classified board will make it more difficult for our shareholders to change the composition (and therefore the policies) of our board of directors in a relatively short period of time.

We have adopted a shareholder rights plan, under which we have granted to our shareholders rights to purchase shares of junior participating preferred stock. These rightsThis plan or “poison pill” could discourage a takeover that is not approved by our board of directors but which a shareholder might consider in its best interest, thereby adversely affecting our stock price.

We have adopted certain certificate of incorporation and bylaws provisions which may have anti-takeover effects. These include: (a) requiring certain actions to be taken at a meeting of shareholders rather than by written consent, (b) requiring a super-majority of shareholders to call a special meeting of shareholders or to approve certain amendments to our bylaws, (c) limiting the maximum number of directors, and (d) providing that directors may be removed only for “cause.” These measures and those described above may have the effect of delaying, deferring or preventing a takeover or other change in control of Veeco that a holder of our common stock might consider in its best interest.

In addition, we are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a Delaware corporation from engaging in any business combination, including mergers and asset sales, with an interested stockholder (generally, a 15% or greater stockholder) for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The operation of Section 203 may have anti-takeover effects, which could delay, defer or prevent a takeover attempt that a holder of our common stock might consider in its best interest.

Item 1B.               Unresolved Staff Comments.

None.

Item 2.                        Properties.

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

(3)          The lease on a 13,000 square foot section of this property expires in 2007, while the lease on the remaining 34,000 square feet expires in 2009.

(4)          This facility is leased from the former principle owner of Manufacturing Technology, Inc. (“MTI”). The Company has entered intosubleased a sublease for partportion of athis building and is marketing the remaining portionsportion of this facility for sublease.

The Santa Barbara, California and St. Paul, Minnesota facilities are subject to mortgages, which at December 31, 2005,2006, had outstanding balances of $5.7$5.4 million and $3.8$3.6 million, respectively. The Company also leases small offices in Chadds Ford, Pennsylvania and Edina, Minnesota, for sales and service. The Company’s foreign subsidiaries lease space for use as sales and service centers in England, France, Germany, Netherlands, Japan, Korea, Malaysia, Singapore, Thailand, China and Taiwan. The Company believes its facilities are adequate to meet its current needs.

Item 3.                        Legal Proceedings.

Environmental

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

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

The former owner of the land and building in which the Company’s Santa Barbara, California Metrology operations are located has disclosed that there are hazardous substances present in the ground under the building. Management believes that the comprehensive indemnification clause that is part of the purchase contract relating to the purchase of such land provides adequate protection against any environmental issues that may arise.

Non-Environmental

On September 17, 2003, the Company filed a lawsuit in the United States District Court for the Central District of California against Asylum Research Inc., a privately-held company founded by former Veeco employees. The lawsuit alleges that the manufacture, use and sale of Asylum’s MFP-3D AFM constitutes willful infringement of five patents owned by the Company, as well as other claims. The Company is suing for unspecified monetary damages and a permanent injunction to stop infringement. Asylum has asserted that the patents the Company is suing on are invalid and unenforceable, and has filed a counterclaim for infringement of a patent licensed by Asylum, and payment of royalties it believes it is owed. Cross motions for summary judgment related to the issues of infringement and/or validity of the patents in the suit are pending. The Court has held hearings on the summary judgment motions and has referred many of the issues to a Special Master. The Company believes that Asylum’s claims are without merit and intends to vigorously pursue its claims. Costs to defend the patents are being capitalized by the Company. If the Company is not successful in defending the patents, these costs may need to be written down.

On February 11,Veeco and certain of its officers have been named as defendants in a securities class action lawsuit consolidated in August 2005 that is pending in federal court in the Company issued a press release announcing, among other things (a) the postponementSouthern District of New York (the “Court”). The lawsuit arises out of the releaserestatement in March 2005 of itsVeeco’s financial results for the fourth quarter and full year ended December 31, 2004 pending completion of an internal investigation of improper accounting transactions at its TurboDisc business unit and (b) Veeco’s expectation that this investigation will lead to adjustments requiring the restatement of the Company’s financial statements previously issued for the quarterly periods and nine months ended September 30, 2004.

Following the February 11, 2005 announcement, ten putative class action shareholder lawsuits were filed asserting claims for violation2004 as a result of federal securities laws on behalf of persons who acquired the Company’s securities during the period beginning November 3, 2003 and ending February 10, 2005. These actions were consolidated into one actiondiscovery of certain improper accounting transactions at its TurboDisc business unit. The plaintiffs in the U.S. District Court for the Southern District of New Yorklawsuit seek unspecified damages and an amended and consolidated complaint and a motion for class certification were filed. The amended complaint names Veeco, its Chairman and Chief Executive Officer, its Executive Vice President and Chief Financial Officer, and its Senior Vice President and Chief Accounting Officer as defendants, and seeks unspecified damages. The lawsuit allegesassert claims against all defendants for violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and claims against the individual defendants for violations of Section 20(b) of the Exchange Act. The CompanyCourt has filedcertified a motion to dismissplaintiff class for the lawsuit consisting of all claimspersons who acquired the Company’s securities during the period from April 26, 2004 through February 10, 2005. The parties are currently involved in the amended complaint and that motion is pending. The Company has also filed an opposition to the motion for class certification which is also pending.discovery process. Although the Company believes this lawsuit is without merit and intends to defend vigorously against the claims, the lawsuit could result in substantial costs, divert management’s attention and resources from our operations and negatively affect our public image and reputation.

In addition, during March 2005, three shareholder derivative lawsuits were filed in March and April of 2005 have been consolidated and are also pending before the U.S. District Court forCourt. The plaintiffs in the Eastern District of New York againstconsolidated derivative action

assert that the Company’s directors and certain of its officers for breaches ofbreached fiduciary duties relating toin connection with the improper accounting transactions at the TurboDisc business unit. Each of these lawsuits is a shareholderThe plaintiffs in the consolidated 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 should pursue such claims. These actions were transferred to the U.S. District Court for the Southern District of New York (the Court before which the securities class action lawsuit described above is pending). These lawsuits seek unspecified damages allegedly sustained by the Company and the return of all bonuses, restricted stock, stock options and other incentive compensation. The deadline for defendants to respond toparties are currently involved in the complaint has been postponed until 30 days after a ruling of the motion to dismiss the securities class action has been issued.discovery process on this action. An unfavorable outcome or prolonged litigation in these matters could materially harm the Company’s business.

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

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

None.

24

PART II

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

The Company’s common stock is quoted on The NASDAQ National Market under the symbol “VECO.” The 20052006 and 20042005 high and low closing bid prices are as follows:

Item 7:                       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, scientific and industrial research, semiconductor, HB-LED (high-brightness light emitting diode) and wireless industries. These industries help create a wide range of information age products such as computer integrated circuits, personal computers, hard disk drives, network servers, digital cameras, wireless phones, TV set-top boxes, personal music/video players and personal digital assistants. Our broad line of products features leading edge technology and allows customers to improve time-to-market of their next generation products. Veeco’s products are also enabling advancements in the growing fields of nanoscience, nanobiology and other areas of scientific and industrial research.

Veeco’s process equipment products precisely deposit or remove (etch) various materials in the manufacturing of TFMHs for the data storage industry, HB-LED/wireless devices (such as power amplifiers and laser diodes) and semiconductor mask reticles. The Company reports financial results of its process equipment product lines in two segments—“Ion Beam and Mechanical Process Equipment,” including the etch, deposition, dicing and slicing products sold mostly to data storage customers and “Epitaxial Process Equipment,” consisting of the Company’s MBE and MOCVD products primarily sold to HB-LED and wireless telecommunications customers.

Veeco’s metrology equipment is used to provide critical surface measurements on semiconductor devices and TFMHs. This equipment allows customers to monitor their products throughout the manufacturing process in order to improve yields, reduce costs and improve product quality. Veeco’s metrology solutions are also used by many universities, scientific laboratories and industrial applications. Veeco sells its broad line of AFMs, optical interferometers and stylus profilers to thousands of universities, research facilities and scientific centers worldwide.

We currently maintain facilities in Arizona, California, Colorado, Minnesota, New Jersey and New York, with sales and service locations around the world. Each of our products is currently manufactured in only one location, since we believe that the technological know-how and precision needed to make each of our products requires specialized expertise.

Highlights of 20052006

·       Revenue increased 5%7.5% to $441.0 million from $410.2 million from $390.4 million in 2004.2005. Veeco experienced strong growth in the data storage and semiconductor markets, up 35% and 27%, respectively,HB-LED/wireless market, representing a 41.6% increase from 2004.2005. This growth was somewhat offset by a 37%16.7% decline in sales to the HB-LED/wireless industry and a 2% decrease in sales to the scientific research marketplace;semiconductor industry;

·       Veeco’s 2005 revenues2006 sales by segment were $162.9$268.9 million from Ion Beam and Mechanical Process Equipment, $65.0 million from Epitaxial Process Equipment and $182.3$172.1 million from Metrology, up 22%,18.0% and down 31% and up 12%5.6%, respectively, from 2004;2005;

·       20052006 sales by region were 33% North America, 20%16% Europe, 16%13% Japan and 31%38% Asia Pacific;

·       Orders were $493.8 million in 2006, up from $404.8 million in 2005, down from $420.3 million in 2004;2005;

·       Veeco improved its profitability in 2005 through a focus on gross margin improvements,in 2006 through an increase in sales volume as well as continued cost reduction initiatives, mix shift to higher-margin products,reductions and a series of operational excellence initiatives such as better supplierimproved supply chain management, includingwhich included outsourcing;

·       Veeco’s continued focus on operational improvements and cost control resulted in ana $11.4 million increase in gross margins to 42.4% in 2005operating income from 38.9% in the prior year;

·       Net lossincome was ($0.9)$14.9 million in 20052006 compared to a net loss of ($62.6)0.9) million in 2004;2005;

·       Net lossDiluted net income per share was ($0.03)$0.48 compared to a loss of ($2.11)0.03) in 2004;2005; and

·       Veeco generated $24.2$22.5 million of cash during 2005,2006, after the effect of making earn-out payments totaling $15.0 million relating to acquisitions. Inventory was reduced by $21.7 million from $110.6 million at December 31, 2004 to $88.9 million at December 31, 2005.an early debt repurchase of $19.5 million.

Outlook/Opportunities

In 2006,2007, Veeco will continue its strategy for growth asfocused on:

·       Offering a broad line of well as its focus on improving profitabilitydifferentiated Process Equipment and gross margin performance. Metrology technologies;

·       Establishing strategic relationships with technology leaders worldwide;

·       Capturing leading market share in our core products;

·       Leveraging our exposure to high-growth end markets, including data storage, HB-LED/wireless, semiconductor and scientific research;

·       Fueling our growth through internal development of new products; and

·       Continuing to improve our operations with the goal of remaining profitable through industry cycles.

As Veeco enters 2006,2007, the Company sees positive market conditions across several of our core markets, (data storage, HB-LED, semiconductorin particular the HB-LED/wireless and scientific research), which, combinedresearch sectors. Veeco’s data storage order rate has slowed at the end of 2006 and early 2007 as customers absorb the significant amount of capital purchased from Veeco through the first nine months of 2006. Based upon early indications of high capacity utilization at our key customers and other factors, our current expectation is for Veeco’s data storage order rate to improve beginning in the second quarter of 2007. This, coupled with significant new product introductions expected from both ourin Process Equipment and Metrology business units, should provide ample opportunity forand continued investments in technology by our customers across our end markets, leads us to currently predict revenue growth. growth in 2007. In addition, consumer spending on many types of electronics has increased and various worldwide economies, such as those in the Asia Pacific region, are experiencing growth. 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. At the beginning of 2006,2007, many of these trends appear quiteto be overall positive.

Technology changes are continuing in all of Veeco’s markets: the continued increase of 80 GB hard drives and investment in 120 GB hard drives and the transition to perpendicular recording in data storage; the increased usage of “mini” drives in consumer electronic applications; the increased use of Veeco’s automated AFMs as critical reference tools for sub 90 nanometer semiconductor applications; the opportunity for Veeco’s MOCVD and MBE to further penetrate the emerging wireless and HB-LED market. Veeco believes that these changes,trends, together with the estimatedcontinued healthy funding of nanoscience research, will prompt our customers to seek our next-generation solutions to address their manufacturing and technology challenges.

Veeco will continue its focus on increasing shareholder value through operational excellence and cash generation. The Company’s goal is to increase gross margins again in 2006,2007, with improvements in both Process Equipment and Metrology.Metrology, specifically in the latter half of 2007 as revenues are forecasted to increase. Veeco anticipates that progress in this area will continue to come from activities such as better supply chain management, including outsourcing of new products, differentiated, value-added new product introductions which focus on achieving better gross margins and development of common hardware and software platforms.

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