Other Balance Sheet Information

Reclassifications

        Certain amounts in the 2001 condensed consolidated financial statements have been reclassified to conform to the 2002 presentation.

Note 3—Segment Information

        The following represents the reportable product segments of the Company, as of and for the three months ended March 31, 2002 and 2001, in thousands:

Note 4—Comprehensive Income (Loss)

        Total comprehensive income (loss) income was ($3.9)$1.9 million and $12.0($2.1) million for the three and six months ended March 31,June 30, 2002, respectively, and $9.7 million and $21.7 million for the three and six months ended June 30, 2001, respectively. Other comprehensive income (loss) is comprised of foreign currency translation adjustments, minimum pension liability and net unrealized holding gains and losses on available-for-sale securities.

Note 5—Recent Accounting Pronouncements

        Effective January 1, 2002, the Company adopted SFAS No. 142,Goodwill and Other Intangible Assets. The intangible assets that are classified as goodwill and those with indefinite lives are no longer amortized under the provisions of this standard. Intangible assets with determinabledefinite lives will continue to be

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amortized over their estimated useful life. The standard also requires that an impairment test be performed to support the carrying value of goodwill and indefinite lived intangible assets at least annually.

        The Company completed the first of the required impairment tests of goodwill and indefinite lived intangible assets in the first quarter of 2002. The Company utilized an independent appraisal as part of its evaluation process. The Company has reviewed its business and determined that four reporting units be reviewed for impairment in accordance with the standard. The four reporting units are New York Equipment and Telecommunications Equipment, which comprise the process equipment operating segment, and AFMAtomic Force Microscope ("AFM") and Optical, which comprise the metrology operating segment. Based upon the independent appraisal and the judgment of management, it was determined that there is no impairment to goodwill or intangibles with definite lives as of January 1, 2002.

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        The following table outlines the components of goodwill and intangible assets by business segment at March 31,June 30, 2002 after the adoption of the standard, in thousands:

        Net income for the three and six months ended March 31,June 30, 2001, includes approximately $0.4 million and $0.8 million of goodwill amortization expense.expense, respectively. Excluding this amountthese amounts would have resulted in net income per common share and diluted net income per common share of $0.54$0.42 and $0.53,$0.41, and $0.96 and $0.94, respectively for the three and six months ended March 31,June 30, 2001.

        In January 2002, the Company adopted SFAS No. 144,Accounting for the Impairment or Disposal of Long Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30,Reporting the Results of Operations for a Disposal of a Segment of a Business. Adoption of this Statement did not have an impact on the Company's consolidated financial position or results of operations.

Note 6—Recent Events

Restructuring

        During the threesix months ended March 31,June 30, 2002, the Company incurred a restructuring charge of $0.8approximately $1.9 million related to the reduction in work force announced in both the fourth quarter of 2001. This2001 and the first quarter of 2002. Of this amount, approximately $1.1 million was recorded in the second quarter of 2002. The $1.9 million charge includes severance related costs for approximately 6090 employees which included both management and manufacturing employees located at each of the Company's process equipment operations, as well as at the Company's Minnesota Plainview and Rochester operations.metrology facility. As of March 31,June 30, 2002, approximately $0.3$0.7 million has been expended and approximately $0.5$1.2 million remains accrued.accrued, which is expected to be paid during the next six months.

        During the year ended December 31, 2001, the Company recorded restructuring charges of approximately $20.0 million in response to the significant downturn in the telecommunications industry and the overall weak business environment. These charges consisted of a $13.6 million write-off of inventory related to order cancellations and the rationalization of certain product lines, $3.0 million

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related to personnel and business relocation costs and $3.4 million related to the write-down of long-lived assets. The $3.0 million charge for personnel and business relocation costs principally related to plant consolidations and a workforce reduction of approximately 230 employees, which included both management and manufacturing employees located in all operations of the Company. As of March 31,June 30, 2002, approximately $1.7$2.2 million of the $3.0 million charge for relocation and termination benefits has been paid and approximately $1.3$0.8 million remains accrued. Of the $0.8 million, $0.3 million relates to rental payments on a lease agreement for space that the Company has vacated and will be paid over the next four years.

Discontinued Operations

        In JanuaryMay 2002, Veeco signed a letter of intent to sellthe Company sold the remainder of its industrial measurement business. This is the measurement date of the disposal and accordingly, the Company has classified the industrial measurement business as a discontinued operation. During the threesix months ended March 31,June 30, 2002, the Company recorded an additional loss on the disposal of the discontinued operations of $0.3 million, net of taxes of approximately $0.2 million. The net assets held for sale

Note 7—Subsequent Events

        On July 11, 2002, the Company signed a definitive merger agreement with FEI Company ("FEI"), of approximately $4.0 million are included in prepaid expenses and other current assets inHillsboro, Oregon. Under the accompanying March 31, 2002 Condensed Consolidated Balance Sheet. The closingterms of the saleagreement, FEI shareholders will receive 1.355 shares of Veeco common stock for each share of FEI common stock outstanding. Based upon FEI's approximately 32 million shares outstanding, the FEI shareholders will receive approximately 44 million Veeco shares. The merger, which will be accounted for under the purchase method, is expected to take placeclose in the secondfourth quarter of 2002.2002, subject to the approval of shareholders of both companies, certain regulatory approvals and other customary closing conditions. Upon consummation of the merger, FEI will become a wholly-owned subsidiary of Veeco, and Veeco will be renamed Veeco FEI Inc. FEI designs, manufactures, markets and services products based on focused charged particle beam technology. FEI's products include transmission electron microscopes (TEM), scanning electron microscopes (SEM), focused ion-beam systems (FIBs) and DualBeam systems that combine a FIB column and a SEM column on a single platform. FEI also designs, manufactures and sells certain components of electron microscopes and FIBs to other manufacturers.

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

Results of Operations.

Three Months Ended March 31,June 30, 2002 and 2001

        Net sales of $80.1$77.3 million for the three months ended March 31,June 30, 2002, representsrepresent a decrease of 36%$34.8 million, or 31%, from the 2001 comparable period net sales of $125.4$112.1 million, reflectingresulting principally from a decrease in bothsales of process equipment and metrology sales.products. Sales in the U.S., Europe, Japan and Asia Pacific, accounted for 55%36%, 14%21%, 17%18% and 14%25%, respectively, of the Company's net sales for the three months ended March 31,June 30, 2002. Sales in the U.S. decreased 40%56% from the comparable 2001 period due to a 43%67% decline in U.S. process equipment sales, particularly infor sales of optical filter deposition products to the telecommunications industry, andas well as a 31%27% decrease in U.S. metrology sales. This decreaseSales in U.S. salesEurope and Asia Pacific increased 32% and 81%, respectively. The increase in Europe is offset in part by $9.3principally a result of $3.7 million of sales of molecular beam epitaxy (MBE) equipment produced by Veeco's Applied Epi subsidiary, which was acquired by the Company in September 2001. SalesThe increase in Europe decreased 29% from the comparable 2001 period, due primarily toAsia Pacific is principally a declineresult of an increase in etch and deposition equipment sales to the data storage industry.industry, as well as an increase of $6.5 million in sales of optical metrology products. Sales in Japan decreased 49% from the 2001 comparable 2001 period, as a result of a declinedue primarily to declines in sales forin both etch and deposition equipment and atomic force microscopes (AFMs). Sales in Asia Pacific remained relatively flat from the comparable 2001 period.optical filter deposition products. The Company believes that there will continue to be quarter-to-quarter variations in the geographic concentration of sales.

        Process equipment sales of $44.8$36.9 million for the three months ended March 31,June 30, 2002, represents a decrease of $35.5decreased by $36.3 million, or 44%50%, from the comparable 2001 period, due primarily to an 88%period. The decrease in process equipment sales has resulted from a decline in sales of optical filter deposition salesequipment to the telecommunications industry, as well as a 30% declinedecrease in etch and deposition sales principally to the data storage industry. Metrology sales of $35.3$40.4 million for the three months ended March 31,June 30, 2002, decreased by $9.8 million, or 22%, overincreased slightly (4%) from the comparable 2001prior period due primarily to a 43% decline in sales of optical metrology products, as well as a 15% decrease in the sale of AFMs.$38.9 million.

        Veeco received $70.2$78.2 million of orders during the three months ended March 31,June 30, 2002, a 36%3% decrease compared to $110.2$80.3 million of orders for the comparable 2001 period. Process equipment orders decreased 47%8% to $38.4$37.1 million, principally reflectingdue to a decreasedecline in orders for thefrom optical telecommunications industry, as well as a decrease in orders for etch and deposition systems by data storage customers. Veeco's Ion Tech subsidiary had a decrease of $2.3 million, or 25%, in orders from the comparable 2001 period. Etch and deposition equipment orders decreased 19% to $25.2 million from $31.2 million for the comparable 2001 period. Metrology orders decreased by 15%increased slightly (2%) to $31.8 million, reflecting a decrease in bookings for both the$41.1 million. The Company's AFM and optical metrology line of products. The book/bill ratio for the firstsecond quarter of 2002 was 0.88.1.01.

        The order and sales declines are a result of the general economic slowdown that has had a very significant impact on the telecommunications, data storage and semiconductor markets that the Company serves.

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

        Gross profit, for the three months ended March 31, 2002 of $33.7 million, represents a decrease of $25.0 million from the comparable 2001 period. Gross profit as a percentage of net sales decreased to 42.1% from 46.8%45.5%, for the three months ended March 31,second quarter of 2002, from 47.4% for the comparable 2001 primarily as a result ofperiod. The decline is attributable to the significant declinedecrease in sales volume for bothof process equipment and metrology.products.

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        Research and development expenses of $13.3 million for the three months ended March 31, 2002, decreased by $1.8 million, or 12%, over the comparable period of 2001. The decrease principally relates the overall decline in business and the cost reduction efforts taken by the Company during the fourth quarter of 2001, which included a 15% workforce reduction, plant consolidations, selective work-week reductions and reduced management salaries.

        Selling, general and administrative expenses of $19.0$19.3 million for the three months ended March 31,June 30, 2002, decreased by approximately $2.1$1.4 million or 10%, overfrom the 2001 comparable period due principally to cost reductions implemented by the Company in the fourth quarter of 2001 period.and the first quarter of 2002, as well as a decrease in selling and commission expenses as a result of the decreased sales volume. The decrease is due to decreased selling and commission expense related topartially offset by the lower sales volume and the cost cutting measures mentioned above. The decrease in selling, general and administrative expenses is offset, in part, by $2.4 million of expenses from the acquisitions ofVeeco's Applied Epi and ThermoMicroscopesTM Microscopes ("TM"), subsidiaries, which were acquired in the third quarter of 2001, and thus had no comparable spending in the second quarter of 2001.

        Amortization expense totaled $3.7        Research and development expenses of $13.9 million for the three months ended June 30, 2002, decreased by approximately $0.9 million, or 6%, from the comparable period of 2001, due primarily to cost reduction efforts implemented by the Company in the fourth quarter of 2001 and the first quarter of 2002.

        Amortization expense totaled $3.2 million in the three months ended June 30, 2002 versus $1.4compared with $0.9 million in 2001. The increase is due primarily to the intangible assets acquired in connection with the acquisitions of Applied Epi and TM, offset in part by $0.4 million of reduced amortization expense related to the accounting requirement to no longer amortize goodwill, effective January 1, 2002, in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill is to be reviewed annually for impairment. As of January 1, 2002, no impairment exists.

        Other expense decreased $1.4 million due to a significant reduction in foreign currency exchange losses, compared to the first quarter of 2001.

        During the three months ended MarchJune 30, 2002, the Company recorded a restructuring charge of $1.1 million. This charge includes severance related costs for approximately 30 employees, which included both management and manufacturing employees, located in each of the Company's process equipment group and the Minnesota metrology facility. As of June 30, 2002, approximately $0.2 million has been expended and approximately $0.9 million remains accrued.

        Other (income) expense, net, for the three months ended June 30, 2002, decreased $0.5 million from the comparable 2001 period due to the decrease in foreign currency exchange losses.

        Interest expense, net, of $1.5 million for the three months ended June 30, 2002 increased $1.9 million from the comparable 2001 period as a direct result of the issuance of $220.0 million of 4.125% convertible subordinated notes, which occurred in December 2001 and January 2002.

        Income taxes for the three months ended June 30, 2002, amounted to a $1.9 million income tax benefit, or 53% of loss before income taxes, as compared to a $5.4 million income tax provision, or 34% of income before income taxes, for the same period of 2001. The higher than statutory effective benefit rate of 53% in 2002 is a result of the impact of R&D tax credits along with foreign tax benefits.

        Quarterly information for the three months ended June 30, 2001, has been restated from that previously filed on the Quarterly Report on Form 10-Q for such period, due to the required accounting to reflect the discontinued operations of the Company's industrial measurement segment, which was recorded in the quarter ended December 31, 2001.

Six Months Ended June 30, 2002 and 2001

        Net sales were $157.5 million for the six months ended June 30, 2002, representing a decrease of approximately $80.0 million, or 34%, from the comparable 2001 period. The decrease is primarily a result of a decrease in process equipment sales. Sales in the U.S., Europe, Japan and Asia Pacific accounted for 46%, 17%, 17% and 20%, respectively, of the Company's net sales for the six months ended June 30, 2002. Sales in the U.S. decreased by 47%, principally as a result of decreased process equipment sales of optical filter deposition products to the telecommunications industry, as well as a decline in sales to the data storage industry. Metrology sales also decreased, primarily as a result of a decline in sales to customers in the semiconductor industry. Sales in Europe remained relatively flat when compared to the comparable 2001 period. Sales in Japan decreased by 49%, primarily as a result of decreases in process equipment sales, as well as decreased metrology sales from the comparable

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2001 period. Asia Pacific sales increased by 45% principally as a result of a 78% increase in process equipment sales, primarily from sales of etch and deposition equipment to data storage customers. Metrology sales for Asia Pacific also increased by 32% from the prior period, as a result of increased sales of optical metrology products.

        Process equipment sales were $81.8 million for the six months ended June 30, 2002, a decrease of approximately $71.8 million, or 47%, from the comparable 2001 period. The decrease is primarily due to a decrease in process equipment sales of $89.3 million to the telecommunications and data storage industries, offset in part by sales of $17.5 million of MBE equipment produced by Veeco's Applied Epi subsidiary. Metrology sales for the six months ended June 30, 2002, were $75.7 million, a decrease of approximately $8.2 million, or 10%, compared to the comparable 2001 period, reflecting a 9% drop in sales of AFMs and a 13% decline in optical metrology sales.

        Veeco received $148.5 million of orders for the six months ended June 30, 2002, a 22% decrease compared to $190.5 million of orders in the comparable 2001 period. Process equipment orders decreased 33% to $75.6 million, principally reflecting decreases in both telecommunications and data storage orders. Metrology orders decreased 6% to $72.9 million, reflecting a decrease in AFM orders. The book/bill ratio for the six months ended June 30, 2002 was 0.94.

        Gross profit for the six months ended June 30, 2002, as a percentage of net sales decreased to 43.8%, from 47.1% for the comparable 2001 period. The decline from the prior period is primarily attributable to the volume decrease in process equipment sales, in particular optical filter deposition products to the telecommunications industry.

        Selling, general and administrative expenses of $38.4 million for the six months ended June 30, 2002, represent a decrease of approximately $3.5 million, or 8%, from the comparable 2001 period, due principally to a decrease in selling and commission expense in response to the decreased sales volume, as well as cost reduction efforts implemented by the Company in the fourth quarter of 2001 and the first quarter of 2002. The decrease is partially offset by the selling, general and administrative expenses of Applied Epi and TM subsidiaries, which were acquired by the Company in the third quarter of 2001, and thus had no comparable spending in the first six months of 2001.

        Research and development expenses of $27.3 million for the six months ended June 30, 2002, represent a decrease of approximately $2.7 million, or 9%, from the comparable period of 2001, as a result of the cost reduction efforts implemented by the Company in the fourth quarter of 2001 and the first quarter of 2002.

        During the six months ended June 30, 2002, the Company incurred a restructuring chargecharges of $0.8$1.9 million related to thein connection with a reduction in work force announced in the fourth quarter of 2001.2001 and the first quarter of 2002. This charge includes severance related costs for approximately 6090 employees which included both management and manufacturing employees located at each of the Company's process equipment operations and Minnesota Plainview and Rochester operations.metrology facility. As of March 31,June 30, 2002, approximately $0.3$0.7 million has been expended and approximately $0.5$1.2 million remains accrued. During the year ended December 31, 2001, the Company recorded restructuring charges of approximately $20.0 million in response to the significant downturn in the telecommunications industry and the overall weak business environment. These charges consisted of a $13.6 million write-off of inventory related to order cancellations and the rationalization of certain product lines, $3.0 million related to personnel and business relocation costs and $3.4 million related to the write-down of long-lived assets. The $3.0 million charge for personnel and business relocation costs principally related to plant consolidations and a workforce reduction of approximately 230 employees, which included both management and manufacturing employees located in all operations of the Company. As of March 31,June 30, 2002, approximately $1.7$2.2 million of the $3.0 million charge for relocation and termination benefits has been paid and approximately $1.3$0.8 million remains accrued.

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        Amortization expense totaled $6.9 million in the six months ended June 30, 2002 compared with $2.3 million in 2001 period, due to the acquisition of intangible assets discussed in the three-month results. This amount is offset in part by $0.8 million of reduced amortization expense related to the accounting requirement to no longer amortize goodwill, effective January 1, 2002, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill is to be reviewed annually for impairment. As of January 1, 2002, no impairment exists.

        Other (income) expense, net, for the six months ended June 30, 2002, decreased $1.9 million from the comparable 2001 period due to the foreign currency exchange losses experienced in the first quarter of 2001, which did not occur in 2002.

        Interest expense, net, of $1.5$3.0 million for the threesix months ended March 31,June 30, 2002, increased $2.3$4.1 million from the comparable 2001 period as a direct result of the issuance of $220.0 million of 4.125% convertible subordinated notes, which occurred in December 2001 and January 2002.

        Income taxes for the threesix months ended March 31,June 30, 2002, amounted to a $3.5 million income tax benefit, of $1.6 million, or 34%,42% of loss before income taxes, as compared to $7.2a $12.6 million income tax provision, or 35%, of income before income taxes, for the same period of 2001.

        Quarterly information for the threesix months ended March 31,June 30, 2001, has been restated from that previously filed on the Quarterly Report on Form 10-Q for such period, due to the required accounting forto reflect the discontinued operations of the Company's industrial measurement segment.segment, which was recorded in the quarter ended December 31, 2001.

Critical Accounting Policies

        General:    Veeco's discussion and analysis of its financial condition and results of operations are based upon Veeco's consolidated financial statements, which have been prepared in accordance with

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accounting principles generally accepted in the United States. The preparation of these financial statements requires Veeco to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, management evaluates its estimates and judgments, including those related to derivatives, bad debts, inventories, intangible assets, 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 believedit believes 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 intangible assets and derivatives to be critical policies due to the estimation processes involved in each.

        Revenue Recognition:    The Company recognizes revenue when persuasive evidence of an arrangement exists, the seller's price of goods or services being sold is fixed or determinable and collectibility is reasonably assured. For products produced according to the Company's published specifications, where no installation is required or installation is deemed perfunctory and no substantive customer acceptance provisions exist, revenue is recognized when title passes to the customer, generally upon shipment. For products produced according to a particular customer's specifications, revenue is recognized when the product has been tested and it has been demonstrated that it meets the customer's specifications and title passes to the customer. The amount of revenue recorded is reduced by the amount of any customer retention (generally 10% to 20%), which is not payable by the customer until installation is completed and final customer acceptance is achieved. 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 applications of the

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Company's existing products, for new 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. 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-progress, 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 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 intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. Changes in strategy and/or market conditions could significantly impact these assumptions, and thus Veeco may be required, during the annual review process, to record an impairment charge for these assets in accordance with SFAS No. 142.

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        Derivatives:    During the threesix months ended March 31,June 30, 2002, the Company used derivative financial instruments to minimize the impact of foreign exchange rate changes on earnings and cash flows. In the normal course of business, operations are exposed to fluctuations in foreign exchange rates. In order to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactionsbalances and other known foreign currency exposures, the Company enters into monthly forward contracts (which during the threesix months ended March 31,June 30, 2002, included a majority of the Company's foreign subsidiaries). The Company does not use derivative financial instruments for trading or speculative purposes. The Company's forward contracts do not subject it to material risks due to exchange rate movements because gains and losses on these contracts are intended to offset exchange gains and losses on the underlying assets and liabilities; both the forward contracts and the underlying assets and liabilities are marked-to-market through earnings.earnings.

Liquidity and Capital Resources

        Cash flows fromused in operations were $1.8$2.7 million for the threesix months ended March 31,June 30, 2002, as compared to $2.0cash flows from operations of $8.4 million for the comparable 2001 period. Net income adjusted for non-cash items provided operating cash flows of $2.1$3.6 million for the threesix months ended March 31,June 30, 2002 compared to $24.7$41.5 million for the comparable 2001 period. The amount of net income adjusted for non-cash items for the threesix months ended March 31,June 30, 2002 was offset by a decreasean increase in working capital of $0.3$6.2 million. Accounts receivable for the threesix months ended March 31,June 30, 2002 decreased by $18.1$19.1 million, primarily as a result of the decrease in sales volume from the fourth quarter of 2001. Deferred gross profit for the threesix months ended March 31,June 30, 2002 decreased by $5.3$7.8 million, primarily as a result of revenue recognition on tools that received final customer acceptance. Taxes payableAccrued expenses and other current liabilities decreased by $8.1$17.2 million, primarily as a result of income tax payments made by the Company's Japanese subsidiary, and various other tax payments made in the first quartersix months of 2002 related to sales and foreign taxes. In addition, accrued expenses decreased as a result of bonuses

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paid in the first quarter of 2002 and the decrease in accrued commission expense and customer deposits related to the decline in sales volume.volume and orders.

        Cash flows from investing activities of $3.1 million for the six months ended June 30, 2002, are a result of the proceeds from the sale of the Company's industrial measurement business of $3.7 million, which closed in May 2002, proceeds from the sale of property, plant and equipment of $1.8 million and maturities of long-term investments of $1.8 million, offset by capital expenditures of $4.2 million.

        In December 2001, the Company issued $200.0 million of 4.125% convertible subordinated notes, and in January 2002, the Company issued an additional $20.0 million of those notes pursuant to the exercise of an over allotmentover-allotment option.

        In connection with the subordinated notes issuance in December 2001 and January 2002, the Company purchased approximately $25.9 million of U.S. government securities, which have been pledged to the trustee under the indenture as security for the exclusive benefit of the holders of the notes. These securities will be sufficient to provide for the payment in full of the first six scheduled interest payments due on the notes and represent restricted investments. The first interest payment was made on June 21, 2002 in the amount of $4.5 million.

        Funds from operations, and the use of proceeds received from the issuance of the subordinated note over allotmentnotes in connection with the exercise of the over-allotment option in January 2002 and the maturities of long-term investments were used to pay for capital expenditures and the scheduled repayment of long-term debt.

        At March 31,June 30, 2002, Veeco's contractual cash obligations and commitments relating to its debt obligations and lease payments are as follows (in thousands):

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        The Company believes that existing cash balances together with cash generated from operations and amounts available under the Company's $100.0 million credit facility will be sufficient to meet the Company's projected working capital and other cash flow requirements for the next twelve months.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

        Veeco's net sales to foreign customers represented approximately 45%64% and 54% of Veeco's total net sales for the three and six months ended March 31,June 30, 2002, respectively, and 41%44% and 42% for the comparablethree and six months ended June 30, 2001, period.respectively. The Company expects that net sales to foreign customers will continue to represent a large percentage of Veeco's total net sales. Veeco's net sales denominated in foreign currencies represented approximately 19%20% of Veeco's total net sales for both the three and six months ended June 30, 2002, respectively, and 12% and 14% for the three and six months ended June 30, 2001, respectively. The aggregate foreign currency exchange gain included in determining consolidated results of operations was $0.2 million, net of $0.5 million of realized hedging losses in the three months ended March 31,June 30, 2002. The aggregate foreign currency exchange loss in the first quarter of 2002 and 15% for the comparable 2001 period.was immaterial. The aggregate foreign currency exchange loss included in determining consolidated results of operations was immaterial during the three months ended March 31, 2002,$0.3 million and was $1.5$1.7 million, net of $0.9$0.1 million and $1.0 million of realized hedging gains in the three and six months ended June 30, 2001, respectively. Veeco is exposed to financial market risks, including changes in foreign currency exchange rates. To mitigate these risks, Veeco uses derivative financial instruments. Veeco does not use derivative financial

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instruments for speculative or trading purposes. The Company enters into monthly forward contracts to reduce the effect of fluctuating foreign currencies on forward exchangeshort-term foreign currency-denominated intercompany balances and other known currency exposures. The average notional amount of such contracts was approximately $2.1 million and $1.6 million for the three and six months ended March 31, 2001.June 30, 2002, respectively. As of June 30, 2002, there were no open forward contracts. The change in currency exchange rates that havehas the largest impact on translating Veeco's international operating profit are the Japanese Yen and the Euro. The Company estimates that based upon the March 31,June 30, 2002 balance sheet, a 10% change in foreign currency exchange rates would impactbe immaterial to reported operating profit by approximately $1.4 million.profit. The Company believes that this quantitative measure has inherent limitations because it does not take into account any governmental actions or changes in either customer purchasing patterns or financing and operating strategies. Veeco is exposed to financial market risks, including changes in foreign currency exchange rates. To mitigate these risks, Veeco uses derivative financial instruments. Veeco does not use derivative financial instruments for speculative or trading purposes. The Company enters into monthly forward contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known currency exposures. The average notional amount of such contracts was approximately $1.2 million for the three months ended March 31, 2002. As of March 31, 2002, there were no open forward contracts.

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PARTPart II. OTHER INFORMATIONOther Information

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

        The annual meeting of stockholders of the Company was held on May 10, 2002. The matters voted on at the meeting were: (a) the election of three directors: (i) Joel A. Elftmann, (ii) Paul R. Low, and (iii) Walter J. Scherr; (b) the approval of an amendment to the Veeco Instruments Inc. 2000 Stock Option Plan; (c) the approval of an amendment to the Company's Certificate of Incorporation; and (d) the ratification of the Board's appointment of Ernst & Young as the independent auditors of the Company's financial statements for the year ending December 31, 2002. As of the record date for the meeting, there were 29,027,006 shares of common stock outstanding, each of which was entitled to one vote with respect to each of the matters voted on at the meeting. The results of the voting were as follows:

Item 5. Other Information

        On July 11, 2002, the Company signed a definitive merger agreement with FEI Company ("FEI"), of Hillsboro, Oregon. Under the terms of the agreement, FEI shareholders will receive 1.355 shares of Veeco common stock for each share of FEI common stock outstanding. Based upon FEI's approximately 32.0 million shares outstanding, the FEI shareholders will receive approximately 44.0 million Veeco shares. The merger, which will be accounted for under the purchase method, is expected to close in the fourth quarter of 2002, subject to the approval of shareholders of both companies, certain regulatory approvals and other customary closing conditions. Upon consummation of the merger, FEI will become a wholly-owned subsidiary of Veeco, and Veeco will be renamed Veeco FEI Inc. FEI designs, manufactures, markets and services products based on focused charged particle beam technology. FEI's products include transmission electron microscopes (TEM), scanning electron microscopes (SEM), focused ion-beam systems (FIBs) and DualBeam systems that combine a FIB column and a SEM column on a single platform. FEI also designs, manufactures and sells certain components of electron microscopes and FIBs to other manufacturers.

        On August 12, 2002, in connection with the proposed merger, the Company and FEI filed with the SEC a joint proxy statement/registration statement on Form S-4 containing a prospectus relating to the

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shares of the Company's common stock to be issued to FEI's shareholders. Investors and security holders are urged to read the joint proxy statement/registration statement because it contains important information about the proposed merger. Investors and security holders may obtain copies of this document, as well as other SEC filings of the Company and FEI, free of charge from the SEC's website at www.sec.gov, as well as from the applicable company by directing a request to Investor Relations for the Company, at (516) 677-0200, Ext. 1403 and to Investor Relations for FEI, at (503) 640-7500, Ext. 7527.

        This report does not constitute an offer of any securities for sale.

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Item 6. Exhibits and Reports on Form 8-K.

Exhibits:

(a)

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.

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*

Filed herewith

(b)

Reports on Form 8-K.

        None.The Registrant filed a Current Report on Form 8-K on July 12, 2002 regarding the Agreement and Plan of Merger dated July 11, 2002 among Veeco Instruments Inc., Venice Acquisition Corp. and FEI Company and certain related matters.

15        The Registrant filed an amendment on Form 8-K/A on July 22, 2002 to its Current Report on Form 8-K dated July 12, 2002 to reflect certain additional parties to the Voting Agreement dated as of July 11, 2002 among Veeco and certain stockholders of FEI Company.

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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: May 9, 2002

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PARTPart I. FINANCIAL INFORMATIONFinancial Information
Item 1. Financial Statements (Unaudited)

Notes to Condensed Consolidated Financial Statements (Unaudited)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.

PARTPart II. OTHER INFORMATIONOther Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K.