UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2005

OR

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

For the transition period from to .

Commission file number: 0-16244

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

Website: www.veeco.com

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

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

~~29,939,729~~Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

30,000,910 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on ~~July 25,~~October 31, 2005.

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward-looking statements may be found in Items 2 and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. Factors that may cause these differences include, but are not limited to:

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

• We operate in a highly competitive industry characterized by rapid technological change.

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

• Our quarterly operating results fluctuate significantly.

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

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

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

• Our success depends on protection of our intellectual property rights. We may be subject to claims of intellectual property infringement by others.

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

• We rely on a limited number of suppliers.

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

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

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

• The other matters discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Report and in Veeco Instruments Inc. (the “Company’s”) Annual Report on Form 10-K for the year ended December 31, 2004.

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

Available Information

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

Internet Address

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

VEECO INSTRUMENTS INC.

INDEX

Part I.	FINANCIAL INFORMATION	4
Item 1.	Financial Statements (Unaudited):	4
	Condensed Consolidated Statements of Operations—Three Months Ended ~~June~~September 30, 2005 and 2004	4
	Condensed Consolidated Statements of Operations—~~Six~~Nine Months Ended ~~June~~September 30, 2005 and 2004	5
	Condensed Consolidated Balance Sheets—~~June~~September 30, 2005 and December 31, 2004	6
	Condensed Consolidated Statements of Cash Flows—~~Six~~Nine Months Ended ~~June~~September 30, 2005 and 2004	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative ~~Disclosure~~Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
Part II.	OTHER INFORMATION	24
~~Item 4.~~	~~Submission of Matters to a Vote of Security Holders~~	24
Item 6.	Exhibits	24
SIGNATURES		25

Part I. Financial Information

Item 1. Financial Statements

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

	Three Months Ended June 30,						Three Months Ended September 30,
	2005			2004			2005			2004

Net sales	$	103,415		$	99,246		$	100,078		$	97,367
Cost of sales	59,989			58,331			55,816			61,913
Gross profit	43,426			40,915			44,262			35,454
Costs and expenses:
Selling, general and administrative expense	21,435			21,686			21,210			19,590
Research and development expense	15,863			14,589			14,388			14,900
Amortization expense	4,026			4,575			4,038			4,336
Other expense (income), net	70			(355		)
Other expense, net							413			170
Total operating expenses	41,394			40,495			40,049			38,996
Operating income	2,032			420
Operating income (loss)							4,213			(3,542			)
Interest expense, net	1,959			2,239			1,815			1,793
Income (loss) before income taxes	73			(1,819		)	2,398			(5,335			)
Income tax provision (benefit)	522			(162		)	832			(3,162			)
Net loss	$	(449	)	$	(1,657	)
Net income (loss)							$		1,566	$		(2,173	)

Net loss per common share	$	(0.02	)	$	(0.06	)
Net income (loss) per common share							$		0.05	$		(0.07	)

Diluted net loss per common share	$	(0.02	)	$	(0.06	)
Diluted net income (loss) per common share							$		0.05	$		(0.07	)

Weighted average shares outstanding	29,863			29,649			29,965			29,670
Diluted weighted average shares outstanding	29,863			29,649			30,360			29,670

See accompanying notes.

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

	Six Months Ended June 30,						Nine Months Ended September 30,
	2005			2004			2005			2004

Net sales	$	197,265		$	190,109		$	297,343		$	287,476
Cost of sales	116,307			112,396			172,123			174,309
Gross profit	80,958			77,713			125,220			113,167
Costs and expenses:
Selling, general and administrative expense	41,606			41,576			62,816			61,166
Research and development expense	30,687			28,616			45,075			43,516
Amortization expense	8,516			9,471			12,554			13,807
Other income, net	(28		)	(641		)
Other expense (income), net							385			(471		)
Total operating expenses	80,781			79,022			120,830			118,018
Operating income (loss)	177			(1,309		)	4,390			(4,851		)
Interest expense, net	4,105			4,438			5,920			6,231
Loss before income taxes	(3,928		)	(5,747		)	(1,530		)	(11,082		)
Income tax provision (benefit)	1,223			(1,380		)	2,055			(4,542		)
Net loss	$	(5,151	)	$	(4,367	)	$	(3,585	)	$	(6,540	)

Net loss per common share	$	(0.17	)	$	(0.15	)	$	(0.12	)	$	(0.22	)

Diluted net loss per common share	$	(0.17	)	$	(0.15	)	$	(0.12	)	$	(0.22	)

Weighted average shares outstanding	29,859			29,608			29,894			29,629
Diluted weighted average shares outstanding	29,859			29,608			29,894			29,629

See accompanying notes.

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

	June 30, 2005		December 31, 2004		September 30, 2005		December 31, 2004
	(Unaudited)				(Unaudited)

Assets
Current assets:
Cash and cash equivalents	$	109,356	$	100,276	$	111,703	$	100,276
Accounts receivable, less allowance for doubtful accounts of $1,892 in 2005 and $2,420 in 2004	75,740		85,914
Accounts receivable, less allowance for doubtful accounts of $1,913 in 2005 and $2,420 in 2004					86,249		85,914
Inventories	100,420		110,643		99,465		110,643
Prepaid expenses and other current assets	6,214		9,039		7,347		9,039
Deferred income taxes	2,963		3,096		3,074		3,096
Total current assets	294,693		308,968		307,838		308,968
Property, plant and equipment at cost, less accumulated depreciation of $72,807 in 2005 and $67,565 in 2004	70,808		73,513
Property, plant and equipment at cost, less accumulated depreciation of $75,775 in 2005 and $67,565 in 2004					70,377		73,513
Goodwill	94,755		94,645		97,610		94,645
Purchased technology, less accumulated amortization of $45,649 in 2005 and $39,181 in 2004	62,120		68,587
Other intangible assets, less accumulated amortization of $21,750 in 2005 and $19,702 in 2004	23,780		25,007
Purchased technology, less accumulated amortization of $48,820 in 2005 and $39,181 in 2004					58,948		68,587
Other intangible assets, less accumulated amortization of $21,416 in 2005 and $19,702 in 2004					23,113		25,007
Long-term investments	3,582		3,541		3,611		3,541
Other assets	3,953		2,652		4,598		2,652
Total assets	$	553,691	$	576,913	$	566,095	$	576,913

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	28,256	$	25,476	$	32,922	$	25,476
Accrued expenses	44,361		63,438		48,363		63,438
Deferred profit	2,637		1,196		2,609		1,196
Income taxes payable	1,162		1,702		1,745		1,702
Current portion of long-term debt	364		354		370		354
Total current liabilities	76,780		92,166		86,009		92,166
Long-term debt, net of current portion	229,395		229,581		229,301		229,581
Other non-current liabilities	2,831		2,814		4,346		2,814
Shareholders’ equity	244,685		252,352		246,439		252,352
Total liabilities and shareholders’ equity	$	553,691	$	576,913	$	566,095	$	576,913

See accompanying notes.

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

	Six Months Ended June 30,						Nine Months Ended September 30,
	2005			2004			2005			2004

Operating activities
Net loss	$	(5,151	)	$	(4,367	)	$	(3,585	)	$	(6,540	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	15,080			15,917			22,403			23,696
Deferred income taxes	(101		)	(4,665		)	(254		)	(9,134		)
Loss on sale of property, plant and equipment							346			—
Non-cash compensation expense							72			—
Other	83			(19		)	—			35
Changes in operating assets and liabilities:
Accounts receivable	6,281			(16,722		)	(4,876		)	(9,574		)
Inventories	8,975			(11,209		)	10,177			(20,597		)
Accounts payable	2,953			8,915			7,642			15,518
Accrued expenses, deferred profit and other current liabilities	(2,428		)	17,428			1,179			11,584
Other, net	(1,598		)	1,207			(3,645		)	(57		)
Net cash provided by operating activities	24,094			6,485			29,459			4,931

Investing activities
Capital expenditures	(4,550		)	(5,934		)	(8,553		)	(9,518		)
Payment for net assets of businesses acquired	(15,038		)	—			(15,038		)	(1,000		)
Proceeds from sale of property, plant and equipment and assets held for sale	2,178			2,641			2,260			2,641
Net maturities of long-term investments	(41		)	4,384
Net cash (used in) provided by investing activities	(17,451		)	1,091
Net (purchases) maturities of long-term investments							(70		)	4,333
Net cash used in investing activities							(21,401		)	(3,544		)

Financing activities
Proceeds from stock issuance	1,041			2,874			1,820			3,017
Repayment of long-term debt	(176		)	(166		)	(264		)	(250		)
Net cash provided by financing activities	865			2,708			1,556			2,767
Effect of exchange rates on cash and cash equivalents	1,572			301			1,813			(3		)
Net change in cash and cash equivalents	9,080			10,585			11,427			4,151
Cash and cash equivalents at beginning of period	100,276			106,830			100,276			106,830
Cash and cash equivalents at end of period	$	109,356		$	117,415		$	111,703		$	110,981

Non-Cash Items

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

During the first nine months of 2004, the Company had non-cash items excluded from the Condensed Consolidated Statements of Cash Flows of approximately $7.3 million. This amount consists of (1) $6.0 million for the accrual of a contingent earn-out payment to the former owner of TurboDisc, resulting from the achievement of certain revenue targets during the third quarter of 2004, which was paid in the first quarter of 2005 and has been reflected as additional goodwill; (2) $0.9 million for the transfer of other current assets to property, plant and equipment; and (3) $0.4 million for the transfer of inventory to property, plant and equipment.

See accompanying notes.

Veeco Instruments Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1—Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the ~~six~~nine months ended ~~June~~September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2004.

Net ~~loss~~income (loss) per common share and diluted net ~~loss~~income (loss) per common share are computed using the weighted average number of common shares outstanding during the period. The effect of approximately ~~140,000~~212,000 common equivalent shares for the nine months ended September 30, 2005, and ~~158,000~~the effect of approximately 283,000 and 525,000 common equivalent shares for the three and ~~six~~nine months ended ~~June 30, 2005, respectively, and the effect of approximately 528,000 and 644,000 common equivalent shares for the three and six months ended June~~September 30, 2004, respectively, were antidilutive, and therefore are not included in the weighted average shares outstanding.

	Three Months Ended September 30,		Nine Months Ended September 30,
	2005	2004	2005	2004
	(In thousands)		(In thousands)

Weighted average shares outstanding	29,965	29,670	29,894	29,629
Dilutive effect of stock options and warrants	395	—	—	—
Diluted weighted average shares outstanding	30,360	29,670	29,894	29,629

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

The Company accounts for its stock option plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock option compensation expense is reflected in net ~~loss,~~income (loss), as all options granted under the stock option plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net ~~loss~~income (loss) and diluted net ~~loss~~income (loss) per common share if the Company had applied the fair value recognition provisions, under which stock option compensation expense would be recognized as incurred, of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

Three Months Ended
June 30,

Six Months Ended
June 30,

2005

2004

2005

2004

(In thousands, except per share amounts)

Net loss, as reported

$
(449
)
$
(1,657
)
$
(5,151
)
$
(4,367
)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

(21,192
)
(3,073
)
(25,216
)
(5,928
)
Pro forma net loss

$
(21,641
)
$
(4,730
)
$
(30,367
)
$
(10,295
)

Net loss per common share:

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

$
(0.02
)
$
(0.06
)
$
(0.17
)
$
(0.15
)
Net loss and diluted net loss per common share, pro forma

$
(0.72
)
$
(0.16
)
$
(1.02
)
$
(0.35
)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
	(In thousands, except per share amounts)

Net income (loss), as reported	$	1,566		$	(2,173	)	$	(3,585	)	$	(6,540	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(3,904		)	(3,234		)	(29,121		)	(9,162		)
Pro forma net loss	$	(2,338	)	$	(5,407	)	$	(32,706	)	$	(15,702	)

Net income (loss) per common share:
Net income (loss) and diluted net income (loss) per common share, as reported	$	0.05		$	(0.07	)	$	(0.12	)	$	(0.22	)
Net loss per common share, pro forma	$	(0.08	)	$	(0.18	)	$	(1.09	)	$	(0.53	)

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

The purpose of the accelerated vesting was to eliminate future compensation expense that Veeco would otherwise recognize in its statement of operations with respect to these accelerated options upon the adoption by Veeco of SFAS No. 123(R) (See Note 2). In addition, because many of these options had exercise prices significantly in excess of current market values, they were not providing an effective means of employee retention and incentive compensation. The future compensation expense that will be avoided, based on Veeco’s implementation date for SFAS No. 123(R) of January 1, 2006, is approximately $7.9 million in 2006 and

~~$3.6~~ $3.6 million in 2007. Pro forma net loss for the ~~three and six~~nine months ended ~~June~~September 30, 2005, presented above, includes the impact of the accelerated vesting.

Reclassifications

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

Note 2—Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R) (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. On April 14, 2005, the Securities and Exchange Commission extended the adoption date of SFAS No. 123(R) to no later than the beginning of the first fiscal year beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt SFAS No. 123(R) as of January 1, 2006.

SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company has not yet determined whether it will adopt SFAS No. 123(R) using the modified prospective method or the modified retrospective method.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on the consolidated results of operations, although it will have no impact on the Company’s overall consolidated financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per common share in Note 1 to Veeco’s Condensed Consolidated Financial Statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce consolidated net operating cash flows and increase consolidated net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees

exercise stock options), the Company did not recognize anany amount of consolidated operating cash flows for such excess tax deductions in 2005 or 2004.

~~In November 2004, the FASB issued SFAS No. 151,~~ ~~Inventory Costs- an amendment to ARB No. 43, Chapter 4.~~ SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal,” as previously stated in ARB No. 43. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect that the adoption of this statement will have a significant impact on the Company’s consolidated financial position or results of operations.

Note 3—Balance Sheet Information

Inventories

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

	June 30, 2005		December 31, 2004		September 30, 2005		December 31, 2004
	(In thousands)				(In thousands)

Raw materials	$	50,519	$	52,301	$	49,231	$	52,301
Work-in-progress	34,837		35,004		35,482		35,004
Finished goods	15,064		23,338		14,752		23,338
	$	100,420	$	110,643	$	99,465	$	110,643

Accrued Warranties

The Company estimates the costs that may be incurred under the warranty it provides and records a liability in the amount of such costs at the time the related revenue is recognized. Factors that affect the Company’s warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. Changes in the Company’s warranty liability during the period are as follows:

	Six Months Ended June 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
	(In thousands)						(In thousands)

Balance as of January 1	$	6,771		$	3,904		$	6,771		$	3,904
Warranties issued during the period	2,833			2,628			4,085			4,015
Settlements made during the period	(3,160		)	(1,523		)	(4,493		)	(1,965		)
Balance as of June 30	$	6,444		$	5,009
Balance as of September 30							$	6,363		$	5,954

Note 4—Segment Information

The Company currently uses three separate reporting segments to manage the business, review operating results, assess performance and allocate resources. The first segment, called “ion beam and mechanical process equipment,” combines the etch, deposition and dicing and slicing products sold mostly to data storage customers. This segment includes ~~the~~ production facilities in Plainview, New York, Ft. Collins, Colorado and Camarillo, California. The second segment, called “epitaxial process equipment,” includes the ~~Molecular Beam Epitaxy~~molecular beam epitaxy and ~~Metal Organic Chemical Vapor Deposition~~metal organic chemical vapor deposition products primarily sold to high brightness light emitting diode and wireless telecommunications customers. This segment includes ~~the~~ production facilities in St. Paul, Minnesota and Somerset, New Jersey. The third segment, called “metrology,” represents equipment that is used to provide critical surface measurements on products such as semiconductor devices and thin film magnetic heads and includes Veeco’s broad line of atomic force microscopes, optical interferometers and stylus profilers sold to semiconductor customers, data storage customers and thousands of research facilities and scientific centers. This segment includes ~~the~~ production facilities in Santa Barbara, California and Tucson, Arizona.

The Company evaluates the performance of its reportable segments based on income or loss from operations before interest, income taxes and amortization ~~(EBITA)~~(“EBITA”). The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Costs excluded from segment profit primarily consist of interest, amortization, income taxes, corporate expenses, as well as other unusual charges for purchased in-process technology, restructuring and asset impairment charges and merger-related costs. Corporate expenses are comprised primarily of general and administrative expenses.

The following table presents certain data pertaining to the reportable product segments of the Company for the three and ~~six~~nine months ended ~~June~~September 30, 2005 and 2004, and at ~~June~~September 30, 2005 and December 31, 2004, in thousands:

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

Three Months Ended June 30, 2005
Three Months Ended September 30, 2005
Net sales	$	46,600	$	14,557		$	42,258	$	—		$	103,415		$	39,389		$	9,992		$	50,697	$	—		$	100,078
Income (loss) before interest, taxes and amortization (“EBITA”)	7,399		(5,130		)	6,517		(2,728		)	6,058
Income (loss) before interest, taxes, amortization and certain charges (EBITA)														4,185			(4,876		)	11,692		(2,750		)	8,251
Interest expense, net	—		—			—		1,959			1,959			—			—			—		1,815			1,815
Amortization expense	920		2,374			457		275			4,026			920			2,373			457		288			4,038
Income (loss) before income taxes	6,479		(7,504		)	6,060		(4,962		)	73			3,265			(7,249		)	11,235		(4,853		)	2,398
Three Months Ended June 30, 2004
Three Months Ended September 30, 2004
Net sales	37,905		19,078			42,263		—			99,246			30,297			33,407			33,663		—			97,367
Income (loss) before interest, taxes and amortization (“EBITA”)	2,433		(1,772		)	6,391		(2,057		)	4,995
(Loss) income before interest, taxes, amortization and certain charges (EBITA)														(235		)	828			1,933		(1,732		)	794
Interest expense, net														—			—			—		1,793			1,793
Amortization expense														789			2,444			796		307			4,336
(Loss) income before income taxes														(1,024		)	(1,616		)	1,137		(3,832		)	(5,335		)
Nine Months Ended September 30, 2005
Net sales														113,828			47,072			136,443		—			297,343
Income (loss) before interest, taxes, amortization and certain charges (EBITA)														10,829			(11,953		)	25,971		(7,903		)	16,944
Interest expense, net	—		—			—		2,239			2,239			—			—			—		5,920			5,920
Amortization expense	1,051		2,457			759		308			4,575			3,060			7,121			1,495		878			12,554
Income (loss) before income taxes	1,382		(4,229		)	5,632		(4,604		)	(1,819		)	7,769			(19,074		)	24,476		(14,701		)	(1,530		)
Six Months Ended June 30, 2005
Total assets as of September 30, 2005														185,160			122,905			136,872		121,158			566,095
Nine Months Ended September 30, 2004
Net sales	74,439		37,080			85,746		—			197,265			103,550			66,442			117,484		—			287,476
Income (loss) before interest, taxes and amortization (“EBITA”)	6,644		(7,077		)	14,279		(5,153		)	8,693
Interest expense, net	—		—			—		4,105			4,105
Amortization expense	2,140		4,748			1,038		590			8,516
Income (loss) before income taxes	4,504		(11,825		)	13,241		(9,848		)	(3,928		)
Total assets as of June 30, 2005	175,221		127,972			132,214		118,284			553,691
Six Months Ended June 30, 2004
Net sales	73,253		33,035			83,821		—			190,109
Income (loss) before interest, taxes and amortization (“EBITA”)	4,591		(3,449		)	12,453		(3,935		)	9,660
Income (loss) before interest, taxes, amortization and certain charges (EBITA)														4,356			(2,621		)	14,386		(5,667		)	10,454
Interest expense, net	—		—			—		4,438			4,438			—			—			—		6,231			6,231
Amortization expense	2,302		5,014			1,543		612			9,471			3,091			7,458			2,339		919			13,807
Merger, restructuring and other	—		—			—		1,498			1,498			—			—			—		1,498			1,498
Income (loss) before income taxes	2,289		(8,463		)	10,910		(10,483		)	(5,747		)	1,265			(10,079		)	12,047		(14,315		)	(11,082		)

Total assets as of December 31, 2004	$	184,266	$	144,021		$	140,654	$	107,972		$	576,913		$	184,266		$	144,021		$	140,654	$	107,972		$	576,913

Corporate total assets are comprised principally of cash at ~~June~~September 30, 2005 and December 31, 2004.

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

June 30,
2005

December 31, 2004

Ion Beam and Mechanical Process Equipment

$
27,395

$
27,276

Epitaxial Process Equipment

39,141

39,091

Metrology

28,219

28,278

Total

$
94,755

$
94,645

	September 30, 2005		December 31, 2004

Ion Beam and Mechanical Process Equipment	$	29,101	$	27,276
Epitaxial Process Equipment	39,141		39,091
Metrology	29,368		28,278
Total	$	97,610	$	94,645

Note 5—Comprehensive LossIncome (Loss)

The Company’s comprehensive ~~loss~~income (loss) is comprised of net ~~loss,~~income (loss), adjusted for foreign currency translation adjustments. The Company had no other sources affecting comprehensive ~~loss.~~income (loss). The Company had total comprehensive ~~loss~~income (loss) of ~~$2.4~~$0.9 million and ~~$8.7~~($7.8) million for the three and ~~six~~nine months ended ~~June~~September 30, 2005, respectively, and ~~$2.7~~($2.3) million and ~~$4.8~~($7.0) million for the three and ~~six~~nine months ended ~~June~~September 30, 2004, respectively.

Note 6—Restructuring

~~2004 Merger and Restructuring Charges~~

As a result of the ~~acquisition~~acquisitions of Manufacturing Technology Inc. and Advanced Imaging Inc. and the resulting plan of consolidation of the two facilities in Ventura and Camarillo, California, certain long-lived assets of Advanced Imaging, Inc. were classified as held for sale as of December 31, 2004. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, these long-lived assets were measured at the lower of their carrying amount or fair value less cost to sell. Fair value was determined by the Company based upon the actual sale proceeds, which were received in February 2005 and April 2005. Approximately $2.2 million of fixed assets held for sale are included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets at December 31, 2004.

In conjunction with the plan announced by the Company in October 2004 to reduce employment levels by 10% in 2005, the Company recorded restructuring and other expenses of approximately $3.6 million in the fourth quarter of 2004. The $3.6 million charge consisted of $2.8 million of personnel severance costs and a $0.8 million accrual for costs related to an internal investigation of improper accounting transactions at the Company’s TurboDisc business unit.

The $2.8 million charge for personnel costs included severance-related costs for approximately 107 employees, which included management, administration and manufacturing employees located at the Company’s Plainview, New York and Camarillo, California (ion beam and mechanical process equipment) operations, the Somerset, New Jersey and St. Paul, Minnesota (epitaxial process equipment) operations, the Santa Barbara, California and Tucson, Arizona (metrology) facilities, the sales and service offices located in France, England and Singapore, and the corporate offices in Woodbury, New York. As of ~~June~~September 30, 2005, approximately ~~$2.3~~$2.4 million has been paid and approximately ~~$0.5~~$0.4 million remains accrued. The remainder is expected to be paid byduring the fourth quarter of 2005.

The $0.8 million charge for costs related to the internal investigation of improper accounting transactions at the Company’s TurboDisc business unit included accounting, legal and other auditing fees ~~performed by~~of external consultants who assisted with the investigation. As of ~~June~~September 30, 2005, all costs have been paid and no amount remains accrued.

A reconciliation of the liability for the merger and restructuring charges during 2004 relating to severance and investigation costs is as follows (in millions):

	Ion Beam and Mechanical Process Equipment		Epitaxial Process Equipment		Metrology		Unallocated Corporate		Total		Ion Beam and Mechanical Process Equipment		Epitaxial Process Equipment		Metrology		Unallocated Corporate		Total
Charged to accrual	$	1.0	$	0.4	$	0.4	$	1.8	$	3.6	$	1.0	$	0.4	$	0.4	$	1.8	$	3.6
Cash payments during 2004	0.3		—		0.1		0.3		0.7		0.3		—		0.1		0.3		0.7
Cash payments during the six months ended June 30, 2005	0.6		0.4		0.3		1.1		2.4
Balance as of June 30, 2005	$	0.1	$	—	$	—	$	0.4	$	0.5
Cash payments during the nine months ended September 30, 2005											0.7		0.4		0.3		1.1		2.5
Balance as of September 30, 2005											$	—	$	—	$	—	$	0.4	$	0.4

1213

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

Executive Summary:

Veeco designs, manufactures, markets and services a broad line of equipment primarily used by manufacturers in the data storage, semiconductor, high brightness light emitting diode (“HB-LED”) and wireless telecommunications industries. Veeco’s products also enable advancements in the growing field of nanoscience and other areas of scientific and industrial research. Our process equipment products precisely deposit or remove (etch) various materials in the manufacturing of advanced thin film magnetic heads (“TFMHs”) for the data storage industry and the HB-LED and wireless telecommunications industries. The Company currently uses three separate reporting segments to manage the business, review operating results, assess performance and allocate resources. The first segment, called “ion beam and mechanical process equipment”, combines the etch, deposition, precision lapping and slicing and dicing products sold mostly to data storage customers. The second segment, called “epitaxial process equipment”, includes the Molecular Beam Epitaxy (“MBE”) and Metal Organic Chemical Vapor Deposition (“MOCVD”) products primarily sold to HB-LED and wireless telecommunications customers. The third segment, called “metrology”, represents equipment that is used to provide critical surface measurements on products such as semiconductor devices and TFMHs, and includes our broad line of atomic force microscopes (“AFMs”), optical interferometers and stylus profilers sold to semiconductor customers, data storage customers and thousands of research facilities and scientific centers. This equipment allows customers to monitor their products throughout the manufacturing process in order to improve yields, reduce costs and improve product quality. Our metrology solutions include key research instruments used by many universities, scientific laboratories and industrial applications.

During the past several years, we have strengthened our product lines through strategic acquisitions. In our metrology business, in June 2003, we purchased the atomic force microscope probe business from Nanodevices Inc. (“Nanodevices”) for approximately $6.0 million, including transaction costs, plus a potential future earn-out payment of up to $4.0 million based on the achievement of certain operating measures. Through June 30, 2005, the Company has made earn-out payments totaling $2.9 million relating to this acquisition. In our epitaxial process equipment business, we purchased the TurboDisc business from Emcore Corporation (“Emcore”) in November 2003 for approximately $63.7 million, including transaction costs, plus a potential future earn-out payment of up to $20.0 million based on the achievement of certain operating measures. Through June 30, 2005, the Company has made earn-out payments totaling $13.1 million to Emcore. In our ion beam and mechanical process equipment business, we acquired the precision bar lapping company, Advanced Imaging, Inc. (“Aii”), in November 2003 for approximately $61.4 million, including transaction costs, plus a potential future earn-out payment of up to $9.0 million based on the achievement of certain operating measures. To date, the operating measures which trigger the Aii earn-out have not been achieved. Most recently, in our ion beam and mechanical process equipment business, Veeco expanded its TFMH “slider” technologies to include slicing and dicing processes, which are critical to controlling thin film head fly height, through the purchase of Manufacturing Technology, Inc. (“MTI”) for $9.5 million.

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

Highlights of the ~~Second~~Third Quarter of 2005:

• Sales were ~~$103.4~~$100.1 million, up ~~4.2%~~2.8% from ~~$99.2~~$97.4 million in the third quarter of 2004, down 3.2% sequentially from $103.4 million in the second quarter of ~~2004, and~~2005.

• Orders were $84.6 million, up ~~10.2% sequentially~~6.4% from ~~$93.9~~$79.5 million in the ~~first~~third quarter of ~~2005.~~

• ~~Orders were~~2004, down 28.7% sequentially from $118.6 ~~million, down 5.0% from $124.7~~ million in the second quarter of ~~2004, and up 19.9% sequentially from $98.9 million in the first quarter of~~ 2005.

• Net ~~loss~~income of ~~$0.4~~$1.6 million, compared with a net loss of ~~$1.7~~$2.2 million in the ~~second~~third quarter of 2004.

• Cash and cash equivalents increased ~~$8.7~~$2.3 million, compared with ~~an increase~~a decrease of ~~$5.6~~$6.4 million in the ~~second~~third quarter of 2004.

Highlights of the First ~~Half~~Nine Months of 2005:

• Sales were ~~$197.3~~$297.3 million, up ~~3.8%~~3.4% from ~~$190.1~~$287.5 million in the first ~~half~~nine months of 2004.

• Orders were ~~$217.5~~$302.0 million, down ~~10.1%~~6.0% from ~~$241.8~~$321.3 million in the first ~~half~~nine months of 2004.

• Net loss of ~~$5.2~~$3.6 million, compared with a net loss of ~~$4.4~~$6.5 million in the first ~~half~~nine months of 2004.

• Cash and cash equivalents increased ~~$9.1~~$11.4 million, after the effect of making earn-out payments during the first quarter totaling $15.0 million relating to acquisitions, compared with an increase of ~~$10.6~~$4.2 million in the first ~~half~~nine months of ~~2004.~~2004, after the effect of making an earn-out payment of $1.0 million.

Current Business Conditions/Outlook:

In the first halfnine months of 2005, Veeco reported sales of $197.3$297.3 million, a 3.8%3.4% increase from the $190.1$287.5 million reported in the first halfnine months of 2004. Veeco’s bookings forwere $302.0 million, down from the $321.3 million reported in the first sixnine months of 2005 of $217.5 million reflected increased demand from our data storage customers who are currently investing in capacity expansions for consumer micro-drive applications and advanced development programs for next generation TFMHs. Second2004. Third quarter data storage orders increased 33% sequentially to $60.4 million after two strong quarters in the fourth quarter of 2004 and the first quarter of 2005. Data storage orders were at a record level$84.6 million, up 6.4% over the prior year but down 28.7% sequentially from the strong $118.6 million Veeco booked in the second quarter of 2005. Veeco has alsothis year. We had forecasted that third quarter bookings would be weak following the strong second quarter, but orders were about 10.0% lower than anticipated. We expect an improvement in fourth quarter orders, currently forecasted to be between $90-100 million. During the third quarter we experienced increased order ratessome seasonality due to customer vacation shut downs, and in previous years we have seen that this seasonality effect improves in the first half of 2005 forfourth quarter. In particular, we expect orders to improve in the fourth quarter from our data storage, semiconductor and scientific research markets when compared tomarkets. As a result of the first half of 2004. Of the major industries servedweak third quarter booking rate, Veeco is reducing its headcount by Veeco, only orders from Veeco’s HB-LED/wireless customers declined in the first half of 2005 as compared with the first half of 2004. This decline was anticipated given the high level of equipment purchased by HB-LED/wireless customers in the first half of 2004 and the absorption of this capital equipment in 2005. Veeco’s overall order rate in the first half of 2005 increases the Company’s backlog and supports Veeco’s outlook for flat to moderately higher revenues in 2005, compared to 2004.

Veeco implemented a plan to improve the Company’s profitability in 2005. This plan is based on headcount reductions, which were takenapproximately 5.0% in the fourth quarter, of 2004,with many actions having already been taken.
For the 2005 year, Veeco had forecasted that its revenues would be flat to modestly higher than the previous year, and that the Company would focus on improving its profitability. This plan, which is expected to be met for the year, is based upon headcount
14

reductions as well as a product mix expectation for 2005 revenues that ~~Veeco expects~~has led to, and we expect will continue to lead to, increased gross margins. The Company currently expects higher 2005 revenues in ion beam products, lower 2005 revenues in epitaxial equipment products and ~~stability~~growth in its metrology revenues as compared to 2004. This revenue mix change, as well as other factors such as improved pricing and volume increases in some product lines iswas expected, ~~to result~~and has resulted in higher gross margins in each subsequent quarter of 2005 compared with 2004. In the third quarter, Veeco reported its fourth consecutive quarter with gross margin improvements of approximately two percentage points per quarter. Veeco’s third quarter gross margins improved to 44.2%, up about eight percentage points from the third quarter of 2004 and about two percentage points higher than the second quarter ~~Veeco’s gross margins increased to 42%, consistent with its plan, 2% better than the 40% reported in the first quarter.~~of 2005. Veeco currently expects gross margins to increase again in the fourth quarter of 2005 as compared to the third ~~and fourth quarters~~quarter of 2005.

Technology changes are continuing in all of Veeco’s markets: the continued ramp up of capacity for 80 GB hard drives in data storage and investments in next generation drives for smaller form factor hard disk drive consumer device applications; the increased use of Veeco’s automated AFMs for ~~sub 110~~90 nanometer and below semiconductor applications; the opportunity for Veeco’s MOCVD and MBE products to further penetrate the emerging HB-LED and wireless market; and the continued funding of nanoscience research which is one driver of Veeco’s scientific research business. While Veeco’s customers remain cautious regarding capital spending, they are placing orders for certain of ~~Veeco~~Veeco’s process equipment and metrology products that enable the production of their next generation products. Veeco remains well positioned to provide leadership technologies for growth applications in semiconductor, data storage, HB-LED/wireless and scientific research. While 2005 will be a relatively flat year with significantly improved profitability compared to 2004, we currently forecast that 2006 will be a growth year for the company driven by new Veeco product introductions in Ion Beam, Epitaxial and Metrology, which address the multi-market growth opportunities outlined above. Veeco currently intends to maintain its focus on gross margin and profitability improvements into 2006.

1415

Results of Operations:

Three Months Ended ~~June~~September 30, 2005 and 2004

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

	Three Months Ended June 30,										Dollar Incr/(Decr)			Three Months Ended September 30,									Dollar Incr/(Decr) Year to Year
	2005					2004					Year to Year			2005				2004					Dollar Incr/(Decr) Year to Year

Net sales	$	103,415		100.0	%	$	99,246		100.0	%	$	4,169		$	100,078	100.0	%	$	97,367		100.0	%	$	2,711
Cost of sales	59,989			58.0		58,331			58.8		1,658			55,816		55.8		61,913			63.6		(6,097		)
Gross profit	43,426			42.0		40,915			41.2		2,511			44,262		44.2		35,454			36.4		8,808
Operating expenses:
Selling, general and administrative expense	21,435			20.7		21,686			21.9		(251		)	21,210		21.2		19,590			20.1		1,620
Research and development expense	15,863			15.3		14,589			14.7		1,274			14,388		14.4		14,900			15.3		(512		)
Amortization expense	4,026			3.9		4,575			4.6		(549		)	4,038		4.0		4,336			4.4		(298		)
Other expense (income), net	70			0.1		(355		)	(0.4	)	425
Other expense, net														413		0.4		170			0.2		243
Total operating expenses	41,394			40.0		40,495			40.8		899			40,049		40.0		38,996			40.1		1,053
Operating income	2,032			2.0		420			0.4		1,612
Operating income (loss)														4,213		4.2		(3,542		)	(3.6	)	7,755
Interest expense, net	1,959			1.9		2,239			2.2		(280		)	1,815		1.8		1,793			1.8		22
Income (loss) before income taxes	73			0.1		(1,819		)	(1.8	)	1,892			2,398		2.4		(5,335		)	(5.5	)	7,733
Income tax provision (benefit)	522			0.5		(162		)	(0.1	)	684			832		0.8		(3,162		)	(3.3	)	3,994

Net loss	$	(449	)	(0.4	)%	$	(1,657	)	(1.7	)%	$	1,208
Net income (loss)														$	1,566	1.6	%	$	(2,173	)	(2.2	)%	$	3,739

	Sales									Orders											Sales									Orders
	Three Months Ended June 30,				Dollar and Percentage Incr/(Decr)					Three Months Ended June 30,				Dollar and Percentage Incr/(Decr)					Book to Bill Ratio		Three Months Ended September 30,				Dollar and Percentage Incr/(Decr)					Three Months Ended September 30,				Dollar and Percentage Incr/(Decr)					Book to Bill Ratio
	2005		2004		Year to Year					2005		2004		Year to Year					2005	2004	2005		2004		Year to Year					2005		2004		Year to Year					2005	2004

Segment Analysis
Ion Beam and Mechanical Process Equipment	$	46,600	$	37,905	$	8,695		22.9	%	$	55,995	$	26,938	$	29,057		107.9	%	1.20	0.71	$	39,389	$	30,297	$	9,092		30.0	%	$	34,463	$	18,728	$	15,735		84.0	%	0.87	0.62
Epitaxial Process Equipment	14,557		19,078		(4,521		)	(23.7	)	12,392		55,786		(43,394		)	(77.8	)	0.85	2.92	9,992		33,407		(23,415		)	(70.1	)	12,684		15,545		(2,861		)	(18.4	)	1.27	0.47
Metrology	42,258		42,263		(5		)	—		50,166		42,016		8,150			19.4		1.19	0.99	50,697		33,663		17,034			50.6		37,408		45,224		(7,816		)	(17.3	)	0.74	1.34
Total	$	103,415	$	99,246	$	4,169		4.2	%	$	118,553	$	124,740	$	(6,187	)	(5.0	)%	1.15	1.26	$	100,078	$	97,367	$	2,711		2.8	%	$	84,555	$	74,497	$	5,058		6.4	%	0.84	0.82

Industry Analysis
Data Storage	$	47,370	$	35,510	$	11,860		33.4	%	$	60,391	$	26,440	$	33,951		128.4	%	1.27	0.74	$	50,116	$	27,054	$	23,062		85.2	%	$	33,554	$	18,833	$	14,721		78.2	%	0.67	0.70
HB-LED/wireless	13,905		20,947		(7,042		)	(33.6	)	13,278		51,112		(37,834		)	(74.0	)	0.95	2.44	9,433		34,424		(24,991		)	(72.6	)	14,647		14,652		(5		)	—		1.55	0.43
Semiconductor	16,896		15,517		1,379			8.9		18,966		22,258		(3,292		)	(14.8	)	1.12	1.43	12,226		10,366		1,860			17.9		11,271		15,866		(4,595		)	(29.0	)	0.92	1.53
Research and Industrial	25,244		27,272		(2,028		)	(7.4	)	25,918		24,930		988			4.0		1.03	0.91	28,303		25,523		2,780			(10.9	)	25,083		30,146		(5,063		)	(16.8	)	0.89	1.18
Total	$	103,415	$	99,246	$	4,169		4.2	%	$	118,553	$	124,740	$	(6,187	)	(5.0	)%	1.15	1.26	$	100,078	$	97,367	$	2,711		2.8	%	$	84,555	$	79,497	$	5,058		6.4	%	0.84	0.82

Regional Analysis
US	$	29,842	$	40,936	$	(11,094	)	(27.1	)%	$	31,360	$	57,165	$	(25,805	)	(45.1	)%	1.05	1.40	$	36,833	$	31,800	$	5,033		15.8	%	$	30,498	$	31,825	$	(1,327	)	(4.2	)%	0.83	1.00
Europe	23,006		17,207		5,799			33.7		22,728		13,848		8,880			64.1		0.99	0.80	15,976		18,307		(2,331		)	(12.7	)	18,231		17,446		785			4.5		1.14	0.95
Japan	20,769		15,374		5,395			35.1		19,060		19,066		(6		)	—		0.92	1.24	12,353		13,032		(679		)	(5.2	)	16,798		12,959		3,839			29.6		1.36	0.99
Asia-Pacific	29,798		25,729		4,069			15.8		45,405		34,661		10,744			31.0		1.52	1.35	34,916		34,228		688			2.0		19,028		17,267		1,761			10.2		0.54	0.50
Total	$	103,415	$	99,246	$	4,169		4.2	%	$	118,553	$	124,740	$	(6,187	)	(5.0	)%	1.15	1.26	$	100,078	$	97,367	$	2,711		2.8	%	$	84,555	$	79,497	$	5,058		6.4	%	0.84	0.82

1516

Net sales of ~~$103.4~~$100.1 million for the ~~second~~third quarter of 2005 were up ~~4.2%~~2.8% from the comparable 2004 period. By segment, metrology sales were up $17.0 million or 50.6% and ion beam and mechanical process equipment sales were up ~~$8.7~~$9.1 million or ~~22.9%~~30.0%, while epitaxial process equipment sales were down ~~$4.5~~$23.4 million or ~~23.7%~~70.1%. Metrology sales ~~remained stable.~~were up primarily due to increased purchases in the semiconductor, data storage and research and industrial markets. The improvement in ion beam and mechanical process equipment sales is principally attributable to increased purchases by data storage customers resulting from a continued industry increase in capacity as well as technology investment in next-generation, higher areal density perpendicular thin film heads. The decrease in epitaxial process equipment sales is principally attributable to decreased purchases by HB-LED/wireless customers. By region, sales in ~~Europe, Japan~~the U.S. and Asia Pacific increased by ~~33.7%, 35.1%~~15.8% and ~~15.8%~~2.0%, respectively, while sales in ~~the U.S.~~Europe and Japan declined by ~~27.1%.~~12.7% and 5.2%, respectively. The Company believes that there will continue to be quarter-to-quarter variations in the geographic distribution of sales.

Orders of ~~$118.6~~$84.6 million for the ~~second~~third quarter of 2005 ~~decreased~~increased by ~~$6.2~~$5.1 million, or ~~5.0%~~6.4%, from the comparable 2004 period. By segment, the ~~77.8% decrease in epitaxial process equipment orders was driven by a $35.4 million reduction in orders for MOCVD systems and an additional decrease in MBE orders of $8.0 million. The 107.9%~~84.0% increase in ion beam and mechanical process equipment was due to increased orders tofrom data storage customers. The ~~19.4%~~18.4% decrease in epitaxial process equipment orders was driven by an $8.2 million reduction in orders for MOCVD systems offset by an increase in MBE orders of $5.3 million. The 17.3% decrease in metrology orders was due to a ~~$0.8~~$5.8 million ~~increase~~decrease in AFM orders and a ~~$7.4~~$2.0 million ~~increase~~decrease in optical metrology orders.

The Company’s book/bill ratio for the ~~second~~third quarter of 2005, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was ~~1.15.~~0.84. Historically, the third quarter has been the lowest quarter for orders for each of the last five years impacted by vacation shut downs and other buying factors. During the quarter ended ~~June~~September 30, 2005, the Company experienced order cancellations of ~~$1.3~~$8.3 million and the rescheduling of order delivery dates by ~~customers.~~customers principally related to the MOCVD product line. The Company’s backlog as of ~~June~~September 30, 2005 was approximately ~~$155.6~~$131.7 million. Due to changing business conditions and customer requirements, the Company may continue to experience cancellations and/or rescheduling of orders.

Gross profit for the quarter ended ~~June~~September 30, 2005 was ~~42.0%~~44.2%, as compared to ~~41.2%~~36.4% in the ~~second~~third quarter of 2004. The ion beam and mechanical process equipment gross margins increased from ~~35.2%~~34.8% to ~~42.7%~~41.0% and the metrology gross margins increased from 49.5% to 52.6%, in each segment primarily due to increased ~~volume and favorable price mix as well as cost cutting measures at the Plainview ion beam facility.~~sales volume. Epitaxial process equipment gross margins ~~declined~~decreased from ~~22.6%~~24.7% to ~~17.8%~~14.0%, primarily due to ~~the lower~~a 70.1% reduction in sales ~~volumes. Metrology gross margins decreased~~volumes, mostly from ~~55.0% to 49.7% due to a less favorable product mix of AFM~~MOCVD products.

Selling, general and administrative expenses were ~~$21.4~~$21.2 million, or ~~20.7%~~21.2% of sales, in the ~~second~~third quarter of 2005, compared with ~~$21.7~~$19.6 million, or ~~21.9%~~20.1%, in the ~~second~~third quarter of 2004. The ~~$0.3~~$1.6 million ~~decrease~~increase is primarily attributable to ~~cost reduction initiatives~~higher insurance and ~~lower commission~~legal costs, ~~partially offset by~~an increase in personnel costs, including incentive bonus accruals and annual salary increases, ~~and increased~~as well as incremental costs ~~from~~attributable to the ~~MTI acquisition.~~Manufacturing Technology Inc. acquisition during the fourth quarter of 2004.

Research and development expense totaled ~~$15.9~~$14.4 million in the ~~second~~third quarter of 2005, ~~an increase~~a decrease of ~~$1.3~~$0.5 million from the ~~second~~third quarter of 2004, due primarily to spending reductions in the ~~acceleration of new products in ion beam and mechanical~~epitaxial process equipment ~~and epitaxial process equipment.~~division. As a percentage of sales, research and development ~~increased~~decreased in the ~~second~~third quarter of 2005 to 14.4% from 15.3% ~~from 14.7% for~~in the ~~second~~third quarter of 2004.

Amortization expense totaled $4.0 million in the ~~second~~third quarter of 2005 compared to ~~$4.6~~$4.3 million in the ~~second~~third quarter of 2004, due to reductions in amortization expense for intangible assets that were fully amortized.

Other expense, net, of ~~$0.1 million and other income, net, of~~ $0.4 million in the ~~second~~third quarter of 2005 consisted of net foreign exchange losses and other expenses. Other expense, net, of $0.2 million in the ~~second~~third quarter of 2004 ~~respectively, was~~ principally ~~due to~~consisted of foreign exchange gains and ~~losses and loss on the sale of property, plant and equipment.~~losses.

Net interest expense ~~in the second quarter of 2005~~ was ~~$2.0 million compared to $2.2~~$1.8 million in the ~~second quarter~~third quarters of 2005 and 2004.

Income ~~taxes~~tax provision for the quarter ended ~~June~~September 30, 2005 amounted to ~~$0.5~~$0.8 million, principally for foreign taxes, compared with aan income tax benefit of ~~$0.2~~$3.2 million in the ~~second~~third quarter of 2004. For the year ended December 31, 2004, in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, the Company recorded a charge of approximately $54.0 million to establish a valuation allowance against the balance of its domestic net deferred tax assets, which ~~consists~~consisted of net operating loss and tax credit carryforwards, as well as temporary deductible differences. For the quarter ended ~~June~~September 30, 2005, the Company incurred a domestic net loss and, accordingly, established a valuation allowance to offset domestic deferred tax assets. If the Company is able to realize part or all of the deferred tax assets in future periods, it will reduce its provision for income taxes with a ~~release~~reversal of the valuation allowance in an amount that corresponds with the income tax liability generated.

1617

~~Six~~Nine Months Ended ~~June~~September 30, 2005 and 2004

The following tables show selected items of Veeco’s Condensed Consolidated Statements of Operations, percentages of sales and comparisons between the ~~six~~nine months ended ~~June~~September 30, 2005 and 2004 and the analysis of sales and orders for the same periods between our segments, industries and regions (in thousands):

	Six Months Ended June 30,										Dollar Incr/(Decr) Year to Year			Nine Months Ended September 30,										Dollar Incr/(Decr) Year to Year
	2005					2004					Dollar Incr/(Decr) Year to Year			2005					2004					Dollar Incr/(Decr) Year to Year

Net sales	$	197,265		100.0	%	$	190,109		100.0	%	$	7,156		$	297,343		100.0	%	$	287,476		100.0	%	$	9,867
Cost of sales	116,307			59.0		112,396			59.1		3,911			172,123			57.9		174,309			60.6		(2,186		)
Gross profit	80,958			41.0		77,713			40.9		3,245			125,220			42.1		113,167			39.4		12,053
Operating expenses:
Selling, general and administrative expense	41,606			21.1		41,576			21.9		30			62,816			21.1		61,166			21.3		1,650
Research and development expense	30,687			15.5		28,616			15.0		2,071			45,075			15.2		43,516			15.1		1,559
Amortization expense	8,516			4.3		9,471			5.0		(955		)	12,554			4.2		13,807			4.8		(1,253		)
Other income, net	(28		)	—		(641		)	(0.3	)	613
Other expense (income), net														385			0.1		(471		)	(0.1	)	856
Total operating expenses	80,781			40.9		79,022			41.6		1,759			120,830			40.6		118,018			41.1		2,812
Operating income (loss)	177			0.1		(1,309		)	(0.7	)	1,486			4,390			1.5		(4,851		)	(1.7	)	9,241
Interest expense, net	4,105			2.1		4,438			2.3		(333		)	5,920			2.0		6,231			2.2		(311		)
Loss before income taxes	(3,928		)	(2.0	)	(5,747		)	(3.0	)	1,819			(1,530		)	(0.5	)	(11,082		)	(3.9	)	9,552
Income tax provision (benefit)	1,223			0.6		(1,380		)	(0.7	)	2,603			2,055			0.7		(4,542		)	(1.6	)	6,597

Net loss	$	(5,151	)	(2.6	)%	$	(4,367	)	(2.3	)%	$	(784	)	$	(3,585	)	(1.2	)%	$	(6,540	)	(2.3	)%	$	2,955

	Sales									Orders											Sales									Orders
	Six Months Ended June 30,				Dollar and Percentage Incr/(Decr)					Six Months Ended June 30,				Dollar and Percentage Incr/(Decr)					Book to Bill Ratio		Nine Months Ended September 30,				Dollar and Percentage Incr/(Decr)					Nine Months Ended September 30,				Dollar and Percentage Incr/(Decr)					Book to Bill Ratio
	2005		2004		Year to Year					2005		2004		Year to Year					2005	2004	2005		2004		Year to Year					2005		2004		Year to Year					2005	2004

Segment Analysis
Ion Beam and Mechanical Process Equipment	$	74,439	$	73,253	$	1,186		1.6	%	$	97,792	$	74,206	$	23,586		31.8	%	1.31	1.01	$	113,828	$	103,550	$	10,278		9.9	%	$	132,255	$	92,934	$	39,321		42.3	%	1.16	0.90
Epitaxial Process Equipment	37,080		33,035		4,045			12.2		26,020		93,686		(67,666		)	(72.2	)	0.70	2.84	47,072		66,442		(19,370		)	(29.2	)	38,704		109,231		(70,527		)	(64.6	)	0.82	1.64
Metrology	85,746		83,821		1,925			2.3		93,678		73,909		19,769			26.7		1.09	0.88	136,443		117,484		18,959			16.1		131,086		119,133		11,953			10.0		0.96	1.01
Total	$	197,265	$	190,109	$	7,156		3.8	%	$	217,490	$	241,801	$	(24,311	)	(10.1	)%	1.10	1.27	$	297,343	$	287,476	$	9,867		3.4	%	$	302,045	$	321,298	$	(19,253	)	(6.0	)%	1.02	1.12

Industry Analysis
Data Storage	$	72,985	$	66,966	$	6,019		9.0	%	$	105,694	$	71,388	$	34,306		48.1	%	1.45	1.07	$	123,101	$	94,020	$	29,081		30.9	%	$	139,248	$	90,221	$	49,027		54.3	%	1.13	0.96
HB-LED/wireless	36,209		37,977		(1,768		)	(4.7	)	27,245		90,093		(62,848		)	(69.8	)	0.75	2.37	45,642		72,401		(26,759		)	(37.0	)	41,892		104,745		(62,853		)	(60.0	)	0.92	1.45
Semiconductor	34,250		28,821		5,429			18.8		33,394		32,321		1,073			3.3		0.98	1.12	46,476		39,187		7,289			18.6		44,665		48,187		(3,522		)	(7.3	)	0.96	1.23
Research and Industrial	53,821		56,345		(2,524		)	(4.5	)	51,157		47,999		3,158			6.6		0.95	0.85	82,124		81,868		256			0.3		76,240		78,145		(1,905		)	(2.4	)	0.93	0.95
Total	$	197,265	$	190,109	$	7,156		3.8	%	$	217,490	$	241,801	$	(24,311	)	(10.1	)%	1.10	1.27	$	297,343	$	287,476	$	9,867		3.4	%	$	302,045	$	321,298	$	(19,253	)	(6.0	)%	1.02	1.12

Regional Analysis
US	$	62,602	$	71,771	$	(9,169	)	(12.8	)%	$	68,624	$	101,238	$	(32,614	)	(32.2	)%	1.10	1.41	$	99,435	$	103,571	$	(4,136	)	(4.0	)%	$	99,122	$	133,063	$	(33,941	)	(25.5	)%	1.00	1.28
Europe	44,200		30,729		13,471			43.8		32,702		26,552		6,150			23.2		0.74	0.86	60,176		49,036		11,140			22.7		50,933		43,998		6,935			15.8		0.85	0.90
Japan	34,984		34,510		474			1.4		36,411		35,591		820			2.3		1.04	1.03	47,337		47,542		(205		)	(0.4	)	53,209		48,550		4,659			9.6		1.12	1.02
Asia-Pacific	55,479		53,099		2,380			4.5		79,753		78,420		1,333			1.7		1.44	1.48	90,395		87,327		3,068			3.5		98,781		95,687		3,094			3.2		1.09	1.10
Total	$	197,265	$	190,109	$	7,156		3.8	%	$	217,490	$	241,801	$	(24,311	)	(10.1	)%	1.10	1.27	$	297,343	$	287,476	$	9,867		3.4	%	$	302,045	$	321,298	$	(19,253	)	(6.0	)%	1.02	1.12

Net sales of ~~$197.3~~$297.3 million for the ~~six~~nine months ended ~~June~~September 30, 2005 were up ~~$7.2~~$9.9 million or ~~3.8%~~3.4% from the comparable 2004 period. By segment, metrology sales were up $19.0 million or 16.1% and ion beam and mechanical process equipment and metrology sales were up ~~$1.2~~$10.3 million or ~~1.6%~~9.9%, while epitaxial process equipment sales were ~~up $4.0~~down $19.4 million or ~~12.2%, and~~29.2%. The increase in metrology sales is principally attributable to increased ~~by $1.9 million or 2.3%.~~automated AFM sales. The improvement in ion beam

and mechanical process equipment sales is principally attributable to ~~increases~~an increase in the data storage ~~and research and industrial markets,~~market, offset by a decline in the HB-LED/wireless market. The ~~improvement~~decline in epitaxial process equipment sales is principally attributable to ~~shipments made from a backlog of orders previously received. The $1.9 million improvement in metrology sales is principally~~

~~attributable to increased automated AFM sales, with increases in the data storage and semiconductor markets partially offset~~decreased purchases by ~~a decline in sales in the research and industrial market.~~HB-LED/wireless customers. By region, sales in Europe and Asia Pacific increased ~~43.8%~~22.7% and 3.5%, respectively, while sales in the U.S. and Japan declined by ~~12.8%.~~4.0% and 0.4%, respectively. The Company believes that there will continue to be period-to-period variations in the geographic distribution of sales.

Orders of ~~$217.5~~$302.0 million for the ~~six~~nine months ended ~~June~~September 30, 2005 represented a ~~$24.3~~decrease of $19.3 million, or ~~a 10.1%~~6.0%, ~~decrease~~ from the comparable 2004 period. By segment, the ~~72.2%~~64.6% decrease in epitaxial process equipment orders was driven by a ~~total of $58.2~~$66.4 million reduction in orders for MOCVD systems and ~~an additional~~a decrease in MBE orders of ~~$9.5~~$4.1 million. The ~~31.8%~~42.3% increase in ion beam and mechanical process equipment was due to increased orders from data storage customers. The ~~26.7%~~10.0% increase in metrology orders was due to ~~an $8.7~~a $2.8 million increase in AFM products and ~~an $11.1~~a $9.1 million increase in optical metrology products.

The Company’s book/bill ratio for the ~~six~~nine months ended ~~June~~September 30, 2005, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was ~~1.10.~~1.02.

Gross profit for the ~~six~~nine months ended ~~June~~September 30, 2005 was ~~41.0%~~42.1%, as compared to ~~40.9%~~39.4% in the comparable period of 2004. Gross profit in 2004 was negatively impacted by $1.5 million in purchase accounting adjustments relating to the acquisitions of the TurboDisc business unit and Aii. These purchase accounting adjustments resulted from the required capitalization of profit in inventory and the permanent elimination of certain deferred revenue. The ion beam and mechanical process equipment gross margins were ~~40.2%~~40.5% in the first ~~six~~nine months of 2005, as compared to ~~34.9%~~35.0% in the same period in ~~2004. The increase was~~2004, primarily due to increased volume ~~favorable price mix~~ and cost cutting measures at the Plainview ion beam facility during the ~~six~~nine months ended ~~June~~September 30, ~~2005 and the effect of the $1.5 million in purchase accounting adjustments in 2004 described above.~~2005. Epitaxial process equipment gross margins in the first ~~six~~nine months of 2005 were ~~20.4%~~19.1%, as compared to ~~21.3%~~24.7% in the prior year period. This decrease was ~~primarily~~ due to ~~higher warranty expenses for~~a 29.2% reduction in sales volumes primarily from MOCVD ~~products and an unfavorable product mix in MBE~~ products. Metrology gross margins decreased from ~~54.0%~~52.7% to ~~50.7%~~51.4% principally due to a less favorable product mix of AFM products.

Selling, general and administrative expenses were ~~$41.6~~$62.8 million, or 21.1% of sales in the ~~six~~nine months ended ~~June~~September 30, 2005, compared with ~~$41.6~~$61.2 million, or ~~21.9%~~21.3% in the ~~six~~nine months ended ~~June~~September 30, 2004. The $1.6 million increase is primarily attributable to higher insurance and legal costs, an increase in accrued bonuses and annual salary increases, as well as incremental costs attributable to the Manufacturing Technology Inc. acquisition during the fourth quarter of 2004.

Research and development expense totaled ~~$30.7~~$45.1 million during the first ~~six~~nine months of 2005, an increase of ~~$2.1~~$1.6 million from the first ~~six~~nine months of 2004, due toan increase in product development in the ~~acceleration of new products in~~ ion beam and mechanical ~~process equipment~~ and epitaxial process ~~equipment.~~equipment divisions. As a percentage of sales, research and development expense increased during the ~~six~~nine months ended ~~June~~September 30, 2005 to ~~15.6%~~15.2% from ~~15.0%~~15.1% for the corresponding period of 2004.

Other ~~income,~~expense, net, for the ~~six~~nine months ended ~~June~~September 30, 2005, was ~~insignificant,~~$0.4 million, compared to ~~$0.6~~other income, net of $0.5 million for the ~~six~~nine months ended ~~June~~September 30, ~~2004, which was principally due to foreign exchange gains and other items.~~2004.

Net interest expense in the ~~six~~nine months ended ~~June~~September 30, 2005 was ~~$4.1~~$5.9 million compared to ~~$4.4~~$6.2 million in the ~~six~~nine months ended ~~June~~September 30, 2004. The change is principally due to the increase in interest income resulting from higher interest rates.

Income ~~taxes~~tax provision for the ~~six~~nine months ended ~~June~~September 30, 2005 amounted to ~~$1.2~~$2.1 million, principally for foreign taxes, compared with a benefit of ~~$1.4~~$4.5 million infor the ~~six~~nine months ended ~~June~~September 30, 2004. For the year ended December 31, 2004, in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, the Company recorded a charge of approximately $54.0 million to establish a valuation allowance against the balance of its domestic net deferred tax assets, which consists of net operating loss and tax credit carryforwards, as well as temporary deductible differences. For the ~~six~~nine months ended ~~June~~September 30, 2005, the Company incurred a domestic net loss and, accordingly, established a valuation allowance to offset domestic deferred tax assets. If the Company is able to realize part or all of the deferred tax assets in future periods, it will reduce its provision for income taxes with a ~~release~~reversal of the valuation allowance in an amount that corresponds with the income tax liability generated.

Liquidity and Capital Resources

The Company had a net increase in cash and cash equivalents of ~~$9.1~~$11.4 million in the ~~six~~nine months ended ~~June~~September 30, 2005. Cash provided by operations was ~~$24.1~~$29.5 million for this period, as compared to cash provided by operations of ~~$6.5~~$4.9 million for the comparable 2004 period. Net income adjusted for non-cash items provided operating cash flows of ~~$9.9~~$19.0 million for the ~~six~~nine months ended ~~June~~September 30, 2005, compared to ~~$6.9~~$8.1 million for the comparable 2004 period. Accounts receivable for the ~~six~~nine months ended ~~June~~September 30, 2005 increased by $4.9 million, primarily due to increased billing activity during September generated by the Ion Beam

business unit offset, in part, by a reduction in the Epitaxial business unit related to a decline in sales volume. During the nine months ended September 30, 2005, inventories decreased by ~~$6.3~~approximately $10.2 million as each business segment has continued to reduce its inventory levels. During the nine months ended September 30, 2005, accounts payable increased by $7.6 million, primarily as a result of the timing of collection activities in the Plainview Ion Beam division and in the Asia Pacific region as well as a reduction in days’ sales outstanding. During the six months ended June 30, 2005, inventories decreased by approximately $9.0 million, mainly due to reductions in finished goods inventory for the salepayment of systems built during 2004, as well as inventory reductions throughout the process equipment businesses. During the six months ended June 30, 2005, accounts payable increased by $3.0 million, principally as a result of an increase in the purchase of materials to meet shipment

~~demand.~~certain vendor invoices. Accrued expenses and other current liabilities ~~decreased $2.4~~increased $1.2 million during the ~~six~~nine months ended ~~June~~September 30, 2005. ~~This decrease is~~Other, net increased by $3.6 million due to ~~a reduction~~the increased costs in accrued interest of $2.2 million related to the Company’s outstanding debt, $2.0 million for reduced merger and restructuring accruals, and a $1.9 reduction in customer deposits, partially offset by increased incentive compensation accruals of $2.6 million related to increased profitability, an increase of $1.4 million in deferred gross profits, plus net increases of $0.3 million in other items.capitalized software, as well as prepaid insurance.

Cash used in investing activities of ~~$17.5~~$21.4 million for the ~~six~~nine months ended ~~June~~September 30, 2005, was ~~mostly~~primarily due to ~~aggregate~~ earn-out payments of ~~$15.0~~$13.1 million to ~~Emcore,~~ the former owner of the TurboDisc business unit, and $1.9 million to the previous shareholders of Nanodevices Inc., and capital expenditures of ~~$4.6~~$8.6 million, partially offset by $2.2 million in proceeds from the sale of ~~assets held for sale and property, plant and equipment.~~certain assets.

Cash provided by financing activities of ~~$0.9~~$1.6 million for the ~~six~~nine months ended ~~June~~September 30, 2005 resulted from ~~$1.1~~$1.8 million in stock issuance proceeds ~~partially~~ offset by $0.2 million in debt payments.

The Company believes that existing cash balances, together with cash generated from operations and amounts available under the Company’s $50.0 million revolving credit facility, will be sufficient to meet the Company’s projected working capital and other cash flow requirements for the next twelve months, as well as the Company’s contractual obligations over the next three years. The Company believes it will be able to meet its obligation to repay the outstanding $220 million subordinated notes that mature on December 21, 2008 through a combination of ~~conversion of the notes outstanding,~~ refinancing, cash generated from operations and/or other means.

The Company is potentially liable for earn-out payments to the former owners of the businesses acquired in 2003 based on revenue targets achieved by each of the respective acquired businesses. The maximum remaining amount of these contingent liabilities is $17.0 million, consisting of $9.0 million to the former shareholders of Aii over a two-year period, $1.1 million to Nanodevices Inc. over a two-year period and $6.9 million to ~~Emcore Corporation,~~ the former owner of TurboDisc, over a one-year period. Any amounts payable are to be paid during the first quarter of 2006 and 2007 to the former owners of Aii and ~~Nanodevices and~~ during the first quarter of 2006 to ~~Emcore.~~the former owner of TurboDisc. These payments ~~are~~would be based on the Company achieving revenue in excess of certain targets for the preceding fiscal year. The target for the $1.1 million earn-out payment to Nanodevices Inc. was achieved as of September 30, 2005 and will be paid during the first quarter of 2006. It is not presently possible to calculate the amounts, if any, that may be due ~~for each year.~~to the former shareholders of Aii or to the former owner of TurboDisc.

On March 15, 2005, the Company ~~terminated its $100.0 million revolving credit facility, which had been established on April 19, 2001, and~~ entered into a new revolving credit facility, which provides for borrowings of up to $50.0 million (the “Facility”). The Facility’s annual interest rate is a floating rate equal to the prime rate of the agent bank plus¹¤₄% and in the event the Company’s ratio of debt to cash flow is below a defined amount, the annual interest rate is adjustable to a minimum rate equal to the prime rate. A LIBOR based interest rate option is also provided. The Facility has a term of three years and borrowings under the Facility may be used for general corporate purposes, including working capital and acquisitions. The Facility contains certain restrictive covenants which, among other requirements, impose limitations with respect to the incurrence of indebtedness, the payment of dividends, long-term leases, investments, mergers, acquisitions, consolidations and sales of assets. The Company is required to satisfy certain financial tests under the Facility and substantially all of the assets of the Company and its material domestic subsidiaries, other than real estate, have been pledged to secure the Company’s obligations under the Facility. As of ~~June~~September 30, 2005, no borrowings were outstanding under the Facility.

1920

Application of Critical Accounting Policies

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

Revenue Recognition: The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition ~~which superseded the earlier related guidance in SAB No. 101,~~ ~~Revenue Recognition in Financial Statements~~. Certain of our product sales are accounted for as multiple-element arrangements in accordance with EITF 00-21, Revenue Arrangements with Multiple Deliverables. A multiple-element arrangement is a transaction, which may involve the delivery or performance of multiple products, services or rights to use assets, and performance may occur at different points in time or over different periods of time. The Company recognizes revenue when persuasive evidence of an arrangement exists, the seller’s price is fixed or determinable and collectibility is reasonably assured. For products produced according to the Company’s published specifications, where no installation is required or installation is deemed perfunctory and no substantive customer acceptance provisions exist, revenue is recognized when title passes to the customer, generally upon shipment. For products produced according to a particular customer’s specifications, revenue is recognized when the product has been tested, ~~and~~ it has been demonstrated that it meets the customer’s specifications and title passes to the customer. The amount of revenue recorded is reduced by the amount of any customer retention (generally 10% to 20%), which is not payable by the customer until installation is completed and final customer acceptance is achieved. Installation is not deemed to be essential to the functionality of the equipment since installation does not involve significant changes to the features or capabilities of the equipment or building complex interfaces and connections. In addition, the equipment could be installed by the customer or other vendors and generally the cost of installation approximates only 1% to 2% of the sales value of the related equipment. For new products, new applications of existing products, or for products with substantive customer acceptance provisions where performance cannot be fully assessed prior to meeting customer specifications at the customer site, revenue is recognized upon completion of installation and receipt of final customer acceptance. Since title to goods generally passes to the customer upon shipment and 80% to 90% of the contract amount becomes payable at that time, inventory is relieved and accounts receivable is recorded for the amount billed at the time of shipment. The profit on the amount billed for these transactions is deferred and recorded as deferred profit in the accompanying balance sheets. At ~~June~~September 30, 2005 and December 31, 2004, $2.6 million and $1.2 million, respectively, are recorded in deferred profit. Service and maintenance contract revenues are recorded as deferred revenue, which is included in other accrued expenses, and recognized as revenue on a straight-line basis over the service period of the related contract.

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

Goodwill and Indefinite-Lived Intangible Asset Impairment: The Company has significant intangible assets related to goodwill and other acquired intangibles. In assessing the recoverability of the Company’s goodwill and other indefinite-lived intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If it is determined that impairment indicators are present and that the assets will not be fully recoverable, their carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Changes in strategy and/or market conditions could significantly impact these assumptions, and thus Veeco may be required to record impairment charges for the assets not previously recorded.

2021

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

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

Deferred Tax Valuation Allowance: As part of the process of preparing Veeco’s condensed consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within Veeco’s condensed consolidated balance sheet. The carrying value of deferred tax assets is adjusted by a valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Our net deferred tax assets consist primarily of net operating loss and tax credit carryforwards, and timing differences between the book and tax treatment of inventory and other asset valuations. Realization of these net deferred tax assets is dependent upon our ability to generate future taxable income.

We record valuation allowances in order to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, we consider a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under SFAS No. 109, factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax ~~asset~~asset’s carrying value.

For the year ended December 31, 2004, the Company recorded a charge of approximately $54.0 million to establish a valuation allowance against the balance of its domestic net deferred tax assets, which consists of net operating loss and tax credit carryforwards, as well as temporary deductible differences. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, which places primary importance on the Company’s historical results of operations. Although the Company’s results in prior years were significantly affected by restructuring and other charges, the Company’s historical losses and losses incurred during 2004 represented negative evidence sufficient to require a full valuation allowance under the provisions of SFAS No. 109. If the Company is able to realize part or all of the deferred tax assets in future periods, it will reduce its provision for income taxes with a ~~release~~reversal of the valuation allowance in an amount that corresponds with the income tax liability generated.

At ~~June~~September 30, 2005 and December 31, 2004, we have foreign deferred tax assets, net of valuation allowances, of ~~$3.0 million and~~ $3.1 ~~million, respectively.~~million. We believe it is more likely than not that we will be able to realize these assets through the reduction of future taxable income.

Other Recent Accounting Pronouncements: On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123(R) (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) must be adopted no later than the beginning of the first fiscal year beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt SFAS No. 123(R) on January 1, 2006.

2122

SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

The Company has not yet determined whether it will adopt SFAS No. 123(R) using the modified prospective method or the modified retrospective method.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on consolidated results of operations, although it will have no impact on the Company’s overall consolidated financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per common share in Note 1 to Veeco’s Condensed Consolidated Financial Statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce consolidated net operating cash flows and increase consolidated net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the Company did not recognize an amount of consolidated operating cash flows for such excess tax deductions in 2005 or 2004.

2223

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Veeco’s net sales to foreign customers represented approximately ~~71.1%~~63.2% and ~~68.3%~~66.6% of Veeco’s total net sales for the three and ~~six~~nine months ended ~~June~~September 30, 2005, respectively, and ~~58.8%~~67.3% and ~~62.2%~~64.0% for the respective comparable 2004 periods. 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 ~~17.1%~~20.2% and ~~19.2%~~19.5% of Veeco’s total net sales for the three and ~~six~~nine months ended ~~June~~September 30, 2005, respectively, and ~~19.0%~~18% and ~~21.4%~~20% for the respective comparable 2004 periods. The aggregate foreign currency exchange loss in 2005 included in determining the consolidated results of operations was approximately $0.3 million and $0.5 million, including approximately $0.1 million ~~net~~ of hedging losses and less than $0.1 million of hedging gains on forward exchange contracts, for the three and ~~six~~nine months ended ~~June~~September 30, ~~2005.~~2005, respectively. The aggregate foreign currency exchange ~~gain~~loss in 2004 included in determining the consolidated results of operations was approximately ~~$0.1~~$0.3 million and ~~$0.3~~$0.1 million, including approximately ~~$0.0~~$0.1 million of hedging losses and ~~$0.2~~less than $0.1 million of hedging gains on forward exchange contracts, for the three and ~~six~~nine months ended ~~June~~September 30, ~~2004.~~2004, respectively. Veeco is exposed to financial market risks, including changes in foreign currency exchange rates. The changes in currency exchange rates that have the largest impact on translating Veeco’s international operating profit are the Japanese Yen and the Euro. Veeco uses derivative financial instruments to mitigate these risks. Veeco does not use derivative financial instruments for speculative or trading purposes. The Company enters into monthly forward contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known currency exposures. The average notional amount of such contracts was approximately ~~$4.5~~$4.2 million and $4.1 million for the three and ~~six~~nine months ended ~~June~~September 30, ~~2005.~~2005, respectively. As of ~~June~~September 30, 2005, the Company had entered into forward contracts for the month of ~~July~~October for the notional amount of approximately ~~$4.0~~$17.1 million, which approximates the fair market value on ~~June~~September 30, 2005.

Item 4. Controls and Procedures.

The Company’s senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures under the supervision of and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings.

The Company is presently in the process of implementing a new company-wide integrated applications software and, to date, has completed the conversion to this new platform in ~~three~~four locations. As a result, certain changes have been made to the Company’s internal controls, which management believes will strengthen the Company’s internal control structure. There have been no other significant changes in our internal controls or other factors that could significantly affect these controls after such evaluation.

2324

Part II. Other Information

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

The annual meeting of stockholders of the Company was held on May 25, 2005. The matters voted on at the meeting were: (a) the election of three directors: (i) Joel A. Elftmann, (ii) Paul R. Low and (iii) Peter J. Simone; (b) approval of an amendment to the Veeco Instruments Inc. First Amended and Restated Employee Stock Purchase Plan; (c) approval of an amendment to the Veeco Instruments Inc. 2000 Stock Incentive Plan; and (d) ratification of the Board’s appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2005. The terms of each of the following directors continued after the meeting: Edward H. Braun, Richard A. D’Amore, Heinz K. Fridrich, Douglas A. Kingsley, Roger D. McDaniel and Irwin H. Pfister. As of the record date for the meeting, there were 29,858,417 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. Each of the directors up for reelection was reelected and each other matter submitted to a stockholder vote was approved by the required number of votes on each such matter. The results of the voting were as follows:

Matter

For

Withheld

Broker
Non-Votes

(a)(i)

22,691,734

1,278,684

(a)(ii)

20,381,772

3,588,172

(a)(iii)

22,978,095

991,849

Matter

For

Against

Abstained

Broker
Non-Votes

(b)

11,784,367

799,965

983,518

(c)

6,711,152

5,865,346

991,352

(d)

23,622,397

327,909

19,638

Item 6. Exhibits.

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

Number	Description	Incorporated by Reference to the Following Document:

10.1	~~Amendment~~Letter agreement dated ~~May 25,~~October 31, 2005 tobetween Veeco Instruments Inc. ~~2000 Stock Incentive Plan.~~and Robert P. Oates.	*

10.2	Letter agreement dated ~~June 17,~~October 31, 2005 between Veeco Instruments Inc. and Jeannine P. Sargent.	~~Current Report on Form 8-K filed~~ ~~July 1, 2005, Exhibit 10.1~~*

10.3	~~Letter agreement dated February 24, 2005 between~~Form of Restricted Stock Agreement pursuant to the Veeco Instruments Inc. ~~and~~ ~~Richard Wissenbach.~~2000 Stock Incentive Plan.	*

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

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

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

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

* Filed herewith

2425

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: ~~August 1,~~November 2, 2005

	Veeco Instruments Inc.

	By:	/s/ EDWARD H. BRAUN
		Edward H. Braun
		*Chairman and Chief Executive Officer*

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

2526

INDEX TO EXHIBITS

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

Number	Description	Incorporated by Reference to the Following Document:

10.1	~~Amendment~~Letter agreement dated ~~May 25, 2005 to~~October 31,2005 between Veeco Instruments Inc. ~~2000 Stock Incentive Plan.~~and Robert P. Oates.	*

10.2	Letter agreement dated ~~June 17,~~October 31, 2005 between Veeco Instruments Inc. and Jeannine P. Sargent.	~~Current Report on Form 8-K filed~~ ~~July 1, 2005, Exhibit 10.1~~*

10.3	~~Letter agreement dated February 24, 2005 between~~Form of Restricted Stock Agreement pursuant to the Veeco Instruments Inc. ~~and~~ ~~Richard Wissenbach.~~2000 Stock Incentive Plan.	*

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

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

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

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

* Filed herewith

2627

	June 30, 2005		December 31, 2004

Ion Beam and Mechanical Process Equipment	$	27,395	$	27,276
Epitaxial Process Equipment	39,141		39,091
Metrology	28,219		28,278
Total	$	94,755	$	94,645

Matter	For	Withheld	Broker Non-Votes

(a)(i)	22,691,734	1,278,684
(a)(ii)	20,381,772	3,588,172
(a)(iii)	22,978,095	991,849

Matter	For	Against	Abstained	Broker Non-Votes

(b)	11,784,367	799,965	983,518
(c)	6,711,152	5,865,346	991,352
(d)	23,622,397	327,909	19,638

Inventories

Note 5—Comprehensive LossIncome (Loss)

Application of Critical Accounting Policies

Part II. Other Information

Edward H. Braun

Chairman and Chief Executive Officer