UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the transition period from              to              .

Commission file number 0-16244

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

Large accelerated filer x    Accelerated filer o              Non-accelerated filer o

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

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

SAFE HARBOR STATEMENT

                This Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Discussions containing such forward-looking statements may be found in Items 2 and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. These risks and uncertainties include, without limitation, the following:

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

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

•                  We face significant competition.

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

•                  Our quarterly operating results fluctuate significantly.

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

•                  We rely on a limited number of suppliers.

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

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

•                  We are subject to foreign currency exchange risks.

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

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

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

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

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

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

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

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

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

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

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

Available Information

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

Internet Address

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

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VEECO INSTRUMENTS INC.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

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

See accompanying notes.

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

See accompanying notes.

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

See accompanying notes.

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VEECO INSTRUMENTS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1—Basis of Presentation

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

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

Net (Loss) Income Per Common Share

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

Net (loss) income and diluted net (loss) income per common share are computed using the weighted average number of common and common equivalent shares outstanding during the period.

During the three and nine month periods ended September 30, 2007, options to purchase 5.7 million shares of common stock (at prices ranging from $0.27 to $72.00 per share) that were outstanding were excluded from the computation of diluted earnings per share.  During the comparable 2006 periods, options to purchase 2.9 million shares (at prices ranging from $23.11 to $72.00 per share) and 3.0 million shares (at prices ranging from $22.63 to $72.00 per share) of common stock that were outstanding were excluded from the computation of diluted earnings per share.  In the 2007 periods, the Company recorded net losses, so the effect of all options outstanding was anti-dilutive.  In 2006, the exercise price of these options exceeded the average market price of the Company’s common stock, thereby causing their effect to be anti-dilutive.

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

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

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

The New Notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, as long as the Company has the ability and the intent to settle the principal amount of the New Notes in cash.  Under the terms of the New Notes, the Company may pay the principal amount of converted New Notes in cash or in shares of common stock.  The Company has indicated that it intends to pay such amounts in cash.  Using the treasury stock method, the impact of the assumed conversion of the New Notes is anti-dilutive for the three and nine months ended September 30, 2007, as the average stock price was below the conversion price of $27.23 for both periods.  The effect of the assumed converted shares is dependent on the stock price at the time of the conversion.  The maximum number of common equivalent shares issuable upon conversion inclusive of the maximum make whole provision is approximately 6.0 million.

Income Taxes

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

Recent Accounting Pronouncements

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

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically scoped out of the Statement) at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as an adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

Note 2—Share-Based Payments

Stock Option and Restricted Stock-Based Compensation

                Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period  The following compensation expense was included in

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the condensed consolidated statement of operations for the three and nine months ended September 30, 2007 and 2006 (in thousands):

                As of September 30, 2007, the total unrecognized compensation cost related to nonvested stock awards is $10.3 million and to stock option awards is $3.7 million.  The related weighted average period over which it is expected that such unrecognized compensation costs will be recognized is approximately 2.4 years for the nonvested stock awards and 2.5 years for option awards.

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

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

Note 3—Balance Sheet Information

Inventories

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

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

Accrued Warranty

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

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

Note 4—Segment Information

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

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

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

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Note 5—Income Taxes

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

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

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

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

Note 6—Comprehensive (Loss) Income

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

Note 7—Debt

Convertible Debt

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

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

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

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

Credit Agreement

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

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

Note 8—Commitments, Contingencies and Other Matters

Litigation

As previously reported in Veeco’s Annual Report on Form 10-K for the year ended December 31, 2006, Veeco and certain of its officers have been named as defendants in a securities class action lawsuit consolidated in August 2005 that is pending in federal court in the Southern District of New York (“the Court”).  The lawsuit arises out of the restatement in March 2005 of Veeco’s financial statements for the quarterly periods and nine months ended September 30, 2004 as a result of the Company’s discovery of certain improper accounting transactions at its TurboDisc business unit.  On July 5, 2007, Veeco entered into a Memorandum of Understanding to settle and fully resolve this lawsuit for a payment of $5.5 million.  Veeco expects that insurance proceeds will cover the settlement amount and any significant legal expenses related to the settlement.  The settlement agreement is subject to court approval and would dismiss all pending claims against Veeco and the other defendants with no admission or finding of wrongdoing by Veeco or any of the other defendants, and Veeco and the other defendants would receive a full release of all claims pending in the litigation.

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2007 Restructuring Expenses

In conjunction with a cost reduction plan, the Company recognized a restructuring charge of approximately $0.5 million and $2.0 million during the three months and nine months ended September 30, 2007, respectively, which was recorded as restructuring expense in the condensed consolidated statements of operations. The charge consisted of personnel severance costs for approximately 40 employees, or approximately 3% of total employees, which included management, administration and manufacturing employees companywide. As of September 30, 2007, approximately $0.9 million has been paid and approximately $1.1 million remains accrued. The remainder is expected to be paid over the next twelve to eighteen months.

The following is a reconciliation of the liability for the restructuring charge (in thousands):

Note 9—Subsequent Events

During the fourth quarter of 2007, the Company’s Board of Directors approved a cost reduction plan that included a reduction in staff (employees, consultants and temporary workers), a reduction of discretionary expenses, realignment of the Company’s sales organization to more closely match current market and regional opportunities, and consolidation of certain engineering groups.  As a result, during the fourth quarter of 2007, the Company expects to reduce its employment level by approximately 100 employees and will recognize a restructuring charge of $5.0 million, comprised predominantly of severance costs for the related employees.

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

                Veeco’s Process Equipment products precisely deposit or remove (etch) various materials in the manufacturing of thin film magnetic heads (“TFMHs”) for the data storage industry, HB-LED/wireless devices (such as power amplifiers and laser diodes), and semiconductor mask reticles.  Veeco’s Metrology equipment is used to provide critical surface measurements on semiconductor devices and TFMHs. This equipment allows customers to monitor their products throughout the manufacturing process in order to improve yields, reduce costs and improve product quality. Veeco’s Metrology solutions are also used by many universities, scientific laboratories, and industrial applications. Veeco sells its broad line of atomic force microscopes (“AFMs”), optical interferometers, and stylus profilers to thousands of universities, research facilities, and scientific centers worldwide.

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

Highlights of the Third Quarter of 2007

•                  Revenue was $97.7 million, a 13% decrease from the third quarter of 2006.

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

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

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

Highlights of the First Nine Months of 2007

•                  Revenue was $295.7 million, a 7% decrease from the first nine months of 2006.

•                  Orders were $336.7 million, a decrease of 13% from the first nine months of 2006.

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

•                  Gross margins were 41.2%, compared to 43.8% in the first nine months of 2006.

Current Business Conditions

                Veeco reported revenue of $97.7 million for the three months ended September 30, 2007, a 13% decrease from the prior year. Veeco expects continued fluctuations in data storage and semiconductor capital expenditure purchases as customers reassess their production ramps and timing of new technology transition plans. Veeco’s revenues were in line with guidance of $92 million to $97 million; however, the Company continued to experience field acceptance delays of new data storage systems. In addition to the challenges in data storage, weakness in Veeco’s semiconductor business also negatively impacted revenue and profitability.

                Veeco’s orders for the three months ended September 30, 2007 were $118.3 million, an increase of 3% from the $114.8 million reported in the same three-month period of 2006. Third quarter orders in the HB-LED/wireless segment remain strong at $43.6 million, up 26% sequentially and 49% from last year’s third quarter. This increased order rate compared to the prior year reflects positive customer interest in Veeco’s next generation “K-Series” metal organic chemical vapor deposition (“MOCVD”) tools, which were introduced in December 2006 and provide significant

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advantages in uniformity and throughput to Veeco’s older tools and those of its competitors.  End market demand for this product line remains strong due to emerging LED applications such as PC backlighting and automotive applications.  Veeco’s data storage orders decreased 15% sequentially and 22% from last year’s third quarter.  While Veeco’s data storage customers are undergoing a period of consolidation and Veeco often has limited visibility to their spending patterns, the Company believes that longer-term industry requirements for increased areal density and consumer electronic expansion will drive future investment in perpendicular head technology and conversion to larger wafer size. The weakest order segment for Veeco during the third quarter was semiconductor, down 22% sequentially and 54% from last year’s third quarter. Veeco is in the process of beta testing its next generation automated AFM product, and currently expects the introduction of this product to help improve Veeco’s semiconductor order and revenue stream in 2008.

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

Outlook

The Company reviews a number of indicators to evaluate the strength of its markets going forward, such as plant utilization trends, capacity requirements and capital spending trends.  Veeco is currently forecasting an increase in revenues on a sequential basis for the fourth quarter of 2007, with expectations for revenues to be in the range of approximately $104 million to $112 million, with bookings of $105 million to $115 million. Fourth quarter 2007 profitability is forecasted to improve from the weak third quarter levels on improved volume and pricing in both Process Equipment and Metrology. Additionally, management has initiated the first phase of a multi-quarter turn-around plan to improve Veeco’s profitability through a combination of increased focus on its best growth opportunities, gross margin improvement and expense reduction and containment. While Veeco has a strong pipeline of new products for the data storage, HB-LED, semiconductor and scientific research markets, many of these are in the early stages of shipments and there is uncertainty associated with customer acceptance and the Company’s ability to recognize revenue upon shipment of the products. The Company’s current expectations for the fourth quarter, which are subject to uncertainties such as the timing of customer acceptance of shipped products, would bring revenue for the full year to approximately $400 million to $408 million, down approximately 10% from 2006.

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

During the fourth quarter of 2007, the Company engaged in a cost reduction plan that included a reduction in staff (employees, consultants and temporary workers), a reduction of discretionary expenses, the realignment of the Company’s sales organization to more closely match current market and regional opportunities, and consolidation of certain engineering groups.  As a result, during the fourth quarter of 2007, the Company expects to reduce its employment level by approximately 100 employees and will recognize a restructuring charge of $5.0 million, comprised predominantly of severance costs for the related employees.  Additional restructuring charges in the range of $8.0 million to 13.0 million could potentially impact fourth quarter 2007 and first quarter 2008 earnings, depending upon the timing and extent of additional actions under consideration. Management expects that these potential additional charges will not result in a significant outlay of cash in the near term.

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Results of Operations:

Three Months Ended September 30, 2007 and 2006

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

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