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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(MarkOne)**

** **

**x****     QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended June 30, 2010**

** **

**OR**

** **

**o****      TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom              to              .**

 

**Commission file number 0-16244**

 

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**VEECO INSTRUMENTS 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’stelephone 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

 

40,877,302 shares of commonstock, $0.01 par value per share, were outstanding as of the close of businesson July 27, 2010.

 

 

 

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**SAFEHARBOR STATEMENT**

 

ThisQuarterly Report on Form 10-Q (the “Report”) contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended. Discussions containing such forward-looking statements may be found inPart I. Items 2 and 3 hereof, as well as within this Report generally. Inaddition, 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:

 

·                  The reduction or elimination of governmentsubsidies and economic incentives may adversely affect the future order ratefor 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;

 

·                  Weare subject to foreign currency exchange risks;

 

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·                  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 in accountingpronouncements or taxation rules or practices may adversely affect ourfinancial 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;

 

·                  We have significant operations in California and other locations whichcould be materially and adversely impacted, in the event of a natural disasteror other significant disruption;

 

·                  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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** **

**VEECOINSTRUMENTS INC.**

 

**INDEX**

 
| ** **                             | **Page**                                                                                                                                                     |
|----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **PART I. FINANCIAL INFORMATION** | ** **                                                                                                                                                   |
|                                   |                                                                                                                                                         |   |
| **Item 1.**                            | Financial  Statements:                                                                                                                                       |   |
|                                   |                                                                                                                                                         |   |
|                                   | Condensed Consolidated Statements of Operations and  Comprehensive Income (Loss) for the Three and Six Months Ended June 30,  2010 and 2009 (Unaudited) | 5 |
|                                   |                                                                                                                                                         |   |
|                                   | Condensed Consolidated Balance Sheets as of  June 30, 2010 (Unaudited) and December 31, 2009                                                       | 6 |
|                                   |                                                                                                                                                         |   |
|                                   | Condensed Consolidated Statements of Cash Flows for  the Six Months Ended June 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                                                                  | 17 |
|                                   |                                                                                                                                                         |   |
| **Item 3.**                            | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                  | 29 |
|                                   |                                                                                                                                                         |   |
| **Item 4.**                            | Controls and  Procedures                                                                                                                                     | 29 |
|                                   |                                                                                                                                                         |   |
| **PART II. OTHER INFORMATION**    |                                                                                                                                                         |
|                                   |                                                                                                                                                         |   |
| **Item 1.**                            | Legal Proceedings                                                                                                                                            | 31 |
|                                   |                                                                                                                                                         |   |
| **Item 1A.**                           | Risk Factors                                                                                                                                                 | 31 |
|                                   |                                                                                                                                                         |   |
| **Item 6.**                            | Exhibits                                                                                                                                                     | 31 |
|                                   |                                                                                                                                                         |   |
| **SIGNATURES**                         | 32                                                                                                                                                           |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**Veeco Instruments Inc. and Subsidiaries**

**Condensed Consolidated Statements of Operations**

**(In thousands, except per share data) (Unaudited)**

 
| ** **                                             | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                             | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  sales                                             |       | $                      | 253,040    |                 | $          | 72,020 |   | $ | 416,271 |   | $ | 134,869 |   |
| Cost  of sales                                         |       | 139,282                |       | 47,636               |       | 232,164 |   | 90,103 |   |
| Gross  profit                                          |       | 113,758                |       | 24,384               |       | 184,107 |   | 44,766 |   |
| Operating  expenses (income):                          | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling,  general and administrative                   |       | 27,287                 |       | 19,822               |       | 50,707 |   | 38,429 |   |
| Research  and development                              |       | 20,550                 |       | 13,163               |       | 36,990 |   | 26,049 |   |
| Amortization                                           |       | 1,634                  |       | 1,831                |       | 3,319 |   | 3,660 |   |
| Restructuring                                          |       | —                 |       | 1,944                |       | (179 | ) | 6,375 |   |
| Asset  impairment charge                               |       | —                 |       | 304                  |       | — |   | 304 |   |
| Other,  net                                            |       | 512                    |       | (77                  | )          | 359 |   | 1,409 |   |
| Total  operating expenses                              |       | 49,983                 |       | 36,987               |       | 91,196 |   | 76,226 |   |
| Operating  income (loss)                               |       | 63,775                 |       | (12,603              | )          | 92,911 |   | (31,460 | ) |
| Interest  expense, net                                 |       | 1,762                  |       | 1,698                |       | 3,544 |   | 3,407 |   |
| Income  (loss) before income taxes                     |       | 62,013                 |       | (14,301              | )          | 89,367 |   | (34,867 | ) |
| Income  tax provision                                  |       | 9,620                  |       | 402                  |       | 10,930 |   | 780 |   |
| Net  income (loss)                                     |       | 52,393                 |       | (14,703              | )          | 78,437 |   | (35,647 | ) |
| Net  loss attributable to noncontrolling interest      |       | —                 |       | (23                  | )          | — |   | (65 | ) |
| Net  income (loss) attributable to Veeco               |       | $                      | 52,393     |                 | $          | (14,680 | ) | $ | 78,437 |   | $ | (35,582 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Income  (loss) per common share attributable to Veeco: | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                  |       | $                      | 1.32       |                 | $          | (0.47 | ) | $ | 2.00 |   | $ | (1.13 | ) |
| Diluted                                                |       | $                      | 1.20       |                 | $          | (0.47 | ) | $ | 1.88 |   | $ | (1.13 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Weighted  average shares outstanding:                  |       |                   |       |                 |       |   |   |   |   |
| Basic                                                  |       | 39,761                 |       | 31,497               |       | 39,283 |   | 31,506 |   |
| Diluted                                                |       | 43,506                 |       | 31,497               |       | 41,683 |   | 31,506 |   |

 

**VeecoInstruments Inc. and Subsidiaries**

**CondensedConsolidated Statements of Comprehensive Income (Loss)**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                       | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                       | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income (loss)                                                               |       | $                      | 52,393     |                 | $          | (14,703 | ) | $ | 78,437 |   | $ | (35,647 | ) |
| Other  comprehensive (loss) income, net of tax Foreign currency translation |       | (152                   | )          | 719                  |       | (825 | ) | (946 | ) |
| Comprehensive  income (loss)                                                     |       | 52,241                 |       | (13,984              | )          | 77,612 |   | (36,593 | ) |
| Comprehensive  loss attributable to noncontrolling interest                      |       | —                 |       | (23                  | )          | — |   | (65 | ) |
| Comprehensive  income (loss) attributable to Veeco                               |       | $                      | 52,241     |                 | $          | (13,961 | ) | $ | 77,612 |   | $ | (36,528 | ) |

 

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

 

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**Veeco Instruments Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

**(In thousands)**

 
| ** **                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **                                      | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  assets:                                |       |              |       |                  |       |
| Cash  and cash equivalents                      |       | $                 | 361,382    |                  | $          | 148,589 |   |
| Short-term  investments                         |       | 53,500            |       | 135,000               |       |
| Accounts  receivable, net                       |       | 140,722           |       | 84,358                |       |
| Inventories                                     |       | 84,210            |       | 77,564                |       |
| Prepaid  expenses and other current assets      |       | 18,927            |       | 7,819                 |       |
| Deferred  income taxes                          |       | 2,963             |       | 3,105                 |       |
| Total  current assets                           |       | 661,704           |       | 456,435               |       |
| Property,  plant and equipment at cost, net     |       | 59,118            |       | 59,389                |       |
| Goodwill                                        |       | 59,422            |       | 59,422                |       |
| Intangible  assets, net                         |       | 25,211            |       | 29,697                |       |
| Other  assets                                   |       | 911               |       | 429                   |       |
| Total  assets                                   |       | $                 | 806,366    |                  | $          | 605,372 |   |
| **Liabilities and equity**                      | ** ** | ** **        | ** ** |                  | ** ** |
| Current  liabilities:                           | ** ** | ** **        | ** ** |                  | ** ** |
| Accounts  payable                               |       | $                 | 50,973     |                  | $          | 29,112 |   |
| Accrued  expenses and other current liabilities |       | 158,383           |       | 106,445               |       |
| Deferred  profit                                |       | 7,863             |       | 2,520                 |       |
| Income  taxes payable                           |       | 14,149            |       | 829                   |       |
| Current  portion of long-term debt              |       | 220               |       | 212                   |       |
| Total  current liabilities                      |       | 231,588           |       | 139,118               |       |
| Deferred  income taxes                          |       | —            |       | 5,039                 |       |
| Long-term  debt                                 |       | 102,352           |       | 100,964               |       |
| Other  liabilities                              |       | 411               |       | 1,192                 |       |
|                                            |       |              |       |                  |       |
| Equity                                          |       | 472,015           |       | 359,059               |       |
|                                            |       |              |       |                  |       |
| Total  liabilities and equity                   |       | $                 | 806,366    |                  | $          | 605,372 |   |

 

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

 

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**Veeco Instruments Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

**(In thousands) (Unaudited)**

 
| ** **                                                                                | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                | ** ** | **June 30,**    | ** ** |
| ** **                                                                                | ** ** | **2010**             | ** ** | **2009** | ** ** |
| **Operating activities**                                                                  |       |                 |       |   |   |
| Net  income (loss)                                                                        |       | $                    | 78,437     |   | $ | (35,647 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                 |       |   |   |
| Depreciation  and amortization                                                            |       | 9,882                |       | 10,866 |   |
| Amortization  of debt discount                                                            |       | 1,501                |       | 1,400 |   |
| Non-cash  equity-based compensation                                                       |       | 5,128                |       | 3,553 |   |
| Non-cash  asset impairment charge                                                         |       | —               |       | 304 |   |
| Non-cash  inventory write-off                                                             |       | —               |       | 1,526 |   |
| Non-cash  restructuring                                                                   |       | (179                 | )          | 6,375 |   |
| Deferred  income taxes                                                                    |       | (4,756               | )          | 360 |   |
| Other,  net                                                                               |       | (2                   | )          | 70 |   |
| Changes  in operating assets and liabilities:                                             |       |                 |       |   |   |
| Accounts  receivable                                                                      |       | (54,631              | )          | 26,883 |   |
| Inventories                                                                               |       | (6,383               | )          | 15,063 |   |
| Accounts  payable                                                                         |       | 21,810               |       | (10,507 | ) |
| Accrued  expenses, deferred profit and other current liabilities                          |       | 70,050               |       | (12,475 | ) |
| Other,  net                                                                               |       | (11,857              | )          | 273 |   |
| Net  cash provided by operating activities                                                |       | 109,000              |       | 8,044 |   |
| **Investing activities**                                                                  |       |                 |       |   |   |
| Capital  expenditures                                                                     |       | (6,168               | )          | (3,645 | ) |
| Payments  for net assets of businesses acquired                                           |       | —               |       | (500 | ) |
| Payments  of earn-outs for businesses acquired                                            |       | —               |       | (9,839 | ) |
| Proceeds  from the redemption of short-term investments                                   |       | 160,141              |       | — |   |
| Payments  for purchases of short-term investments                                         |       | (78,500              | )          | — |   |
| Proceeds  from the sale of property, plant and equipment                                  |       | 13                   |       | 275 |   |
| Net  cash provided by (used in) investing activities                                      |       | 75,486               |       | (13,709 | ) |
| **Financing activities**                                                                  |       |                 |       |   |   |
| Proceeds  from stock option exercises                                                     |       | 33,113               |       | — |   |
| Restricted  stock tax withholdings                                                        |       | (2,898               | )          | (295 | ) |
| Repayments  of long-term debt                                                             |       | (105                 | )          | (96 | ) |
| Net  cash provided by (used in) financing activities                                      |       | 30,110               |       | (391 | ) |
| Effect  of exchange rate changes on cash and cash equivalents                             |       | (1,803               | )          | (249 | ) |
| Net  increase (decrease) in cash and cash equivalents                                     |       | 212,793              |       | (6,305 | ) |
| Cash  and cash equivalents at beginning of period                                         |       | 148,589              |       | 103,799 |   |
| Cash  and cash equivalents at end of period                                               |       | $                    | 361,382    |   | $ | 97,494 |   |
|                                                                                      |       |                 |       |   |   |
| **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                                |       | 1,123                |       | 241 |   |
| 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 Subsidiaries**

**Notes 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 six months ended June 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.

 

*Net Income(Loss) Per Common Share*

 

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

 
| ** **                                             | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                             | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Basic  weighted average shares outstanding             |       | 39,761                 |       | 31,497               |       | 39,283 |   | 31,506 |   |
| Dilutive  effect of stock options and restricted stock |       | 2,327                  |       | —               |       | 1,215 |   | — |   |
| Dilutive  effect of convertible notes                  |       | 1,418                  |       | —               |       | 1,185 |   | — |   |
| Diluted  weighted average shares outstanding           |       | 43,506                 |       | 31,497               |       | 41,683 |   | 31,506 |   |

 

Netincome (loss) per common share is computed using the weighted average number ofcommon shares outstanding during the period. Diluted net income (loss) percommon share is computed using the weighted average number of common shares andcommon equivalent shares outstanding during the period. For the three monthsended June 30, 2009, the effect of approximately 0.8 million stock optionsand 0.4 million restricted shares were excluded from the computation of dilutedweighted average shares outstanding due to the net loss sustained in the periodas their inclusion would have been anti-dilutive. For the six months ended June 30,2009, the effect of approximately 0.1 million stock options were excluded fromthe computation of diluted weighted average shares outstanding due to the netloss sustained in the period as their inclusion would have beenanti-dilutive.  For the three and sixmonths ended June 30, 2010, no shares were excluded from the computationof diluted weighted average shares 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 six months ended June 30,2010, had a dilutive affect of 1,418,000 and 1,185,000 common equivalentshares, respectively and for the three and six months ended June 30, 2009,the impact 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 June 30, 2010 was approximately 5.4 million.

 

Holders may convert theconvertible 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 

 

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events including our commonstock trading at prices equal to 130% of the conversion price for a specifiedperiod, which is at least 20 trading days during the 30 consecutive tradingdays of the immediately preceding fiscal quarter and only during such fiscalquarter. At the end of the second quarter of 2010, our common stock was tradingat prices equal to or above 130% of the conversion price for the specifiedperiod and, as a result, the convertible notes will be convertible during thethird quarter of 2010.  If the convertible notes are converted, we havethe ability and intent to pay the principal balance of notes tendered forconversion in cash. We will re-perform this test each quarter up to andincluding the fourth quarter of 2011. See Note 6 for further details on ourdebt.

 

*Short-Term Investments*

 

Wedetermine the appropriate balance sheet classification of our investments atthe time of purchase and evaluate the classification at each balance sheetdate. As part of our cash management program, we maintain a portfolio ofmarketable securities which are classified as available-for-sale. Thesesecurities include certificates of deposit placed through an account registryservice (“CDARS”) with maturities of greater than three months but less thanone year when purchased in principal amounts that, when aggregated withinterest to accrue over the term, will not exceed Federal Deposit InsuranceCorporation limits. These securities are carried at cost, which approximatesmarket 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 (loss) gain included in determining the condensedconsolidated results of operations was approximately $(0.5) million and$0.1 million during the three months ended June 30, 2010 and 2009,respectively. Included in the aggregate foreign currency exchange (loss) gainwere gains related to forward contracts of $0.2 million and $0.1 millionduring the three months ended June 30, 2010, and 2009, respectively. Theaggregate foreign currency exchange loss included in determining the condensedconsolidated results of operations was approximately $(0.4) million and$(1.3) million during the six months ended June 30, 2010 and 2009,respectively. Included in the aggregate foreign currency exchange loss weregains related to forward contracts of $0.3 million and $0.2 million duringthe six months ended June 30, 2010, and 2009, respectively.

 

Theseamounts were recognized and are included in other, net in the accompanyingcondensed consolidated statements of operations. As of June 30, 2010,approximately $0.1 million of losses related to forward contracts were includedin accrued expenses and other current liabilities and were subsequently paid inJuly 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 $9.2 million,  entered into in June 2010 for July 2010,will be settled in July 2010.

 

The weighted averagenotional amount of derivative contracts outstanding during the three and sixmonths ended June 30, 2010 were approximately $8.2 and $5.7 million,respectively.

 

**Note 2—****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 condensed consolidatedstatements of operations for the three and six months ended June 30, 2010and 2009 (in thousands):

 

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| ** **                         | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                         | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Equity-based  compensation expense |       | $                      | 2,958      |                 | $          | 2,155 |   | $ | 5,128 |   | $ | 3,553 |   |
|                                    |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 

Asof June 30, 2010, the total unrecognized compensation costs related tononvested stock and stock option awards was $11.6 million and $17.7 million,respectively. The related weighted average period over which we expect thatsuch unrecognized compensation costs will be recognized is approximately 2.9years for nonvested stock awards and 2.4 years for option awards.

 

*StockOption and Restricted Stock Activity*

 

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

 

| ** **                              | ** ** | **Shares  (000s)** | ** ** | **Weighted  Average Grant-  Date Fair Value** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-----------------------------------------------|------------|
| Nonvested  at January 1, 2010      |       | 892                |       | $                                             | 12.97      |   |
| Granted                                 |       | 169                |       | 34.42                                         |       |
| Vested                                  |       | (253               | )          | 11.28                                         |       |
| Forfeited  (including cancelled awards) |       | (13                | )          | 14.38                                         |       |
| Nonvested  at June 30, 2010        |       | 795                |       | 18.04                                         |       |
|                                         |            |                    |            |                                               |            |  |

 

A summary of our stockoption awards for the six months ended June 30, 2010, is presented below:

 
| ** **                                 | ** ** | **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                                    |       | 610                |       | 33.98                                  |       |                                   |       |                                                            |       |
| Exercised                                  |       | (1,709             | )          | 19.37                                  |       |                                   |       |                                                            |       |
| Forfeited  (including cancelled options)   |       | (37                | )          | 14.22                                  |       |                                   |       |                                                            |       |
| Expirations  of vested options             |       | (9                 | )          | 34.13                                  |       |                                   |       |                                                            |       |
| Outstanding  at June 30, 2010         |       | 3,361              |       | 17.99                                  |       | $                                      | 70,354     |                                                            | 5.8        |   |
| Options  exercisable at June 30, 2010 |       | 1,032              |       | 16.91                                  |       | $                                      | 22,960     |                                                            | 3.7        |   |
|                                            |            |                    |            |                                        |            |                                        |            |                                                                 |            |  |  |

 

*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 willreplace the 2000 Plan as the active stock plan. The Company’s employees,directors and consultants are eligible to receive awards under the 2010 Plan.The 2010 Plan permits the granting of a variety of awards, including bothnon-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 marketprice of the Company’s stock at the prior day close from date of grant; thoseoption awards generally vest over a 3 year period and have 10-year contractualterms. 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.

 

**Note 3—Balance SheetInformation**

 

*AccountsReceivable, net*

 

Accounts receivable areshown net of the allowance for doubtful accounts of $0.8 million and $0.9million as of June 30, 2010 and December 31, 2009, respectively.

 

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*Inventories*

 

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

 
| ** **       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------|------------|-------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Raw  materials   |       | $                 | 51,480     |                  | $          | 49,013 |   |
| Work  in process |       | 26,147            |       | 21,560                |       |
| Finished  goods  |       | 6,583             |       | 6,991                 |       |
|             |       | $                 | 84,210     |                  | $          | 77,564 |   |

 

*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, materialusage and labor costs incurred in correcting product failures during thewarranty period.  We periodically assessthe adequacy of our recognized warranty liability and adjust the amount asnecessary.  Changes in our warrantyliability during the period are as follows (in thousands):

 
| ** **                           | ** ** | **Six  months ended  June 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| Balance  as of beginning of period   |       | $                                    | 7,556      |   | $ | 6,892 |   |
| Warranties  issued during the period |       | 5,390                                |       | 1,304 |   |
| Settlements  made during the period  |       | (3,577                               | )          | (1,923 | ) |
| Balance  at end of period            |       | $                                    | 9,369      |   | $ | 6,273 |   |

 

**Note 4—SegmentInformation**

 

We manage the business,review operating results and assess performance, as well as allocate resources,based upon three separate reporting segments that reflect the market focus ofeach business. The Light Emitting Diode (“LED”) & Solar ProcessEquipment segment consists of metal organic chemical vapor deposition (“MOCVD”)systems, molecular beam epitaxy (“MBE”) systems, thermal deposition sources,and other types of deposition systems. These systems are primarily sold tocustomers in the high-brightness LED (“HB LED”) and solar industries, as wellas to scientific research customers. This segment has product development andmarketing sites in Somerset, New Jersey, St. Paul, Minnesota, Clifton Park, NewYork and Lowell, Massachusetts. The Data Storage Process Equipment segmentconsists of the ion beam etch, ion beam deposition, diamond-like carbon,physical vapor deposition and dicing and slicing products sold primarily tocustomers in the data storage industry. This segment has product developmentand marketing sites in Plainview, New York and Ft. Collins, Colorado. In ourMetrology segment, we design and manufacture atomic force microscopes, scanningprobe microscopes, stylus profilers and optical interferometers used to providecritical surface measurements in research and production environments. Thisbroad line of products is used in universities, research facilities andscientific centers worldwide. In production environments such as semiconductor,data storage and other broad industries, our metrology instruments enablecustomers to monitor their products throughout the manufacturing process toimprove yields, reduce costs and improve product quality. This segment hasproduct development and marketing sites in Camarillo and Santa Barbara,California and Tucson, Arizona.

 

We evaluate the performanceof our reportable segments based on income (loss) from operations beforeinterest, income taxes, amortization and certain items (“Segment profit (loss)”),which is the primary indicator used to plan and forecast future periods. Thepresentation of this financial measure facilitates meaningful comparison withprior periods, as management believes Segment profit (loss) reports baselineperformance and thus provides useful information. The other excluded itemsinclude restructuring (credits) expenses, asset impairment charges, inventorywrite-offs and equity-based compensation expense. The accounting policies ofthe reportable segments are the same as those described in the summary ofcritical 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) before income taxes for the three andsix months ended June 30, 2010 and 2009, respectively, and goodwill andtotal assets as of June 30, 2010 and December 31, 2009 (inthousands):

 
| ** **                                | ** ** | **LED & Solar  Process  Equipment** | ** ** | **Data Storage  Process  Equipment** | ** ** | **Metrology** | ** ** | **Unallocated  Corporate  Amount** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------|------------|---------------|------------|------------------------------------|------------|-----------|------------|
| **Three months ended June 30, 2010** | ** ** | ** **                                   | ** ** | ** **                           | ** ** | ** **    | ** ** | ** **                         | ** ** |      | ** ** |
| Net  sales                                |       | $                                            | 185,646    |                                 | $          | 35,742        |       | $                                  | 31,652     |      | $          | — |   | $ | 253,040 |   |
| Segment  profit (loss)                    |       | $                                            | 58,856     |                                 | $          | 9,925         |       | $                                  | 3,354      |      | $          | (3,768 | ) | $ | 68,367 |   |
| Interest,  net                            |       | —                                       |       | —                               |       | —        |       | 1,762                              |       | 1,762     |       |
| Amortization                              |       | 796                                          |       | 383                                  |       | 397           |       | 58                                 |       | 1,634     |       |
| Equity-based  compensation                |       | 671                                          |       | 308                                  |       | 435           |       | 1,544                              |       | 2,958     |       |
| Income  (loss) before income taxes        |       | $                                            | 57,389     |                                 | $          | 9,234         |       | $                                  | 2,522      |      | $          | (7,132 | ) | $ | 62,013 |   |
| **Three months ended June 30, 2009** |       |                                         |       |                                 |       |          |       |                               |       |      |       |
| Net  sales                                |       | $                                            | 31,882     |                                 | $          | 17,593        |       | $                                  | 22,545     |      | $          | — |   | $ | 72,020 |   |
| Segment  loss                             |       | $                                            | (472       | )                                    | $          | (1,009        | )          | $                                  | (3,012     | )         | $          | (1,876 | ) | $ | (6,369 | ) |
| Interest,  net                            |       | —                                       |       | —                               |       | —        |       | 1,698                              |       | 1,698     |       |
| Amortization                              |       | 774                                          |       | 403                                  |       | 578           |       | 76                                 |       | 1,831     |       |
| Equity-based  compensation                |       | 218                                          |       | 337                                  |       | 321           |       | 1,279                              |       | 2,155     |       |
| Restructuring                             |       | 195                                          |       | 1,444                                |       | 262           |       | 43                                 |       | 1,944     |       |
| Asset  impairment charge                  |       | —                                       |       | 304                                  |       | —        |       | —                             |       | 304       |       |
| Loss  before income taxes                 |       | $                                            | (1,659     | )                                    | $          | (3,497        | )          | $                                  | (4,173     | )         | $          | (4,972 | ) | $ | (14,301 | ) |
|                                      |       |                                         |       |                                 |       |          |       |                               |       |      |       |
| **Six months ended June 30, 2010**   | ** ** | ** **                                   | ** ** | ** **                           | ** ** | ** **    | ** ** | ** **                         | ** ** |      | ** ** |
| Net  sales                                |       | $                                            | 297,150    |                                 | $          | 58,987        |       | $                                  | 60,134     |      | $          | — |   | $ | 416,271 |   |
| Segment  profit (loss)                    |       | $                                            | 88,673     |                                 | $          | 13,122        |       | $                                  | 6,286      |      | $          | (6,902 | ) | $ | 101,179 |   |
| Interest,  net                            |       | —                                       |       | —                               |       | —        |       | 3,544                              |       | 3,544     |       |
| Amortization                              |       | 1,592                                        |       | 766                                  |       | 844           |       | 117                                |       | 3,319     |       |
| Equity-based  compensation                |       | 1,138                                        |       | 523                                  |       | 739           |       | 2,728                              |       | 5,128     |       |
| Restructuring                             |       | —                                       |       | (179                                 | )          | —        |       | —                             |       | (179      | )          |
| Income  (loss) before income taxes        |       | $                                            | 85,943     |                                 | $          | 12,012        |       | $                                  | 4,703      |      | $          | (13,291 | ) | $ | 89,367 |   |
| **Six months ended June 30, 2009**   |       |                                         |       |                                 |       |          |       |                               |       |      |       |
| Net  sales                                |       | $                                            | 54,084     |                                 | $          | 34,498        |       | $                                  | 46,287     |      | $          | — |   | $ | 134,869 |   |
| Segment  loss                             |       | $                                            | (4,184     | )                                    | $          | (2,641        | )          | $                                  | (5,717     | )         | $          | (3,500 | ) | $ | (16,042 | ) |
| Interest,  net                            |       | —                                       |       | —                               |       | —        |       | 3,407                              |       | 3,407     |       |
| Amortization                              |       | 1,549                                        |       | 808                                  |       | 1,155         |       | 148                                |       | 3,660     |       |
| Equity-based  compensation                |       | 374                                          |       | 589                                  |       | 557           |       | 2,033                              |       | 3,553     |       |
| Restructuring                             |       | 929                                          |       | 2,830                                |       | 2,386         |       | 230                                |       | 6,375     |       |
| Inventory  write-offs                     |       | —                                       |       | 1,526                                |       | —        |       | —                             |       | 1,526     |       |
| Asset  impairment charge                  |       | —                                       |       | 304                                  |       | —        |       | —                             |       | 304       |       |
| Loss  before income taxes                 |       | $                                            | (7,036     | )                                    | $          | (8,698        | )          | $                                  | (9,815     | )         | $          | (9,318 | ) | $ | (34,867 | ) |

 
| ** **                       | ** ** | **LED & Solar  Process  Equipment** | ** ** | **Data Storage  Process  Equipment** | ** ** | **Metrology** | ** ** | **Unallocated  Corporate  Amount** | ** ** | **Total** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------|------------|---------------|------------|------------------------------------|------------|-----------|------------|
| **As of June 30, 2010**     |       |                                              |       |                                      |       |          |       |                               |       |      |       |
| Goodwill                         |       | $                                                 | 51,989     |                                      | $          | —        |       | $                                  | 7,433      |      | $          | — |   | $ | 59,422 |   |
| Total  assets                    |       | $                                                 | 239,266    |                                      | $          | 58,669        |       | $                                  | 81,047     |      | $          | 427,384 |   | $ | 806,366 |   |
|                             |       |                                              |       |                                      |       |          |       |                               |       |      |       |
| **As of December 31, 2009** |       |                                              |       |                                      |       |          |       |                               |       |      |       |
| Goodwill                         |       | $                                                 | 51,989     |                                      | $          | —        |       | $                                  | 7,433      |      | $          | — |   | $ | 59,422 |   |
| Total  assets                    |       | $                                                 | 178,406    |                                      | $          | 54,106        |       | $                                  | 72,912     |      | $          | 299,948 |   | $ | 605,372 |   |

 

Corporate total assets arecomprised principally of cash and cash equivalents and short-term investmentsat June 30, 2010 and December 31, 2009, respectively.

 

**Note 5—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.

 

TheCompany evaluates the need for a valuation allowance against its deferred taxassets each quarter. For the year ending December 31, 2010, the Companyhas determined that a significant portion of its deferred tax assets 

 

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arerealizable on 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 ending December 31,2010.

 

**Note 6—Debt**

 

*Convertible Notes*

 

The 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 April 16,2007). Holders may convert the convertible notes at any time during the periodbeginning on January 15, 2012 through the close of business on the secondday prior to April 15, 2012 and earlier upon the occurrence of certainevents including our common stock trading at prices equal to 130% of theconversion price for a specified period, which is at least 20 trading daysduring the 30 consecutive trading days of the immediately preceding fiscalquarter and only during such fiscal quarter. At the end of the second quarterof 2010, our common stock was trading at prices equal to or above 130% of theconversion price for the specified period and, as a result, the convertible noteswill be convertible during the third quarter of 2010.  If the convertiblenotes are converted, we have the ability and intent to pay the principalbalance of notes tendered for conversion in cash. We will re-perform this testeach quarter up to and including the fourth quarter of 2011. The notes areunsecured and are effectively subordinated to all of our senior and securedindebtedness and to all indebtedness and other liabilities of our subsidiaries.

 

InMay 2008, accounting guidance was issued that requires a portion ofconvertible debt 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. The convertible notes are subjectto such 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  June 30,** | ** ** | **Six  months ended  June 30,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **2010**                               | ** ** | **2009**                             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Contractual  interest                      |       | $                                      | 1,089      |                                 | $          | 1,089 |   | $ | 2,178 |   | $ | 2,178 |   |
| Amortization  of the discount on the Notes |       | 760                                    |       | 707                                  |       | 1,501 |   | 1,400 |   |
| Total  interest expense on the Notes       |       | $                                      | 1,849      |                                 | $          | 1,796 |   | $ | 3,679 |   | $ | 3,578 |   |
| 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):

 
| ** **                                     | ** ** | **June 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                    |       | 5,993                   |       | 7,493                       |       |
| Net  carrying value of the liability component |       | $                       | 99,581     |                        | $          | 98,081 |   |

 

AtJune 30, 2010, $105.6 million of the notes outstanding had a fairvalue of approximately $156.7 million.

 

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*Mortgage Payable*

 

Wealso have a mortgage payable, with approximately $3.0 million outstandingat June 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 June 30, 2010 was approximately $3.3 million.

 

**Note 7—****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.

 

As of June 30, 2010,major categories of assets measured at fair value on a recurring basis underLevel 2 consisted of CDARS totaling $159.5 million and treasury bills totaling$147.0 million. As of December 31, 2009, major categories of assetsmeasured at fair value on a recurring basis under Level 2 consisted of CDARStotaling $180.0 million and derivative instruments totaling $0.2 million. As ofJune 30, 2010, the major category of liabilities measured at fair value ona recurring basis under Level 2 consisted of derivative instruments totaling$0.1 million. The Company had no Level 1 and Level 3 assets and liabilitiesmeasured on a recurring basis at June 30, 2010 and December 31, 2009.

 

CDARS and treasury bills arecarried at cost, which approximates market value. Accordingly, no gains orlosses (realized/ unrealized) have been incurred.

 

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.

 

As of June 30, 2010,major categories of assets and liabilities measured at fair value under Level 3on a nonrecurring basis consisted of property, plant and equipment totaling$59.1 million, goodwill totaling $59.4 million, intangible assets totaling$25.2 million, an asset retirement obligation totaling ($0.2) million and arestructuring liability totaling ($1.3) million. As of December 31, 2009,major categories of assets and liabilities measured at fair value under Level 3on a nonrecurring basis consisted of property, plant and equipment totaling$59.4 million, goodwill totaling $59.4 million, intangible assets totaling$29.7 million, an asset retirement obligation totaling ($0.2) million and a restructuringliability totaling ($2.5) million. The Company had no Level 1 or Level 2 assetsand liabilities measured on a nonrecurring basis at June 30, 2010 and December 31,2009.

 

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**Note 8—****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 six months ended June 30, 2010. We recorded restructuring chargesof approximately $1.9 million and $6.4 million during the three and six monthsended June 30, 2009, respectively, and inventory write-offs of $1.5million, included in cost of sales in the accompanying Condensed ConsolidatedStatement of Operations, associated with the discontinuance of certain productsin connection with the transitioning to outsourced manufacturing during thethree and six months ended June 30, 2009. Restructuring for the three andsix months ended June 30, 2010 and 2009 is as follows (in thousands):

 
| ** **                                 | ** ** | **Three months ended********June 30,** | ** ** | **Six months ended********June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Personnel  severance and related costs     |       | $                                           | —     |                                      | $          | 767 |   | $ | — |   | $ | 5,153 |   |
| Lease-related  costs (credits)             |       | —                                      |       | 893                                       |       | (179 | ) | 893 |   |
| Moving  costs and consolidation activities |       | —                                      |       | 284                                       |       | — |   | 329 |   |
|                                       |       | $                                           | —     |                                      | $          | 1,944 |   | $ | (179 | ) | $ | 6,375 |   |

 

*Personnel severance and relatedcosts*

 

Duringthe three and six months ended June 30, 2009, we recorded $0.8 million and$5.2 million, respectively, in personnel severance and related costs resultingfrom a headcount reduction of approximately 53 employees during the three monthperiod and 193 employees during the six month period. This reduction inworkforce included executives, management, administration, sales and servicepersonnel and manufacturing employees’ companywide.

 

*Lease-related costs (credits)*

 

During the first quarter of2010, we had a change in estimate relating to one of our leased facilities. Asa 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 ourData Storage Process Equipment facilities in Camarillo, CA.  As a result,we incurred an additional restructuring charge, representing the remaininglease payment obligations and estimated property taxes for the facility wevacated, offset by the estimated expected sublease income to be received. We made certain assumptions in determining the charge, which included estimatedsublease income and terms of the sublease as well as the estimated discountrate to be used in determining the fair value of the liability.  Wedeveloped these assumptions based on our understanding of the current realestate market as well as current market interest rates.  The assumptionsare based on management’s best estimates, and will be adjusted periodically ifbetter information is obtained.  We also incurred charges associated withmoving and consolidation activities for both of these locations.

 

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*Restructuring liability*

 

Thefollowing is a reconciliation of the liability for the 2009 and 2008restructuring charge from inception through June 30, 2010 (in thousands):

 
| ** **                             | ** ** | **LED & Solar  Process  Equipment** | ** ** | **Data Storage  Process  Equipment** | ** ** | **Metrology** | ** ** | **Unallocated  Corporate** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------|------------|---------------|------------|----------------------------|------------|-----------|------------|
| Short-term  liability                  |       |                                              |       |                                      |       |          |       |                       |       |      |       |
| Balance  as of January 1, 2010    |       | $                                                 | 353        |                                      | $          | 486           |       | $                          | 15         |      | $          | 1,597 |   | $ | 2,451 |   |
| Reversal  of lease-related costs       |       | —                                            |       | (108                                      | )          | —        |       | —                     |       | (108      | )          |
| Short-term/long-term  reclassification |       | —                                            |       | 70                                        |       | —        |       | 536                        |       | 606       |       |
| Cash  payments                         |       | (353                                              | )          | (253                                      | )          | (15           | )          | (1,030                     | )          | (1,651    | )          |
| Balance  as of June 30, 2010      |       | $                                                 | —     |                                      | $          | 195           |       | $                          | —     |      | $          | 1,103 |   | $ | 1,298 |   |
|                                   |       |                                              |       |                                      |       |          |       |                       |       |      |       |
| Long-term  liability                   |       |                                              |       |                                      |       |          |       |                       |       |      |       |
| Balance  as of January 1, 2010    |       | $                                                 | —     |                                      | $          | 229           |       | $                          | —     |      | $          | 536 |   | $ | 765 |   |
| Reversal  of lease-related costs       |       | —                                            |       | (71                                       | )          | —        |       | —                     |       | (71       | )          |
| Short-term/long-term  reclassification |       | —                                            |       | (70                                       | )          | —        |       | (536                       | )          | (606      | )          |
| Balance  as of June 30, 2010      |       | $                                                 | —     |                                      | $          | 88            |       | $                          | —     |      | $          | — |   | $ | 88 |   |

 

The balance of the short-term restructuringliability relating to personnel severance charges is expected to be paid overthe next three months. The long-term liability will be paid over the remaininglife of the leases for the former corporate headquarters and a former Data StorageProcess Equipment facility, which expire in June 2011 and May 2012,respectively. We have not incurred and currently do not anticipate or expect toincur additional restructuring charges during 2010.

 

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

 

**ExecutiveSummary**

 

Wedesign, manufacture, market and service enabling solutions for customers in thehigh brightness (“HB”) light emitting diode (“LED”) (“HB LED”), solar, datastorage, scientific research, semiconductor, and industrial markets. We haveleading technology positions in our three segments: LED & Solar ProcessEquipment, Data Storage Process Equipment and Metrology.

 

Inour LED & Solar segment, we design and manufacture metal organicchemical vapor deposition (“MOCVD”) systems, molecular beam epitaxy (“MBE”)systems and sources, and other types of deposition systems such as web andglass coaters, which we sell to manufacturers of HB LEDs and solar panels, aswell 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.

 

Inour Metrology segment, we design and manufacture atomic force microscopes (“AFMs”),scanning probe microscopes (“SPMs”), stylus profilers, and opticalinterferometers used to provide critical surface measurements in research andproduction environments. This broad line of products is used in universities,research facilities and scientific centers worldwide. In productionenvironments such as semiconductor, data storage and other industries, ourmetrology instruments enable customers to monitor their products throughout themanufacturing process to improve yields, reduce costs and improve productquality.

 

Wecurrently maintain facilities in Arizona, California, Colorado, Massachusetts,Minnesota, New Jersey and New York, with sales and service locations inMinnesota, Pennsylvania, France, England, Germany, Netherlands, Japan,Singapore, China, Taiwan, Korea, Malaysia, Philippines and Thailand.

 

**Highlightsof the Second Quarter of 2010**

 

·                  Revenue was $253.0 million, a 251.3% increasefrom the second quarter of 2009.

·                  Orders were $346.9 million, a 251.6% increasefrom the second quarter of 2009.

·                  Net income was $52.4 million, or $1.20 pershare, compared to a net loss of $(14.7) million, or $(0.47) per share, in thesecond quarter of 2009.

·                  Gross margins were 45.0%, compared to 33.9%in the second quarter of 2009.

 

**Outlook**

 

Withbacklog of $597 million at the end of June 2010, Veeco continues to havevery strong business momentum. We continue to experience high levels ofactivity in our LED business, similar to the last three quarters, withmulti-tool MOCVD system orders being quoted across a large number of customers.Our K465iTM is performing well in the market and we are increasing manufacturingcapacity to satisfy customer demand.  In the second quarter of 2010, weshipped 81 systems. We currently plan to ship approximately 100 MOCVD tools inthe third quarter 2010 and plan to reach a production capacity of 120 tools ormore by the fourth quarter.  As a resultof our variable-cost, outsourced manufacturing strategy, we have dramaticallyincreased our production capacity with the ability to flex our actual MOCVDshipments up or down each quarter depending upon specific customer demand anddelivery requirements.

 

Wecurrently believe that the third quarter will be another strong order quarterfor our MOCVD business. In particular, China’s initiative to subsidize the HBLED industry via seven national ‘industrial parks’ is spurring strong orderquoting patterns for Veeco, both from Chinese entities as well as from Koreanand Taiwanese customers that are partnering with Chinese entities.  We believe the HB LED industry is at thebeginning of a multi-year MOCVD investment cycle as HB LEDs increase theirpenetration in laptop and TV backlighting and gain momentum for generalillumination.

 

Weare continuing to invest in our copper, indium, gallium, selenide (“CIGS”)Solar business, with a goal to build a “best of breed” deposition product lineand ultimately help to drive CIGS technology as a low-cost, high

 

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efficiency solar technology.We shipped our first tool from our FastFlex family of deposition systems to anAsia customer during the second quarter of 2010.

 

Businessconditions in our other segments, Data Storage and Metrology, also remainpositive. In 2010, our Data Storage business is currently anticipated toperform well as customers invest in capacity additions and next-generationrecording head technology.  Order rates have improved significantly fromthe low levels of business experienced in late 2008 and early 2009, withcustomers again investing in technology and capacity purchases. In Metrology weare winning in the market due to our new AFM and Optical products and havehigher demand in the semiconductor, research and industrial markets as theglobal economy improved from 2009

 

Basedupon Veeco’s strong backlog, the Company is currently forecasting that 2010revenues will be over $1 billion, with strong year-over year growth from 2009in revenue and profitability in all three business segments.

 

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 December 31,2009, as well as any modifications or revisions to risk factors contained inour subsequent filings with the SEC

 

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

 

18

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**Results of Operations:**

 

**ThreeMonths Ended June 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 June 30, 2010 and 2009 (dollarsin thousands):

 
| ** **                                        | ** ** | ** **             | ** ** | **Dollar and** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|----------------|------------|
| ** **                                        | ** ** | **Three months ended** | ** ** | **Percentage** | ** ** |
| ** **                                        | ** ** | **June 30,**      | ** ** | **Change**     | ** ** |
| ** **                                        | ** ** | **2010**               | ** ** | **2009**       | ** ** | **Period to Period** | ** ** |
| Net  sales                                        |       | $                      | 253,040    |           | 100.0      | % | $ | 72,020 |   | 100.0 | % | $ | 181,020 |   | 251.3 | % |
| Cost  of sales                                    |       | 139,282                |       | 55.0           |       | 47,636 |   | 66.1 |   | 91,646 |   | 192.4 |   |
| Gross  profit                                     |       | 113,758                |       | 45.0           |       | 24,384 |   | 33.9 |   | 89,374 |   | 366.5 |   |
| Operating  expenses (income):                     |       |                   |       |           |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative         |       | 27,287                 |       | 10.8           |       | 19,822 |   | 27.5 |   | 7,465 |   | 37.7 |   |
| Research  and development                         |       | 20,550                 |       | 8.1            |       | 13,163 |   | 18.3 |   | 7,387 |   | 56.1 |   |
| Amortization                                      |       | 1,634                  |       | 0.6            |       | 1,831 |   | 2.5 |   | (197 | ) | (10.8 | ) |
| Restructuring                                     |       | —                 |       | —         |       | 1,944 |   | 2.7 |   | (1,944 | ) | (100.0 | ) |
| Asset  impairment charge                          |       | —                 |       | —         |       | 304 |   | 0.4 |   | (304 | ) | (100.0 | ) |
| Other,  net                                       |       | 512                    |       | 0.2            |       | (77 | ) | (0.1 | ) | 589 |   | * |   |
| Total  operating expenses                         |       | 49,983                 |       | 19.8           |       | 36,987 |   | 51.4 |   | 12,996 |   | 35.1 |   |
| Operating  income (loss)                          |       | 63,775                 |       | 25.2           |       | (12,603 | ) | (17.5 | ) | 76,378 |   | * |   |
| Interest  expense, net                            |       | 1,762                  |       | 0.7            |       | 1,698 |   | 2.4 |   | 64 |   | 3.8 |   |
| Income  (loss) before income taxes                |       | 62,013                 |       | 24.5           |       | (14,301 | ) | (19.9 | ) | 76,314 |   | * |   |
| Income  tax provision                             |       | 9,620                  |       | 3.8            |       | 402 |   | 0.6 |   | 9,218 |   | 2,293.0 |   |
| Net  income (loss)                                |       | 52,393                 |       | 20.7           |       | (14,703 | ) | (20.4 | ) | 67,096 |   | * |   |
| Net  loss attributable to noncontrolling interest |       | —                 |       | —         |       | (23 | ) | 0.1 |   | 23 |   | (100.0 | ) |
| Net  income (loss) attributable to Veeco          |       | $                      | 52,393     |           | 20.7       | % | $ | (14,680 | ) | (20.4 | )% | $ | 67,073 |   | * |   |

 

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*Not Meaningful

 

*NetSales and Orders*

 

Netsales of $253.0 million for the three months ended June 30, 2010 were up251.3% compared to the comparable 2009 quarter. The following is an analysis ofnet sales and orders by segment and by region (dollars in thousands):

 
| ** **                                         | ** ** | **Sales**                              | ** ** | **Orders**                         | ** ** | ** **                             | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **Three  months ended  June 30,** | ** ** | **Dollar  and Percentage  Change** | ** ** | **Three months  ended  June 30,** | ** ** | **Dollar  and Percentage  Change** | ** ** | **Book to Bill  Ratio** | ** ** |
| ** **                                         | ** ** | **2010**                               | ** ** | **2009**                           | ** ** | **Period****to****Period**             | ** ** | **2010** | ** ** | **2009** | ** ** | **Period****to****Period** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Segment  Analysis**                              | ** ** | ** **                             | ** ** | ** **                         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| LED & Solar  Process Equipment            |       | $                                      | 185,646    |                               | $          | 31,882                                 |       | $ | 153,764 |   | 482.3 | % | $ | 260,439 |   | $ | 56,342 |   | $ | 204,097 |   | 362.2 | % | 1.40 |   | 1.77 |   |
| Data Storage Process  Equipment                    |       | 35,742                                 |       | 17,593                             |       | 18,149                                 |       | 103.2 |   | 50,025 |   | 19,318 |   | 30,707 |   | 159.0 |   | 1.40 |   | 1.10 |   |
| Metrology                                          |       | 31,652                                 |       | 22,545                             |       | 9,107                                  |       | 40.4 |   | 36,499 |   | 23,010 |   | 13,489 |   | 58.6 |   | 1.15 |   | 1.02 |   |
| Total                                              |       | $                                      | 253,040    |                               | $          | 72,020                                 |       | $ | 181,020 |   | 251.3 | % | $ | 346,963 |   | $ | 98,670 |   | $ | 248,293 |   | 251.6 | % | 1.37 |   | 1.37 |   |
| **Regional  Analysis**                             | ** ** | ** **                             | ** ** | ** **                         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas                                           |       | $                                      | 30,200     |                               | $          | 23,864                                 |       | $ | 6,336 |   | 26.6 | % | $ | 33,101 |   | $ | 20,660 |   | $ | 12,441 |   | 60.2 | % | 1.10 |   | 0.87 |   |
| Europe, Middle East and  Africa (“EMEA”) |       | 26,637                                 |       | 14,889                             |       | 11,748                                 |       | 78.9 |   | 26,830 |   | 16,193 |   | 10,637 |   | 65.7 |   | 1.01 |   | 1.09 |   |
| Japan                                              |       | 12,414                                 |       | 4,511                              |       | 7,903                                  |       | 175.2 |   | 10,151 |   | 7,434 |   | 2,717 |   | 36.5 |   | 0.82 |   | 1.65 |   |
| Asia Pacific                                       |       | 183,789                                |       | 28,756                             |       | 155,033                                |       | 539.1 |   | 276,881 |   | 54,383 |   | 222,498 |   | 409.1 |   | 1.51 |   | 1.89 |   |
| Total                                              |       | $                                      | 253,040    |                               | $          | 72,020                                 |       | $ | 181,020 |   | 251.3 | % | $ | 346,963 |   | $ | 98,670 |   | $ | 248,293 |   | 251.6 | % | 1.37 |   | 1.37 |   |

 

Sales and orders increasedin each segment in the second quarter of 2010 compared with the comparable 2009quarter due to our customers’ requirements in response to increasinglyfavorable economic conditions compared to 2009. LED & Solar ProcessEquipment sales were up 482.3% from the comparable 2009 quarter primarily dueto an increase in end user demand for HB LED backlighting applications andcontinued strong customer acceptance of Veeco’s newest generation systems. DataStorage Process Equipment segment sales were up 103.2% from the

 

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comparable 2009 quarter dueto an increase in demand by our data storage customers as the global economyimproved from 2009. Additionally, Metrology sales were up 40.4% from thecomparable 2009 quarter, due to higher demand in the semiconductor, researchand industrial markets as the global economy improved from 2009. By region, netsales increased by 539.1% in the Asia Pacific region, primarily due to MOCVDsales to HB LED customers, while sales in the Americas, EMEA and Japan also increased26.6%, 78.9% and 175.2%, respectively. We believe that there will continue tobe period-to-period variations in the geographic distribution of sales.

 

Orders for the secondquarter of 2010 increased 251.6% from the comparable 2009 quarter. By segment,the 362.2% increase in orders for LED & Solar Process Equipment wasprincipally driven by HB LED based manufacturers increasing production fortelevision and laptop backlighting applications. The 159.0% increase in DataStorage Process Equipment orders resulted from an increase in demand by ourdata storage customers due to both capacity expansion and technology buys. The58.6% increase in Metrology orders is due to higher demand in thesemiconductor, research and industrial markets.

 

Our book-to-bill ratio forthe second quarter of 2010, which is calculated by dividing orders received ina given time period by revenue recognized in the same time period, was 1.37 to1, reflecting the increasingly favorable economic conditions experienced in thelast four quarters, specifically related to our LED & Solar ProcessEquipment segment. Our backlog as of June 30, 2010 was $597.5 million,compared to $402.0 million as of December 31, 2009. During the threemonths ended June 30, 2010, we experienced backlog adjustments ofapproximately $1.4 million, principally due to adjustments related to foreigncurrency translation. For certain sales arrangements we require a deposit for aportion of the sales price before shipment. As of June 30, 2010 we hadcustomer deposits and advanced billings of $113.6 million.

 

*GrossProfit*

 

Grossprofit, as a percentage of net sales, for the second quarter of 2010, was45.0%, compared to 33.9% in the comparable 2009 quarter. LED & SolarProcess Equipment gross margins increased to 44.0% from 32.7%, Data StorageProcess Equipment gross margins increased to 48.6% from 34.3% and Metrologygross margins increased to 46.6% from 35.2%. The increases in gross margin weredriven primarily by increased sales volume in each of our segments.

 

*OperatingExpenses*

 

Selling,general and administrative expenses increased by $7.5 million, or 37.7%, fromthe comparable 2009 quarter, however, decreased from 27.5% of net sales to10.8% of sales.  The dollar increase wasprimarily due to an increase in bonus and profit sharing expense, equity-basedcompensation, travel and entertainment expenses, salary and related expensesand professional fees associated primarily with the significant increase inbusiness activity in our LED & Solar Process Equipment segment.

 

Researchand development expenses increased $7.4 million from the comparable 2009quarter, however, decreased from 18.3% of net sales to 8.1%. The dollarincrease was primarily due to increased spending in our LED & SolarProcess Equipment segment to support future growth.

 

Restructuring expense of$1.9 million for the second quarter of 2009 consisted of $0.8 million ofpersonnel severance costs resulting from a reduction in workforce. In addition,there were $0.9 million of lease-related costs and $0.2 million of moving andconsolidation costs incurred in our Data Storage Process Equipment segmentassociated with vacating our Camarillo, CA facilities. In addition to the $1.9million in restructuring expense, we incurred $0.3 million of asset impairment costs.

 

Other, net for the secondquarter of 2010 includes a foreign currency exchange loss of $0.5 millioncompared to a foreign currency exchange gain of $0.1 million in the comparable2009 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 June 30,2010, the Company had an effective tax rate of 15.5% and recorded a provisionfor income taxes of $9.6 million which includes $2.0 million relating to ourforeign operations and $7.6 million relating to U.S. federal, state and localtaxes. The effective tax rate is lower than the statutory rate primarily 

 

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due to the Company’s abilityto realize a significant portion of its deferred tax assets, primarily relatedto net operating loss carryforwards and federal tax credits, on amore-likely-than-not basis based on the forecasted results of operations forthe year ending December 31, 2010.

 

For the three months ended June 30,2009, the Company had an effective tax rate of (2.8)% and recorded a provisionfor income taxes of $0.4 million which included $0.2 million relating to ourforeign operations and $0.2 million relating to state and local taxes.

 

**Results of Operations:**

 

**Six MonthsEnded June 30, 2010 and 2009**

 

The following table showsour Condensed Consolidated Statements of Operations, percentages of sales, andcomparisons between the six months ended June 30, 2010 and 2009 (dollarsin thousands):

 
| ** **                                        | ** ** | ** **           | ** ** | **Dollar and** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|----------------|------------|
| ** **                                        | ** ** | **Six months ended** | ** ** | **Percentage** | ** ** |
| ** **                                        | ** ** | **June 30,**    | ** ** | **Change**     | ** ** |
| ** **                                        | ** ** | **2010**             | ** ** | **2009**       | ** ** | **Period to Period** | ** ** |
| Net  sales                                        |       | $                    | 416,271    |           | 100.0      | % | $ | 134,869 |   | 100.0 | % | $ | 281,402 |   | 208.6 | % |
| Cost  of sales                                    |       | 232,164              |       | 55.8           |       | 90,103 |   | 66.8 |   | 142,061 |   | 157.7 |   |
| Gross  profit                                     |       | 184,107              |       | 44.2           |       | 44,766 |   | 33.2 |   | 139,341 |   | 311.3 |   |
| Operating  expenses (income):                     |       |                 |       |           |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative              |       | 50,707               |       | 12.2           |       | 38,429 |   | 28.5 |   | 12,278 |   | 31.9 |   |
| Research  and development                         |       | 36,990               |       | 8.9            |       | 26,049 |   | 19.3 |   | 10,941 |   | 42.0 |   |
| Amortization                                      |       | 3,319                |       | 0.8            |       | 3,660 |   | 2.7 |   | (341 | ) | (9.3 | ) |
| Restructuring                                     |       | (179                 | )          | (0.0           | )          | 6,375 |   | 4.7 |   | (6,554 | ) | * |   |
| Asset  impairment charge                          |       | —               |       | —         |       | 304 |   | 0.2 |   | (304 | ) | (100.0 | ) |
| Other,  net                                       |       | 359                  |       | 0.1            |       | 1,409 |   | 1.0 |   | (1,050 | ) | (74.5 | ) |
| Total  operating expenses                         |       | 91,196               |       | 21.9           |       | 76,226 |   | 56.5 |   | 14,970 |   | 19.6 |   |
| Operating  income (loss)                          |       | 92,911               |       | 22.3           |       | (31,460 | ) | (23.3 | ) | 124,371 |   | * |   |
| Interest  expense, net                            |       | 3,544                |       | 0.9            |       | 3,407 |   | 2.5 |   | 137 |   | 4.0 |   |
| Income  (loss) before income taxes                |       | 89,367               |       | 21.5           |       | (34,867 | ) | (25.9 | ) | 124,234 |   | * |   |
| Income  tax provision                             |       | 10,930               |       | 2.6            |       | 780 |   | 0.6 |   | 10,150 |   | 1,301.3 |   |
| Net  income (loss)                                |       | 78,437               |       | 18.8           |       | (35,647 | ) | (26.4 | ) | 114,084 |   | * |   |
| Net  loss attributable to noncontrolling interest |       | —               |       | —         |       | (65 | ) | 0.1 |   | 65 |   | (100.0 | ) |
| Net  income (loss) attributable to Veeco          |       | $                    | 78,437     |           | 18.8       | % | $ | (35,582 | ) | (26.4 | )% | $ | 114,019 |   | * |   |

 

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*Not Meaningful

 

*NetSales and Orders*

 

Netsales of $416.3 million for the six months ended June 30, 2010 were up208.6% compared to the comparable 2009 period. The following is an analysis ofnet sales and orders by segment and by region (dollars in thousands):

 
| ** **                              | ** ** | **Sales**                            | ** ** | **Orders**                         | ** ** | ** **                           | ** ** | ** **                         | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **Six  months ended  June 30,** | ** ** | **Dollar  and Percentage  Change** | ** ** | **Six  months ended  June 30,** | ** ** | **Dollar  and Percentage  Change** | ** ** | **Book to  Bill  Ratio** | ** ** |
| ** **                              | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **Period****to****Period**           | ** ** | **2010**                           | ** ** | **2009** | ** ** | **Period****to****Period** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Segment  Analysis**                   | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| LED & Solar  Process Equipment |       | $                                    | 297,150    |                               | $          | 54,084                               |       | $                                  | 243,066    |   | 449.4 | % | $ | 472,102 |   | $ | 84,863 |   | $ | 387,239 |   | 456.3 | % | 1.59 |   | 1.57 |   |
| Data Storage Process  Equipment         |       | 58,987                               |       | 34,498                             |       | 24,489                               |       | 71.0                               |       | 76,398 |   | 27,136 |   | 49,262 |   | 181.5 |   | 1.30 |   | 0.79 |   |
| Metrology                               |       | 60,134                               |       | 46,287                             |       | 13,847                               |       | 29.9                               |       | 66,307 |   | 39,721 |   | 26,586 |   | 66.9 |   | 1.10 |   | 0.86 |   |
| Total                                   |       | $                                    | 416,271    |                               | $          | 134,869                              |       | $                                  | 281,402    |   | 208.6 | % | $ | 614,807 |   | $ | 151,720 |   | $ | 463,087 |   | 305.2 | % | 1.48 |   | 1.12 |   |
| **Regional  Analysis**                  | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Americas                                |       | $                                    | 57,410     |                               | $          | 43,833                               |       | $                                  | 13,577     |   | 31.0 | % | $ | 65,344 |   | $ | 32,232 |   | $ | 33,112 |   | 102.7 | % | 1.14 |   | 0.74 |   |
| EMEA                                    |       | 50,394                               |       | 33,150                             |       | 17,244                               |       | 52.0                               |       | 65,955 |   | 27,497 |   | 38,458 |   | 139.9 |   | 1.31 |   | 0.83 |   |
| Japan                                   |       | 22,839                               |       | 9,987                              |       | 12,852                               |       | 128.7                              |       | 16,937 |   | 14,360 |   | 2,577 |   | 17.9 |   | 0.74 |   | 1.44 |   |
| Asia Pacific                            |       | 285,628                              |       | 47,899                             |       | 237,729                              |       | 496.3                              |       | 466,571 |   | 77,631 |   | 388,940 |   | 501.0 |   | 1.63 |   | 1.62 |   |
| Total                                   |       | $                                    | 416,271    |                               | $          | 134,869                              |       | $                                  | 281,402    |   | 208.6 | % | $ | 614,807 |   | $ | 151,720 |   | $ | 463,087 |   | 305.2 | % | 1.48 |   | 1.12 |   |

 

Sales and orders increasedin each segment in the first half of 2010 compared with the comparable2009  period due to our customers’ requirementsin response to increasingly favorable economic conditions compared to 2009. LED &Solar Process Equipment sales were up 449.4% from the comparable 2009 periodprimarily due to an increase in end user demand for HB LED backlightingapplications and strong customer acceptance of Veeco’s

 

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newest generation systems.Data Storage Process Equipment sales were up 71.0% from the comparable 2009period due to an increase in demand by our data storage customers as the globaleconomy improved from 2009. Additionally, Metrology sales were up 29.9% fromthe comparable 2009 period, due to higher demand in the semiconductor, researchand industrial markets as the global economy improved from 2009. By region, netsales increased by 496.3% in the Asia Pacific region, primarily due to MOCVDsales to HB LED customers, while sales in the Americas, EMEA and Japan alsoincreased 31.0%, 52.0% and 128.7%, respectively. We believe that there willcontinue to be period-to-period variations in the geographic distribution ofsales.

 

Orders for the second halfof 2010 increased 305.2% from the comparable 2009 period. By segment, the 456.3%increase in orders for LED & Solar Process Equipment was principallydriven by HB LED based manufacturers increasing production for television andlaptop backlighting applications. The 181.5% increase in Data Storage ProcessEquipment orders resulted from an increase in demand by our data storagecustomers due to both capacity expansion and technology buys. The 66.9%increase in Metrology orders was due to higher demand in the semiconductor,research and industrial markets.

 

*GrossProfit*

 

Grossprofit, as a percentage of net sales, for the first half of 2010, was 44.2%,compared to 33.2% in the comparable 2009 period. LED & Solar ProcessEquipment gross margins increased to 43.5% from 31.2%, Data Storage ProcessEquipment gross margins increased to 45.0% from 38.3% and Metrology grossmargins increased to 46.9% from 37.2%. The increases in gross margin weredriven primarily by increased sales volume in each of our segments. In thefirst half of 2009, Data Storage Process Equipment 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 $12.3 million, or 31.9%, fromthe comparable 2009 period, however, decreased from 28.5% of net sales to 12.2%of sales. The increase was primarily due to an increase in bonus and profitsharing expense, equity-based compensation, travel and entertainment expenses,salary and related expenses and professional fees associated primarily with thesignificant increase in business activity in our LED & Solar ProcessEquipment segment.

 

Researchand development expenses increased $10.9 million from the comparable 2009period, however, decreased from 19.3% of net sales to 8.9% of sales. The dollarincrease was primarily due to increased spending in our LED & SolarProcess Equipment segment to support future growth.

 

Restructuring included acredit of approximately $0.2 million during the first half of 2010 due to achange in estimate for one of our leased facilities. Restructuring expense of$6.4 million in the first half of 2009 consisted of $5.2 million of personnelseverance costs resulting from a reduction in workforce, $0.9 million oflease-related costs and $0.3 million of moving and consolidation costs incurredin our Data Storage Process Equipment segment associated with vacating ourCamarillo, CA facilities. In addition, there was also a $0.3 million assetimpairment charge.

 

Other, net for the firsthalf of 2010 included a foreign currency exchange loss of $0.4 million comparedto a foreign exchange loss of $1.3 million in the comparable 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 six months ended June 30,2010, the Company had an effective tax rate of 12.2% and recorded a provision forincome taxes of $10.9 million which includes $3.0 million relating to ourforeign operations and $7.9 million relating to U.S. federal, state and localtaxes. The effective tax rate is lower than the statutory rate primarily due tothe Company’s ability to realize a significant portion of its deferred taxassets, primarily related to net operating loss carryforwards and federal taxcredits, on a more-likely-than-not basis based on the forecasted results ofoperations for the year ending December 31, 2010.

 

For the six months ended June 30,2009, the Company had an effective tax rate of (2.2)% and recorded a provisionfor income taxes of $0.8 million which included $0.5 million relating to ourforeign operations and $0.3 

 

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million relating to stateand local taxes.

 

**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 ourproducts and services. A summary of the cash flow activity for the six monthsended June 30, 2010 and 2009, respectively, is as follows (in thousands):

 
| ** **                                             | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **June 30,**    | ** ** |
| ** **                                             | ** ** | **2010**             | ** ** | **2009** | ** ** |
| Net  income (loss)                                     |       | $                    | 78,437     |   | $ | (35,647 | ) |
| Net  cash provided by operating activities             |       | $                    | 109,000    |   | $ | 8,044 |   |
| Net  cash provided by (used in) investing activities   |       | 75,486               |       | (13,709 | ) |
| Net  cash provided by (used in) financing activities   |       | 30,110               |       | (391 | ) |
| Effect  of exchange rates on cash and cash equivalents |       | (1,803               | )          | (249 | ) |
| Net  increase (decrease) in cash and cash equivalents  |       | 212,793              |       | (6,305 | ) |
| Cash  and cash equivalents at beginning of period      |       | 148,589              |       | 103,799 |   |
| Cash  and cash equivalents at end of period            |       | $                    | 361,382    |   | $ | 97,494 |   |

 

We had a net increase incash of $212.8 million during the six months ended June 30, 2010. Cashprovided by operations was $109.0 million for this period, as compared tocash provided by operations of $8.0 million for the comparable 2009period. Net income adjusted for non-cash items provided operating cash flows of$90.0 million for the six months ended June 30, 2010, whereas $17.6million was used in the comparable 2009 period. Net cash provided by operationsfor the six months ended June 30, 2010 included a net change in operatingassets and liabilities of $19.0 million. Inventories increased byapproximately $6.4 million, principally due to an increase in purchases tosupport the significant MOCVD orders from the comparable 2009 period. Accountsreceivable increased $54.6 million during the six months ended June 30,2010, due to higher sales volume when compared to the fourth quarter of 2009.Accrued expenses and other current liabilities increased $51.9 million duringthe six months ended June 30, 2010, due primarily to an increase incustomer deposits, partially offset by the payment of management bonuses andprofit sharing in the first quarter of 2010. Accounts payable also increased by$21.8 million during the first half of 2010 due to the higher level of businessactivity.

 

Cash provided by investingactivities of $75.5 million for the six months ended June 30, 2010primarily related to the redemption of short-term investments of $160.1million, partially offset by purchases of additional short-term investments of$78.5 million and $6.2 million in capital expenditures principally in our LED &Solar Process Equipment segment. Cash used in investing activities of $13.7million for the six months ended June 30, 2009 primarily related to the$9.8 million earn-out payments and $3.6 million in capital expenditures, ofwhich $2.4 million is principally attributable to our LED & SolarProcess Equipment segment. During the remainder of 2010, we estimate we willinvest an additional $22.5 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 $30.1 million for the six months ended June 30, 2010primarily related to stock option exercises. Cash used in financing activitiesof $0.4 million for the six months ended June 30, 2009 primarily relatedto restricted stock tax withholdings.

 

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

 

Asof June 30, 2010, we have outstanding $105.6 million aggregate principalamount of 4.125% convertible subordinated notes due April 15, 2012 (the “Notes”).We pay interest on the Notes on April 15 and October 15 of each year.We have previously engaged in repurchase transactions of our Notes and mayenter into similar transactions in the future 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).Holders may 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 

 

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occurrence of certain eventsincluding our common stock trading at prices equal to 130% of the conversionprice for a specified period, which is at least 20 trading days during the 30consecutive trading days of the immediately preceding fiscal quarter and onlyduring such fiscal quarter. At the end of the second quarter of 2010, ourcommon stock was trading at prices equal to or above 130% of the conversionprice for the specified period and, as a result, the Notes will be convertibleduring the third quarter of 2010.  If the Notes are converted, we have theability and intent to pay the principal balance of notes tendered for conversionin cash. We will re-perform this test each quarter up to and including thefourth quarter of 2011.

 

Webelieve that existing cash balances together with cash generated fromoperations will be sufficient to meet our projected working capital and other cashflow 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 throughwith cash 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.

 

**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 June 30,2010 were $283.4 million.

 

**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 financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses. Management continually monitors andevaluates its estimates and judgments, including those related to bad debts,inventories, intangible and other long-lived assets, income taxes, warrantyobligations, restructuring costs, and contingent liabilities, includingpotential 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 certainaccounting policies related to revenue recognition, the valuation ofinventories, the impairment of goodwill and indefinite-lived intangible assets,the impairment of long-lived assets, fair value measurements, warranty costs,the accounting for income taxes and equity-based compensation to be criticalpolicies due to the 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 these arrangements is allocatedto each element based upon its estimated fair market value*.*

 

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 or determinable,collectability is reasonably assured and no uncertainties exist regardingcustomer acceptance. For transactions on which we recognize systems revenue,either at the time of shipment or delivery, our contractual arrangements withcustomers do not contain provisions for right of return or forfeiture, refundor other purchase price concessions. Sales arrangements are reviewed on acase-by-case basis; however, our products generally fall into one of

 

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two categories; eitherinstruments or systems, for which we have established revenue recognitionprotocols as described below.

 

Instruments— For standard products produced according to our published specifications,principally metrology instruments sold typically to universities, researchfacilities and scientific centers and in general industrial applications whereinstallation is inconsequential or perfunctory and no substantive customeracceptance provisions exist, revenue is recognized when title and risk of losspass to the customer, either at time of shipment or delivery.  Acceptance of the product by the customer isbased upon meeting standard published specifications. Customer acceptanceprovisions include initial setup at the customer site, performance offunctional test procedures and calibration testing of the basic features andfunctionality of the product.  Theseprovisions are a replication of the testing performed in our facilities priorto shipment.  The skills and equipmentrequired to complete installation of such instruments are not specialized andare readily available in the market and are often performed by distributors orrepresentative organizations.

 

Systems— Process equipment systems and certain metrology systems, which are sold tomanufacturers in the LED, solar, data storage and semiconductor industries andare used in manufacturing facilities and commercial production environments typicallyinclude process acceptance criteria based upon Veeco and/or customerspecifications. We are generally required to install these products anddemonstrate compliance with acceptance tests at the customer’s facility.Generally, based upon the terms of the sales arrangement, these products aresold with a retention (typically 10% to 20% of the sales contract value) whichis payable by the customer when installation and field acceptance is completed.Such installations are not considered complex and are not deemed essential tothe functionality of the equipment because they do not involve significantchanges to the features or capabilities of the equipment or involve buildingcomplex interfaces or connections. Installation normally represents only 2% - 4%of the fair value of the sales contract. Sales arrangements for these systemsare bifurcated into separate units of accounting or elements based on objectiveevidence of fair value. The two elements are the system and installation of thesystem. The amount of revenue allocated to each element is based upon itsrelative fair value. The price charged when the system or installation serviceis sold separately generally determines fair value.  The value of the installation service isbased upon the fair value of the service performed, including labor, which isbased upon the estimated time to complete the installation at hourly rates, andmaterial components. We recognize revenue for the system or delivered elementsince the delivered item has value to the customer on a standalonebasis, there is objective and reliable evidence of the fair value of theundelivered item (i.e., the installation service) and delivery or performanceof the undelivered item is considered probable and substantially in our control,based on our historical experience. The value of the undelivered element is thegreater of the fair value of the installation or the portion of the sales pricethat will not be received until the installation is completed (i.e., theretention amount). System revenue is generally recognized upon shipment ordelivery provided title and risk of loss has passed to the customer. Revenuefrom installation services is recognized at the time acceptance is receivedfrom the customer. If the arrangement does not meet all the above criteria, theentire amount of the sales arrangement is deferred until the criteria have beenmet or all elements have been delivered to the customer 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 profit on the amount billed for thesetransactions is deferred and recognized as deferred profit in the accompanyingCondensed 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 of

 

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market value are management’sestimates related to our future manufacturing schedules, customer demand,technological and/or market obsolescence, possible alternative uses, andultimate 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 four reporting units that are required tobe reviewed for impairment. The reporting units are LED & SolarProcess Equipment, Data Storage Process Equipment and AFM and OpticalMetrology. AFM and Optical Metrology comprise the Metrology operating segment.In identifying the reporting units management considered the economiccharacteristics of operating segments including the products and servicesprovided, production processes, types or classes of customer and productdistribution.

 

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.Developing the estimate of the discounted future cash flow requires significantjudgment and projections of future financial performance. The key assumptionsused in developing the discounted future cash flows are the projection offuture revenues and expenses, working capital requirements, residual growthrates and the weighted average cost of capital. In developing our financialprojections, we consider historical data, current internal estimates and marketgrowth trends. Changes to any of these assumptions could materially change thefair value 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 inputs asdefined in such. Level 1 inputs are quoted, unadjusted prices in active marketsfor identical assets or liabilities that the company has the ability to accessat the measurement date. Level 2 inputs are inputs other than quoted pricesincluded within Level 1 that are observable for the asset or liability, eitherdirectly or indirectly, such as quoted prices for similar assets orliabilities. Level 3 inputs are unobservable inputs for the asset or liability.Unobservable inputs are used to measure fair value to the extent thatobservable inputs are not available, thereby allowing for situations in whichthere is little, if any, market activity for the asset or liability at themeasurement date. These requirements apply to our long-lived assets, goodwilland intangible assets. We use Level 3 inputs to value all of such assets andthe methodology we use to value such assets has not changed since December 31,2009. The Company primarily applies the market approach for recurring fairvalue 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

 

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failures during the warrantyperiod. Unforeseen component failures or exceptional component performance canalso result in changes to warranty costs. If actual warranty costs differsubstantially from our estimates, revisions to the estimated warranty liabilitywould 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 andliabilities, which are included within our Condensed Consolidated BalanceSheets. The carrying value of our deferred tax assets is adjusted by a partialvaluation allowance to recognize the extent to which the future tax benefitswill be recognized on a more likely than not basis. Our net deferred tax assetsconsist primarily of net operating loss and tax credit carry forwards, andtiming differences 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. If we are able to realize part or all of the domestic deferredtax assets in future periods, we will reduce our provision for income taxeswith a release of the valuation allowance in an amount that corresponds withthe income tax liability generated.

 

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 ofdividend payouts. 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 stock overa 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 bothhistorical and implied volatility provides the best estimate of the futurevolatility of the market price of our common stock.

 

The expected term,representing the period of time that options granted are expected to be outstanding,is estimated using a lattice-based model incorporating historical post vestexercise 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.

 

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**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-elementarrangements guidance noted above.  The Company does not believe that thisguidance will have a material impact on its condensed consolidated financialstatements.

 

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

 

Our net sales to foreigncustomers represented approximately 88.2% and 86.5% of our total net sales forthe three and six months ended June 30, 2010, respectively, and 66.9% and67.5% for the comparable 2009 periods. We expect that net sales to foreigncustomers will continue to represent a large percentage of our total net sales.Our net sales denominated in foreign currencies represented approximately 6.9%and 8.3% of our total net sales for the three and six months ended June 30,2010  respectively, and 16.2% and 15.4%for the comparable 2009 periods.

 

The aggregate foreigncurrency exchange (loss) gain included in determining the condensedconsolidated results of operations was approximately $(0.5) million and$0.1 million during the three months ended June 30, 2010 and 2009,respectively. Included in the aggregate foreign currency exchange (loss) gainwere gains related to forward contracts of $0.2 million and $0.1 millionduring the three months ended June 30, 2010, and 2009, respectively. Theaggregate foreign currency exchange loss included in determining the condensedconsolidated results of operations was approximately $0.4 million and$1.3 million during the six months ended June 30, 2010 and 2009,respectively. Included in the aggregate foreign currency exchange loss weregains related to forward contracts of $0.3 million and $0.2 million duringthe six months ended June 30, 2010, and 2009, respectively. These amountswere recognized and are included in other, net in the accompanying condensedconsolidated statements of operations.

 

We are exposed to financialmarket risks, including changes in foreign currency exchange rates. The changesin currency exchange rates that have the largest impact on translating ourinternational operating profit are the Japanese Yen and the Euro. We usederivative financial instruments to mitigate these risks. We do not usederivative financial instruments for speculative or trading purposes. We generallyenter into monthly forward contracts to reduce the effect of fluctuatingforeign currencies on short-term foreign currency-denominated intercompanytransactions and other known currency exposures. The weighted average notionalamount of derivative contracts outstanding during the three and six monthsended June 30, 2010 was approximately $8.2 and $5.7 million,respectively.

 

Asof June 30, 2010, approximately $0.1 million of losses related to forwardcontracts were included in accrued expenses and other current liabilities andwere subsequently paid in July 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 $9.2 million, entered intoin June 2010, will be settled in July 2010. The fair value of thecontracts at inception was zero, which did not significantly change at June 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 second 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 June 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 and in Part I — Item 1A of our AnnualReport on Form 10-K for the year ended December 31, 2009. There havebeen no material changes from the risk factors previously disclosed in our 2009Annual Report, except for the following:

 

**The reduction or elimination ofgovernment subsidies and economic incentives may adversely affect the futureorder rate for our MOCVD equipment.**

 

The Chinese government hasprovided various incentives to encourage development of the LED industry,including subsidizing a significant portion of the purchase cost of MOCVDequipment.  These subsidies have enabledand encouraged certain customers in this region to purchase more of our MOCVDequipment than these customers might have purchased without thesesubsidies.  These subsidies are expectedto decline over time and may end or be reduced at some point in thefuture.  The reduction or elimination ofthese incentives may result in a reduction in future orders for our MOCVDequipment in this region.

 

**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:**                                   |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                            |       |                                                                                                                 |
| 3.1        |       | Amendment No. 1 to  the Fourth Amended and Restated Bylaws of Veeco effective May 20, 2010                                                            |       | Current report on  Form 8-K filed on May 26, 2010, Exhibit 3.1                                        |
| 10.1       |       | Second Amendment to  Employment Agreement of John R. Peeler, effective June 11, 2010.                                                                      |       | *                                                                                                                    |
| 10.2       |       | Veeco Instruments Inc.  Performance-Based Restricted Stock 2010                                                                                                 |       | *                                                                                                                    |
| 10.3       |       | Veeco Instruments Inc.  2010 Stock Incentive Plan                                                                                                               |       | Registration  Statement on Form S-8 (File No. 333-166852) filed May 14,  2010, Exhibit 10.1 |
| 10.4       |       | Form of 2010 Stock  Incentive Plan, Stock Option Agreement                                                                                                 |       | Registration  Statement on Form S-8 (File No. 333-166852) filed May 14,  2010, Exhibit 10.2 |
| 10.5       |       | Form of 2010 Stock  Incentive Plan, Restricted Stock Agreement                                                                                             |       | Registration  Statement on Form S-8 (File No. 333-166852) filed May 14,  2010, Exhibit 10.3 |
| 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:  July 28, 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:**                                   |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                            |       |                                                                                                                 |
| 3.1        |       | Amendment No. 1 to  the Fourth Amended and Restated Bylaws of Veeco effective May 20, 2010                                                            |       | Current report on  Form 8-K filed on May 26, 2010, Exhibit 3.1                                        |
| 10.1       |       | Second Amendment to  Employment Agreement of John R. Peeler, effective June 11, 2010.                                                                      |       | *                                                                                                                    |
| 10.2       |       | Veeco Instruments Inc.  Performance-Based Restricted Stock 2010                                                                                                 |       | *                                                                                                                    |
| 10.3       |       | Veeco Instruments Inc.  2010 Stock Incentive Plan                                                                                                               |       | Registration  Statement on Form S-8 (File No. 333-166852) filed May 14,  2010, Exhibit 10.1 |
| 10.4       |       | Form of 2010 Stock  Incentive Plan, Stock Option Agreement                                                                                                 |       | Registration  Statement on Form S-8 (File No. 333-166852) filed May 14,  2010, Exhibit 10.2 |
| 10.5       |       | Form of 2010 Stock  Incentive Plan, Restricted Stock Agreement                                                                                             |       | Registration  Statement on Form S-8 (File No. 333-166852) filed May 14,  2010, Exhibit 10.3 |
| 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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