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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 
| **(Mark  One)**                                             |
|-------------------------------------------------------------|
| ** **                                                  |
| **x**                                                       | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                        |
| **For the quarterly period ended  September 30, 2010** |
|                                                        |
| **OR**                                                      |
|                                                        |
| **o**                                                       | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom              to              .**

 

**Commission file number 0-16244**

 

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**VEECOINSTRUMENTS INC.**

(ExactName of Registrant as Specified in Its Charter)

 
| **Delaware**                                                                      |       | **11-2989601**                             |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------|
| (State  or Other Jurisdiction of

Incorporation  or Organization)                 | ** ** | (I.R.S.  Employer

Identification  Number) |
|                                                                              | ** ** |                                       |
| **Terminal Drive  Plainview, New York**                                           |       | **11803**                                  |
| (Address  of Principal Executive Offices)                                         | ** ** | (Zip  Code)                                |
|                                                                              |       |                                       |
| Registrant’s  telephone number, including area code: **(516) 677-0200** |
|                                                                              |
| Website:  **www.veeco.com**                                                       |

 

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Indicate by check markwhether the Registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o  No  o

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large  accelerated filer o                     | Accelerated  filer x         |
|------------------------------------------------|------------------------------|
|                                           |                         |
| Non-accelerated  filer o                       | Smaller  reporting company o |
| (Do  not check if a Smaller reporting company) |                         |

 

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

 

39,904,001 shares ofcommon stock, $0.01 par value per share, were outstanding as of the close ofbusiness on October 27, 2010.

 

 

 

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**SAFEHARBOR STATEMENT**

 

ThisQuarterly Report on Form 10-Q (the “Report”) contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. Discussions containing such forward-looking statements may be foundin Part I. 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 toidentify forward-looking statements. All forward-looking statements are subjectto a number of risks and uncertainties that could cause actual results todiffer materially from projected results. These risks and uncertaintiesinclude, without limitation, the following:

 

·                  Thereduction or elimination of government subsidies and economic incentives mayadversely affect the future order rate for our MOCVD equipment;

 

·                  Our failure to successfully implement outsourcing activities or failureof our outsourcing partners to perform as anticipated could adversely affectour results of operations and our ability to realize the benefits of the recentincrease in MOCVD order volume;

 

·                  Manufacturing interruptions or delays couldaffect our ability to meet customer demand, while the failure to estimatecustomer demand accurately could result in excess or obsolete inventory and/orliabilities to our suppliers for products no longer needed;

 

·                  Werely on a limited number of suppliers, some of which are sole-source suppliers;

 

·                  Our backlog is subject to customer cancellation or modification and suchcancellation could result in decreased sales and increased provisions forexcess and obsolete inventory and/or liabilities to our suppliers for productsno longer needed;

 

·                  Our sales to HB LED and data storagemanufacturers are highly dependent on these manufacturers’ sales for consumerelectronics applications, which can experience significant volatility due toseasonal and other factors. This could materially adversely impact our futureresults of operations;

 

·                  Negativeworldwide economic conditions could result in a decrease in our net sales andan increase in our operating costs, which could adversely affect our businessand operating results;

 

·                  Weare exposed to the risks of operating a global business, including the need toobtain export licenses for certain of our shipments;

 

·                  We are exposed to risks associated with ourentrance into the emerging solar industry;

 

·                  Thetiming of our orders, shipments, and revenue recognition may cause ourquarterly operating results to fluctuate significantly;

 

·                  We operate in industries characterized by rapid technological change;

 

·                  Weface significant competition;

 

·                  Wedepend on a limited number of customers that operate in highly concentratedindustries;

 

·                  Thecyclicality of the industries we serve directly affects our business;

 

·                  Oursales cycle is long and unpredictable;

 

·                  Ourinability to attract, retain, and motivate key employees could have a materialadverse effect on our business;

 

·                  The price of our common shares may be volatileand could decline significantly;

 

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·                  Weare subject to foreign currency exchange risks;

 

·                  The enforcement and protection of our intellectual property rights maybe expensive and could divert our valuable resources;

 

·                  Wemay be subject to claims of intellectual property infringement by others;

 

·                  Ouracquisition strategy subjects us to risks associated with evaluating andpursuing these opportunities and integrating these businesses;

 

·                  We may be required to take additionalimpairment charges for goodwill and indefinite-livedintangible assets or definite-lived intangible and long-lived assets;

 

·                  Changes inaccounting pronouncements or taxation rules or practices may adverselyaffect our financial results;

 

·                  We are subject to the internal controlevaluations and attestation requirements of Section 404 of theSarbanes-Oxley Act;

 

·                  Weare subject to risks of non-compliance with environmental, health and safetyregulations;

 

·                  Wehave adopted certain measures that may have anti-takeover effects which maymake an acquisition of our Company by another company more difficult; and

 

·                  Thematters set forth in this Report generally, including the risk factors setforth in “Part 2. Item 1A. Risk Factors.”

 

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

 

**Available Information**

 

Wefile annual, quarterly and current reports, information statements and otherinformation with the Securities and Exchange Commission (the “SEC”). The publicmay obtain information by calling the SEC at 1-800-SEC-0330. The SEC alsomaintains an Internet site that contains reports, proxy and informationstatements, and other information regarding issuers that file electronicallywith the SEC. The address of that site is http://www.sec.gov.

 

**Internet Address**

 

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

 

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**VEECO INSTRUMENTS INC.**

 

**INDEX**

 
|                                   | ** **                                                                                                                                                         | **Page** |
|----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I. FINANCIAL INFORMATION** | ** **                                                                                                                                                         |
|                                   |                                                                                                                                                               |     |
| **Item 1.**                            | Financial Statements:                                                                                                                                              |     |
|                                   |                                                                                                                                                               |     |
|                                   | Condensed  Consolidated Statements of Operations and Comprehensive Income (Loss) for the  Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited) | 5        |
|                                   |                                                                                                                                                               |     |
|                                   | Condensed  Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and  December 31, 2009                                                       | 6        |
|                                   |                                                                                                                                                               |     |
|                                   | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  September 30, 2010 and 2009 (Unaudited)                                           | 7        |
|                                   |                                                                                                                                                               |     |
|                                   | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                                                  | 8        |
|                                   |                                                                                                                                                               |     |
| **Item 2.**                            | Management’s Discussion  and Analysis of Financial Condition and Results of Operations                                                                        | 19       |
|                                   |                                                                                                                                                               |     |
| **Item 3.**                            | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                        | 31       |
|                                   |                                                                                                                                                               |     |
| **Item 4.**                            | Controls and  Procedures                                                                                                                                           | 31       |
|                                   |                                                                                                                                                               |     |
| **PART II. OTHER INFORMATION**    |                                                                                                                                                               |
|                                   |                                                                                                                                                               |     |
| **Item 1.**                            | Legal Proceedings                                                                                                                                                  | 33       |
|                                   |                                                                                                                                                               |     |
| **Item 1A.**                           | Risk Factors                                                                                                                                                       | 33       |
|                                   |                                                                                                                                                               |     |
| **Item 2.**                            | Unregistered  Sale of Equity Securities and Use of Proceeds                                                                                                        | 33       |
|                                   |                                                                                                                                                               |     |
| **Item 6.**                            | Exhibits                                                                                                                                                           | 34       |
|                                   |                                                                                                                                                               |     |
| **SIGNATURES**                         | 35                                                                                                                                                                 |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

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

 
| ** **                                                    | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                    | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  sales                                                    |       | $                                | 277,094    |                            | $          | 74,688 |   | $ | 633,233 |   | $ | 163,270 |   |
| Cost  of sales                                                |       | 141,612                          |       | 44,141                          |       | 342,210 |   | 105,566 |   |
| Gross  profit                                                 |       | 135,482                          |       | 30,547                          |       | 291,023 |   | 57,704 |   |
| Operating  expenses (income):                                 | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling,  general and administrative                          |       | 24,565                           |       | 15,631                          |       | 62,852 |   | 41,926 |   |
| Research  and development                                     |       | 18,306                           |       | 10,662                          |       | 47,861 |   | 29,327 |   |
| Amortization                                                  |       | 1,237                            |       | 1,270                           |       | 3,711 |   | 3,775 |   |
| Restructuring                                                 |       | —                           |       | 781                             |       | (179 | ) | 4,770 |   |
| Asset  impairment                                             |       | —                           |       | —                          |       | — |   | 304 |   |
| Other,  net                                                   |       | (275                             | )          | (307                            | )          | 75 |   | 368 |   |
| Total  operating expenses                                     |       | 43,833                           |       | 28,037                          |       | 114,320 |   | 80,470 |   |
| Operating  income (loss)                                      |       | 91,649                           |       | 2,510                           |       | 176,703 |   | (22,766 | ) |
| Interest  expense, net                                        |       | 1,637                            |       | 1,656                           |       | 5,181 |   | 5,063 |   |
| Income  (loss) from continuing operations before income taxes |       | 90,012                           |       | 854                             |       | 171,522 |   | (27,829 | ) |
| Income  tax (benefit) provision                               |       | (1,092                           | )          | 823                             |       | 7,663 |   | 2,379 |   |
| Income  (loss) from continuing operations                     |       | 91,104                           |       | 31                              |       | 163,859 |   | (30,208 | ) |
|                                                          |       |                             |       |                            |       |   |   |   |   |
| Discontinued  operations:                                     |       |                             |       |                            |       |   |   |   |   |
| (Loss)  income from discontinued operations                   |       | (4,311                           | )          | 978                             |       | 3,546 |   | (5,206 | ) |
| Income  tax provision (benefit)                               |       | 630                              |       | (261                            | )          | 2,805 |   | (1,037 | ) |
| (Loss)  income from discontinued operations                   |       | (4,941                           | )          | 1,239                           |       | 741 |   | (4,169 | ) |
|                                                          |       |                             |       |                            |       |   |   |   |   |
| Net  income (loss)                                            |       | 86,163                           |       | 1,270                           |       | 164,600 |   | (34,377 | ) |
| Net  loss attributable to noncontrolling interest             |       | —                           |       | —                          |       | — |   | (65 | ) |
| Net  income (loss) attributable to Veeco                      |       | $                                | 86,163     |                            | $          | 1,270 |   | $ | 164,600 |   | $ | (34,312 | ) |
|                                                          |       |                             |       |                            |       |   |   |   |   |
| Income  (loss) per common share attributable to Veeco:        |       |                             |       |                            |       |   |   |   |   |
| Basic:                                                        |       |                             |       |                            |       |   |   |   |   |
| Continuing  operations                                        |       | $                                | 2.28       |                            | $          | — |   | $ | 4.15 |   | $ | (0.96 | ) |
| Discontinued  operations                                      |       | (0.12                            | )          | 0.04                            |       | 0.02 |   | (0.13 | ) |
| Income  (loss)                                                |       | $                                | 2.16       |                            | $          | 0.04 |   | $ | 4.17 |   | $ | (1.09 | ) |
| Diluted  :                                                    |       |                             |       |                            |       |   |   |   |   |
| Continuing  operations                                        |       | $                                | 2.16       |                            | $          | — |   | $ | 3.89 |   | $ | (0.96 | ) |
| Discontinued  operations                                      |       | (0.12                            | )          | 0.04                            |       | 0.02 |   | (0.13 | ) |
| Income  (loss)                                                |       | $                                | 2.04       |                            | $          | 0.04 |   | $ | 3.91 |   | $ | (1.09 | ) |
|                                                          |       |                             |       |                            |       |   |   |   |   |
| Weighted  average shares outstanding:                         |       |                             |       |                            |       |   |   |   |   |
| Basic                                                         |       | 39,946                           |       | 31,608                          |       | 39,508 |   | 31,540 |   |
| Diluted                                                       |       | 42,258                           |       | 32,375                          |       | 42,175 |   | 31,540 |   |

 

 

**Veeco Instruments Inc. and Subsidiaries**

**Condensed Consolidated Statements of ComprehensiveIncome (Loss)**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                  | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                  | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income (loss)                                          |       | $                                | 86,163     |                            | $          | 1,270 |   | $ | 164,600 |   | $ | (34,377 | ) |
| Other  comprehensive income (loss), net of tax              |       |                             |       |                            |       |   |   |   |   |
| Foreign  currency translation                               |       | 985                              |       | 966                             |       | 160 |   | 20 |   |
| Unrealized  gain on available-for-sale securities           |       | 252                              |       | —                          |       | 252 |   | — |   |
| Comprehensive  income (loss)                                |       | 87,400                           |       | 2,236                           |       | 165,012 |   | (34,357 | ) |
| Comprehensive  loss attributable to noncontrolling interest |       | —                           |       | —                          |       | — |   | (65 | ) |
| Comprehensive  income (loss) attributable to Veeco          |       | $                                | 87,400     |                            | $          | 2,236 |   | $ | 165,012 |   | $ | (34,292 | ) |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements*.*

 

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**Veeco Instruments Inc. and SubsidiariesCondensed Consolidated Balance Sheets (In thousands)**

 
| ** **                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                                         | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                         |       |                   |       |                  |       |
| Current  assets:                                   |       |                   |       |                  |       |
| Cash  and cash equivalents                         |       | $                      | 278,144    |                  | $          | 148,500 |   |
| Short-term  investments                            |       | 157,111                |       | 135,000               |       |
| Restricted  cash                                   |       | 31,581                 |       | —                |       |
| Accounts  receivable, net                          |       | 129,574                |       | 67,546                |       |
| Inventories                                        |       | 80,544                 |       | 55,807                |       |
| Prepaid  expenses and other current assets         |       | 31,146                 |       | 6,419                 |       |
| Assets  of discontinued segment held for sale      |       | 80,252                 |       | 40,058                |       |
| Deferred  income taxes                             |       | 38,892                 |       | 3,105                 |       |
| Total  current assets                              |       | 827,244                |       | 456,435               |       |
| Property,  plant and equipment at cost, net        |       | 45,490                 |       | 44,707                |       |
| Goodwill                                           |       | 52,003                 |       | 52,003                |       |
| Intangible  assets, net                            |       | 18,058                 |       | 21,770                |       |
| Other  assets                                      |       | 901                    |       | 429                   |       |
| Assets  of discontinued segment held for sale      |       | —                 |       | 30,028                |       |
| Total  assets                                      |       | $                      | 943,696    |                  | $          | 605,372 |   |
| **Liabilities and equity**                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current  liabilities:                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| Accounts  payable                                  |       | $                      | 44,793     |                  | $          | 24,910 |   |
| Accrued  expenses and other current liabilities    |       | 192,122                |       | 99,823                |       |
| Deferred  profit                                   |       | 5,853                  |       | 2,520                 |       |
| Income  taxes payable                              |       | 44,034                 |       | 829                   |       |
| Liabilities  of discontinued segment held for sale |       | 12,000                 |       | 10,824                |       |
| Current  portion of long-term debt                 |       | 225                    |       | 212                   |       |
| Total  current liabilities                         |       | 299,027                |       | 139,118               |       |
| Deferred  income taxes                             |       | 3,019                  |       | 5,039                 |       |
| Long-term  debt                                    |       | 103,063                |       | 100,964               |       |
| Other  liabilities                                 |       | 315                    |       | 1,192                 |       |
| ** **                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Equity                                             |       | 538,272                |       | 359,059               |       |
|                                               |       |                   |       |                  |       |
| Total  liabilities and equity                      |       | $                      | 943,696    |                  | $          | 605,372 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements*.*

 

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**Veeco Instruments Inc. and SubsidiariesCondensed Consolidated Statements of Cash Flows(In thousands) (Unaudited)**
| ** **                                                                                | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **September 30,**          | ** ** |
| ** **                                                                                | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| **Operating activities**                                                                  |       |                            |       |   |   |
| Net income (loss)                                                                         |       | $                               | 164,600    |   | $ | (34,377 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                             |       | 9,952                           |       | 10,766 |   |
| Amortization of debt discount                                                             |       | 2,269                           |       | 2,114 |   |
| Non-cash equity-based compensation                                                        |       | 7,003                           |       | 5,106 |   |
| Non-cash asset impairment                                                                 |       | —                          |       | 304 |   |
| Non-cash inventory write-off                                                              |       | —                          |       | 1,526 |   |
| Non-cash restructuring                                                                    |       | (179                            | )          | 4,770 |   |
| Deferred income taxes                                                                     |       | (37,850                         | )          | 683 |   |
| Non-cash cash flows from discontinued operations                                          |       | 7,050                           |       | 7,995 |   |
| Other, net                                                                                |       | 3                               |       | 34 |   |
| Changes in operating assets and liabilities:                                              |       |                            |       |   |   |
| Accounts receivable                                                                       |       | (61,499                         | )          | (5,324 | ) |
| Inventories                                                                               |       | (24,579                         | )          | 13,406 |   |
| Accounts payable                                                                          |       | 19,908                          |       | 2,378 |   |
| Accrued expenses, deferred profit and other  current liabilities                          |       | 138,947                         |       | 12,079 |   |
| Cash flows from discontinued operations                                                   |       | (11,703                         | )          | 6,718 |   |
| Other, net                                                                                |       | (26,051                         | )          | (6,510 | ) |
| Net cash provided by operating activities                                                 |       | 187,871                         |       | 21,668 |   |
| **Investing activities**                                                                  |       |                            |       |   |   |
| Capital expenditures                                                                      |       | (8,023                          | )          | (4,584 | ) |
| Payments for net assets of businesses acquired                                            |       | —                          |       | (2,413 | ) |
| Payments of earn-outs for businesses acquired                                             |       | —                          |       | (9,839 | ) |
| Transfers to restricted cash                                                              |       | (31,581                         | )          | (482 | ) |
| Proceeds from the maturity of CDARS                                                       |       | 213,641                         |       | — |   |
| Proceeds from sales of short-term investments                                             |       | 11,013                          |       | — |   |
| Payments for purchases of short-term investments                                          |       | (246,514                        | )          | — |   |
| Purchases of treasury stock                                                               |       | (31,602                         | )          | — |   |
| Proceeds from the sale of property, plant and  equipment                                  |       | 13                              |       | 834 |   |
| Cash flows from discontinued operations                                                   |       | 1,682                           |       | (600 | ) |
| Net cash used in investing activities                                                     |       | (91,371                         | )          | (17,084 | ) |
| **Financing activities**                                                                  |       |                            |       |   |   |
| Proceeds from stock option exercises                                                      |       | 36,060                          |       | 2,904 |   |
| Restricted stock tax withholdings                                                         |       | (2,898                          | )          | (495 | ) |
| Repayments of long-term debt                                                              |       | (157                            | )          | (146 | ) |
| Net cash provided by financing activities                                                 |       | 33,005                          |       | 2,263 |   |
| Effect of exchange rate changes on cash and cash  equivalents                             |       | 139                             |       | (8 | ) |
| Net increase in cash and cash equivalents                                                 |       | 129,644                         |       | 6,839 |   |
| Cash and cash equivalents at beginning of period                                          |       | 148,500                         |       | 102,521 |   |
| Cash and cash equivalents at end of period                                                |       | $                               | 278,144    |   | $ | 109,360 |   |
|                                                                                      |       |                            |       |   |   |
| **Non-cash investing and financing  activities**                                          | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Accrual of payment for net assets of businesses  acquired                                 |       | $                               | —     |   | $ | 1,000 |   |
| Transfers from property, plant and equipment to  inventory                                |       | 1,114                           |       | 1,159 |   |
| Transfers from inventory to property, plant and  equipment                                |       | 850                             |       | 23 |   |
| Sale of property, plant and equipment with note  receivable                               |       | 140                             |       | — |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements*.*

 

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** **

**Veeco Instruments Inc. and SubsidiariesNotes to Condensed Consolidated Financial Statements (Unaudited)**

 

**Note 1—Basisof Presentation**

 

The accompanying unauditedcondensed consolidated financial statements of Veeco Instruments Inc. (togetherwith its consolidated subsidiaries, “Veeco,” the “Company” or “we”) have beenprepared in accordance with accounting principles generally accepted in theUnited States (“U.S.”) for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby U.S. generally accepted accounting principles for complete financialstatements. In the opinion of management, all adjustments considered necessaryfor a fair presentation (consisting of normal recurring accruals) have beenincluded. Operating results for the three and nine months ended September 30,2010, are not necessarily indicative of the results that may be expected forthe year ending December 31, 2010. For further information, refer to theconsolidated financial statements and footnotes thereto included in our AnnualReport on Form 10-K for the year ended December 31, 2009.

 

Consistent with prior years,we report 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 interimquarter ends are determined at the beginning of each year based on the 13-weekquarters. The 2010 interim quarter ends are March 28, June 27 and September 26.The 2009 interim quarter ends were March 29, June 28 and September 27.For ease of reference, we report these interim quarter ends as March 31, June 30and September 30 in our interim condensed consolidated financialstatements.

 

*Income(Loss) Per Common Share**attributable to Veeco*

 

Thefollowing table sets forth the reconciliation of basic weighted average sharesoutstanding and diluted weighted average shares outstanding (*in thousands*):

 
| ** **                                             | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                             | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Basic  weighted average shares outstanding             |       | 39,946                           |       | 31,608                          |       | 39,508 |   | 31,540 |   |
| Dilutive  effect of stock options and restricted stock |       | 1,301                            |       | 767                             |       | 1,540 |   | — |   |
| Dilutive  effect of convertible notes                  |       | 1,011                            |       | —                          |       | 1,127 |   | — |   |
| Diluted  weighted average shares outstanding           |       | 42,258                           |       | 32,375                          |       | 42,175 |   | 31,540 |   |

 

Basic income (loss) percommon share attributable to Veeco is computed using the weighted averagenumber of common shares outstanding during the period. Diluted income (loss)per common share attributable to Veeco is computed using the weighted averagenumber of common shares and common equivalent shares outstanding during the period.For the nine months ended September 30, 2009, the effect of approximately0.2 million shares were excluded from the computation of diluted weightedaverage shares outstanding due to the net loss sustained in the period as theirinclusion would have been anti-dilutive. For the three and nine months ended September 30,2010, no shares were excluded from the computation of diluted weighted averageshares outstanding.

 

Our convertible notes meetthe criteria for determining the effect of the assumed conversion using thetreasury stock method of accounting, as long as we have the ability and theintent to settle the principal amount of the notes in cash. Under the terms ofthese notes, we may pay the principal amount of converted notes in cash or inshares of common stock. We have indicated that we intend to pay the principalamount in cash. Using the treasury stock method, it was determined that theimpact of the assumed conversion for the three and nine months ended September 30,2010, had a dilutive affect of 1.0 million and 1.1 million common equivalentshares, respectively, for the three months ended September 30, 2009, theimpact was anti-dilutive, due to the conversion price being out of the moneyfor the period and for the nine months ended September 30, 2009, theimpact was anti-dilutive, due to the net loss sustained in the period. Theeffect of the assumed converted shares is dependent on the stock price at thetime of the conversion. The maximum number of common equivalent shares issuableupon conversion at September 30, 2010 was approximately 5.4 million.

 

On or after April 20,2011, we may redeem the notes, in whole or in part, for cash at 100% of theprincipal amount of the notes to be redeemed plus accrued and unpaid interestto, but not including, the redemption date. Holders may convert the convertiblenotes at any time during the period beginning on January 15, 2012 throughthe

 

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close of business on thesecond day prior to April 15, 2012 and earlier upon the occurrence ofcertain events including if the notes have been called for redemption or if,for a given fiscal quarter our common stock trades at prices equal to 130% ofthe conversion price for at least 20 trading days during the final 30 tradingdays of the immediately preceding fiscal quarter. At the end of the thirdquarter of 2010, our common stock was not trading at prices equal to or above130% of the conversion price for the specified period and, as a result, theconvertible notes will not be convertible during the fourth quarter of 2010. If the convertible notes are converted, we have the ability and intent topay the principal balance of notes tendered for conversion in cash. We willre-perform this test each quarter up to and including the fourth quarter of2011. See Note 7 for further details on our debt.

 

*Short-term Investments*

 

We determine the appropriatebalance sheet classification of our investments at the time of purchase andevaluate the classification at each balance sheet date. As part of our cashmanagement program, we maintain a portfolio of marketable securities which areclassified as available-for-sale. These securities include Federal DepositInsurance Corporation (“FDIC”) insured corporate bonds, treasury bills,commercial paper and certificates of deposit placed through an account registryservice (“CDARS”) with maturities of greater than three months when purchasedin principal amounts that, when aggregated with interest to accrue over theterm, will not exceed FDIC limits. Securities classified as available-for-saleare carried at fair market value, with the unrealized gains and losses, net oftax, included in the determination of comprehensive income (loss) and reportedin equity. Net realized gains and losses are included in net income (loss).CDARS, commercial paper and treasury bills classified as cash equivalents arecarried at cost, which approximates fair market value.

 

*Derivative Financial Instruments*

 

Weuse derivative financial instruments to minimize the impact of foreign exchangerate changes on earnings and cash flows. In the normal course of business, ouroperations are exposed to fluctuations in foreign exchange rates. In order toreduce the effect of fluctuating foreign currencies on short-term foreigncurrency-denominated intercompany transactions and other known foreign currencyexposures, we enter into monthly forward contracts. We do not use derivativefinancial instruments for trading or speculative purposes. Our forwardcontracts are not expected to subject us to material risks due to exchange ratemovements because gains and losses on these contracts are intended to offsetexchange gains and losses on the underlying assets and liabilities. The forwardcontracts are marked-to-market through earnings. We conduct our derivativetransactions with highly rated financial institutions in an effort to mitigateany material credit risk.

 

The aggregate foreigncurrency exchange gain (loss) included in determining the condensedconsolidated results of operations was approximately $0.1 million and$(0.1) million during the three months ended September 30, 2010 and2009, respectively. Included in the aggregate foreign currency exchange gainwere losses related to forward contracts of $(0.1) million during thethree months ended September 30, 2010. The aggregate foreign currencyexchange loss included in determining the condensed consolidated results ofoperations was approximately $(0.3) million and $(0.6) million during thenine months ended September 30, 2010 and 2009, respectively. Included inthe aggregate foreign currency exchange loss were gains related to forwardcontracts of $0.1 million during the nine months ended September 30, 2009.

 

Theseamounts were recognized and are included in Other, net in the accompanyingcondensed consolidated statements of operations. As of September 30, 2010,approximately $0.2 million of losses related to forward contracts were includedin accrued expenses and other current liabilities and were subsequently paid inOctober 2010. As of December 31, 2009, approximately $0.2 million ofgains related to forward contracts were included in prepaid expenses and othercurrent assets and were subsequently received in January 2010. Monthlyforward contracts with a notional amount of $1.7 million, entered into in September 2010for October 2010, will be settled in October 2010.

 

The weighted averagenotional amount of derivative contracts outstanding during the three and ninemonths ended September 30, 2010 were approximately $6.8 and$5.9 million, respectively.

 

**Note 2 — Discontinued Operations**

 

On August 15, 2010, wesigned a definitive agreement to sell our metrology business to BrukerCorporation for approximately $229 million, comprising our entire Metrologyreporting segment. Accordingly, Metrology’s operating results are accounted foras discontinued operations in determining the condensed consolidated results ofoperations for all periods presented. Additionally, Metrology’s assets andliabilities are classified as held for sale on our condensed consolidatedbalance sheet for all periods presented. The sales transaction closed on October 7,2010.

 

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Summaryinformation related to discontinued operations is as follows (*in thousands*):

 
| ** **                                                  | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                  | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  sales                                                  |       | $                                | 31,880     |                            | $          | 24,225 |   | $ | 92,011 |   | $ | 70,512 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Gross  profit                                               |       | 15,623                           |       | 10,361                          |       | 44,189 |   | 27,970 |   |
| Total  operating expenses                                   |       | 19,934                           |       | 9,383                           |       | 40,643 |   | 33,176 |   |
| Operating  (loss) income                                    |       | (4,311                           | )          | 978                             |       | 3,546 |   | (5,206 | ) |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Net  (loss) income from discontinued operations, net of tax |       | (4,941                           | )          | 1,239                           |       | 741 |   | (4,169 | ) |
|                                                             |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 
| ** **                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |   |   |   |   |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|--------|--------|--------|--------|
| ** **                                         | ** ** | **2010**               | ** ** | **2009**              | ** ** |   |   |   |   |
| **Assets**                                         | ** ** | ** **             |       |                  |       |   |   |   |   |
| Cash                                               |       | $                      | 48         |                  | $          | 89     |   |   |   |   |   |
| Accounts  receivable, net                          |       | 27,669                 |       | 16,812                |       |   |   |   |   |
| Inventories                                        |       | 26,047                 |       | 21,757                |       |   |   |   |   |
| Property,  plant and equipment at cost, net        |       | 13,412                 |       | 14,682                |       |   |   |   |   |
| Goodwill                                           |       | 7,419                  |       | 7,419                 |       |   |   |   |   |
| Other  assets                                      |       | 5,657                  |       | 9,327                 |       |   |   |   |   |
| Assets  of discontinued segment held for sale      |       | $                      | 80,252     |                  | $          | 70,086 |   |   |   |   |   |
|                                               |       |                   |       |                  |       |   |   |   |   |
| **Liabilities**                                    | ** ** | ** **             | ** ** |                  | ** ** |   |   |   |   |
| Accounts  payable                                  |       | $                      | 7,287      |                  | $          | 4,202  |   |   |   |   |   |
| Accrued  expenses and other current liabilities    |       | 4,713                  |       | 6,622                 |       |   |   |   |   |
| Liabilities  of discontinued segment held for sale |       | $                      | 12,000     |                  | $          | 10,824 |   |   |   |   |   |

 

**Note 3—****Equity-based Compensation Plans**

 

*Equity-basedCompensation*

 

Equity-based compensation cost is measured at thegrant date, based on the fair value of the award, and is recognized as expenseover each employee’s requisite service period. The following compensation expense was included in the condensedconsolidated statements of operations for the three and nine months ended September 30, 2010 and 2009 (*in thousands*):

 
| ** **                         | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                         | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Equity-based  compensation expense |       | $                                | 7,514      |                            | $          | 2,400 |   | $ | 12,642 |   | $ | 5,953 |   |
|                                    |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

As a result of the sale ofour Metrology segment to Bruker Corporation, equity-based compensation expenserelated to Metrology employees has been classified as discontinued operationsin determining the condensed consolidated results of operations for the threeand nine months ended September 30, 2010 and 2009. For the three and ninemonths ended September 30, 2010, $4.9 million and $5.6 million of equity-basedcompensation expense has been classified as discontinued operations. For thethree and nine months ended September 30, 2009, $0.3 million and $0.9million of equity-based compensation expense has been classified asdiscontinued operations. For the three and nine months ended September 30,2010, total equity-based compensation expense included a charge of $4.5 millionrelated to the acceleration of equity awards associated with the sale of ourMetrology business. We expect to recognize approximately $2.0 million ofadditional equity-based compensation expense in the fourth quarter related tothe acceleration of these awards.

 

Asof September 30, 2010, the total unrecognized compensation costs relatedto nonvested stock and stock option awards was $9.4 million and $15.7 million,respectively. The related weighted average period over which we

 

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expect that such unrecognizedcompensation costs will be recognized is approximately 2.8 years for nonvestedstock awards and 2.2 years for option awards.

 

*StockOption and Restricted Stock Activity*

 

A summary of our restrictedstock awards including restricted stock units for the nine months ended September 30,2010, is presented below:

 

| ** **                              | ** ** | **Shares  (000s)** | ** ** | **Weighted  Average Grant-  Date Fair Value** | ** ** |
|-----------------------------------------|------------|--------------------|------------|--------------------------------------------------------------|------------|
| Nonvested  at January 1, 2010      |       | 892                |       | $                                                            | 12.97      |   |
| Granted                                 |       | 179                |       | 34.78                                                        |       |
| Vested                                  |       | (306               | )          | 12.89                                                        |       |
| Forfeited  (including cancelled awards) |       | (15                | )          | 14.25                                                        |       |
| Nonvested  at September 30, 2010   |       | 750                |       | 18.19                                                        |       |
|                                         |            |                    |            |                                                              |            |  |

 

A summary of our stockoption awards for the nine months ended September 30, 2010, is presentedbelow:

 
| ** **                                      | ** ** | **Shares  (000s)** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic  Value (000s)** | ** ** | **Weighted-  Average  Remaining  Contractual  Life (in years)** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|----------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------------|------------|
| Outstanding  at January 1, 2010            |       | 4,506              |       | $                                      | 16.35      |                                   |       |                                                            |       |   |
| Granted                                         |       | 631                |       | 34.21                                  |       |                                   |       |                                                            |       |
| Exercised                                       |       | (1,951             | )          | 18.95                                  |       |                                   |       |                                                            |       |
| Forfeited  (including cancelled options)        |       | (42                | )          | 13.63                                  |       |                                   |       |                                                            |       |
| Expirations  of vested options                  |       | (22                | )          | 47.20                                  |       |                                   |       |                                                            |       |
| Outstanding  at September 30, 2010         |       | 3,122              |       | 18.15                                  |       | $                                      | 57,068     |                                                            | 5.7        |   |
| Options  exercisable at September 30, 2010 |       | 1,107              |       | 15.98                                  |       | $                                      | 22,676     |                                                            | 3.9        |   |
|                                                 |            |                    |            |                                        |            |                                        |            |                                                                 |            |  |  |

 

*Treasury Stock*

 

On August 24, 2010, ourBoard of Directors authorized the repurchase of up to $200 million of ourcommon stock until August 26, 2011. Repurchases are expected to be madefrom time to time on the open market in accordance with applicable federalsecurities laws. The timing of repurchases and the exact number of shares ofcommon stock to be purchased will depend upon market conditions, SECregulations, and other factors. The repurchases will be funded using theCompany’s available cash balances and cash generated from operations. Theprogram does not obligate the Company to acquire any particular amount ofcommon stock and may be modified or suspended at any time at the Company’sdiscretion. During the three months ended September 30, 2010, we purchased929,382 shares for $31.6 million (including transaction costs) under theprogram at an average cost of $34.00 per share. This stock repurchase isincluded as a reduction to Equity in the Condensed Consolidated Balance Sheet.

 

*2010 Stock Incentive Plan*

 

On April 1, 2010, theBoard of Directors of the Company and on May 14, 2010, our shareholdersapproved the 2010 Stock Incentive Plan (the “2010 Plan”). The 2010 Plan replacedthe 2000 Stock Incentive Plan as the Company’s active stock plan. The Company’semployees, directors and consultants are eligible to receive awards under the2010 Plan. The 2010 Plan permits the granting of a variety of awards, includingboth non-qualified and incentive stock options, share appreciation rights,restricted shares, restricted share units and dividend equivalent rights. TheCompany is authorized to issue up to 3,500,000 shares under the 2010 Plan.Option awards are generally granted with an exercise price equal to the closingprice of the Company’s stock on the trading day prior to the date of grant;those option awards generally vest over a 3 year period and have a 10-year term.Restricted share awards generally vest over 4-5 years. Certain option and shareawards provide for accelerated vesting if there is a change in control, asdefined in the 2010 Plan.

 

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**Note 4—Balance SheetInformation**

 

*Short-term Investments*

 

Available-for-salesecurities consist of the following (*in thousands*):

 
| ** **                           | ** ** | **September 30, 2010** | ** **    |
|--------------------------------------|------------|----------------------------------|---------------|
| ** **                           | ** ** | **Amortized  Cost**              | ** **    | **Gains in Accumulated  Other Comprehensive  Income** | ** ** | **Losses in Accumulated  Other Comprehensive  Income** | ** ** | **Estimated  Fair Value** | ** ** |
| Commercial  paper                    |       | $                                |  35,915  |   | $ |  32 |   | $ |  — |   | $ |  35,947 |   |
|                                 |       |                             |          |   |   |   |   |   |   |
| FDIC  insured corporate bonds        |       | 85,802                           |          | 160 |   | — |   | 85,962 |   |
|                                 |       |                             |          |   |   |   |   |   |   |
| Treasury  bills                      |       | 35,142                           |          | 60 |   | — |   | 35,202 |   |
|                                 |       |                             |          |   |   |   |   |   |   |
| Total  available-for-sale securities |       | $                                |  156,859 |   | $ |  252 |   | $ |  — |   | $ | 157,111 |   |

 

During the three and ninemonths ended September 30, 2010, available-for-sale securities were soldfor total proceeds of $11.0 million. The gross realized gains on these saleswere minimal for the three and nine months ended September 30, 2010. Forpurpose of determining gross realized gains, the cost of securities sold isbased on specific identification. Net unrealized holding gains onavailable-for-sale securities amounting to $0.2 million for the three and ninemonths ended September 30, 2010, respectively, have been included inaccumulated other comprehensive income. We held no available-for-salesecurities during the nine months ended September 30, 2009.

 

Contractual maturities ofavailable-for-sale debt securities at September 30, 2010, are as follows (*in thousands*):

 

| ** **                            | ** ** | **Estimated Fair Value** | ** **    |
|---------------------------------------|------------|------------------------------------|---------------|
| Due  in one year or less              |       | $                                  |  60,583  |   |
|                                  |       |                               |          |
| Due  in 1–2 years                |       | 96,528                             |          |
|                                  |       |                               |          |
| Total  investments in debt securities |       | $                                  |  157,111 |   |

 

Actual maturities may differfrom contractual maturities because some borrowers have the right to call orprepay obligations with or without call or prepayment penalties.

 

*Restricted Cash*

 

At September 30, 2010,the Company has $31.6 million of restricted cash which serves as collateral forbank guarantees which provide financial assurance that the Company will fulfillcertain customer obligations. The cash is held in custody by the issuing bank,and is restricted as to withdrawal or use while the related bank guarantees areoutstanding.

 

*AccountsReceivable, net*

 

Accounts receivable areshown net of the allowance for doubtful accounts of $0.4 million as of September 30,2010 and December 31, 2009.

 

*Inventories*

 

Inventories are stated atthe lower of cost (principally first-in, first-out) or market. Inventoriesconsist of (*in thousands*):

 

| ** **       | ** ** | **September 30,** | ** **   | **December 31,** | ** ** |
|------------------|------------|------------------------|--------------|-----------------------|------------|
| ** **       | ** ** | **2010**               | ** **   | **2009**              | ** ** |
| Raw  materials   |       | $                      |  44,461 |                  | $          |  34,214 |   |
| Work  in process |       | 33,527                 |         | 17,908                |       |
| Finished  goods  |       | 2,556                  |         | 3,685                 |       |
|             |       | $                      |  80,544 |                  | $          |  55,807 |   |

 

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*AccruedWarranty*

 

We estimate the costs thatmay be incurred under the warranty we provide and record a liability in theamount of such costs at the time the related revenue is recognized. Factorsthat affect our warranty liability include product failure rates, material usageand labor costs incurred in correcting product failures during the warrantyperiod. We periodically assess the adequacy of our recognized warrantyliability and adjust the amount as necessary. Changes in our warranty liabilityduring the period are as follows (*in thousands*):

 
| ** **                           | ** ** | **Nine months ended** | ** **  |
|--------------------------------------|------------|---------------------------------|-------------|
| ** **                           | ** ** | **September 30,**          | ** **  |
| ** **                           | ** ** | **2010**                        | ** **  | **2009** | ** ** |
| Balance  as of beginning of period   |       | $                               |  6,675 |   | $ |  5,533 |   |
| Warranties  issued during the period |       | 7,242                           |        | 2,414 |   |
| Settlements  made during the period  |       | (4,906                          | )           | (2,394 | ) |
| Balance  at end of period            |       | $                               |  9,011 |   | $ |  5,553 |   |

 

**Note 5—SegmentInformation**

 

We manage the business,review operating results and assess performance, as well as allocate resources,based upon two separate reporting segments that reflect the market focus ofeach business. The Light Emitting Diode (“LED”) & Solar segmentconsists of metal organic chemical vapor deposition (“MOCVD”) systems,molecular beam epitaxy (“MBE”) systems, Copper, Indium, Gallium, Selenide(“CIGS”) deposition systems and thermal deposition sources. These systems areprimarily sold to customers in the high-brightness LED (“HB LED”) and solarindustries, as well as to scientific research customers. This segment hasmanufacturing, product development and marketing sites in Somerset, New Jersey,St. Paul, Minnesota and Lowell, Massachusetts and has a product developmentsite in Clifton Park, New York. The Data Storage segment consists of the ionbeam etch, ion beam deposition, diamond-like carbon, physical vapor depositionand dicing and slicing products sold primarily to customers in the data storageindustry. This segment has manufacturing, product development and marketingsites in Plainview, New York, Camarillo, California and Ft. Collins, Colorado.

 

We evaluate the performanceof our reportable segments based on income (loss) from continuing operationsbefore interest, income taxes, amortization and certain items (“Segment profit(loss)”), which is the primary indicator used to plan and forecast futureperiods. The presentation of this financial measure facilitates meaningfulcomparison with prior periods, as management believes Segment profit (loss)reports baseline performance and thus provides useful information. The otherexcluded items include restructuring (credits) expenses, asset impairmentcharges, inventory write-offs and equity-based compensation expense. Theaccounting policies of the reportable segments are the same as those describedin the summary of critical accounting policies.

 

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The following tables presentcertain data pertaining to our reportable product segments and a reconciliationof Segment profit (loss) to Income (loss) from continuing operations beforeincome taxes for the three and nine months ended September 30, 2010 and 2009,respectively, and goodwill and total assets as of September 30, 2010 andDecember 31, 2009 (*in thousands*):

 
| ** **                                                    | ** ** | **LED & Solar** | ** ** | **Data Storage ** | ** ** | **Unallocated  Corporate  Amount** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|------------------------------------|------------|------------|------------|
| **Three months ended September 30, 2010**                     | ** ** | ** **                    | ** ** | ** **                  | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Net  sales                                                    |       | $                             | 242,613    |                        | $          | 34,481                             |       | $          | —     |   | $ | 277,094 |   |
| Segment  profit (loss)                                        |       | $                             | 91,785     |                        | $          | 9,377                              |       | $          | (5,662     | ) | $ | 95,500 |   |
| Interest,  net                                                |       | —                        |       | —                      |       | 1,637                              |       | 1,637      |       |
| Amortization                                                  |       | 796                           |       | 383                         |       | 58                                 |       | 1,237      |       |
| Equity-based  compensation                                    |       | 582                           |       | 258                         |       | 1,774                              |       | 2,614      |       |
| Income  (loss) from continuing operations before income taxes |       | $                             | 90,407     |                        | $          | 8,736                              |       | $          | (9,131     | ) | $ | 90,012 |   |
| **Three months ended September 30, 2009**                     |       |                          |       |                        |       |                               |       |       |       |
| Net  sales                                                    |       | $                             | 52,965     |                        | $          | 21,723                             |       | $          | —     |   | $ | 74,688 |   |
| Segment  profit (loss)                                        |       | $                             | 8,456      |                        | $          | 857                                |       | $          | (2,642     | ) | $ | 6,671 |   |
| Interest,  net                                                |       | —                        |       | —                      |       | 1,656                              |       | 1,656      |       |
| Amortization                                                  |       | 792                           |       | 405                         |       | 73                                 |       | 1,270      |       |
| Equity-based  compensation                                    |       | 245                           |       | 303                         |       | 1,562                              |       | 2,110      |       |
| Restructuring                                                 |       | 200                           |       | 224                         |       | 357                                |       | 781        |       |
| Income  (loss) from continuing operations before income taxes |       | $                             | 7,219      |                        | $          | (75                                | )          | $          | (6,290     | ) | $ | 854 |   |
|                                                          |       |                          |       |                        |       |                               |       |       |       |
| **Nine months ended September 30, 2010**                      | ** ** | ** **                    | ** ** | ** **                  | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Net  sales                                                    |       | $                             | 539,765    |                        | $          | 93,468                             |       | $          | —     |   | $ | 633,233 |   |
| Segment  profit (loss)                                        |       | $                             | 177,538    |                        | $          | 21,859                             |       | $          | (12,159    | ) | $ | 187,238 |   |
| Interest,  net                                                |       | —                        |       | —                      |       | 5,181                              |       | 5,181      |       |
| Amortization                                                  |       | 2,388                         |       | 1,149                       |       | 174                                |       | 3,711      |       |
| Equity-based  compensation                                    |       | 1,720                         |       | 781                         |       | 4,502                              |       | 7,003      |       |
| Restructuring                                                 |       | —                        |       | (179                        | )          | —                             |       | (179       | )          |
| Income  (loss) from continuing operations before income taxes |       | $                             | 173,430    |                        | $          | 20,108                             |       | $          | (22,016    | ) | $ | 171,522 |   |
| **Nine months ended September 30, 2009**                      |       |                          |       |                        |       |                               |       |       |       |
| Net  sales                                                    |       | $                             | 107,050    |                        | $          | 56,220                             |       | $          | —     |   | $ | 163,270 |   |
| Segment  loss                                                 |       | $                             | 1,948      |                        | $          | (3,092                             | )          | $          | (6,141     | ) | $ | (7,285 | ) |
| Interest,  net                                                |       | —                        |       | —                      |       | 5,063                              |       | 5,063      |       |
| Amortization                                                  |       | 2,341                         |       | 1,213                       |       | 221                                |       | 3,775      |       |
| Equity-based  compensation                                    |       | 619                           |       | 892                         |       | 3,595                              |       | 5,106      |       |
| Restructuring                                                 |       | 1,129                         |       | 3,054                       |       | 587                                |       | 4,770      |       |
| Inventory  write-offs                                         |       | —                        |       | 1,526                       |       | —                             |       | 1,526      |       |
| Asset  impairment charge                                      |       | —                        |       | 304                         |       | —                             |       | 304        |       |
| Loss  from continuing operations before income taxes          |       | $                             | (2,141     | )                           | $          | (10,081                            | )          | $          | (15,607    | ) | $ | (27,829 | ) |

 
|                         | ** ** | **LED &  Solar** | ** ** | **Data Storage** | ** ** | **Unallocated  Corporate  Amount** | ** ** | **Total** | ** ** |
|------------------------------|------------|----------------------|------------|------------------|------------|------------------------------------|------------|-----------|------------|
| **As of September 30, 2010** |       |                 |       |             |       |                               |       |      |       |
| Goodwill                     |       | $                    | 52,003     |             | $          | —                             |       | $         | —     |   | $ | 52,003 |   |
| Total  assets                |       | $                    | 291,902    |             | $          | 50,217                             |       | $         | 601,577    |   | $ | 943,696 |   |
|                         |       |                 |       |             |       |                               |       |      |       |
| **As of December 31, 2009**  |       |                 |       |             |       |                               |       |      |       |
| Goodwill                     |       | $                    | 52,003     |             | $          | —                             |       | $         | —     |   | $ | 52,003 |   |
| Total  assets                |       | $                    | 178,406    |             | $          | 54,106                             |       | $         | 372,860    |   | $ | 605,372 |   |

 

Corporate total assets arecomprised principally of cash and cash equivalents, short-term investments andassets of discontinued segment held for sale at September 30, 2010 and December31, 2009, respectively.

 

**Note 6—IncomeTaxes**

 

Inassessing the realizability of deferred tax assets, the Company considerswhether it is more-likely-than-not that some portion or all of the deferred taxassets will be realized. Significant judgment is required in making thisassessment. The ultimate realization of the net deferred tax assets, consistingof net operating losses, tax credit carryforwards and temporary differences isdependent upon the generation of future taxable income prior to the expirationof any net operating loss carryforwards.

 

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TheCompany evaluates the need for a valuation allowance against its deferred taxassets each quarter. For the year ending December 31, 2010, the Company hasdetermined that a significant portion of its deferred tax assets are realizableon a more-likely-than-not basis based on the forecasted results ofoperations.  This tax benefit has beenincluded in calculating the estimated effective tax rate for the year endingDecember 31, 2010.

 

**Note 7—Debt**

 

*Convertible Notes*

 

Our convertible notes areinitially convertible into 36.7277 shares of common stock per $1,000 principalamount of notes (equivalent to a conversion price of $27.23 per share or apremium of 38% over the closing market price for Veeco’s common stock on April16, 2007). On or after April 20, 2011, we may redeem the notes, in whole or inpart, for cash at 100% of the principal amount of the notes to be redeemed plusaccrued and unpaid interest to, but not including, the redemption date. Holdersmay convert the convertible notes at any time during the period beginning onJanuary 15, 2012 through the close of business on the second day prior to April15, 2012 and earlier upon the occurrence of certain events including if thenotes are called for redemption or if, for a given fiscal quarter, our commonstock trades at prices equal to 130% of the conversion price for at least 20trading days during the final 30 trading days of the immediately precedingfiscal quarter. At the end of the third quarter of 2010, our common stock wasnot trading at prices equal to or above 130% of the conversion price for thespecified period and, as a result, the convertible notes will not beconvertible during the fourth quarter of 2010. If the convertible notes areconverted, we have the ability and intent to pay the principal balance of notestendered for conversion in cash. We will re-perform this test each quarter upto and including the fourth quarter of 2011. The notes are unsecured and areeffectively subordinated to all of our senior and secured indebtedness and toall indebtedness and other liabilities of our subsidiaries.

 

InMay 2008, accounting guidance was issued that requires a portion of convertibledebt to be allocated to equity. We implemented this guidance as of January 1,2009. This guidance requires issuers of convertible debt that can be settled incash to separately account for (*i.e.,*bifurcate) a portion of the debt associated with the conversion feature andreclassify this portion to equity. The liability portion, which represents thefair value of the debt without the conversion feature, is accreted to its facevalue over the life of the debt using the effective interest method byamortizing the discount between the face amount and the fair value. Theamortization is recorded as interest expense. Our convertible notes are subjectto this accounting guidance since they may be settled in cash upon conversion.Thus, as a result of the adoption of this accounting guidance, we reclassifiedapproximately $16.3 million from long-term debt to additional paid-in capitaleffective as of the date of issuance of the notes. This reclassificationcreated a $16.3 million discount on the debt that is amortized over theremaining life of the notes, which will be through April 15, 2012. Thisadditional interest expense does not require the use of cash.

 

Thecomponents of interest expense recorded on the notes were as follows (*in thousands*):

 
| ** **                                 | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Contractual  interest                      |       | $                                                    | 1,089      |                                                | $          | 1,089 |   | $ | 3,267 |   | $ | 3,267 |   |
| Amortization  of the discount on the notes |       | 769                                                  |       | 714                                                 |       | 2,270 |   | 2,114 |   |
| Total  interest expense on the notes       |       | $                                                    | 1,858      |                                                | $          | 1,803 |   | $ | 5,537 |   | $ | 5,381 |   |
| Effective  interest rate                   |       | 7.0                                                  | %          | 6.8                                                 | %          | 7.0 | % | 6.8 | % |

 

Thecarrying amounts of the liability and equity components of the notes were asfollows (*in thousands*):

 

| ** **                                     | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Carrying  amount of the equity component       |       | $                            | 16,318     |                        | $          | 16,318 |   |
| ** **                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Principal  balance of the liability component  |       | $                            | 105,574    |                        | $          | 105,574 |   |
| Less:  unamortized discount                    |       | 5,224                        |       | 7,493                       |       |
| Net  carrying value of the liability component |       | $                            | 100,350    |                        | $          | 98,081 |   |

 

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AtSeptember 30, 2010, $105.6 million of the convertible notes outstandinghad a fair value of approximately $145.1 million.

 

*Mortgage Payable*

 

Wealso have a mortgage payable, with approximately $3.0 million outstandingat September 30, 2010. The mortgage accrues interest at an annual rate of7.91%, and the final payment is due on January 1, 2020. The fair value ofthe mortgage at September 30, 2010 was approximately $3.2 million.

 

**Note 8—****FairValue Measurements**

 

We have categorized ourassets and liabilities recorded at fair value based upon the fair valuehierarchy. The levels of fair value hierarchy are as follows:

 

·                  Level 1 inputsutilize quoted prices (unadjusted) in active markets for identical assets orliabilities that we have the ability to access.

 

·                  Level 2 inputsutilize other-than-quoted prices that are observable, either directly orindirectly. Level 2 inputs include quoted prices for similar assets andliabilities in active markets, and inputs such as interest rates and yieldcurves that are observable at commonly quoted intervals.

 

·                  Level 3 inputsare unobservable and are typically based on our own assumptions, includingsituations where there is little, if any, market activity.

 

In certain cases, the inputsused to measure fair value may fall into different levels of the fair valuehierarchy. In such cases, we categorize such assets or liabilities based on thelowest level input that is significant to the fair value measurement in itsentirety. Our assessment of the significance of a particular input to the fairvalue measurement in its entirety requires judgment and considers factorsspecific to the asset.

 

Both observable andunobservable inputs may be used to determine the fair value of positions thatare classified within the Level 3 category. As a result, the unrealizedgains and losses for assets within the Level 3 category presented below mayinclude changes in fair value that were attributable to both observable (e.g.,changes in market interest rates) and unobservable (e.g., changes in historicalcompany data) inputs.

 

The major categories ofassets and liabilities measured on a recurring basis, at fair value, as ofSeptember 30, 2010 and December 31, 2009, are as follows (*in millions*):

 
| ** **                    | ** ** | **September 30, 2010** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **Level 1**                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Treasury  bills               |       | $                                | 35.2       |   | $ | 90.0 |   | $ | — |   | $ | 125.2 |   |
| FDIC  insured corporate bonds |       | 86.0                             |       | — |   | — |   | 86.0 |   |
| Commercial  paper             |       | 35.9                             |       | 107.0 |   | — |   | 142.9 |   |
| Derivative  instrument        |       | —                           |       | 0.2 |   | — |   | 0.2 |   |
| Total                         |       | $                                | 157.1      |   | $ | 197.2 |   | $ | — |   | $ | 354.3 |   |

 
|                   | ** ** | **December  31,2009** | ** ** |
|------------------------|------------|-----------------------|------------|
|                   | ** ** | **Level 1**           | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| CDAR’s            |       | $                     | —     |   | $ | 180.0 |   | $ | — |   | $ | 180.0 |   |
| Derivative  instrument |       | —                |       | 0.2 |   | — |   | 0.2 |   |
| Total                  |       | $                     | —     |   | $ | 180.2 |   | $ | — |   | $ | 180.2 |   |

 

CDARS, commercial paper andtreasury bills that are classified as cash equivalents are carried at cost,which approximates market value. Accordingly, no gains or losses(realized/unrealized) have been incurred for cash equivalents. All investmentsclassified as available-for-sale contain quoted prices in active markets.

 

Derivative instrumentsinclude foreign currency forward contracts to hedge certain foreign currencytransactions. Derivative instruments are valued using standardcalculations/models that are primarily based on observable inputs, includingforeign currency exchange rates, volatilities and interest rates.

 

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The major categories ofassets and liabilities measured on a nonrecurring basis, at fair value, as ofSeptember 30, 2010 and December 31, 2009, are as follows (*in millions*):

 
| ** **                          | ** ** | **September 30, 2010** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **Level 1**                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Property,  plant and equipment, net |       | $                                | —     |   | $ | — |   | $ | 45.5 |   | $ | 45.5 |   |
| Goodwill                            |       | —                           |       | — |   | 52.0 |   | 52.0 |   |
| Intangible  assets, net             |       | —                           |       | — |   | 18.1 |   | 18.1 |   |
| Asset  retirement obligation        |       | —                           |       | — |   | (0.2 | ) | (0.2 | ) |
| Restructuring  liability            |       | —                           |       | — |   | (1.0 | ) | (1.0 | ) |
| Total                               |       | $                                | —     |   | $ | — |   | $ | 114.4 |   | $ | 114.4 |   |

 
|                                | ** ** | **December  31,2009** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
|                                | ** ** | **Level 1**           | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Property,  plant and equipment, net |       | $                     | —     |   | $ | — |   | $ | 44.7 |   | $ | 44.7 |   |
| Goodwill                            |       | —                |       | — |   | 52.0 |   | 52.0 |   |
| Intangible  assets, net             |       | —                |       | — |   | 21.8 |   | 21.8 |   |
| Asset  retirement obligation        |       | —                |       | — |   | (0.2 | ) | (0.2 | ) |
| Restructuring  liability            |       | —                |       | — |   | (2.4 | ) | (2.4 | ) |
| Total                               |       | $                     | —     |   | $ | — |   | $ | 115.9 |   | $ | 115.9 |   |

 

**Note 9—****Commitments, Contingencies and Other Matters**

 

*Restructuring and Other Charges(Credits)*

 

During 2009, we continuedour multi-quarter plan to improve profitability and reduce and containspending, which began in 2007. We made progress against the initiatives thatmanagement set in 2007, continued our restructuring plan and executedactivities with a focus on creating a more cost effective organization, with agreater percentage of variable costs. These activities included downsizing andconsolidating some locations, reducing our workforce, consultants anddiscretionary expenses and realigning our sales organization and engineeringgroups.

 

In conjunction with theseactivities, we recorded a restructuring credit of approximately $0.2 millionduring nine months ended September 30, 2010. We recorded restructuring chargesof approximately $0.8 million and $4.8 million during the three and nine monthsended September 30, 2009, respectively, an asset impairment charge of $0.3million and inventory write-offs of $1.5 million, included in cost of sales inthe accompanying Condensed Consolidated Statement of Operations, associatedwith the discontinuance of certain products in connection with the transitionto outsourced manufacturing during the nine months ended September 30, 2009.Restructuring for the three and nine months ended September 30, 2010 and 2009is as follows (*in thousands*):

 
| ** **                                 | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                 | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Personnel  severance and related costs     |       | $                                | —     |                            | $          | 781 |   | $ | — |   | $ | 3,455 |   |
| Lease-related  costs (credits)             |       | —                           |       | —                          |       | (179 | ) | 893 |   |
| Moving  costs and consolidation activities |       | —                           |       | —                          |       | — |   | 422 |   |
|                                       |       | $                                | —     |                            | $          | 781 |   | $ | (179 | ) | $ | 4,770 |   |

 

*Personnel Severance and RelatedCosts*

 

Duringthe three and nine months ended September 30, 2009, we recorded $0.8 millionand $3.5 million, respectively, in personnel severance and related costsresulting from a headcount reduction of approximately 27 employees during thethree month period and 160 employees during the nine month period. Thisreduction in workforce included executives, management, administration, salesand service personnel and manufacturing employees’ companywide.

 

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*Lease-related Costs (credits)*

 

During the first quarter of2010, we had a change in estimate relating to one of our leased Data Storage facilities.As a result, we incurred a restructuring credit of $0.2 million, consistingprimarily of the remaining lease payment obligations and estimated propertytaxes for a portion of the facility we will occupy, offset by a reduction inexpected sublease income. We made certain assumptions in determining thecredit, which included a reduction in estimated sublease income and terms ofthe sublease as well as the estimated discount rate to be used in determiningthe fair value of the remaining liability. We developed these assumptions basedon our understanding of the current real estate market as well as currentmarket interest rates. The assumptions are based on management’s bestestimates, and will be adjusted periodically if new information is obtained.

 

During the second quarter of 2009, we vacated one ofour Data Storage facilities.  As a result, we incurred a restructuringcharge, representing the remaining lease payment obligations and estimatedproperty taxes for the facility we vacated, offset by the estimated expectedsublease income to be received.  We made certain assumptions indetermining the charge, which included estimated sublease income and terms ofthe sublease as well as the estimated discount rate to be used in determiningthe fair value of the liability.  We developed these assumptions based onour understanding of the current real estate market as well as current marketinterest rates.  The assumptions are based on management’s best estimates,and will be adjusted periodically if better information is obtained.  Wealso incurred charges associated with moving and consolidation activities forboth of these locations.

 

*Restructuring Liability*

 

Thefollowing is a reconciliation of the liability associated with the 2009 and2008 restructuring charges from inception through September 30, 2010 (*in thousands*):

 
| ** **                             | ** ** | **LED & Solar** | ** ** | **Data Storage** | ** ** | **Unallocated  Corporate** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|-----------------------|------------|----------------------------|------------|-----------|------------|
| **Short-term liability**               |       |                          |       |                  |       |                       |       |      |       |
| Balance  as of January 1, 2010         |       | $                             | 353        |                  | $          | 486                        |       | $         | 1,597      |   | $ | 2,436 |   |
| Reversal  of lease-related costs       |       | —                        |       | (108                  | )          | —                     |       | (108      | )          |
| Short-term/long-term  reclassification |       | —                        |       | 97                    |       | 536                        |       | 633       |       |
| Cash  payments                         |       | (353                          | )          | (299                  | )          | (1,312                     | )          | (1,964    | )          |
| Balance  as of September 30, 2010      |       | $                             | —     |                  | $          | 176                        |       | $         | 821        |   | $ | 997 |   |
|                                   |       |                          |       |                  |       |                       |       |      |       |
| **Long-term liability**                |       |                          |       |                  |       |                       |       |      |       |
| Balance  as of January 1, 2010         |       | $                             | —     |                  | $          | 229                        |       | $         | 536        |   | $ | 765 |   |
| Reversal  of lease-related costs       |       | —                        |       | (71                   | )          | —                     |       | (71       | )          |
| Short-term/long-term  reclassification |       | —                        |       | (97                   | )          | (536                       | )          | (633      | )          |
| Balance  as of September 30, 2010      |       | $                             | —     |                  | $          | 61                         |       | $         | —     |   | $ | 61 |   |

 

The balance of the short-term and long-termliability will be paid over the remaining life of the leases for the formercorporate headquarters and a former Data Storage facility, which expire in June2011 and May 2012, respectively. We have not incurred and currently do notanticipate or expect to incur additional restructuring charges during 2010.

 

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

 

**ExecutiveSummary**

 

Wemake equipment to develop and manufacture light-emitting diodes (“LEDs”), solarpanels, hard-disk drives and other devices. We have leading technologypositions in our two segments: LED & Solar and Data Storage.

 

Inour LED & Solar segment, we design and manufacture metal organic chemicalvapor deposition (“MOCVD”) systems, molecular beam epitaxy (“MBE”) systems, Copper,Indium, Gallium, Selende (“CIGS”) deposition systems and thermal depositionsources which we sell to manufacturers of high brightness LEDs (“HB LEDs”) andsolar panels, as well as to scientific research customers.

 

Inour Data Storage segment, we design and manufacture ion beam etch, ion beamdeposition, diamond-like carbon, physical vapor deposition, chemical vapordeposition, and dicing and slicing systems primarily used to create thin filmmagnetic heads (“TFMHs”) that read and write data on hard disk drives.

 

Wesupport our customers through product development, manufacturing, sales andservice sites in the U.S., Korea, Taiwan, China, Singapore, Japan, Europe andother locations.

 

**Highlightsof the Third Quarter of 2010**

 

·                  Revenue was $277.1 million, a 271% increasefrom the third quarter of 2009.

·                  Orders were $278.2 million, a 42% increasefrom the third quarter of 2009.

·                  Net income from continuing operations was$91.1 million, or $2.16 per share, compared to no net income, or $0.00 pershare, in the third quarter of 2009.

·                  Gross margins were 48.9%, compared to 40.9%in the third quarter of 2009.

 

**Fourth Quarter 2010 Outlook**

 

Wehave recently experienced rescheduling of MOCVD tool shipments from the fourthquarter into the first quarter by several customers in Korea and Taiwan.  Due to the recent strong order rate fromChina, our current plan for fourth quarter revenue includes a significantamount of large multi-tool MOCVD shipments to key Chinese customers, many ofwhom are currently building or expanding their facilities. While we currentlyexpect that these tools will ship over the next few months, timing of revenuecould shift into the first quarter due to customer facility readiness. Veeco’sfourth quarter 2010 revenue is currently forecasted to be between $285 and $320million.

 

Atthe beginning of the fourth quarter, Veeco continues to experience high levelsof quoting activity, and we currently expect that fourth quarter bookings willbe equal to or better than the third quarter. Strong quoting activity continuesfor MOCVD tools particularly in China and Taiwan, and overall market conditionsin Data Storage also remain healthy.

 

**2011 Outlook**

 

Veeco’sbacklog of $569 million at the end of September, plus further strength in MOCVDbookings currently forecasted for the fourth quarter, should position Veeco forsolid revenue performance in the first half of 2011.  The Company has built its MOCVD manufacturingcapacity to 120 or more tools per quarter, and will head into 2011 with theability to flex quarterly shipments up or down as required by customer demand.

 

Whileit is difficult to predict future business trends in LED, we believe there maybe an opportunity to sell thousands of MOCVD systems as LEDs fully penetratedisplay applications and see accelerated adoption in solid state lighting overthe next few years.  In order tocapitalize upon this potential opportunity, Veeco is expanding training,service and support functions in China, Taiwan and Korea, and accelerating ournew product roadmap.

 

Inour other businesses, quoting activity is picking up for our CIGS solardepositions systems as we make progress advancing these tools’ processcapabilities for high-efficiency/low cost solar cells.  Our Data Storage business continues toperform exceptionally well this year, with new products that are meetingcustomer technology challenges and a flexible outsourced manufacturing model.

 

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Ouroutlook discussion above constitutes “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Ourexpectations regarding future results are subject to risks and uncertainties.Our actual results may differ materially from those anticipated. Risksassociated with our ability to achieve these results are set forth in Items 1,1A, 3, 7 and 7A in our annual report on Form 10-K for the year ended December31, 2009, as well as any modifications or revisions to risk factors containedin our subsequent filings with the SEC.

 

Youshould not place undue reliance on any forward-looking statements, which speakonly as of the dates they are made.

 

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**Results of Operations:**

 

**ThreeMonths Ended September 30, 2010 and 2009**

 

Consistent with prior years,we report 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 interimquarter ends are determined at the beginning of each year based on the 13-weekquarters. The 2010 interim quarter ends are March 28, June 27 and September 26.The 2009 interim quarter ends were March 29, June 28 and September 27.For ease of reference, we report these interim quarter ends as March 31, June 30and September 30 in our interim condensed consolidated financialstatements.

 

The following table showsour Condensed Consolidated Statements of Operations, percentages of sales, andcomparisons between the three months ended September 30, 2010 and 2009 (*dollars in thousands*):

 
| ** **                                             | ** ** | ** **                       | ** ** | **Dollar and** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------|------------|
| ** **                                             | ** ** | **Three months ended** | ** ** | **Percentage**      | ** ** |
| ** **                                             | ** ** | **September 30,**           | ** ** | **Change**          | ** ** |
| ** **                                             | ** ** | **2010**                         | ** ** | **2009**            | ** ** | **Year to Year** | ** ** |
| Net  sales                                             |       | $                                | 277,094    |                | 100.0      | % | $ | 74,688 |   | 100.0 | % | $ | 202,406 |   | 271.0 | % |
| Cost  of sales                                         |       | 141,612                          |       | 51.1                |       | 44,141 |   | 59.1 |   | 97,471 |   | 220.8 |   |
| Gross  profit                                          |       | 135,482                          |       | 48.9                |       | 30,547 |   | 40.9 |   | 104,935 |   | 343.5 |   |
| Operating  expenses (income):                          |       |                             |       |                |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative                   |       | 24,565                           |       | 8.9                 |       | 15,631 |   | 20.9 |   | 8,934 |   | 57.2 |   |
| Research  and development                              |       | 18,306                           |       | 6.6                 |       | 10,662 |   | 14.3 |   | 7,644 |   | 71.7 |   |
| Amortization                                           |       | 1,237                            |       | 0.4                 |       | 1,270 |   | 1.7 |   | (33 | ) | (2.6 | ) |
| Restructuring                                          |       | —                           |       | —              |       | 781 |   | 1.0 |   | (781 | ) | (100.0 | ) |
| Other,  net                                            |       | (275                             | )          | (0.1                | )          | (307 | ) | (0.4 | ) | 32 |   | (10.4 | ) |
| Total  operating expenses                              |       | 43,833                           |       | 15.8                |       | 28,037 |   | 37.5 |   | 15,796 |   | 56.3 |   |
| Operating  income                                      |       | 91,649                           |       | 33.1                |       | 2,510 |   | 3.4 |   | 89,139 |   |   | * |
| Interest  expense, net                                 |       | 1,637                            |       | 0.6                 |       | 1,656 |   | 2.2 |   | (19 | ) | (1.1 | ) |
| Income  from continuing operations before income taxes |       | 90,012                           |       | 32.5                |       | 854 |   | 1.1 |   | 89,158 |   |   | * |
| Income  tax (benefit) provision                        |       | (1,092                           | )          | (0.4                | )          | 823 |   | 1.1 |   | (1,915 | ) |   | * |
| Income  from continuing operations                     |       | 91,104                           |       | 32.9                |       | 31 |   | 0.0 |   | 91,073 |   | 32.9 |   |
|                                                   |       |                             |       |                |       |   |   |   |   |   |   |   |   |
| Discontinued  operations:                              |       |                             |       |                |       |   |   |   |   |   |   |   |   |
| (Loss)  income from discontinued operations            |       | (4,311                           | )          | (1.6                | )          | 978 |   | 0.4 |   | (5,289 | ) | (1.9 | ) |
| Income  tax provision (benefit)                        |       | 630                              |       | 0.2                 |       | (261 | ) | (0.1 | ) | 891 |   | 0.3 |   |
| (Loss)  income from discontinued operations            |       | (4,941                           | )          | (1.8                | )          | 1,239 |   | 1.7 |   | 89,158 |   | 32.2 |   |
| Net  income                                            |       | $                                | 86,163     |                | 31.1       | % | $ | 1,270 |   | 1.7 | % | $ | 85,784 |   | 42.4 | % |

 

----

* Not Meaningful

 

*NetSales and Orders*

 

Netsales of $277.1 million for the three months ended September 30, 2010 wereup 271.0% compared to the comparable 2009 quarter. The following is an analysisof net sales and orders by segment and by region (*dollars inthousands*):

 
| ** **                                         | ** ** | **Sales**                                                | ** ** | **Orders**                                      | ** ** | ** **                                               | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                         | ** ** | **Three months ended**

**September 30,** | ** ** | **Dollar and Percentage**

**Change** | ** ** | **Three months ended**

**September 30,** | ** ** | **Dollar and Percentage**

**Change** | ** ** | **Book to Bill**

**Ratio** | ** ** |
| ** **                                         | ** ** | **2010**                                                 | ** ** | **2009**                                        | ** ** | **Year to Year**                               | ** ** | **2010** | ** ** | **2009** | ** ** | **Year to Year** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Segment  Analysis**                              | ** ** | ** **                                               | ** ** | ** **                                      | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| LED & Solar                               |       | $                                                        | 242,613    |                                            | $          | 52,965                                                   |       | $ | 189,648 |   | 358.1 | % | $ | 243,218 |   | $ | 179,229 |   | $ | 63,989 |   | 35.7 | % | 1.00 |   | 3.38 |   |
| Data Storage                                       |       | 34,481                                                   |       | 21,723                                          |       | 12,758                                                   |       | 58.7 |   | 34,972 |   | 17,242 |   | 17,730 |   | 102.8 |   | 1.01 |   | 0.79 |   |
| Total                                              |       | $                                                        | 277,094    |                                            | $          | 74,688                                                   |       | $ | 202,406 |   | 271.0 | % | $ | 278,190 |   | $ | 196,471 |   | $ | 81,719 |   | 41.6 | % | 1.00 |   | 2.63 |   |
| **Regional  Analysis**                             | ** ** | ** **                                               | ** ** | ** **                                      | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas                                           |       | $                                                        | 20,915     |                                            | $          | 11,448                                                   |       | $ | 9,467 |   | 82.7 | % | $ | 23,440 |   | $ | 30,136 |   | $ | (6,696 | ) | -22.2 | % | 1.12 |   | 2.63 |   |
| Europe, Middle East and  Africa (“EMEA”) |       | 33,236                                                   |       | 11,293                                          |       | 21,943                                                   |       | 194.3 |   | 9,672 |   | 11,373 |   | (1,701 | ) | (15.0 | ) | 0.29 |   | 1.01 |   |
| Asia Pacific                                       |       | 222,943                                                  |       | 51,947                                          |       | 170,996                                                  |       | 329.2 |   | 245,078 |   | 154,962 |   | 90,116 |   | 58.2 |   | 1.10 |   | 2.98 |   |
| Total                                              |       | $                                                        | 277,094    |                                            | $          | 74,688                                                   |       | $ | 202,406 |   | 271.0 | % | $ | 278,190 |   | $ | 196,471 |   | $ | 81,719 |   | 41.6 | % | 1.00 |   | 2.63 |   |

 

Sales and orders increasedin each segment in the third quarter of 2010 compared with the comparable 2009quarter due to our customers’ requirements in response to increasinglyfavorable economic conditions compared to 2009. LED & Solar sales wereup 358.1% from the comparable 2009 quarter primarily due to an increase in enduser demand for HB LED backlighting applications and continued strong customeracceptance of Veeco’s newest generation systems. Data Storage segment saleswere up 58.7% from the  comparable 2009quarter due to an increase

 

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in demand by our datastorage customers as the global economy improved from 2009. By region, netsales increased by 329.2% in the Asia Pacific region, primarily due to MOCVDsales to HB LED customers, while sales in the Americas and EMEA also increased82.7% and 194.3%,  respectively. Webelieve that there will continue to be period-to-period variations in thegeographic distribution of sales.

 

Orders for the third quarterof 2010 increased 41.6% from the comparable 2009 quarter. By segment, the 35.7%increase in orders for LED & Solar was principally driven by HB LEDbased manufacturers increasing production of LEDs. The 102.8% increase in DataStorage orders resulted from an increase in demand by our data storagecustomers due to both capacity expansion and technology buys.

 

Our book-to-bill ratio forthe third quarter of 2010, which is calculated by dividing orders received in agiven time period by revenue recognized in the same time period, was 1 to 1.Our backlog as of September 30, 2010 was $569.0 million, compared to$377.0 million as of December 31, 2009. During the three months ended September 30,2010, we experienced backlog adjustments of approximately $0.4 million,principally due to adjustments related to foreign currency translation. Forcertain sales arrangements we require a deposit for a portion of the salesprice before shipment. As of September 30, 2010, we had customer depositsand advanced billings of $131.5 million.

 

*GrossProfit*

 

Grossprofit, as a percentage of net sales, for the third quarter of 2010, was 48.9%,compared to 40.9% in the comparable 2009 quarter. LED & Solar grossmargins increased to 48.7% from 41.7% primarily resulting from favorable product mix, cost reductions andincreased sales volume. Data Storage gross margins increased to 51.0% from39.9%, driven primarily by favorable product mix, cost reductions and increasedsales volume.

 

*OperatingExpenses*

 

Selling,general and administrative expenses increased by $8.9 million, or 57.2%, fromthe comparable 2009 quarter, however, decreased from 20.9% of net sales to 8.9%of sales. The dollar increase was primarily due to an increase in bonus andprofit sharing expense, equity-based compensation, travel and entertainmentexpenses, salary and related expenses and professional fees associatedprimarily with the significant increase in business activity in our LED &Solar segment.

 

Researchand development expenses increased $7.6 million from the comparable 2009quarter, however, decreased from 14.3% of net sales to 6.6%. The dollarincrease was primarily due to increased spending in our LED & Solarsegment to support future growth.

 

Restructuring expense of$0.8 million for the third quarter of 2009 consisted primarily of personnelseverance costs resulting from a reduction in workforce. There were no suchcharges in 2010.

 

Other, net for the thirdquarter of 2010 includes a foreign currency exchange loss of $0.1 millioncompared to none in the comparable 2009 quarter.

 

*Income Taxes*

 

Our provision for incometaxes consists of U.S. federal, state and local and foreign taxes in amountsnecessary to align our quarter-to-date tax provision with the effective taxrate we expect to achieve for the full year.

 

For the three months ended September 30,2010, the Company had an effective tax rate of (1.2%) and recorded a benefitfor income taxes of $1.1 million. The benefit for income taxes includes a taxprovision of $2.4 million relating to U.S federal, state and local and foreigntaxes offset by a discrete tax benefit of $3.5 million primarily related tostate research and development tax credits as the Company had a favorableresolution of an income tax audit.

 

The effective tax rate islower than the statutory rate primarily due to the Company’s ability to realizea significant portion of its deferred tax assets, primarily related to netoperating loss carryforwards and federal tax credits, on a more-likely-than-notbasis based on the forecasted results of operations for the year ending December 31,2010.

 

For the three months ended September 30,2009, the Company recorded a provision for income taxes of $0.6 million relatedto U.S federal, state and local and foreign taxes.

 

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**Results of Operations:**

 

**Nine MonthsEnded September 30, 2010 and 2009**

 

The following table showsour Condensed Consolidated Statements of Operations, percentages of sales, andcomparisons between the nine months ended September 30, 2010 and 2009 (*dollars in thousands*):

 
| ** **                                                    | ** ** | ** **                      | ** ** | **Dollar and** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|------------|---------------------|------------|
| ** **                                                    | ** ** | **Nine months ended** | ** ** | **Percentage**      | ** ** |
| ** **                                                    | ** ** | **September 30,**          | ** ** | **Change**          | ** ** |
| ** **                                                    | ** ** | **2010**                        | ** ** | **2009**            | ** ** | **Year to Year** | ** ** |
| Net  sales                                                    |       | $                               | 633,233    |                | 100.0      | % | $ | 163,270 |   | 100.0 | % | $ | 469,963 |   | 287.8 | % |
| Cost  of sales                                                |       | 342,210                         |       | 54.0                |       | 105,566 |   | 64.7 |   | 236,644 |   | 224.2 |   |
| Gross  profit                                                 |       | 291,023                         |       | 46.0                |       | 57,704 |   | 35.3 |   | 233,319 |   | 404.3 |   |
| Operating  expenses (income):                                 |       |                            |       |                |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative                          |       | 62,852                          |       | 9.9                 |       | 41,926 |   | 25.7 |   | 20,926 |   | 49.9 |   |
| Research  and development                                     |       | 47,861                          |       | 7.6                 |       | 29,327 |   | 18.0 |   | 18,534 |   | 63.2 |   |
| Amortization                                                  |       | 3,711                           |       | 0.6                 |       | 3,775 |   | 2.3 |   | (64 | ) | (1.7 | ) |
| Restructuring                                                 |       | (179                            | )          | (0.0                | )          | 4,770 |   | 2.9 |   | (4,949 | ) |   | * |
| Asset  impairment                                             |       | —                          |       | —              |       | 304 |   | 0.2 |   | (304 | ) | (100.0 | ) |
| Other,  net                                                   |       | 75                              |       | 0.0                 |       | 368 |   | 0.2 |   | (293 | ) | (79.6 | ) |
| Total  operating expenses                                     |       | 114,320                         |       | 18.1                |       | 80,470 |   | 49.3 |   | 33,850 |   | 42.1 |   |
| Operating  income (loss)                                      |       | 176,703                         |       | 27.9                |       | (22,766 | ) | (13.9 | ) | 199,469 |   |   | * |
| Interest  expense, net                                        |       | 5,181                           |       | 0.8                 |       | 5,063 |   | 3.1 |   | 118 |   | 2.3 |   |
| Income  (loss) from continuing operations before income taxes |       | 171,522                         |       | 27.1                |       | (27,829 | ) | (17.0 | ) | 199,351 |   |   | * |
| Income  tax provision                                         |       | 7,663                           |       | 1.2                 |       | 2,379 |   | 1.5 |   | 5,284 |   | 222.1 |   |
| Income  (loss) from continuing operations                     |       | 163,859                         |       | 25.9                |       | (30,208 | ) | (4.8 | ) | 194,067 |   | 30.6 |   |
|                                                          |       |                            |       |                |       |   |   |   |   |   |   |   |   |
| Discontinued  operations:                                     |       |                            |       |                |       |   |   |   |   |   |   |   |   |
| Income  (loss) from discontinued operations                   |       | 3,546                           |       | 0.6                 |       | (5,206 | ) | (0.8 | ) | 8,752 |   |   | * |
| Income  tax provision (benefit)                               |       | 2,805                           |       | 0.4                 |       | (1,037 | ) | (0.2 | ) | 3,842 |   |   | * |
| Income  (loss) from discontinued operations                   |       | 741                             |       | 0.1                 |       | (4,169 | ) | (2.6 | ) | 199,351 |   |   | * |
| Net  income (loss)                                            |       |                            | 164,600    |                | 26.0       |   |   | (34,377 | ) | (21.1 | ) |   | 202,819 |   | 43.2 |   |
| Net  loss attributable to noncontrolling interest             |       | —                          |       | —              |       | (65 | ) | 0.1 |   | 65 |   | (100.0 | ) |
| Net  income (loss) attributable to Veeco                      |       | $                               | 164,600    |                | 26.0       | % | $ | (34,312 | ) | (21 | )% | $ | 198,912 |   |   | * |

 

----

* Not Meaningful

 

*NetSales and Orders*

 

Netsales of $633.2 million for the nine months ended September 30, 2010 wereup 287.8% compared to the comparable 2009 period. The following is an analysisof net sales and orders by segment and by region (*dollars inthousands*):

 
| ** **             | ** ** | **Sales**                       | ** ** | **Orders**                          | ** ** | ** **                      | ** ** |
|------------------------|------------|---------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **Nine months ended** | ** ** | **Dollar and Percentage** | ** ** | **Nine months ended** | ** ** | **Dollar and Percentage** | ** ** | **Book to Bill** | ** ** |
| ** **             | ** ** | **September 30,**          | ** ** | **Change**                          | ** ** | **September 30,**          | ** ** | **Change** | ** ** | **Ratio** | ** ** |
| ** **             | ** ** | **2010**                        | ** ** | **2009**                            | ** ** | **Year to Year**      | ** ** | **2010** | ** ** | **2009** | ** ** | **Year to Year** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Segment  Analysis**  | ** ** | ** **                      | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| LED & Solar   |       | $                               | 539,765    |                                | $          | 107,050                         |       | $ | 432,715 |   | 404.2 | % | $ | 715,320 |   | $ | 264,092 |   | $ | 451,228 |   | 170.9 | % | 1.33 |   | 2.47 |   |
| Data Storage           |       | 93,468                          |       | 56,220                              |       | 37,248                          |       | 66.3 |   | 111,370 |   | 44,379 |   | 66,991 |   | 151.0 |   | 1.19 |   | 0.79 |   |
| Total                  |       | $                               | 633,233    |                                | $          | 163,270                         |       | $ | 469,963 |   | 287.8 | % | $ | 826,690 |   | $ | 308,471 |   | $ | 518,219 |   | 168.0 | % | 1.31 |   | 1.89 |   |
| **Regional  Analysis** | ** ** | ** **                      | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas               |       | $                               | 63,484     |                                | $          | 39,361                          |       | $ | 24,123 |   | 61.3 | % | $ | 72,551 |   | $ | 51,645 |   | $ | 20,906 |   | 40.5 | % | 1.14 |   | 1.31 |   |
| EMEA                   |       | 65,673                          |       | 33,454                              |       | 32,219                          |       | 96.3 |   | 57,604 |   | 27,817 |   | 29,787 |   | 107.1 |   | 0.88 |   | 0.83 |   |
| Asia Pacific           |       | 504,076                         |       | 90,455                              |       | 413,621                         |       | 457.3 |   | 696,535 |   | 229,009 |   | 467,526 |   | 204.2 |   | 1.38 |   | 2.53 |   |
| Total                  |       | $                               | 633,233    |                                | $          | 163,270                         |       | $ | 469,963 |   | 287.8 | % | $ | 826,690 |   | $ | 308,471 |   | $ | 518,219 |   | 168.0 | % | 1.31 |   | 1.89 |   |

 

Sales and orders increasedin each segment for the nine months ended September 30, 2010 compared withthe comparable 2009 period due to our customers’ requirements in response toincreasingly favorable economic conditions compared to 2009. LED &Solar sales were up 404.2% from the comparable 2009 period primarily due to anincrease in end user demand for HB LED backlighting applications and strongcustomer acceptance of Veeco’s newest generation systems. Data Storage saleswere up 66.3% from the comparable 2009 period due to an increase in demand byour data storage customers as the global economy improved from 2009. By region,net sales increased by 457.3% in the Asia Pacific region, primarily due toMOCVD sales to HB LED customers, while sales in the Americas and EMEA  also increased 61.3% and 96.3%,  respectively. We believe that there willcontinue to be period-to-period variations in the geographic distribution ofsales.

 

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Orders for the nine monthsended September 30, 2010 increased 168.0% from the comparable 2009 period.By segment, the 170.9% increase in orders for LED & Solar wasprincipally driven by HB LED based manufacturers increasing production fortelevision and laptop backlighting applications. The 151.0% increase in DataStorage orders resulted from an increase in demand by our data storagecustomers due to both capacity expansion and technology buys.

 

*GrossProfit*

 

Grossprofit, as a percentage of net sales, for the nine months ended September 30,2010, was 46.0%, compared to 35.3% in the comparable 2009 period. LED &Solar gross margins increased to 45.9% from 36.4% and Data Storage grossmargins increased to 47.2% from 34.4%, driven primarily by cost reduction,favorable product mix and increased sales volume in each segment. For the ninemonths ended September 30, 2009, Data Storage gross margins were alsonegatively impacted by a charge of $1.5 million for the write-off of inventoryassociated with the discontinuance of certain product lines.

 

*OperatingExpenses*

 

Selling,general and administrative expenses increased by $20.9 million, or 49.9%, fromthe comparable 2009 period, however, decreased from 25.7% of net sales to 9.9%of sales. The dollar increase was primarily due to an increase in bonus andprofit sharing expense, equity-based compensation, travel and entertainmentexpenses, salary and related expenses and professional fees associatedprimarily with the significant increase in business activity in our LED &Solar segment.

 

Researchand development expenses increased $18.5 million from the comparable 2009period, however, decreased from 18.0% of net sales to 7.6% of sales. The dollarincrease was primarily due to increased spending in our LED & Solarsegment to support future growth.

 

Restructuring included acredit of approximately $0.2 million during the nine months ended September 30,2010 due to a change in estimate for one of our abandoned leased facilities.Restructuring expense of $4.8 million in the nine months ended September 30,2009 consisted of $3.5 million of personnel severance costs resulting from areduction in workforce, $0.9 million of lease-related costs and $0.4 million ofmoving and consolidation costs incurred in our Data Storage segment associatedwith vacating our Camarillo, CA facilities. In addition, there was also a $0.3million asset impairment charge.

 

Other, net for the ninemonths ended September 30, 2010 included a no foreign currency exchangegain or loss compared to a foreign exchange gain of $0.1 million in thecomparable 2009 period.

 

*Income Taxes*

 

Our provision for incometaxes consists of U.S. federal, state and local and foreign taxes in amountsnecessary to align our quarter-to-date tax provision with the effective taxrate we expect to achieve for the full year.

 

For the nine months ended September 30,2010, the Company had an effective tax rate of 4.5% and recorded a provisionfor income taxes of $7.7 million.  Theprovision for income taxes includes $11.2 million relating to U.S federal,state and local and foreign taxes offset by a discrete tax benefit of $3.5million primarily related to state research and development tax credits as theCompany had a favorable resolution of an income tax audit.

 

The effective tax rate islower than the statutory rate primarily due to the Company’s ability to realizea significant portion of its deferred tax assets, primarily related to netoperating loss carryforwards and federal tax credits, on a more-likely-than-notbasis based on the forecasted results of operations for the year ending December 31,2010.

 

For the nine months ended September 30,2009, the Company recorded a provision for income taxes of $1.3 million relatedto U.S federal, state and local and foreign taxes.

 

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**Liquidityand Capital Resources**

 

Historically, our principalcapital requirements have included the funding of acquisitions, capitalexpenditures and repayment of debt. We traditionally have generated cash fromoperations and debt and stock issuances. Our ability to generate sufficientcash flows from operations is dependent on the continued demand for our productsand services. A summary of the cash flow activity for the nine months ended September 30,2010 and 2009, respectively, is as follows (*in thousands*):

 

| ** **                                             | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **September 30,**          | ** ** |
| ** **                                             | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Net income  (loss)                                     |       | $                               | 164,600    |   | $ | (34,377 | ) |
| Net cash  provided by operating activities             |       | $                               | 187,871    |   | $ | 21,668 |   |
| Net cash used in  investing activities                 |       | (91,371                         | )          | (17,084 | ) |
| Net cash  provided by financing activities             |       | 33,005                          |       | 2,263 |   |
| Effect of  exchange rates on cash and cash equivalents |       | 139                             |       | (8 | ) |
| Net increase in  cash and cash equivalents             |       | 129,644                         |       | 6,839 |   |
| Cash and cash  equivalents at beginning of period      |       | 148,500                         |       | 102,521 |   |
| Cash and cash  equivalents at end of period            |       | $                               | 278,144    |   | $ | 109,360 |   |

 

We had a net increase incash of $129.6 million during the nine months ended September 30, 2010.Cash provided by operations was $187.9 million for this period, ascompared to cash provided by operations of $21.7 million for thecomparable 2009 period. Net income adjusted for non-cash items providedoperating cash flows of $152.8 million for the nine months ended September 30,2010, whereas $1.1 million was used in operating cash flows in the comparable2009 period. Net cash provided by operations for the nine months ended September 30,2010 included a decrease in net operating assets of $35.0 million.Inventories increased by approximately $24.6 million, principally to supportsignificant MOCVD order activity. Accounts receivable increased $61.5 million,due to higher sales volume when compared to the fourth quarter of 2009. Accruedexpenses and other current liabilities increased $138.9 million, due primarilyto an increase in customer deposits. Accounts payable also increased by $19.9million, due to the higher level of business activity.

 

Cash used in investing activitiesof $91.4 million for the nine months ended September 30, 2010 primarilyrelated to purchases of additional short-term investments of $246.5 million,$31.6 million transferred to restricted cash and $31.6 million in purchases oftreasury stock, capital expenditures of $8.0 million, partially offset by thesale or redemption of short-term investments of $224.7 million. Cash used ininvesting activities of $17.1 million for the nine months ended September 30,2009 primarily related to the $9.8 million earn-out payments and $4.6 millionin capital expenditures, of which $4.1 million is principally attributable toour LED & Solar segment. During the remainder of 2010, we estimate wewill invest an additional $10.7 million in capital expenditures primarilyrelated to lab tools for high-growth opportunities, as well as for plantexpansion and building improvements.

 

Cash provided by financingactivities of $33.0 million and $2.3 million for the nine months ended September 30,2010 and 2009 primarily related to stock option exercises.

 

Based on forecasted resultsof operations for the year ending December 31, 2010, we expect to exhaustour net federal operating loss carryforwards (“NOLs”) and federal tax credits (“FTCs”)this year. As a result, we anticipate paying taxes when the NOLs and FTCs areexhausted.

 

At September 30, 2010,we have $31.6 million of restricted cash which serves as collateral for bankguarantees which provide financial assurance that we will fulfill certaincustomer obligations. The cash is held in custody by the issuing bank, and isrestricted as to withdrawal or use while the related bank guarantees areoutstanding.

 

On August 15, 2010, wesigned a definitive agreement to sell our metrology business to BrukerCorporation comprising our entire Metrology reporting segment. At closing, on October 7,2010, we received $229.4 million in cash consideration of which 10% of suchconsideration will be held in escrow. The final purchase price is subject tocertain post-closing adjustments related to final working capital. We expect torecord a net gain on the sale of approximately $99 million during the fourthquarter.

 

As of September 30,2010, we have outstanding $105.6 million aggregate principal amount of 4.125%convertible subordinated notes due April 15, 2012 (the “Notes”). We payinterest on the Notes on April 15 and October 15 of each year. Wehave previously engaged in repurchase transactions of our Notes and may enterinto 

 

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similar transactions in thefuture depending on market conditions, our cash position and other factors.

 

The Notes are initiallyconvertible into 36.7277 shares of common stock per $1,000 principal amount ofNotes (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).On or after April 20, 2011, we may redeem the notes, in whole or in part,for cash at 100% of the principal amount of the notes to be redeemed plusaccrued and unpaid interest to, but not including, the redemption date. Holdersmay convert the 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 if the noteshave been called for redemption or if, for a given fiscal quarter, our commonstock trades at prices equal to 130% of the conversion price for at least 20trading days during the final 30 trading days of the immediately precedingfiscal quarter. At the end of the third quarter of 2010, our common stock wasnot trading at prices equal to or above 130% of the conversion price for thespecified period and, as a result, the Notes will not be convertible during thefourth quarter of 2010.  If the Notes are converted, we have the abilityand intent to pay the principal balance of notes tendered for conversion incash. We will re-perform this test each quarter up to and including the fourthquarter of 2011.

 

Webelieve that existing cash balances together with cash generated fromoperations will be sufficient to meet our projected working capital and othercash flow requirements for the next twelve months, as well as our contractualobligations. We believe we will be able to meet our obligation to repay the$105.6 million of outstanding Notes that mature on April 15, 2012 withcash and short-term investments on hand.

 

In 2006 we purchased 19.9%of the common stock of Fluens Corporation (“Fluens”). On May 14, 2009, weacquired the remaining 80.1% of Fluens for $1.5 million and an earn-outarrangement based on future performance. No gain or loss was recognized uponthe purchase of the 80.1% portion. The difference between the purchase priceincluding the earn-out consideration and the amount by which noncontrollinginterest was reduced on the balance sheet was attributed to equity of Veeco.Such difference amounted to approximately $1.0 million, and was recorded asadditional paid-in capital. We paid $0.5 million of the $1.5 million purchaseprice of the 80.1% remaining portion of Fluens upon closing, as well as $0.2million in respect of the earn-out arrangement for periods prior to 2009. Wepaid a second installment of $0.5 million of the purchase price on September 30,2009. We paid the remaining $0.5 million of the $1.5 million in the firstquarter of 2010, which was included in accrued expenses in the accompanyingcondensed consolidated Balance Sheet at December 31, 2009.

 

*Common Stock Repurchase Program*

 

The Company’s sharerepurchase activity for the three and nine months ended September 30, 2010was as follows *(in thousands, except share data)*:

 
| ** **                               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                               | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Cost of  repurchases                     |       | $                                | 31,602     |                            | $          | — |   | $ | 31,602 |   | $ | — |   |
| Shares  repurchased and held in treasury |       | 929,382                          |       | —                          |       | 929,382 |   | — |   |
| Average cost per  share                  |       | $                                | 34.00      |                            | $          | — |   | $ | 34.00 |   | $ | — |   |

 

At September 30, 2010,there remained $168.4 million of authorization for future repurchases.

 

**Contractual Obligations**

 

There have been nosignificant changes to our “Contractual Obligations” table, except for purchasecommitments, in Part II, Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” of our 2009 AnnualReport on Form 10-K. The purchase commitments outstanding at September 30,2010 were $244.0 million.

 

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**Applicationof Critical Accounting Policies**

 

*General:*  Our discussion and analysis of our financialcondition and results of operations are based upon our Consolidated FinancialStatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses. Management continuallymonitors and evaluates its estimates and judgments, including those related tobad debts, inventories, intangible and other long-lived assets, income taxes,warranty obligations, restructuring costs, and contingent liabilities,including potential litigation. Management bases its estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. We consider certain accountingpolicies related to revenue recognition, the valuation of inventories, theimpairment of goodwill and indefinite-lived intangible assets, the impairmentof long-lived assets, fair value measurements, warranty costs, the accountingfor income taxes and equity-based compensation to be critical policies due tothe estimation processes involved in each.

 

*Revenue Recognition:*  We recognize revenue based on currentaccounting guidance provided by the Securities and Exchange Commission and theFinancial Accounting Standards Board (“FASB”). Our revenue transactions includesales of products under multiple-element arrangements. Revenue under thesearrangements is allocated to each element based upon its estimated fair marketvalue*.*

 

Weconsider a broad array of facts and circumstances when evaluating each of oursales arrangements in determining when to recognize revenue, including specificterms of the purchase order, contractual obligations to the customer, thecomplexity of the customer’s post delivery acceptance provisions, customercreditworthiness and the installation process. Revenue is recognized whenpersuasive evidence of an arrangement exists, the sales price is fixed ordeterminable, collectability is reasonably assured and no uncertainties existregarding customer acceptance. For transactions on which we recognize systemsrevenue, either at the time of shipment or delivery, our contractualarrangements with customers do not contain provisions for right of return orforfeiture, refund or other purchase price concessions. Sales arrangements arereviewed on a case-by-case basis; however, we have established a revenuerecognition protocol as described below.

 

Systems,which are sold to manufacturers in the LED, solar, data storage andsemiconductor industries and are used in manufacturing facilities andcommercial production environments typically include process acceptancecriteria based upon Veeco and/or customer specifications. We are generallyrequired to install these products and demonstrate compliance with acceptancetests at the customer’s facility. Generally, based upon the terms of the salesarrangement, these products are sold with a retention (typically 10% to 20% ofthe sales contract value) which is payable by the customer when installationand field acceptance is completed. Such installations are not consideredcomplex and are not deemed essential to the functionality of the equipmentbecause they do not involve significant changes to the features or capabilitiesof the equipment or involve building complex interfaces or connections.Installation normally represents only 2% - 4% of the fair value of the salescontract. Sales arrangements for these systems are bifurcated into separateunits of accounting or elements based on objective evidence of fair value. Thetwo elements are the system and installation of the system. The amount ofrevenue allocated to each element is based upon its relative fair value. Theprice charged when the system or installation service is sold separatelygenerally determines fair value.  Thevalue of the installation service is based upon the fair value of the serviceperformed, including labor, which is based upon the estimated time to completethe installation at hourly rates, and material components. We recognize revenuefor the system or delivered element since the delivered item has value to thecustomer on a standalone basis, there is objective and reliable evidenceof the fair value of the undelivered item (i.e., the installation service) anddelivery or performance of the undelivered item is considered probable andsubstantially in our control, based on our historical experience. The value ofthe undelivered element is the greater of the fair value of the installation orthe portion of the sales price that will not be received until the installationis completed (i.e., the retention amount). System revenue is generallyrecognized upon shipment or delivery provided title and risk of loss has passedto the customer. Revenue from installation services is recognized at the timeacceptance is received from the customer. If the arrangement does not meet allthe above criteria, the entire amount of the sales arrangement is deferreduntil the criteria have been met or all elements have been delivered to thecustomer or been completed.

 

Fornew products, new applications of existing products, or for products withsubstantive customer acceptance provisions where performance cannot be fullyassessed prior to meeting customer specifications at the customer site, revenueis recognized upon completion of installation and receipt of final customeracceptance. Since title to goods generally passes to the customer upon shipmentor delivery and 80% to 90% of the contract amount becomes payable at that time,inventory is relieved and accounts receivable is recognized for the amountbilled at the time of shipment. The

 

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profit on the amount billedfor these transactions is deferred and recognized as deferred profit in theaccompanying Condensed Consolidated Balance Sheets.

 

InJapan, where our contractual terms with customers generally specify risk ofloss and title transfers upon customer acceptance, revenue is recognized andthe customer is billed upon receipt of written customer acceptance.

 

Revenuerelated to maintenance and service contracts is recognized ratably over theapplicable contract term.  Component andspare part revenue is recognized at the time of shipment or delivery inaccordance with the terms of the applicable sales arrangement.

 

*Inventory Valuation:*  Inventories are stated at the lower of cost(principally first-in, first-out method) or market. Management evaluates theneed to record adjustments for impairment of inventory on a quarterly basis.Our policy is to assess the valuation of all inventories, including rawmaterials, work-in-process, finished goods, and spare parts and other serviceinventory. Obsolete inventory or inventory in excess of management’s estimatedusage for the next 12 month’s requirements is written-down to itsestimated market value, if less than its cost. Inherent in the estimates ofmarket value are management’s estimates related to our future manufacturingschedules, customer demand, technological and/or market obsolescence, possiblealternative uses, and ultimate realization of excess inventory.

 

*Goodwilland Indefinite-Lived Intangible Asset Impairment:*  The Company does not amortize goodwill orintangible assets with indefinite useful lives, but instead tests the balancesin these asset accounts for impairment at least annually at the reporting unitlevel. Our policy is to perform this annual impairment test in the fourthquarter of each fiscal year or more frequently if impairment indicators arise.Impairment indicators include, among other conditions, cash flow deficits, ahistorical or anticipated decline in revenue or operating profit, adverse legalor regulatory developments, and a material decrease in the fair value of someor all of the assets.

 

Pursuant to relevantaccounting pronouncements we are required to determine if it is appropriate touse the operating segment as defined under accounting guidance as the reportingunit or one level below the operating segment, depending on whether certaincriteria are met. We have identified two reporting units that are required tobe reviewed for impairment. The reporting units are LED & Solar andData Storage. In identifying the reporting units management considered theeconomic characteristics of operating segments including the products andservices provided, production processes, types or classes of customer andproduct distribution.

 

We perform this impairmenttest by first comparing the fair value of our reporting units to theirrespective carrying amount. When determining the estimated fair value of areporting unit, we utilize a discounted future cash flow approach sincereported quoted market prices are not available for our reporting units. Developingthe estimate of the discounted future cash flow requires significant judgmentand projections of future financial performance. The key assumptions used indeveloping the discounted future cash flows are the projection of futurerevenues and expenses, working capital requirements, residual growth rates andthe weighted average cost of capital. In developing our financial projections,we consider historical data, current internal estimates and market growthtrends. Changes to any of these assumptions could materially change the fairvalue of the reporting unit. We reconcile the aggregate fair value of ourreporting units to the Company’s adjusted market capitalization as a supportingcalculation. The adjusted market capitalization is calculated by multiplyingthe average share price of our common stock for the last ten trading days priorto the measurement date by the number of outstanding common shares and adding acontrol premium.

 

If the carrying value of thereporting units exceed the fair value we would then compare the implied fairvalue of our goodwill to the carrying amount in order to determine the amountof the impairment, if any.

 

*Definite-Lived Intangible and Long-Lived AssetImpairment:* Long-lived assets, such as property, plant, and equipment, and intangibleassets with definite useful lives, are reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying amount of an asset maynot be recoverable. Impairment indicators include, among other conditions, cashflow deficits, a historical or anticipated decline in revenue or operatingprofit, adverse legal or regulatory developments, and a material decrease inthe fair value of some or all of the assets. Assets are grouped at the lowestlevel for which there is identifiable cash flows that are largely independentof the cash flows generated by other asset groups. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto the estimated undiscounted future cash flows expected to be generated by theasset. If the carrying amount of an asset exceeds its estimated future cashflows, an impairment charge is recognized by the amount by which the carryingamount of the asset exceeds the fair value of the asset.

 

*Fair ValueMeasurements:* Accounting guidance for our non-financial assetsand non-financial liabilities requires that we disclose the type of inputs weuse to value our assets and liabilities, based on three categories of 

 

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inputs as defined in such.Level 1 inputs are quoted, unadjusted prices in active markets for identicalassets or liabilities that the company has the ability to access at themeasurement date. Level 2 inputs are inputs other than quoted prices includedwithin Level 1 that are observable for the asset or liability, either directlyor indirectly, such as quoted prices for similar assets or liabilities. Level 3inputs are unobservable inputs for the asset or liability. Unobservable inputsare used to measure fair value to the extent that observable inputs are notavailable, thereby allowing for situations in which there is little, if any,market activity for the asset or liability at the measurement date. Theserequirements apply to our long-lived assets, goodwill and intangible assets. Weuse Level 3 inputs to value all of such assets and the methodology we use tovalue such assets has not changed since December 31, 2009. The Companyprimarily applies the market approach for recurring fair value measurements.

 

*Warranty Costs:*  We estimate the costs that may be incurredunder the warranty we provide and record a liability in the amount of suchcosts at the time the related revenue is recognized. Estimated warranty costsare determined by analyzing specific product and historical configurationstatistics and regional warranty support costs. Our warranty obligation isaffected by product failure rates, material usage, and labor costs incurred incorrecting product failures during the warranty period. Unforeseen componentfailures or exceptional component performance can also result in changes towarranty costs. If actual warranty costs differ substantially from our estimates,revisions to the estimated warranty liability would be required.

 

*Income Taxes:*  As part of the process of preparing ourCondensed Consolidated Financial Statements, we are required to estimate ourincome taxes in each of the jurisdictions in which we operate. This processinvolves estimating the actual current tax expense, together with assessingtemporary differences resulting from differing treatment of items for tax andaccounting purposes. These differences result in deferred tax assets and liabilities,which are included within our Condensed Consolidated Balance Sheets. Thecarrying value of our deferred tax assets is adjusted by a partial valuationallowance to recognize the extent to which the future tax benefits will berecognized on a more likely than not basis. Our net deferred tax assets consistprimarily of net operating loss and tax credit carry forwards, and timingdifferences between the book and tax treatment of inventory, acquiredintangible assets and other asset valuations. Realization of these net deferredtax assets is dependent upon our ability to generate future taxable income.

 

Werecord valuation allowances in order to reduce our deferred tax assets to theamount expected to be realized. In assessing the adequacy of recorded valuationallowances, we consider a variety of factors, including the scheduled reversalof deferred tax liabilities, future taxable income, and prudent and feasibletax planning strategies. Under the relevant accounting guidance, factors suchas current and previous operating losses are given significantly greater weightthan the outlook for future profitability in determining the deferred tax assetcarrying value.

 

Relevantaccounting guidance addresses the determination of how tax benefits claimed orexpected to be claimed on a tax return should be recorded in the financialstatements. Under such guidance, we must recognize the tax benefit from anuncertain tax position only if it is more likely than not that the tax positionwill be sustained on examination by the taxing authorities, based on thetechnical merits of the position. The tax benefits recognized in the financialstatements from such uncertain tax positions are measured based on the largestbenefit that has a greater than fifty percent likelihood of being realized uponultimate resolution.

 

*Equity-basedCompensation:*Equity-based compensationcost is measured at the grant date, based on the fair value of the award and isrecognized as expense over the employee requisite service period. In order todetermine the fair value of stock options on the date of grant, we apply theBlack-Scholes option-pricing model. Inherent in the model are assumptionsrelated to risk-free interest rate, dividend yield, expected stock-pricevolatility and option life.

 

The risk-free rate assumedin valuing the options is based on the U.S. Treasury yield curve in effect atthe time of grant for the expected term of the option. The dividend yieldassumption is based on the Company’s historical and future expectation of dividendpayouts. While the risk-free interest rate and dividend yield are lesssubjective assumptions, typically based on factual data derived from publicsources, the expected stock-price volatility and option life assumptionsrequire a level of judgment which make them critical accounting estimates.

 

We use an expectedstock-price volatility assumption that is a combination of both historicalvolatility, calculated based on the daily closing prices of our common stockover a period equal to the expected term of the option and implied volatility,utilizing market data of actively traded options on our common stock, which areobtained from public data sources. We believe that the historical volatility ofthe price of our common stock over the expected term of the option is a strongindicator of the expected future volatility and that implied volatility takesinto consideration market expectations of how future volatility will differfrom historical volatility. Accordingly, we believe a combination of both historicaland implied volatility provides the best estimate of the future volatility ofthe market price of our common stock.

 

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The expected term,representing the period of time that options granted are expected to beoutstanding, is estimated using a lattice-based model incorporating historicalpost vest exercise and employee termination behavior.

 

We estimate forfeituresusing our historical experience, which is adjusted over the requisite serviceperiod based on the extent to which actual forfeitures differ or are expectedto differ, from such estimates. Because of the significant amount of judgmentused in these calculations, it is reasonably likely that circumstances maycause the estimate to change.

 

With regard to theweighted-average option life assumption, we consider the exercise behavior ofpast grants and model the pattern of aggregate exercises.

 

**Recent Accounting Pronouncements**

 

*Subsequent Events:* The FASB hasissued amended guidance for subsequentevents. The amendment removes the requirement for an SEC filer todisclose a date through which subsequent events have been evaluated in bothissued and revised financial statements. Revised financial statements includefinancial statements revised as a result of either correction of an error orretrospective application of U.S. GAAP. The FASB also clarified that if thefinancial statements have been revised, then an entity that is not an SEC filershould disclose both the date that the financial statements were issued oravailable to be issued and the date the revised financial statements wereissued or available to be issued. The FASB believes these amendments removepotential conflicts with the SEC’s literature. All of the amendments wereeffective upon issuance (February 24, 2010). The adoption of this guidancedid not have a material impact on the Company’s condensed consolidatedfinancial statements.

 

*Fair Value Measurements*: In January 2010,the FASB issued amended guidance for FairValue Measurements and Disclosures. This update requires some newdisclosures and clarifies existing disclosure requirements about fair valuemeasurement. The FASB’s objective is to improve these disclosures and, thus,increase the transparency in financial reporting. Specifically, this updaterequires that a reporting entity disclose separately the amounts of significanttransfers in and out of Level 1 and Level 2 fair value measurements anddescribe the reasons for the transfers; and in the reconciliation for fairvalue measurements using significant unobservable inputs, a reporting entityshould present separately information about purchases, sales, issuances, andsettlements. In addition, this update clarifies the requirements of existingdisclosures. For purposes of reporting fair value measurement for each class ofassets and liabilities, a reporting entity needs to use judgment in determiningthe appropriate classes of assets and liabilities; and a reporting entityshould provide disclosures about the valuation techniques and inputs used tomeasure fair value for both recurring and nonrecurring fair value measurements.This update was adopted on January 1, 2010, except for the disclosuresabout purchases, sales, issuances, and settlements in the roll forward ofactivity in Level 3 fair value measurements. The adoption of this guidance didnot have a material impact on the Company’s condensed consolidated financialstatements. Those disclosures are effective for fiscal years beginning after December 15,2010, and for interim periods within those fiscal years. Early application ispermitted. The Company does not believe that this guidance will have a materialimpact on its condensed consolidated financial statements.

 

*Revenue Recognition:* In October 2009, theFASB issued amended guidance related to multiple-element arrangements whichrequires an entity to allocate arrangement consideration at the inception of anarrangement to all of its deliverables based on their relative selling prices.This update eliminates the use of the residual method of allocation andrequires the relative-selling-price method in all circumstances. All entitiesmust adopt the guidance no later than the beginning of their first fiscal yearbeginning on or after June 15, 2010. Entities may elect to adopt theguidance through either prospective application for revenue arrangementsentered into or materially modified, after the effective date or throughretrospective application to all revenue arrangements for all periodspresented. The Company does not believe that this guidance will have a materialimpact on its condensed consolidated financial statements.

 

In October 2009, the FASB issued amended guidance that is expectedto significantly affect how entities account for revenue arrangements thatcontain both hardware and software elements. As a result, many tangibleproducts that rely on software will be accounted for under the revisedmultiple-element arrangements revenue recognition guidance, rather than thesoftware revenue recognition guidance. The revised guidance must be adopted byall entities no later than fiscal years beginning on or after June 15,2010. An entity must select the same transition method and same period for theadoption of both this guidance and the revisions to the multiple-element 

 

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arrangementsguidance noted above.  The Company does not believe that this guidancewill have a material impact on its condensed consolidated financial statements.

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk.**

 

Our net sales to foreigncustomers represented approximately 92.5% and 90.0% of our total net sales forthe three and nine months ended September 30, 2010, respectively, and84.7% and 76.0% for the comparable 2009 periods. We expect that net sales toforeign customers will continue to represent a large percentage of our totalnet sales. Our net sales denominated in foreign currencies representedapproximately 1.5% and 2.2% of our total net sales for the three and ninemonths ended September 30, 2010 respectively, and 3.4% and 5.9% for the comparable 2009 periods.

 

The aggregate foreigncurrency exchange gain (loss) included in determining the condensedconsolidated results of operations was approximately $0.1 million and$(0.1) million during the three months ended September 30, 2010 and2009, respectively. Included in the aggregate foreign currency exchange gainwere losses related to forward contracts of $(0.1) million during thethree months ended September 30, 2010. The aggregate foreign currencyexchange loss included in determining the condensed consolidated results ofoperations was approximately $(0.3) million and $(0.6) million during thenine months ended September 30, 2010 and 2009, respectively. Included inthe aggregate foreign currency exchange loss were gains related to forward contractsof $0.1 million during the nine months ended September 30, 2009. Theseamounts were recognized and are included in other, net in the accompanyingcondensed consolidated statements of operations.

 

We are exposed to financialmarket risks, including changes in foreign currency exchange rates. The changein currency exchange rates that have the largest impact on translating ourinternational operating profit is the Japanese Yen. We use derivative financialinstruments to mitigate these risks. We do not use derivative financialinstruments for speculative or trading purposes. We generally enter intomonthly forward contracts to reduce the effect of fluctuating foreigncurrencies on short-term foreign currency-denominated intercompany transactionsand other known currency exposures. The weighted average notional amount ofderivative contracts outstanding during the three and nine months ended September 30,2010 was approximately $6.8 and $5.9 million, respectively.

 

Asof September 30, 2010, approximately $0.2 million of losses related toforward contracts were included in accrued expenses and other currentliabilities and were subsequently paid in October 2010. As of December 31,2009, approximately $0.2 million of gains related to forward contracts were includedin prepaid expenses and other current assets and were subsequently received in January 2010.Monthly forward contracts with a notional amount of $1.7 million, entered intoin September 2010, will be settled in October 2010. The fair value ofthe contracts at inception was zero, which did not significantly change at September 30,2010.

 

Webelieve that based upon our hedging program, a 10% change in foreign exchangerates would have an immaterial impact on the consolidated results ofoperations. We believe that this quantitative measure has inherent limitationsbecause, as discussed in the first paragraph of this section, it does not takeinto account any governmental actions or changes in either customer purchasingpatterns or our financing and operating strategies.

 

Assuming third quarter 2010variable debt and investment levels, the effect of a one-point change ininterest rates would not have a material effect on net interest expense.

 

**Item 4.Controls and Procedures.**

 

Oursenior management is responsible for establishing and maintaining a system ofdisclosure controls and procedures (as defined in Rule 13a-15 and 15d-15under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by an issuer in the reports that it filesor submits under the Exchange Act is accumulated and communicated to the issuer’smanagement, including its principal executive officer or officers and principalfinancial officer or officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure.

 

Wehave evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures under the supervision of and with the participation ofmanagement, 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 

 

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officer and our chieffinancial officer concluded that our disclosure controls and procedures areeffective to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms and is accumulated and communicated toour management, including our principal executive officer and principalfinancial officer or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.

 

Therehave been no significant changes in our internal controls or other factorsduring the fiscal quarter ended September 30, 2010 that have materiallyaffected or are reasonably likely to materially affect our internal controlover financial reporting.

 

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**Part II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Weare involved in various legal proceedings arising in the normal course of ourbusiness. We do not believe that the ultimate resolution of these matters willhave a material adverse effect on our consolidated financial position, resultsof operations or cash flows.

 

**Item1A.  Risk Factors.**

 

Information regarding riskfactors appears in the “Safe Harbor Statement” at the beginning of thisQuarterly Report on Form 10-Q, in Part I — Item 1A of our AnnualReport on Form 10-K for the year ended December 31, 2009 and in Part II— Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30,2010. There have been no material changes from the risk factors previouslydisclosed in our 2009 Annual Report and our Quarterly Report on Form 10-Qfor the quarter ended June 30, 2010.

 

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

 

Thefollowing table contains the Company’s stock repurchases of equity securitiesin the second quarter of 2010:

 
| **Period**                                                             | ** ** | **Total Number of  Shares  Repurchased** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number of Shares  Purchased as Part of Publicly  Announced Program (1)** | ** ** | **Approximate Dollar Value of  Shares that May Yet Be Purchased  Under the Program (1)** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Fiscal month of  September 2010 (August 30, 2010 - September 26, 2010) |       | 929,382                                            |       | $                                            | 34.00      |                                                                                                                          | 929,382    |                                                                                                                                            | $          | 168,397,600 |   |
|                                                                        |            |                                                    |            |                                              |            |                                                                                                                               |            |                                                                                                                                                 |            |  |  |

 

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(1)                                                      On August 24,2010, we announced that our Board of Directors had authorized the repurchase ofup to $200 million of our common stock until August 26, 2011. The programdoes not obligate the Company to acquire any particular amount of common stockand may be modified or suspended at any time at the Company’s discretion.

 

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**Item 6.Exhibits.**

 

Unless otherwise indicated,each of the following exhibits has been previously filed with the SEC by theCompany under File No. 0-16244.

 
| **Number** | ** ** | **Description**                                                                                                                                                   | ** ** | **Incorporated by Reference to the  Following Document:** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                              |       |                                                                               |
| 2.1        |       | Stock Purchase Agreement  dated August 15, 2010 among Veeco Instruments Inc., Veeco Metrology Inc.  and Bruker Corporation                                   |       | *                                                                                  |
|       |       |                                                                                                                                                              |       |                                                                               |
| 10.1       |       | Letter Agreement dated  September 23, 2010 between Veeco Instruments Inc. and Mark R. Munch                                                                  |       | *                                                                                  |
|       |       |                                                                                                                                                              |       |                                                                               |
| 31.1       |       | Certification of Chief  Executive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of  the Securities and 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 and 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.   |       | *                                                                                  |

 

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*       Filed herewith

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date:  October 27, 2010

 
|   | Veeco  Instruments Inc. |
|--------|------------------------------|
|   |                         |   |
|   | By:                          | /s/ JOHN R. PEELER |
|   |                         | John R. Peeler*Chief Executive Officer* |
|   |                         |   |
|   | By:                          | /s/ DAVID D. GLASS |
|   |                         | David D. Glass*Executive Vice President and Chief  Financial Officer* |

 

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**INDEXTO EXHIBITS**

 

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

 
| **Number** | ** ** | **Description**                                                                                                                                                   | ** ** | **Incorporated by Reference to the  Following Document:** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                              |       |                                                                               |
| 2.1        |       | Stock Purchase Agreement  dated August 15, 2010 among Veeco Instruments Inc., Veeco Metrology Inc.  and Bruker Corporation                                   |       | *                                                                                  |
|       |       |                                                                                                                                                              |       |                                                                               |
| 10.1       |       | Letter Agreement dated  September 23, 2010 between Veeco Instruments Inc. and Mark R. Munch                                                                  |       | *                                                                                  |
|       |       |                                                                                                                                                              |       |                                                                               |
| 31.1       |       | Certification of Chief  Executive Officer pursuant to Rule 13a—14(a) or  Rule 15d—14(a) of the Securities and 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 and 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.   |       | *                                                                                  |

 

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*      Filed herewith

 

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