10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2006

OR

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

For the transition period from              to              .

Commission file number 0-16244

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	11-2989601
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification Number)
100 Sunnyside Boulevard, Suite B Woodbury, New York	11797-2902
(Address of Principal Executive Offices)	(Zip Code)

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

Website: www.veeco.com

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

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

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

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

31,076,375 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on October 30, 2006.

SAFE HARBOR STATEMENT

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

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

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

·      We face significant competition.

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

·      Our quarterly operating results fluctuate significantly.

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

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

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

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

·      We are subject to foreign currency exchange risks.

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

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

·      We rely on a limited number of suppliers.

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

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

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

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

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

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

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·      The other matters discussed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Report and in the Annual Report on Form 10-K for the year ended December 31, 2005 of Veeco Instruments Inc. (“Veeco” or the “Company”).

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

Available Information

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

Internet Address

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

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VEECO INSTRUMENTS INC.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2006 and 2005		5
	Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2006 and 2005		6
	Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005		7
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005		8
	Notes to Condensed Consolidated Financial Statements (Unaudited)		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		31
Item 1A.	Risk Factors		31
Item 6.	Exhibits		32
SIGNATURES			33

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

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

	Three Months Ended September 30,
	2006			2005
Net sales	$	112,369		$	100,078
Cost of sales	64,513			55,816
Gross profit	47,856			44,262
Costs and expenses:
Selling, general and administrative expense	22,296			21,210
Research and development expense	15,716			14,388
Amortization expense	4,025			4,038
Write-off of purchased in-process technology	1,160			—
Other (income) expense, net	(310		)	413
Total operating expenses	42,887			40,049
Operating income	4,969			4,213
Interest expense, net	1,056			1,815
Income before income taxes and noncontrolling interest	3,913			2,398
Income tax provision	612			832
Noncontrolling interest	(1,207		)	—
Net income	$	4,508		$	1,566
Net income per common share	$	0.15		$	0.05
Diluted net income per common share	$	0.14		$	0.05
Weighted average shares outstanding	30,693			29,965
Diluted weighted average shares outstanding	31,393			30,360

See accompanying notes.

5

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

	Nine Months Ended September 30,
	2006			2005
Net sales	$	317,922		$	297,343
Cost of sales	178,585			172,123
Gross profit	139,337			125,220
Costs and expenses:
Selling, general and administrative expense	68,622			62,816
Research and development expense	45,554			45,075
Amortization expense	12,029			12,554
Write-off of purchased in-process technology	1,160			—
Other (income) expense, net	(243		)	385
Total operating expenses	127,122			120,830
Operating income	12,215			4,390
Interest expense, net	3,583			5,920
Gain on extinguishment of debt	(330		)	—
Income (loss) before income taxes and noncontrolling interest	8,962			(1,530		)
Income tax provision	2,878			2,055
Noncontrolling interest	(1,207		)	—
Net income (loss)	$	7,291		$	(3,585	)
Net income (loss) per common share	$	0.24		$	(0.12	)
Diluted net income (loss) per common share	$	0.23		$	(0.12	)
Weighted average shares outstanding	30,369			29,894
Diluted weighted average shares outstanding	31,100			29,894

See accompanying notes.

6

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

	September 30, 2006		December 31, 2005
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	126,565	$	124,499
Accounts receivable, less allowance for doubtful accounts of $2,331 in 2006 and $1,860 in 2005	87,049		89,230
Inventories	104,689		88,904
Prepaid expenses and other current assets	13,107		9,640
Deferred income taxes	3,531		2,870
Total current assets	334,941		315,143
Property, plant and equipment at cost, less accumulated depreciation of $84,857 in 2006 and $77,954 in 2005	71,684		69,806
Goodwill	100,898		99,622
Purchased technology, less accumulated amortization of $61,548 in 2006 and $51,992 in 2005	47,045		55,776
Other intangible assets, less accumulated amortization of $25,539 in 2006 and $22,274 in 2005	25,543		26,899
Other assets	428		614
Total assets	$	580,539	$	567,860
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	36,429	$	31,289
Accrued expenses	51,617		51,169
Deferred profit	758		537
Income taxes payable	2,054		2,123
Current portion of long-term debt	393		375
Total current liabilities	91,251		85,493
Deferred income taxes	2,418		1,048
Long-term debt	208,907		229,205
Other non-current liabilities	3,097		3,527
Noncontrolling interest	1,793		—
Shareholders’ equity	273,073		248,587
Total liabilities and shareholders’ equity	$	580,539	$	567,860

See accompanying notes.

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

	Nine Months Ended September 30,
	2006			2005
Operating activities
Net income (loss)	$	7,291		$	(3,585	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	22,426			22,403
Deferred income taxes	291			(254		)
Gain on extinguishment of debt	(330		)	—
Non-cash compensation expense for share-based payments	1,443			72
Noncontrolling interest in net loss of subsidiary	(1,207		)	—
Write-off of purchased in-process technology	1,160			—
(Gain) loss on sale of property plant and equipment	(27		)	346
Changes in operating assets and liabilities:
Accounts receivable	3,103			(4,876		)
Inventories	(14,691		)	10,177
Accounts payable	5,025			7,642
Accrued expenses, deferred profit and other current liabilities	3,159			1,179
Other, net	(5,119		)	(3,645		)
Net cash provided by operating activities	22,524			29,459
Investing activities
Capital expenditures	(12,473		)	(8,553		)
Payments for net assets of businesses acquired	(3,068		)	(15,038		)
Proceeds from sale of property, plant and equipment and assets held for sale	35			2,260
Net maturities of investments	(128		)	(70		)
Net cash used in investing activities	(15,634		)	(21,401		)
Financing activities
Proceeds from stock issuance	15,082			1,820
Repayments of long-term debt	(19,680		)	(264		)
Net cash (used in) provided by financing activities	(4,598		)	1,556
Effect of exchange rates on cash and cash equivalents	(226		)	1,813
Net change in cash and cash equivalents	2,066			11,427
Cash and cash equivalents at beginning of period	124,499			100,276
Cash and cash equivalents at end of period	$	126,565		$	111,703

Non-Cash Items

During the nine months ended September 30, 2006, the Company had non-cash items excluded from the Condensed Consolidated Statements of Cash Flows of approximately $6.3 million.  This amount consisted of (1) $1.5 million reflecting the transfer of demonstration and lab equipment from property, plant and equipment to inventory; (2) $0.7 million for the transfer of inventory to property, plant and equipment; and (3) $3.5 million fair value of assets acquired and $0.6 million of liabilities assumed in connection with the consolidation of a variable interest entity (See Note 7 — Business Acquisition and Related Party Transaction).

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During the nine months ended September 30, 2005, the Company had non-cash items excluded from the Condensed Consolidated Statements of Cash Flows of approximately $4.2 million.  This amount consists of (1) $1.8 million of additional purchase price relating to the acquisition of Manufacturing Technology Inc., which resulted in a corresponding increase to goodwill; (2) $1.3 million for the transfer of property, plant and equipment to inventory; and  (3) $1.1 million for the accrual of a contingent earn-out payment to the former shareholders of Nanodevices Inc. related to the achievement of certain revenue targets during the third quarter of 2005, which was paid in the second quarter of 2006, and has been reflected as additional goodwill.

See accompanying notes.

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

Note 1—Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the three and nine months ended September 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.  For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Earnings (Loss) Per Share

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

	Three months ended September 30,		Nine months ended September 30,
	2006	2005	2006	2005
	(In thousands)
Weighted average shares outstanding	30,693	29,965	30,369	29,894
Dilutive effect of stock options and restricted stock awards and units	700	395	731	—
Diluted weighted average shares outstanding	31,393	30,360	31,100	29,894

Net income and diluted net income per common share are computed using the weighted average number of common and common equivalent shares outstanding during the period. The effect of approximately 212,000 common equivalent shares for the nine months ended September 30, 2005, were anti-dilutive and therefore, are not included in the weighted average shares outstanding.

In addition, the effect of the assumed conversion of convertible subordinated notes into approximately 5.2 million and 5.3 million common equivalent shares is antidilutive and therefore, is not included in the weighted shares outstanding for the three and nine months ended September 30, 2006, respectively.  The effect of the assumed conversion of convertible subordinated notes into approximately 5.7 million common equivalent shares is antidilutive and therefore, is not included in the weighted average shares outstanding for the comparable prior year periods.

Share-Based Compensation

As of September 30, 2006, the Company has stock option and restricted stock plans, which are described more fully in Note 2. The Company also assumed certain stock option plans and agreements in connection with various acquisitions, as also discussed in Note 2. Prior to 2006, the Company accounted for these stock option plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and generally, no compensation expense was reflected in net income as options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, supersedes APB No. 25 and amends SFAS No. 95, Statement of Cash Flows.  SFAS No. 123(R) requires all share-based payments to employees and non-employee directors, including grants of stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.  SFAS No. 123(R) was adopted using the modified prospective method of application, which requires Veeco to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based awards, expense

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is also recognized to reflect the remaining service period of awards that had been included in the pro forma disclosures in prior periods.  SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under previous accounting literature, which  has the effect of reducing consolidated cash flows from operations and increasing cash flows from financing activities in periods after adoption. For the three and nine months ended September 30, 2006, the Company did not recognize any amount of consolidated financing cash flows for such excess tax deductions.

Total share-based compensation expense is attributable to the remaining requisite service periods of stock options and restricted common stock awards and units. For the three months ended September 30, 2006, the Company granted 9,900 restricted common stock awards and units to its employees. For the nine months ended September 30, 2006, the Company granted 146,200 stock options and 208,150 restricted common stock awards and units to its directors, officers and employees. As a result of adopting SFAS No. 123(R), the Company’s net income for the three and nine months ended September 30, 2006 was $0.1 million and $0.4 million lower, respectively,  than if it had continued to account for share-based compensation under APB No. 25. Net income per common share and diluted net income per common share for the three and nine months ended September 30, 2006, are approximately $0.01 lower for both periods, than if the Company had continued to account for share-based compensation under APB No. 25. As of September 30, 2006, the total unrecognized compensation cost related to nonvested stock awards and option awards is $4.2 million and $1.4 million, respectively, and the related weighted average period over which it is expected that such unrecognized compensation costs will be recognized is approximately 2.3 years for the nonvested stock awards and 2.2 years for option awards. Future share-based compensation expense will depend on levels of share-based awards granted in the future and, therefore, cannot be predicted at this time.

Prior to the Company’s adoption of SFAS No. 123(R), SFAS No. 123 required that the Company provide pro forma information regarding net loss and loss per share as if compensation cost for the Company’s stock-based awards had been determined in accordance with the fair value method prescribed therein. In accordance with SFAS No. 123, the following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions, under which compensation expense would be recognized as incurred, to stock-based employee compensation.

	Three months ended September 30, 2005			Nine months ended September 30, 2005
	(In thousands, except per share amounts)
Net income (loss), as reported	$	1,566		$	(3,585	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(3,904		)	(29,121		)
Pro forma net loss	$	(2,338	)	$	(32,706	)
Net income (loss) per common share:
Net income (loss) and diluted net income (loss) per common share, as reported	$	0.05		$	(0.12	)
Net loss and diluted net loss per common share, pro forma	$	(0.08	)	$	(1.09	)

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes.  FIN 48 clarifies the accounting and disclosure for income taxes by defining the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority.  It also provides guidance on derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently assessing the impact of FIN 48 on its consolidated financial position and results of operations.

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements.  Statement No. 157 establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring use of fair value,

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establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.  Statement No. 157 is effective for fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In September 2006, the FASB issued FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.  Statement No. 158 improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.  The recognition and disclosure provisions of Statement No. 158 are effective for fiscal years ending after December 15, 2006.  The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008.  The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

Reclassifications

Certain amounts in the 2005 condensed consolidated financial statements have been reclassified to conform to the 2006 presentation.

Note 2—Share-Based Payments

Stock Option and Restricted Stock Plans

The Company has several stock option and restricted stock plans. The Veeco Instruments Inc. 2000 Stock Incentive Plan, as amended, (the “2000 Plan”), was approved by the Board of Directors and shareholders in May 2000. The 2000 Plan provides for the grant to officers and key employees of up to 8,530,000 options (2,114,174 options are available for future grants as of September 30, 2006) to purchase shares of common stock of the Company. Stock options granted pursuant to the 2000 Plan expire after seven years and generally become exercisable over a three-year period following the grant date. However, grants made under the 2000 Plan between June 17, 2005 and December 23, 2005 became exercisable on or before December 31, 2005, and are subject to a resale restriction which provides that the shares issuable upon exercise of the option may not be transferred prior to the second anniversary of the option grant date. In addition, the 2000 Plan provides for automatic annual grants of 5,000 shares of restricted stock to each member of the Board of Directors of the Company who is not an employee of the Company.  Up to 1,700,000 of the awards authorized under the 2000 Plan may be issued in the form of restricted stock (1,471,650 shares are available for future grants as of September 30, 2006). For the nine months ended September 30, 2006, the Company granted 164,650 shares of restricted common stock and 3,500 restricted stock units to key employees, which vest over three years, and in May 2006, granted 40,000 shares of restricted common stock to the non-employee members of the Board of Directors, which vest over a period of one year.

A summary of the Company’s restricted stock awards including restricted stock units as of September 30, 2006, is presented below:

	Shares (000’s)		Weighted- Average Grant-Date Fair Value
Nonvested at beginning of year	45		$	15.60
Granted	208		24.22
Vested	—		—
Forfeited	(25	)	23.61
Nonvested at September 30, 2006	228		$	22.60

The Veeco Instruments Inc. 2000 Stock Option Plan for Non-Officer Employees (the “Non-Officer Plan”) was approved by the Board of Directors in October 2000. The Non-Officer Plan provided for the grant of stock options to non-officer employees to purchase shares of common stock of the Company. Stock options granted pursuant to the Non-Officer Plan become exercisable over a three-year period following the grant date and expire after seven years.

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The Veeco Instruments Inc. Amended and Restated 1992 Employees’ Stock Option Plan (the “1992 Plan”) provided for the grant to officers and key employees of stock options to purchase shares of common stock of the Company. Stock options granted pursuant to the 1992 Plan become exercisable over a three-year period following the grant date and expire after ten years.

The Veeco Instruments Inc. 1994 Stock Option Plan for Outside Directors, as amended, (the “Directors’ Option Plan”), provided for automatic annual grants of stock options to each member of the Board of Directors of the Company who is not an employee of the Company. Such options are exercisable immediately and expire after ten years.

The Non-Officer Plan, the 1992 Plan and the Directors’ Option Plan have been frozen; and, thus, there are no options available for future grant as of September 30, 2006 under these plans.

In addition to the plans described above, the Company assumed certain stock option plans and agreements relating to the merger in September 2001 with Applied Epi, Inc. (“Applied Epi”). These stock option plans do not have options available for future grants and expire after ten years from the date of grant. Options granted under two of the plans vested over three years and options granted under one of the plans vested immediately. As of September 30, 2006, there are 197,192 options outstanding under the various Applied Epi plans. In addition, Veeco assumed certain warrants related to Applied Epi, which were in effect prior to the merger with Veeco. These warrants expired in February 2006.

In May 2000, the Company assumed certain stock option plans and agreements related to CVC, Inc. and Commonwealth Scientific Corporation, a subsidiary of CVC, Inc., which were in effect prior to the merger with Veeco. These plans do not have options available for future grants, the options granted thereunder generally vested over a three to five year period and expire five to ten years from the date of grant. As of September 30, 2006, there are 6,965 options outstanding under the various CVC, Inc. and Commonwealth Scientific Corporation plans.

With the adoption of SFAS No. 123(R) on January 1, 2006, the Company is required to record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, the Company applies the Black-Scholes option-pricing model. Inherent in the model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which make them critical accounting estimates.

Beginning in the fourth quarter of 2005, the Company used an expected stock-price volatility assumption that is a combination of both historical and implied volatilities of the underlying stock, which are obtained from public data sources. Prior to that time, the Company based this assumption solely on historical volatility.

With regard to the weighted-average option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises.

The fair value of each option granted during the nine months ended September 30, 2006, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Weighted-average expected stock-price volatility	40	%
Weighted-average expected option life	3 years
Average risk-free interest rate	4.99	%
Average dividend yield	0	%

No options were granted in the third quarter of 2006.

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The fair value of each option grant that was unvested as of January 1, 2006, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Weighted-average expected stock-price volatility	60	%
Weighted-average expected option life	4 years
Average risk-free interest rate	3.64	%
Average dividend yield	0	%

A summary of the Company’s stock option plans as of and for the nine months ended September 30, 2006, is presented below:

	Shares (000’s)		Weighted- Average Exercise Price		Aggregate Intrinsic Value (000s)		Weighted- Average Remaining Contractual Life (in years)
Outstanding at beginning of year	7,834		$	24.81
Granted	146		23.61
Exercised	(822	)	18.23
Forfeited (including cancelled options)	(639	)	24.98
Outstanding at September 30, 2006	6,519		$	25.59	$	7,868	3.3
Options exercisable at September 30, 2006	6,312		$	25.73	$	7,655	­­­­­3.2

The weighted-average grant date fair value of stock options granted for the nine months ended September 30, 2006 was $7.61 per option.  The weighted-average grant date fair value of stock options granted for the three and nine months ended September 30, 2005 was $9.54 and $8.08 per option, respectively.  The total intrinsic value of stock options exercised during the three and nine months ended September 30, 2006 was $1.2 million and $4.4 million, respectively.  The total intrinsic value of stock options exercised during the three and nine months ended September 30, 2005 was $0.5 million and $0.6 million, respectively.

The following table summarizes information about stock options outstanding at September 30, 2006:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at September 30, 2006 (000’s)	Weighted- Average Remaining Contractual Life (in years)	Weighted- Average Exercise Price		Number Outstanding at September 30, 2006 (000’s)	Weighted- Average Exercise Price
$0.27	93	4.3	$	0.27	93	$	0.27
10.26-15.35	150	4.9	14.50		125	14.52
15.45-23.11	3,363	4.2	19.44		3,307	19.44
23.61-35.00	2,063	2.6	29.57		1,937	29.95
35.75-50.60	790	1.1	44.22		790	44.22
54.35-72.00	60	2.7	55.92		60	55.92
	6,519	3.3	$	25.59	6,312	$	25.73

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

The purpose of the accelerated vesting was to avoid future compensation expense of approximately $7.9 million in 2006 and $3.6 million in 2007 associated with these options that the Company would otherwise have

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recognized in its Consolidated Statements of Operations upon the adoption of SFAS No. 123(R) (see Note 1).  In addition, many of these options had exercise prices significantly in excess of current market values and were not providing an effective means of employee retention and incentive compensation.

Employee Stock Purchase Plan

Under the Veeco Instruments Inc. Amended and Restated Employee Stock Purchase Plan (the “ESP Plan”), the Company is authorized to issue up to 2,000,000 shares of common stock to its full-time U.S. employees, nearly all of whom are eligible to participate. Under the terms of the ESP Plan, employees can choose to have up to 10% of their annual base earnings withheld to purchase the Company’s common stock. The purchase price of the stock as of September 30, 2006 was 95% of the end-of-offering period market price and qualifies as a noncompensatory employee stock purchase plan under Section 423 of the Internal Revenue Code.

Shares Reserved for Future Issuance

As of September 30, 2006, the Company has reserved the following shares for future issuance related to:

Issuance upon exercise of stock options and issuance of restricted stock	8,636,213
Issuance upon conversion of subordinated debt	5,193,456
Issuance of shares pursuant to the ESP Plan	1,453,582
Total shares reserved	15,283,251

Preferred Stock

The Board of Directors of the Company has authority under the Company’s Certificate of Incorporation to issue shares of preferred stock with voting and economic rights to be determined by the Board or Directors.

Note 3—Balance Sheet Information

Inventories

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

	September 30, 2006		December 31, 2005
	(In thousands)
Raw materials	$	50,788	$	45,357
Work in progress	39,478		33,307
Finished goods	14,423		10,240
	$	104,689	$	88,904

Accrued Warranty

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

	Nine Months Ended September 30,
	2006			2005
	(In thousands)
Balance as of January 1	$	6,671		$	6,771
Warranties issued during the period	5,088			4,085
Settlements made during the period	(4,602		)	(4,493		)
Balance as of September 30	$	7,157		$	6,363

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Note 4—Segment Information

As of January 1, 2006, the Company changed its management structure in a manner that caused the composition of its reportable segments to change. The Company currently manages the business, reviews operating results and assesses performance, as well as allocates resources, based upon two separate reporting segments. The Company merged the former Ion Beam and Mechanical Process Equipment segment and the Epitaxial Process Equipment segment into one reporting segment. The new Process Equipment segment combines the etch, deposition, dicing and slicing products sold mostly to data storage customers and the molecular beam epitaxy and metal organic chemical vapor deposition products primarily sold to high brightness light emitting diode and wireless telecommunications customers. This segment has production facilities in Plainview, New York, Ft. Collins, Colorado, Camarillo, California, St. Paul, Minnesota and Somerset, New Jersey. The Metrology segment remains unchanged and represents equipment that is used to provide critical surface measurements on products such as semiconductor devices and thin film magnetic heads and includes Veeco’s broad line of atomic force microscopes, optical interferometers and stylus profilers sold to semiconductor customers, data storage customers and thousands of research facilities and scientific centers. This segment has production facilities in Santa Barbara, California and Tucson, Arizona.  Accordingly, the Company has restated segment information for the prior periods presented.

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

The following tables present certain data pertaining to the reportable product segments of the Company and a reconciliation of EBITA to income (loss) before income taxes and noncontrolling interest for the three and nine months ended September 30, 2006 and 2005, and goodwill and total assets as of September 30, 2006 and December 31, 2005 (in thousands):

	Process Equipment			Metrology		Unallocated Corporate Amount			Total
Three Months Ended September 30, 2006
Net sales	$	71,375		$	40,994	$	—		$	112,369
Income (loss) before interest, taxes, amortization and certain items (EBITA)	7,482			4,352		(1,680		)	10,154
Interest expense, net	—			—		1,056			1,056
Amortization expense	3,333			433		259			4,025
Write-off of purchased in-process technology	1,160			—		—			1,160
Income (loss) before income taxes and noncontrolling interest	2,989			3,919		(2,995		)	3,913
Three Months Ended September 30, 2005
Net sales	$	49,381		$	50,697	$	—		$	100,078
(Loss) income before interest, taxes, amortization and certain items (EBITA)	(691		)	11,692		(2,750		)	8,251
Interest expense, net	—			—		1,815			1,815
Amortization expense	3,293			457		288			4,038
(Loss) income before income taxes and noncontrolling interest	(3,984		)	11,235		(4,853		)	2,398

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Nine Months Ended September 30, 2006
Net sales	$	191,927		$	125,995	$	—		$	317,922
Income (loss) before interest, taxes, amortization and certain items (EBITA)	17,159			16,280		(8,035		)	25,404
Interest expense, net	—			—		3,583			3,583
Amortization expense	9,909			1,328		792			12,029
Write-off of purchased in-process technology	1,160			—		—			1,160
Gain on extinguishment of debt	—			—		(330		)	(330		)
Income (loss) before income taxes and noncontrolling interest	6,090			14,952		(12,080		)	8,962
Nine Months Ended September 30, 2005
Net sales	$	160,900		$	136,443	$	—		$	297,343
(Loss) income before interest, taxes, amortization and certain items (EBITA)	(1,124		)	25,971		(7,903		)	16,944
Interest expense, net	—			—		5,920			5,920
Amortization expense	10,181			1,495		878			12,554
(Loss) income before income taxes and noncontrolling interest	(11,305		)	24,476		(14,701		)	(1,530		)

	Process Equipment		Metrology		Unallocated Corporate Amount		Total
As of September 30, 2006
Goodwill	$	71,530	$	29,368	$	—	$	100,898
Total assets	299,080		147,313		134,146		580,539
As of December 31, 2005
Goodwill	$	70,254	$	29,368	$	—	$	99,622
Total assets	300,617		132,928		134,315		567,860

Corporate total assets are comprised principally of cash at September 30, 2006 and December 31, 2005.

Note 5—Comprehensive Income (Loss)

Total comprehensive income (loss) was $3.5 million and $8.0 million for the three and nine months ended September 30, 2006, and $0.9 million and ($7.8) million for the three and nine months ended September 30, 2005, respectively. The Company’s comprehensive income (loss) is comprised of net income (loss) and foreign currency translation adjustments.

Note 6—Other Matters

As of September 30, 2006, the Company has outstanding $200.0 million of 4.125% convertible subordinated notes.  During the first quarter of 2006, the Company repurchased $20.0 million of its notes, reducing the amount outstanding from $220.0 million to $200.0 million.  The repurchase amount was $19.5 million in cash, of which $19.4 million related to principal and $0.1 million related to accrued interest.  As a result of the repurchase, the Company recorded a gain from the early extinguishment of debt in the amount of $0.6 million, offset by a $0.3 million proportionate reduction in the related deferred financing costs for a net gain of $0.3 million.

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In conjunction with a cost reduction plan announced by the Company in October 2005, the Company recognized a restructuring charge of approximately $1.2 million in the fourth quarter of 2005. The $1.2 million charge consisted of personnel severance costs for approximately 37 employees which included management, administration and manufacturing employees located at the Company’s Plainview, New York, Camarillo, California and Somerset, New Jersey Process Equipment operations and the Santa Barbara, California Metrology operations. As of September 30, 2006, the entire accrual has been expended.

A reconciliation of the liability for the 2005 restructuring charge for severance costs is as follows (in millions):

	Process Equipment		Metrology		Total
Charged to accrual	$	0.8	$	0.4	$	1.2
Cash payments during 2005	0.2		0.1		0.3
Balance as of December 31, 2005	0.6		0.3		0.9
Cash payments during the nine months ended September 30, 2006	0.6		0.3		0.9
Balance as of September 30, 2006	$	0.0	$	0.0	$	0.0

Note 7—Business Acquisition and Related Party Transaction

In 2006, Veeco invested $0.5 million to purchase 19.9% of the common stock of Fluens Corporation (“Fluens”).  Approximately 31% of Fluens is owned by a business unit Vice President of Veeco.  Veeco and Fluens plan to jointly develop a next-generation process for high-rate deposition of aluminum oxide for data storage applications.  If this development is successful and upon the satisfaction of certain additional conditions by May 2009, Veeco will be obligated to purchase the balance of the outstanding stock of Fluens for $3.0 million together with an earn-out payment to Fluens’ other stockholders based on future performance.

During the third quarter of 2006, the Company finalized its purchase accounting for Fluens determining that Fluens is a variable interest entity and the Company is its primary beneficiary as defined by FIN 46R, Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51. As such, the Company has consolidated the results of Fluens’ operations from the acquisition date, and has attributed the 80.1% portion that is not owned by Veeco to noncontrolling interest in the Company’s consolidated financial statements.  As part of that acquisition accounting, the Company recorded $1.2 million of in-process technology, which was written off during the third quarter of 2006.

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

Executive Summary:

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

The Company currently manages the business, reviews operating results and assesses performance, as well as allocates resources, based upon two separate reporting segments.  As of January 1, 2006, the Company merged the former Ion Beam and Mechanical Process Equipment segment and the Epitaxial Process Equipment segment into one reporting segment. The new Process Equipment segment combines the etch, deposition, dicing and slicing products sold mostly to data storage customers and the molecular beam epitaxy (“MBE”) and metal organic chemical vapor deposition (“MOCVD”) products primarily sold to HB-LED and wireless telecommunications customers. The Metrology segment remains unchanged and represents equipment that is used to provide critical surface measurements on products such as semiconductor devices and thin film magnetic heads and includes Veeco’s broad line of atomic force microscopes (“AFMs”), optical interferometers and stylus profilers sold to semiconductor customers, data storage customers and thousands of research facilities and scientific centers.

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

Highlights of the Third Quarter of 2006:

·      Revenue was $112.4 million, a 12% increase over the third quarter of 2005.

·      Orders were $114.8 million, up 36% from the third quarter of 2005.

·      Net income was $4.5 million, or $0.14 per share, compared to net income of $1.6 million, or $0.05 per share, in the third quarter of 2005

Highlights of the First Nine Months of 2006:

·      Revenue was $317.9 million, a 7% increase over the comparable 2005 period.

·      Orders were $384.8 million, up 27% from the comparable 2005 period.

·      Gross margin was 43.8%, up from 42.1% for the comparable 2005 period.

·      Net income was $7.3 million, or $0.23 per share, compared to a loss of ($3.6) million, or ($0.12) per share in the comparable 2005 period.

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Current Business Conditions/Outlook:

Veeco reported revenue of $112.4 million in the third quarter of 2006, a 12% increase from the prior year, but flat with the second quarter of 2006 and below the Company’s expectations.  Third quarter 2006 orders were $114.8 million, up 36% from the third quarter of 2005, but down 20% sequentially from the $143.2 million in the second quarter of 2006.  Veeco’s third quarter results were impacted by a slowdown of data storage customers’ production ramps, causing shipment delays from the third to fourth quarter, as well as third quarter seasonal buying patterns that have historically impacted Veeco’s overall order rate.  Veeco expects continued adjustments in data storage capital expenditure purchases as customers reassess their production ramps and timing of new technology transition plans.  Due to this slowdown in overall business conditions, Veeco has lowered its 2006 revenue guidance from approximately $460 million to approximately $440 million.

Veeco’s nine month 2006 revenues were $317.9 million, up $20.6 million, or 6.9%, from $297.3 million in the first nine months of 2005.  Operating income for the nine months ended September 30, 2006 was $12.2 million, compared to $4.4 million in the prior year period.  Net income for the first nine months of 2006 was $7.3 million, or diluted net income of $0.23 per share, compared to a net loss of ($3.6) million, or diluted net loss of ($0.12) per share, for the first nine months of 2005.

Veeco’s orders for the nine months ended September 30, 2006 were $384.8 million, an increase of 27.4% from the $302.1 million reported in the first nine months of 2005, reflecting double digit market growth in data storage and in HB-LED/wireless. Veeco’s data storage orders increased 34% from the prior year period to $187.2 million.  Another area of strength was in HB-LED/wireless, which reported orders of $80.9 million, up 93% from the prior year period.  The increased order rate for the first nine months of 2006 versus the prior year reflects the introduction of new consumer HB-LED backlighting for emerging applications such as personal computers and flat panel televisions.

 Despite the current delay in data storage production ramps, Veeco believes that longer term industry requirements for increased areal density and consumer electronic expansion will drive future investment in perpendicular head technology, transition to smaller femto slider formats and conversion to larger wafer size.

Technology changes are continuing in all of Veeco’s markets including: the continued increase of 80 GB hard drives and investment in 120 GB hard drives in data storage; the increased use of “mini” drives in consumer electronic applications; the increased use of Veeco’s automated AFMs for 65 nanometer and below semiconductor applications; the opportunity for Veeco’s MOCVD and MBE products to further penetrate the emerging wireless and HB-LED markets. Veeco believes that these changes, together with the continued funding of nanoscience research, will prompt customers to seek the Company’s next-generation solutions to address their manufacturing and technology challenges.  Veeco’s research and development efforts are resulting in several significant new products, including physical vapor deposition (PVD), atomic layer deposition (ALD), next generation MOCVD for the HB-LED growth opportunity and new metrology products in the semiconductor scientific research and life sciences.  The Company will continue to introduce new Process Equipment and Metrology products across all of Veeco’s end markets.

In 2006, Veeco has focused on improving gross margins.  For the year to date period, Veeco’s overall gross margin increased to 43.8% from 42.1% in the comparable prior year period.  This increase reflects a significant improvement in Process Equipment margin and steady margin in the Metrology business.  However, Veeco is experiencing a shift in sales mix from generally higher margin Metrology business to generally lower margin Process Equipment business.  This mix shift negatively impacted Veeco’s overall gross margins in the third quarter, and may continue to impact gross margin improvements in future periods.  Nonetheless, Veeco will continue to focus on improving its gross margins within its Process Equipment and Metrology businesses.

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Results of Operations:

Three Months Ended September 30, 2006 and 2005

The following tables show selected items of Veeco’s Consolidated Statements of Operations, percentages of sales and comparisons between the three months ended September 30, 2006 and 2005 and the analysis of sales and orders for the same periods by segment, industry and regions (in thousands):

	Three Months ended September 30,									Dollar
	2006					2005				Change
Net sales	$	112,369		100.0	%	$	100,078	100.0	%	$	12,291
Cost of sales	64,513			57.4		55,816		55.8		8,697
Gross profit	47,856			42.6		44,262		44.2		3,594
Operating expenses:
Selling, general and administrative expense	22,296			19.9		21,210		21.2		1,086
Research and development expense	15,716			14.0		14,388		14.4		1,328
Amortization expense	4,025			3.6		4,038		4.0		(13		)
Write-off of purchased in-process technology	1,160			1.0		—		—		1,160
Other (income) expense, net	(310		)	(0.3	)	413		0.4		(723		)
Total operating expenses	42,887			38.2		40,049		40.0		2,838
Operating income	4,969			4.4		4,213		4.2		756
Interest expense, net	1,056			0.9		1,815		1.8		(759		)
Income before income taxes and noncontrolling interest	3,913			3.5		2,398		2.4		1,515
Income tax provision	612			0.5		832		0.8		(220		)
Noncontrolling interest	(1,207		)	(1.0	)	—		—		(1,207		)
Net income	$	4,508		4.0	%	$	1,566	1.6	%	$	2,942

	Sales									Orders
	Three Months ended				Dollar and Percentage					Three Months ended				Dollar and Percentage					Book to Bill
	September 30,				Change					September 30,				Change					Ratio
	2006		2005		Year to Year					2006		2005		Year to Year					2006	2005
Segment Analysis
Process Equipment	$	71,375	$	49,381	$	21,994		44.5	%	$	74,806	$	47,147	$	27,659		58.7	%	1.05	0.95
Metrology	40,994		50,697		(9,703		)	(19.1	)	40,042		37,408		2,634			7.0		0.98	0.74
Total	$	112,369	$	100,078	$	12,291		12.3	%	$	114,848	$	84,555	$	30,293		35.8	%	1.02	0.84
Industry Analysis
Data Storage	$	45,410	$	50,116	$	(4,706	)	(9.4	)%	$	45,345	$	33,554	$	11,791		35.1	%	1.00	0.67
HB-LED/wireless	27,657		9,433		18,224			193.2		29,207		14,647		14,560			99.4		1.06	1.55
Semiconductor	15,978		12,226		3,752			30.7		14,193		11,271		2,922			25.9		0.89	0.92
Research and Industrial	23,324		28,303		(4,979		)	(17.6	)	26,103		25,083		1,020			4.1		1.12	0.89
Total	$	112,369	$	100,078	$	12,291		12.3	%	$	114,848	$	84,555	$	30,293		35.8	%	1.02	0.84
Regional Analysis
US	$	40,608	$	36,833	$	3,775		10.2	%	$	42,804	$	30,498	$	12,306		40.4	%	1.05	0.83
Europe	14,882		15,976		(1,094		)	(6.8	)	15,558		18,231		(2,673		)	(14.7	)	1.05	1.14
Japan	7,718		12,353		(4,635		)	(37.5	)	13,226		16,798		(3,572		)	(21.3	)	1.71	1.36
Asia-Pacific	49,161		34,916		14,245			40.8		43,260		19,028		24,232			127.3		0.88	0.54
Total	$	112,369	$	100,078	$	12,291		12.3	%	$	114,848	$	84,555	$	30,293		35.8	%	1.02	0.84

Net sales of $112.4 million for the third quarter of 2006 were up $12.3 million, or 12.3%, compared to the third quarter of 2005. By segment, process equipment sales were up $22.0 million, or 44.5%. The increase in process equipment sales is primarily due to an increase in sales to the HB-LED/wireless market.  Metrology sales decreased $9.7 million primarily due to decreased AFM sales to the research and industrial markets.  By region, net sales increased by 40.8% and 10.2% in Asia-Pacific and the U.S., respectively, while sales in Japan and Europe declined by 37.5% and 6.8%, respectively. The Company believes that there will continue to be quarter-to-quarter

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variations in the geographic distribution of sales.

Orders of $114.8 million for the third quarter of 2006 increased by $30.3 million, or 35.8%, from the comparable 2005 period. By segment, the 58.7% increase in process equipment orders was primarily driven by continued market growth in the HB-LED/wireless and data storage sectors reflecting growth in embedded storage in consumer electronics, continued investment in perpendicular recording technology, and HB-LED backlighting of small area flat panel displays. The 7.0% increase in metrology orders was due to a $5.4 million increase in orders for optical metrology products, partially offset by a $2.8 million decrease in orders for AFM products.

The Company’s book-to-bill ratio for the third quarter of 2006, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 1.02.  The Company’s backlog as of September 30, 2006 was $160.2 million, compared to $114.1 million as of December 31, 2005.  During the quarter ended September 30, 2006, the Company experienced backlog adjustments and order cancellations of $1.4 million.  The Company also experienced rescheduling of order delivery dates by customers.  Due to changing business conditions and customer requirements, the Company may continue to experience cancellations and/or rescheduling of orders.

Gross profit for the quarter ended September 30, 2006, was 42.6%, as compared to 44.2% in the third quarter of 2005.  This decrease was primarily attributable to a shift in sales mix from the generally higher margin metrology business to the generally lower margin process equipment business.  Process equipment sales represented 64% of total sales for the third quarter of 2006, up from 49% in the prior year period.  Metrology sales accounted for 36% of total sales for the third quarter of 2006, down from 51% in the prior year period.  The impact of the changing sales mix in the third quarter of 2006 was partially offset by an increase in process equipment gross margins to 38.1% from 35.6% in the prior year period.  This increase is primarily due to an increase in sales volume of $22.0 million, improved product mix, cost reductions and improved supply chain management, which included outsourcing in this segment.  However, Metrology gross margins decreased to 50.3% from 52.6%, principally due to lower sales volume of AFM products partially offset by favorable product mix in the Optical Metrology business

Selling, general and administrative expenses were $22.3 million, or 19.9% of sales in the third quarter of 2006, compared with $21.2 million, or 21.2%, in the comparable prior year period.  The $1.1 million increase is primarily attributable to the expansion of field sales and marketing personnel to support the Company’s new product introductions and the Company’s Asia-Pacific operations.

Research and development expense totaled $15.7 million in the third quarter of 2006, an increase of $1.3 million from the third quarter of 2005, primarily due to new product development efforts in Ion Beam and MOCVD.  As a percentage of sales, research and development decreased in the third quarter of 2006 to 14.0% from 14.4% for the comparable prior year period.

Amortization expense remained flat at $4.0 million in the third quarter of 2006 compared with the third quarter of 2005.

During the third quarter of 2006, the Company finalized its purchase accounting for Fluens determining that Fluens is a variable interest entity and the Company is its primary beneficiary as defined by Financial Accounting Standards Board (“FASB”) Financial Interpretation (“FIN”) 46R, Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51. As such, the Company has consolidated the results of Fluens’ operations from the acquisition date, and has attributed the 80.1% portion that is not owned by Veeco to noncontrolling interest in the Company’s consolidated financial statements.  As part of this acquisition accounting, the Company recorded $1.2 million of in-process technology, which was written-off during the third quarter of 2006.

Net interest expense in the third quarter of 2006 was $1.1 million compared to $1.8 million in the third quarter of 2005.  This reduction was due to an increase in interest rates and higher cash balances invested during the third quarter of 2006 compared to the comparable prior year period, as well as the reduction in interest expense related to the early extinguishment of debt.

Income tax provision for the quarter ended September 30, 2006 was $0.6 million compared to $0.8 million in the third quarter of 2005. The 2006 provision for income taxes included $0.2 million relating to Veeco’s foreign operations which continue to be profitable and $0.4 million relating to the Company’s domestic operations.  Due to significant domestic net operating loss carryforwards, which are fully reserved by a valuation allowance, Veeco’s

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domestic operations are not expected to incur significant income taxes for the foreseeable future.  During the third quarter, the Company released $1.5 million of its valuation allowance due to the utilization of net operating loss carryforwards.  The 2005 provision for income taxes of $0.9 million primarily related to Veeco’s foreign operations, which were profitable.

Noncontrolling interest was a credit to income of $1.2 million for the three months ended September 30, 2006.  As the Company is the primary beneficiary of Fluens, a variable interest entity as defined by FIN46(R), Veeco is required to consolidate Fluens and eliminate the portion of its results attributable to noncontrolling interests.  As a result, the Company eliminated from its net income 80.1% of the write-off of Fluens’ in-process technology and Fluens’ operating losses since the acquisition date.

Nine Months Ended September 30, 2006 and 2005

The following tables show selected items of Veeco’s Consolidated Statements of Operations, percentages of sales and comparisons between the nine months ended September 30, 2006 and 2005, and the analysis of sales and orders for the same periods by segment, industry and regions (in thousands):

	Nine Months ended September 30,										Dollar
	2006					2005					Change
Net sales	$	317,922		100.0	%	$	297,343		100.0	%	$	20,579
Cost of sales	178,585			56.2		172,123			57.9		6,462
Gross profit	139,337			43.8		125,220			42.1		14,117
Operating expenses:
Selling, general and administrative expense	68,622			21.5		62,816			21.1		5,806
Research and development expense	45,554			14.3		45,075			15.2		479
Amortization expense	12,029			3.8		12,554			4.2		(525		)
Write-off of purchased in-process technology	1,160			0.4		—			—		1,160
Other (income) expense, net	(243		)	—		385			0.1		(628		)
Total operating expenses	127,122			40.0		120,830			40.6		6,292
Operating income	12,215			3.8		4,390			1.5		7,825
Interest expense, net	3,583			1.1		5,920			2.0		(2,337		)
Gain on extinguishment of debt	(330		)	(0.1	)	—			—		(330		)
Income (loss) before income taxes and noncontrolling interest	8,962			2.8		(1,530		)	(0.5	)	10,492
Income tax provision	2,878			0.9		2,055			0.7		823
Noncontrolling interest	(1,207		)	(0.4	)	—			—		(1,207		)
Net income (loss)	$	7,291		2.3	%	$	(3,585	)	(1.2	)%	$	10,876

	Sales									Orders
	Nine Months ended September 30,				Dollar and Percentage Change					Nine Months ended September 30,				Dollar and Percentage Change					Book to Bill Ratio
	2006		2005		Year to Year					2006		2005		Year to Year					2006	2005
Segment Analysis
Process Equipment	$	191,927	$	160,900	$	31,027		19.3	%	$	252,608	$	170,959	$	81,649		47.8	%	1.32	1.06
Metrology	125,995		136,443		(10,448		)	(7.7	)	132,142		131,086		1,056			0.8		1.05	0.96
Total	$	317,922	$	297,343	$	20,579		6.9	%	$	384,750	$	302,045	$	82,705		27.4	%	1.21	1.02
Industry Analysis
Data Storage	$	138,598	$	123,101	$	15,497		12.6	%	$	187,177	$	139,248	$	47,929		34.4	%	1.35	1.13
HB-LED/wireless	61,177		45,642		15,535			34.0		80,939		41,892		39,047			93.2		1.32	0.92
Semiconductor	39,735		46,476		(6,741		)	(14.5	)	44,288		44,665		(377		)	(0.8	)	1.11	0.96
Research and Industrial	78,412		82,124		(3,712		)	(4.5	)	72,346		76,240		(3,894		)	(5.1	)	0.92	0.93
Total	$	317,922	$	297,343	$	20,579		6.9	%	$	384,750	$	302,045	$	82,705		27.4	%	1.21	1.02
Regional Analysis
US	$	105,053	$	99,435	$	5,618		5.6	%	$	131,192	$	99,122	$	32,070		32.4	%	1.25	1.00
Europe	49,332		60,176		(10,844		)	(18.0	)	42,374		50,933		(8,559		)	(16.8	)	0.86	0.85
Japan	34,016		47,337		(13,321		)	(28.1	)	44,400		53,209		(8,809		)	(16.6	)	1.31	1.12
Asia-Pacific	129,521		90,395		39,126			43.3		166,784		98,781		68,003			68.8		1.29	1.09
Total	$	317,922	$	297,343	$	20,579		6.9	%	$	384,750	$	302,045	$	82,705		27.4	%	1.21	1.02

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Net sales of $317.9 million for the nine months ended September 30, 2006 were up $20.6 million or 6.9% compared to the nine months ended September 30, 2005.  By segment, process equipment sales were up $31.0 million or 19.3%.  The increase in process equipment sales is primarily due to sales to HB-LED/wireless and data storage customers.  The increases in these areas were driven by the increased use of hard drives in consumer electronics and improved conditions within the HB-LED/wireless market.  Metrology sales decreased $10.4 million, primarily due to a $13.9 million decrease in AFM sales to research and industrial markets, partially offset by a $3.5 million increase in optical metrology sales.  By region, sales in Asia-Pacific increased by 43.3%, while sales in Japan and Europe declined by 28.1% and 18.0%, respectively.  The Company believes that there will continue to be period-to-period variations in the geographic distribution of sales.

Orders of $384.8 million for the nine months ended September 30, 2006 increased by $82.7 million, or 27.4%, from the comparable 2005 period.  By segment, the 47.8% increase in process equipment orders was primarily driven by strong data storage industry conditions resulting from technology changes requiring increases in equipment capital expenditures, as well as improved conditions in the HB-LED/wireless market.  The 0.8% increase in metrology orders was due to a $4.0 million increase in optical metrology products, partially offset by a $2.9 million decrease in AFM products.

The Company’s book-to-bill ratio for the nine months ended September 30, 2006, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period was 1.21.  The Company’s backlog as of September 30, 2006 is $160.2 million, compared to $114.1 million as of December 31, 2005. During the nine months ended September 30, 2006, the Company experienced backlog adjustments and order cancellations of $20.7 million, primarily in the HB-LED/wireless industry for MOCVD products.  The Company also experienced rescheduling of order delivery dates by customers.  Due to changing business conditions and customer requirements, the Company may continue to experience cancellations and/or rescheduling of orders.

Gross profit for the nine months ended September 30, 2006, was 43.8%, as compared to 42.1% in the comparable prior year period.  The increase is primarily due to an increase in sales volume as well as continued cost reductions and improved supply chain management, which included outsourcing.

Selling, general and administrative expenses were $68.6 million, or 21.5% of sales, in the nine months ended September 30, 2006, compared with $62.8 million, or 21.1% of sales in the nine months ended September 30, 2005.  The $5.8 million increase is primarily attributable to higher selling and commission expenses resulting from the increase in sales and the expansion of the Company’s Asia Pacific operations.  In addition, selling, general and administrative expenses increased due to higher compensation expenses and litigation related expenses for the securities class action and consolidated derivative action lawsuits.

Research and development expense totaled $45.6 million in the nine months ended September 30, 2006, an increase of $0.5 million from the comparable period of 2005, primarily due to new product development efforts.  As a percentage of sales, research and development decreased during the 2006 period to 14.3% from 15.2% of sales for the comparable 2005 period.

Amortization expense totaled $12.0 million in the nine months ended September 30, 2006, compared with $12.6 million in the prior year period, due to certain intangible assets becoming fully amortized.

During the third quarter of 2006, the Company finalized its purchase accounting for Fluens determining that Fluens is a variable interest entity and the Company is its primary beneficiary as defined by FIN 46R, Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51. As such, the Company has consolidated the results of Fluens’ operations from the acquisition date, and has attributed the 80.1% portion that is not owned by Veeco to noncontrolling interest in the Company’s consolidated financial statements.  As part of this acquisition accounting, the Company recorded $1.2 million of in-process technology, which was written-off during the nine months ended September 30, 2006.

During the nine months ended September 30, 2006, the Company repurchased $20.0 million aggregate

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principal amount of its 4.125% convertible subordinated notes. As a result of this repurchase, the amount of convertible subordinated notes outstanding was reduced to $200.0 million, and the Company recorded a gain from the early extinguishment of debt in the amount of $0.6 million, offset by a $0.3 million proportionate reduction in the related deferred financing costs, for a net gain of $0.3 million.

Net interest expense in the nine months ended September 30, 2006 was $3.6 million compared to $5.9 million in the prior year period.  This reduction was due to higher interest rates and cash balances invested during the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, as well as the reduction in interest expense related to the early extinguishment of debt.

Income tax provision for the nine months ended September 30, 2006 was $2.9 million compared to $2.1 million in the prior year period.  The 2006 provision for income taxes included $1.9 million relating to Veeco’s foreign operations, which continue to be profitable, and $1.0 million relating to the Company’s domestic operations.  Due to significant domestic net operating loss carryforwards, which are fully reserved by a valuation allowance, Veeco’s domestic operations are not expected to incur significant income taxes for the foreseeable future. During the nine months ended September 30, 2006, the Company released $1.5 million of its valuation allowance due to the utilization of net operating loss carryforwards. The 2005 provision for income taxes of $2.1 million primarily related to Veeco’s foreign operations, which were profitable.

Noncontrolling interest was a credit to income of $1.2 million for the nine months ended September 30. 2006.  As the Company is the primary beneficiary of Fluens, a variable interest entity as defined by FIN46(R), Veeco is required to consolidate Fluens and eliminate the portion of its results attributable to noncontrolling interests.  As a result, the Company eliminated from its net income 80.1% of the write-off of Fluens’ in-process technology and Fluens’ operating losses since the acquisition date.

Liquidity and Capital Resources

Historically, Veeco’s principal capital requirements have included the funding of acquisitions and capital expenditures. The Company historically has generated cash from operations and debt and stock issuances. Veeco’s ability to generate sufficient cash flows from operations is dependent on the continued demand for the Company’s products and services.

The Company had a net increase in cash of $2.1 million for the nine months ended September 30, 2006 from December 31, 2005. Cash provided by operations was $22.5 million for this period, as compared to cash provided by operations of $29.5 million for the comparable 2005 period. Net income (loss) adjusted for non-cash items provided operating cash flows of $31.0 million for the nine months ended September 30, 2006, compared to $19.0 million for the comparable 2005 period. Net cash provided by operations for the nine months ended September 30, 2006 was impacted by an increase in net operating assets and liabilities of $8.5 million. Accounts receivable decreased $3.1 million during the nine months ended September 30, 2006, due to an improvement in days sales outstanding.  Inventories increased by approximately $14.7 million during the same period, principally due to shipment delays in the process equipment segment and the build up of work-in-process for products to be shipped in the fourth quarter of 2006. In addition, inventories increased due primarily to revenue recognition being deferred on certain tools shipped, where title does not transfer to the end customer until final customer acceptance. Accounts payable increased by $5.0 million, as the Company managed its payables to increase days payable outstanding, as well as the timing of payments processed at the end of the quarter.  Accrued expenses and other current liabilities increased $3.2 million during the nine months ended September 30, 2006, due to an increase in customer deposits received on shipments to occur in the fourth quarter of 2006 and accrued interest for the required semi-annual interest payment on the convertible subordinated notes, offset in part by a reduction in incentive compensation under the Company’s annual bonus plans. The increase in net other current assets and liabilities is mainly a result of increased VAT (value added tax) related to Veeco’s foreign subsidiaries, other receivables relating to grant programs, prepaid licensing costs and capitalized software.

Cash used in investing activities of $15.6 million for the nine months ended September 30, 2006 resulted primarily from capital expenditures of $12.5 million and earn-out payments totaling $3.2 million to the former owners of TurboDisc and Nanodevices Inc. The Company expects to invest approximately $21.0 million in total during 2006 in capital projects primarily related to engineering equipment and lab tools used in producing, testing and process development for Veeco’s products, enhanced manufacturing facilities and the continuing implementation of SAP and related computer systems.

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Cash used in financing activities for the nine months ended September 30, 2006 totaled $4.6 million, primarily consisting of cash used in the repurchase of a portion of the Company’s outstanding convertible subordinated notes, as discussed below, partially offset by $15.1 million of common stock issuances resulting from the exercise of employee stock options.

As of September 30, 2006, the Company has outstanding $200.0 million of 4.125% convertible subordinated notes.  During the first quarter of 2006, the Company repurchased $20.0 million of its notes, reducing the amount outstanding from $220.0 million to $200.0 million.  The repurchase amount was $19.5 million in cash, of which $19.4 million related to principal and $0.1 million related to accrued interest.  As a result of the repurchase, the Company recorded a gain from the early extinguishment of debt in the amount of $0.6 million, offset by a $0.3 million proportionate reduction in the related deferred financing costs, for a net gain of $0.3 million. The Company may engage in similar transactions in the future depending on market conditions, its cash position and other factors.

The Company believes that existing cash balances together with cash generated from operations and amounts available under the Company’s revolving credit facility will be sufficient to meet the Company’s projected working capital and other cash flow requirements for the next twelve months, as well as the Company’s contractual obligations, over the next three years. The Company believes it will be able to meet its obligation to repay the outstanding $200.0 million convertible subordinated notes that mature on December 21, 2008, through a combination of conversion of the notes outstanding, refinancing, cash generated from operations and/or other means.

The Company is potentially liable for earn-out payments to the former owners of certain acquired businesses based on revenue targets achieved by the acquired businesses.  The Company is potentially liable for an earn-out payment to the former shareholders of Advanced Imaging, Inc. based on achieving revenue in excess of certain targets for 2006, which currently do not appear achievable.  During the first quarter of 2006, the Company paid an earn-out payment of $2.0 million to the former owner of TurboDisc.  During the second quarter of 2006, the Company paid approximately $1.2 million to the former shareholders of Nanodevices Inc. Both amounts were accrued at December 31, 2005. No additional payments will be required in the future to either set of former owners.

In 2006, Veeco invested $0.5 million to purchase 19.9% of the common stock of Fluens Corporation.  Approximately 31% of Fluens is owned by a related party who is a business unit Vice President of Veeco.  Veeco and Fluens plan to jointly develop a next-generation process for high-rate deposition of aluminum oxide for data storage applications.  If this development is successful and upon the satisfaction of certain additional conditions by May 2009, Veeco will be obligated to purchase the balance of the outstanding stock of Fluens for $3.0 million and pay an earn-out.  During the third quarter of 2006, the Company finalized its purchase accounting for the Fluens acquisition determining that Fluens is a variable interest entity and as such, has consolidated the results of Fluens’ operations from the acquisition date.

Application of Critical Accounting Policies

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

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Revenue Recognition:  The Company recognizes revenue in accordance with the SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition. Certain of Veeco’s product sales are accounted for as multiple-element arrangements in accordance with Emerging Issues Task Force (“EITF”) 00-21, Revenue Arrangements with Multiple Deliverables. A multiple-element arrangement is a transaction which may involve the delivery or performance of multiple products, services, or rights to use assets, and performance may occur at different points in time or over different periods of time. The Company recognizes revenue when persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collectibility is reasonably assured. For products produced according to the Company’s published specifications, where no installation is required or installation is deemed perfunctory and no substantive customer acceptance provisions exist, revenue is recognized when title passes to the customer, generally upon shipment. For products produced according to a particular customer’s specifications, revenue is recognized when the product has been tested, it has been demonstrated that it meets the customer’s specifications and title passes to the customer. The amount of revenue recorded is reduced by the amount of any customer retention (generally 10% to 20%), which is not payable by the customer until installation is completed and final customer acceptance is achieved. Installation is not deemed to be essential to the functionality of the equipment since installation does not involve significant changes to the features or capabilities of the equipment or require the building of complex interfaces and connections. In addition, the equipment could be installed by the customer or other vendors and generally the cost of installation approximates only 1% to 2% of the sales value of the related equipment. For new products, new applications of existing products, or for products with substantive customer acceptance provisions where performance cannot be fully assessed prior to meeting customer specifications at the customer site, revenue is recognized upon completion of installation and receipt of final customer acceptance. Since title to goods generally passes to the customer upon shipment and 80% to 90% of the contract amount becomes payable at that time, inventory is relieved and accounts receivable is recorded for the amount billed at the time of shipment. The profit on the amount billed for these transactions is deferred and recorded as deferred profit in the accompanying consolidated balance sheets. At September 30, 2006 and December 31, 2005, $0.8 million and $0.5 million, respectively, are recorded in deferred profit. Service and maintenance contract revenues are recorded as deferred revenue, which is included in other accrued expenses, and recognized as revenue on a straight-line basis over the service period of the related contract.

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

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

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

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

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

Veeco records valuation allowances in order to reduce the Company’s deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, management considers a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under Statement of Financial Accounting Standards (“SFAS”) No. 109, factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.

At September 30, 2006, the Company had estimated a valuation allowance of approximately $70.0 million against substantially all of its domestic net deferred tax assets, which consist of net operating loss and tax credit carryforwards, as well as temporary deductible differences.  The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, which places primary importance on the Company’s historical results of operations. Although the Company’s results in prior years were significantly affected by restructuring and other charges, the Company’s historical loss and the losses incurred in 2005 and 2004 represent negative evidence sufficient to require a full valuation allowance under the provisions of SFAS No. 109. If the Company is able to realize part or all of the deferred tax assets in future periods, it will reduce its provision for income taxes with a release of the valuation allowance in an amount that corresponds with the income tax liability generated.

Share-Based Compensation:  Prior to 2006, the Company accounted for its stock option plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and generally, no compensation expense was reflected in net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, supersedes APB No. 25 and amends SFAS No. 95, Statement of Cash Flows.  Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.  SFAS No. 123(R) was adopted using the modified prospective method of application, which requires Veeco to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been included in the pro forma disclosures in prior periods.  SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under previous accounting literature, which has the effect of reducing consolidated net operating cash flows and increasing consolidated net financing cash flows in periods after adoption. For the three and nine months ended September 30, 2006, the Company did not recognize any amount of consolidated financing cash flows for such excess tax deductions.

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Total share-based compensation expense is attributable to the remaining requisite service periods of stock options and restricted common stock awards and units. For the three months ended September 30, 2006, the Company granted 9,900 restricted common stock awards and units to its employees.  For the nine months ended September 30, 2006, the Company granted 146,200 stock options and 208,150 restricted common stock awards and units to its directors, officers and employees. As a result of adopting SFAS No. 123(R), the Company’s net income for the three and nine months ended September 30, 2006 was $0.1 million and $0.4 million lower, respectively, than if it had continued to account for share-based compensation under APB No. 25. Net income per common share and diluted net income per common share for the three and nine months ended September 30, 2006 are approximately $0.01 lower for both periods, than if the Company had continued to account for share-based compensation under APB No. 25. As of September 30, 2006, the total unrecognized compensation cost related to nonvested stock awards and option awards is $4.2 million and $1.4 million, respectively, and the related weighted average period over which it is expected that such unrecognized compensation costs will be recognized is approximately 2.3 years for the nonvested stock awards and 2.2 years for option awards. Future share-based compensation expense will depend on levels of share-based awards granted in the future and, therefore, cannot be predicted at this time.

With the adoption of SFAS No. 123(R) on January 1, 2006, the Company is required to record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, the Company applies the Black-Scholes option-pricing model. Inherent in the model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which make them critical accounting estimates. Beginning in the fourth quarter of 2005, the Company used an expected stock-price volatility assumption that is a combination of both historical and implied volatilities of the underlying stock, which are obtained from public data sources. Prior to that time, the Company based this assumption solely on historical volatility. With regard to the weighted-average option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises.

Other Recent Accounting Pronouncements:In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes.  FIN 48 clarifies the accounting and disclosure for income taxes by defining the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority.  It also provides guidance on derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently assessing the impact of FIN 48 on its consolidated financial position and results of operations.

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

In September 2006, the FASB issued FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.   Statement No. 158 improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.  The recognition and disclosure provisions of Statement No. 158 are effective for fiscal years ending after December 15, 2006.  The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008.  The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Veeco’s net sales to foreign customers represented approximately 63.9% and 67.0% of Veeco’s total net sales for the three and nine months ended September 30, 2006, respectively, and 63.2% and 66.6% for the comparable 2005 periods, respectively. The Company expects that net sales to foreign customers will continue to represent a large percentage of Veeco’s total net sales. Veeco’s net sales denominated in foreign currencies represented approximately 12.5% and 15.1% of Veeco’s total net sales for the three and nine months ended September 30, 2006, respectively, and 20.2% and 19.5% for the comparable 2005 periods, respectively. The aggregate foreign currency exchange impact included in determining the consolidated results of operations was a gain of approximately $0.1 million and a loss of approximately $0.3 million for the three and nine months ended September 30, 2006, respectively, and losses of $0.3 million and $0.5 million for the comparable 2005 periods, respectively.  Included in the aggregate foreign currency exchange impact, were hedging related losses of approximately $0.3 million and  approximately $0.2 million for the three and nine months ended September 30, 2006, respectively, and a loss of approximately $0.1 million and a gain of less than $0.1 million related to hedging for each of the comparable 2005 periods. Veeco is exposed to financial market risks, including changes in foreign currency exchange rates. The changes in currency exchange rates that have the largest impact on translating Veeco’s international operating profit are the Japanese Yen and the Euro. Veeco uses derivative financial instruments to mitigate these risks. Veeco does not use derivative financial instruments for speculative or trading purposes. The Company enters into monthly forward contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known currency exposures. The average notional amount of such contracts was approximately $6.0 million and $4.6 million for the three and nine months ended September 30, 2006, respectively. As of September 30, 2006, the Company had entered into a forward contract for the month of October for the notional amount of approximately $2.8 million, which approximates the fair market value on September 30, 2006.

Item 4. Controls and Procedures.

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

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

The Company is presently in the process of implementing new company-wide integrated applications software and, to date, has completed the conversion to this new platform in approximately 70% of Veeco’s businesses with the remainder expected to be completed in the first half of 2007. As a result, certain changes have been made to the Company’s internal controls, which management believes will strengthen the Company’s internal control structure.  There have been no other significant changes in our internal controls or other factors during the fiscal quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1.  Legal Proceedings.

In re Veeco Instruments Inc. Securities Litigation and Shareholder Derivative Litigation

                Veeco and certain of its officers have been named as defendants in a consolidated securities class action lawsuit pending in federal court in the Southern District of New York (the “Court”).  The lawsuit arises out of the restatement in March 2005 of Veeco’s financial statements for the quarterly periods and nine months ended September 30, 2004 as a result of the Company’s discovery of certain improper accounting transactions at its TurboDisc business unit.  The plaintiffs in the lawsuit seek unspecified damages and assert claims against all defendants for violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and claims against the individual defendants for violations of Section 20(b) of the Exchange Act.  The Court has certified a plaintiff class for the lawsuit consisting of all persons who acquired the Company’s securities during the period from April 26, 2004 through February 10, 2005.  The parties are currently involved in the discovery process.  Although the Company believes this lawsuit is without merit and intends to defend vigorously against the claims, the lawsuit could result in substantial costs, divert management’s attention and resources from our operations and negatively affect our public image and reputation.

                In addition, three shareholder derivative lawsuits have been consolidated and are also pending before the Court.  The plaintiffs in the consolidated derivative action assert that the Company’s directors and certain of its officers breached fiduciary duties in connection with the improper accounting transactions at the TurboDisc business unit.  The plaintiffs in the consolidated derivative action seek unspecified damages allegedly sustained by the Company and the return of all bonuses, restricted stock, stock options and other incentive compensation.  The parties are currently involved in the discovery process on this action.  An unfavorable outcome or prolonged litigation in these matters could materially harm the Company’s business.

Item 1A.  Risk Factors.

Information regarding risk factors appears in the “Safe Harbor Statement” at the beginning of this Quarterly Report on Form 10-Q and in Part I — Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005.  There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

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Item 6. Exhibits.

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

Number	Description	Incorporated by Reference to the Following Document:
10.1	Veeco Instruments Inc. Amended and Restated 2000 Stock Incentive Plan, effective July 20, 2006.	Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.4
10.2	Form of Directors Restricted Stock Agreement pursuant to the Veeco Instruments Inc. 2000 Stock Incentive Plan, effective May 2006.	*
10.3	Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco Instruments Inc. 2000 Stock Incentive Plan, effective June 2006.	*
10.4	Form of Indemnification Agreement entered into between Veeco Instruments Inc. and each of its directors and executive officers.	Current Report on Form 8-K filed on October  23, 2006, Exhibit 10.1
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.	*

*       Filed herewith

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SIGNATURES

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

Date:  November 3, 2006

Veeco Instruments Inc.
By:	/s/ EDWARD H. BRAUN
	Edward H. Braun Chairman and Chief Executive Officer
By:	/s/ JOHN F. REIN, JR.
	John F. Rein, Jr. Executive Vice President, Chief Financial Officer and Secretary

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INDEX TO EXHIBITS

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

Number	Description	Incorporated by Reference to the Following Document:
10.1	Veeco Instruments Inc. Amended and Restated 2000 Stock Incentive Plan, effective July 20, 2006.	Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibit 10.4
10.2	Form of Directors Restricted Stock Agreement pursuant to the Veeco Instruments Inc. 2000 Stock Incentive Plan, effective May 2006.	*
10.3	Form of Notice of Restricted Stock Award and related terms and conditions pursuant to the Veeco Instruments Inc. 2000 Stock Incentive Plan, effective June 2006.	*
10.4	Form of Indemnification Agreement entered into between Veeco Instruments Inc. and each of its directors and executive officers.	Current Report on Form 8-K filed on October  23, 2006, Exhibit 10.1
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.	*

*       Filed herewith

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EX-10.2

EXHIBIT 10.2

DIRECTORS RESTRICTED STOCK AGREEMENT

THIS AGREEMENT (the “Agreement”) is entered into as of _______________ (the “Award Date”) by and between Veeco Instruments Inc., a Delaware corporation (the “Company”) and ___________________ (“Participant”), a Non-Employee Director of the Company (as defined in the “Plan” described below).

WHEREAS, the Company has adopted the Veeco Instruments Inc. 2000 Stock Incentive Plan (as it may be amended from time to time, the “Plan”), the terms of which are hereby incorporated by reference and made a part of this Agreement; and

WHEREAS, Paragraphs (iv) and (v) of Section 8 of the Plan provide for the issuance of awards of the Company’s common stock, par value $0.01 per share (“Common Stock”), to Non-Employee Directors subject to certain restrictions (“Restricted Stock”); and

NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows:

ARTICLE I
DEFINITIONS

Section 1.1             In General.  Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Plan.  In addition, wherever the following term is used in this Agreement, it shall have the meaning specified below, unless the context clearly indicates otherwise.

Section 1.2             “Restrictions” shall mean the restrictions on sale or other transfer set forth in Section 4.2 and the exposure to forfeiture set forth in Section 3.1.

ARTICLE II.
RESTRICTED STOCK  AWARD

Section 2.1             Award of Restricted Stock.  In consideration of the Participant’s service as a Non-Employee Director of the Company, in exchange for the promises contained herein, and for other good and valuable consideration which the Committee has determined exceeds the aggregate par value of the shares of Common Stock subject to the Award (as defined below), as of the Award Date, the Company issues to the Participant 5,000 shares of Restricted Stock (the “Award”).

Section 2.2             Award Subject to Plan.  The Award granted hereunder is subject to the terms and provisions of the Plan, including without limitation Section 8 thereof.

ARTICLE III.
RESTRICTIONS

Section 3.1             Forfeiture; Repurchase Right.

(a)           Unless otherwise provided by written agreement between the Company and Participant, which may be entered into at any time, including in connection with such

termination, any Award which is not vested at the time when the Participant’s service as a Director of the Company ends shall thereupon be forfeited immediately and without any further action by the Company or the Participant.

(b)           Upon termination of a Participant’s service as a Director, the Company or any Affiliate shall have the right, but not the obligation, to purchase any unvested Restricted Stock then held by such Participant at a cash price per share equal to the price paid by the Participant for such Restricted Stock, if any; provided that no such right of repurchase shall exist in the event of a Normal Termination (as defined in the Plan).

Section 3.2             Vesting and Lapse of Restrictions.  Subject to Section 3.1, the Restrictions shall lapse with respect to the Restricted Stock subject to the Award and the Participant’s rights thereto shall vest, on the first anniversary of the Date of Grant; provided, in each case, that the Participant remains continuously in active service as a Director of the Company for at least nine months following the Award Date.

Section 3.3             Legend.  Until such time as Restrictions have lapsed, the Company may, at any time, place legends referencing the Restrictions and any applicable federal and/or state securities laws restrictions on certificates representing shares of Restricted Stock issued pursuant to this Agreement.  The legend may include the following:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS SET FORTH IN THE PLAN AND THE AWARD AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION.”

Section 3.4             Payment of Taxes; Issuance of Shares.

(a)           Participant understands, acknowledges and agrees that, unless a Section 83(b) election is made (as described in Section 3.6), the difference between the Fair Market Value of the Restricted Stock at the time it vests, and the amount, if any, paid by the Participant for such stock is subject to state and federal income taxes and Participant is responsible for paying such taxes.  If the Company is required to withhold any such taxes, Participant hereby authorizes the Company to reduce the number of vested shares of Restricted Stock delivered to Participant at the time the restrictions lapse by the number of shares of Restricted Stock required to satisfy such tax withholding requirements (based on the Fair Market Value of shares at such time).  Such shares of vested Restricted Stock shall be returned to the Company.  Participant’s acknowledgement and acceptance of these tax provisions are conditions precedent to the right of Participant to receive the Restricted Stock under the Plan and this Agreement.

(b)           In lieu of the reduction of shares delivered described in paragraph (a) above, Participant may pay to the Company the amount of tax required to be withheld in cash, by check or in other form satisfactory to the Company.  Such payment must be made by the date on which the Restrictions lapse or such later date as is established by the Company (not to exceed 15 days after the date on which the Restrictions lapse).

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(c)           The Shares will be deposited directly into Participant’s brokerage account with the Company’s approved broker when vested and any applicable withholding obligations have been satisfied.

Section 3.5             Certain Changes in Capitalization.  If the shares of the Company’s Common Stock as a whole are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company, whether through merger, consolidation, reorganization, recapitalization, reclassification, stock dividend, stock split, combination of shares, exchange of shares, change in corporate structure or the like, the Committee, in its sole discretion, shall have the discretion and power to determine and to make effective provision for acceleration of the time or times at which any Restrictions shall lapse or be removed.  In addition, in the case of the occurrence of any event described in this Section 3.5, the Committee, subject to the provisions of the Plan and this Agreement, shall make an appropriate and proportionate adjustment in the number and kind of shares of Restricted Stock, to the end that after such event the Participant’s proportionate interest shall be maintained as before the occurrence of such event.  Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons. In the event that the Participant receives any new or additional or different shares or securities by reason of any transaction or event described in this Section 3.5, such new or additional or different shares or securities which are attributable to the Participant in his capacity as the registered owner of the Restricted Stock then subject to Restrictions, shall be considered to be Restricted Stock and shall be subject to all of the Restrictions.

Section 3.6             Section 83(b) Election.  Participant understands that Section 83(a) of the Code taxes as ordinary income the difference between the amount, if any, paid for the shares of Common Stock and the Fair Market Value of such shares at the time the Restrictions on such shares lapse.  Participant understands that, notwithstanding the preceding sentence, Participant may elect to be taxed at the time of the Award Date, rather that at the time the Restrictions lapse, by filing an election under Section 83(b) of the Code (an “83(b) Election”) with the Internal Revenue Service within 30 days of the Award Date. In the event Participant files an 83(b) Election, Participant will recognize ordinary income in an amount equal to the difference between the amount, if any, paid for the shares of Common Stock and the Fair Market Value of such shares as of the Award Date, and will be responsible for paying all such taxes, and, if applicable, paying the Company the amount of  any tax required to be withheld thereon at the time of such election, in  the manner set forth in Section 3.5. Participant further understands that acopy of such 83(b) Election form must be filed with his or her federal income tax return for the calendar year in which the Award D falls, and a copy delivered to the Company.  Participant acknowledges that the foregoing is only a summary of the effect of United States federal income taxation with respect to the award of Restricted Stock hereunder, and does not purport to be complete or to deal with any state local, or foreign tax requirements that might apply. PARTICIPANT FURTHER ACKNOWLEDGES THAT THE COMPANY IS NOT RESPONSIBLE FOR FILING THE PARTICIPANT’S 83(b) ELECTION, AND THE COMPANY HAS DIRECTED PARTICIPANT TO SEEK INDEPENDENT ADVICE REGARDING THE APPLICABLE PROVISIONS OF THE CODE, THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FEDERAL GOVERNMENT OR FOREIGN COUNTRY IN WHICH PARTICIPANT MAY RESIDE, AND THE TAX CONSEQUENCES OF PARTICIPANT’S DEATH.

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ARTICLE IV.
OTHER PROVISIONS

Section 4.1             Book Entry; Escrow.  The Shares representing the Restricted Stock will be held in book-entry or global certificate form.  If the Company instead chooses to issue share certificates representing the Restricted Stock, the certificates for the Restricted Stock shall be deposited in escrow with the Secretary or Assistant Secretary of the Company or such other escrow holder as the Company may appoint; provided, however, that in no event shall the Participant retain physical custody of any certificates representing unvested Restricted Stock issued to him.  The deposited certificates shall remain in escrow until all of the Restrictions lapse or shall have been removed.

Section 4.2             Restricted Stock Not Transferable.  No Restricted Stock or any interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Participant or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that this Section 4.2 shall not prevent transfers by will or by applicable laws of descent and distribution.

Section 4.3             Rights as Stockholder.  Except as otherwise provided herein, upon issuance of the shares of Restricted Stock pursuant to Section 4.1, the Participant shall have all the rights of a stockholder with respect to said shares, subject to the Restrictions herein, including the right to vote the shares and to receive all dividends or other distributions paid or made with respect to the shares or Restricted Stock; provided, however, that any and all shares of Common Stock received by the Participant with respect to such Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization shall also be subject to the Restrictions until the Restrictions on the underlying shares of Restricted Stock lapse or are removed pursuant to this Agreement.

Section 4.4             Not a Contract.  Nothing in this Agreement or in the Plan shall confer upon the Participant any right to continue as a Director of the Company, except as may otherwise be provided by any written agreement entered into by and between the Company and the Participant.

Section 4.5             Governing Law.   The laws of the State of Delaware shall govern the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws.

Section 4.6             Conformity to Securities Laws.  The Participant acknowledges that the Plan and this Agreement are intended to conform to the extent necessary with all provisions of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and any and all regulations and rules promulgated thereunder by the Securities and Exchange Commission, including without limitation Rule 16b-3 under the Exchange Act.  Notwithstanding anything herein to the contrary, the Plan shall be administered, and the Awards are granted, only in such a manner as to conform to such laws, rules and regulations.  To the extent permitted by applicable law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.

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Section 4.7             Amendment, Suspension and Termination.  The Award may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Committee or the Board, provided that, except as may otherwise be provided by the Plan, neither the amendment, suspension nor termination of this Agreement shall, without the consent of the Participant, alter or impair any rights or obligations under any Award.

Section 4.8             Notices.  Notices required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the Participant to his address shown in the Company records, and to the Company at its principal executive office.

Section 4.9             Severability. The invalidity or unenforceability of any paragraph or provision of this Agreement shall not affect the validity or enforceability of any other paragraph or provision, and all other provisions shall remain in full force and effect.  If any provision of this Agreement is held to be excessively broad, then such provision shall be reformed and construed by limiting and reducing it so as to be enforceable to the maximum extent permitted by law.

Section 4.10           Data Privacy.  By entering into this Agreement and as a condition of the grant of the Restricted Stock, Participant consents to the collection, use and transfer of personal data as described in this Section.  Participant understands that the Company and its subsidiaries hold certain personal information about the Participant, including the Participant’s name, home address and telephone number, date of birth, social security number or identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all options or any other entitlement to shares of stock (restricted or otherwise) awarded, cancelled, exercised, vested, unvested or outstanding in Participant’s favor, for the purpose of managing and administering the Plan (“Data”).  Participant further understands that the Company and/or its subsidiaries will transfer Data amongst themselves as necessary for the purpose of implementation, administration and management of Participant’s participation in the Plan, and that the Company and/or any of its subsidiaries may each further transfer Data to any third parties assisting the Company in the implementation, administration and management of the Plan (“Data Recipients”).  Participant understands that these Data Recipients may be located in the Participant’s country of residence, the European Economic Area, or elsewhere throughout the world, such as the United States.  Participant authorizes the Data Recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing Participant’s participation in the Plan, including any transfer of such Data, as may be required for the administration of the Plan and/or the subsequent holding of shares on the Participant’s behalf, to a broker or other third party with whom Participant may elect to deposit any shares of stock acquired upon vesting of the shares of Restricted Stock.  Participant understands that he or she may, at any time, review the Data, require any necessary amendments to it or withdraw the consent herein in writing by contacting the Company.  Withdrawal of consent may, however, affect Participant’s ability to participate in the Plan.

[signature page follows]

5

IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto.

VEECO INSTRUMENTS INC.

By:

Name:

Title:

Signed:

6

EX-10.3

Exhibit 10.3

VEECO INSTRUMENTS INC.

NOTICE OF RESTRICTED STOCK AWARD

Veeco Instruments Inc. (the “Company”), is pleased to confirm the award to the employee named below (“Participant”) of restricted shares of common stock, par value $0.01 per share, of the Company described below.

Participant:	__________________
Award Date:	__________________
Aggregate number of shares of Restricted Stock subject to the Award (the “Award”):	______________ Shares
Vesting/Lapsing of Restrictions:	One-third of the shares comprising the Award will vest on each of first three anniversaries of the Award Date.
Additional Provisions:	This Award shall be subject to the terms and conditions set forth in the Veeco Instruments Inc. Terms and Conditions of Restricted Stock Award (June 2006) (the “Terms and Conditions”). Unless Participant notifies Veeco within 10 days following receipt of this notice that he or she declines this Award, Participant will be deemed to have accepted and agreed to the Terms and Conditions. Any such notice should be in writing and sent to Veeco Instruments Inc., Attention: General Counsel, 100 Sunnyside Boulevard, Suite B, Woodbury, NY 11797 or by facsimile to 516-677-0380.

VEECO INSTRUMENTS INC.

By:________________________

Name:

Title:

VEECO INSTRUMENTS INC.

TERMS AND CONDITIONS OF RESTRICTED STOCK AWARD
(JUNE 2006)

These TERMS AND CONDITIONS OF RESTRICTED STOCK AWARD (JUNE 2006) (these “Terms and Conditions”) apply to any award by Veeco Instruments Inc., a Delaware corporation (the “Company”), of the Company’s common stock, par value $0.01 per share (“Common Stock”), subject to certain restrictions (“Restricted Stock”), pursuant to the Veeco Instruments Inc. 2000 Stock Incentive Plan (as it may be amended from time to time, the “Plan”), which specifically references these Terms and Conditions.

ARTICLE I
DEFINITIONS

Section 1.1             In General.  Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Plan and/or the applicable Notice of Restricted Stock Award.  In addition, wherever the following term is used in these Terms and Conditions, it shall have the meaning specified below, unless the context clearly indicates otherwise.

Section 1.2             “Restrictions” shall mean the restrictions on sale or other transfer set forth in Section 4.2 and the exposure to forfeiture set forth in Section 3.1.

ARTICLE II.
RESTRICTED STOCK  AWARD

Section 2.1             Award of Restricted Stock.  The Award is made in consideration of the Participant’s agreement to remain in the employ of the Company and for other good and valuable consideration which the Committee has determined exceeds the aggregate par value of the shares of Common Stock subject to the Award.

Section 2.2             Award Subject to Plan.  The Award is subject to the terms and provisions of the Plan, including without limitation Section 8 thereof.

ARTICLE III.
RESTRICTIONS

Section 3.1             Forfeiture; Repurchase Right.  Unless otherwise provided by written agreement between the Company and Participant, any shares of Restricted Stock which are not vested at the time Participant’s employment with the Company or one of its Subsidiaries terminates shall thereupon be forfeited immediately and without any further action by the Company or the Participant.

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Section 3.2             Vesting and Lapse of Restrictions.  Subject to Section 3.1, the Restrictions shall lapse with respect to the Restricted Stock subject to the Award, and the Participant’s rights thereto shall vest, as follows:

Date:	Restrictions Shall Lapse with Respect to:
First Anniversary of Award Date	One-third of the Award
Second Anniversary of Award Date	One-third of the Award
Third Anniversary of Award Date	One-third of the Award

provided, in each case, that the Participant remains continuously employed in active service from the Award Date through such vesting date.

Section 3.3             Legend.  Until such time as the Restrictions have lapsed, the Company may instruct the transfer agent for the Common Stock and/or other record-keepers to include a restrictive code or similar notation in its records (or legend on stock certificates, if any) to denote the Restrictions and any applicable federal and/or state securities laws restrictions relating to Restricted Stock.  The notation or legend may include the following:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS SET FORTH IN THE PLAN AND IN THE TERMS AND CONDITIONS APPLICABLE TO THE RESTRICTED STOCK AWARD, COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION.”

Section 3.4             Payment of Taxes; Issuance of Shares.

(a)           Participant understands, acknowledges and agrees that, unless a Section 83(b) election is made (as described in Section 3.6), the difference between the Fair Market Value of the Restricted Stock at the time it vests, and the amount, if any, paid by the Participant for such stock is subject to state and federal income taxes and Participant is responsible for paying such taxes.  If the Company is required to withhold any such taxes, Participant hereby authorizes the Company to reduce the number of vested shares of Restricted Stock delivered to Participant at the time the restrictions lapse by the number of shares of Restricted Stock required to satisfy such tax withholding requirements (based on the Fair Market Value of shares at such time).  Such shares of vested Restricted Stock shall be returned to the Company.

(b)           In lieu of the reduction of shares delivered described in paragraph (a) above, Participant may pay to the Company the amount of tax required to be withheld in cash, by check or in other form satisfactory to the Company.  Such payment must be made by the date on which the Restrictions lapse or such later date as is established by the Company (not to exceed 15 days after the date on which the Restrictions lapse).

(c)           The Shares will be deposited directly into Participant’s brokerage account with the Company’s approved broker when vested and any applicable withholding obligations have been satisfied.

Section 3.5             Certain Changes in Capitalization.  If the shares of the Company’s Common Stock as a whole are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company, whether through merger, consolidation,

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reorganization, recapitalization, reclassification, stock dividend, stock split, combination of shares, exchange of shares, change in corporate structure or the like, the Committee, in its sole discretion, shall have the discretion and power to determine and to make effective provision for acceleration of the time or times at which any Restrictions shall lapse or be removed.  In addition, in the case of the occurrence of any event described in this Section 3.5, the Committee, subject to the provisions of the Plan and these Terms and Conditions, shall make an appropriate and proportionate adjustment in the number and kind of shares of Restricted Stock, to the end that after such event the Participant’s proportionate interest shall be maintained as before the occurrence of such event.  Any such adjustment made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons. In the event that the Participant receives any new or additional or different shares or securities by reason of any transaction or event described in this Section 3.5, such new or additional or different shares or securities which are attributable to the Participant in his capacity as the registered owner of the Restricted Stock then subject to Restrictions, shall be considered to be Restricted Stock and shall be subject to all of the Restrictions.

Section 3.6             Section 83(b) Election.  Participant understands that, under Section 83(a) of the Internal Revenue Code of 1986, as amended (the “Code”), the Participant will recognize as ordinary income the difference between the amount, if any, paid for the shares of Common Stock and the Fair Market Value of such shares at the time the Restrictions on such shares lapse.  Participant understands that, notwithstanding the preceding sentence, Participant may elect to be taxed at the time of the Award Date, rather that at the time the Restrictions lapse, by filing an election under Section 83(b) of the Code (an “83(b) Election”) with the Internal Revenue Service within 30 days of the Award Date. In the event Participant files an 83(b) Election, Participant will recognize ordinary income in an amount equal to the difference between the amount, if any, paid for the shares of Common Stock and the Fair Market Value of such shares as of the Award Date, and will be responsible for paying all such taxes, and, if applicable, paying the Company the amount of any tax required to be withheld thereon at the time of such election, in the manner set forth in Section 3.4.  Participant further understands that a copy of such 83(b) Election form must be filed with his or her federal income tax return for the calendar year in which the Award falls, and a copy delivered to the Company.  Participant acknowledges that the foregoing is only a summary of the effect of United States federal income taxation with respect to the award of Restricted Stock hereunder, and does not purport to be complete or to deal with any state local, or foreign tax requirements that might apply.  PARTICIPANT FURTHER ACKNOWLEDGES THAT THE COMPANY IS NOT RESPONSIBLE FOR FILING THE PARTICIPANT’S 83(b) ELECTION, AND THE COMPANY HAS DIRECTED PARTICIPANT TO SEEK INDEPENDENT ADVICE REGARDING THE APPLICABLE PROVISIONS OF THE CODE, THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FEDERAL GOVERNMENT OR FOREIGN COUNTRY IN WHICH PARTICIPANT MAY RESIDE, AND THE TAX CONSEQUENCES OF PARTICIPANT’S DEATH.

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ARTICLE IV.
OTHER PROVISIONS

Section 4.1             Book Entry; Escrow.  The Shares representing the Restricted Stock will be held in book-entry or global certificate form.  If the Company instead chooses to issue share certificates representing the Restricted Stock, the certificates for the Restricted Stock shall be deposited in escrow with the Secretary or Assistant Secretary of the Company or such other escrow holder as the Company may appoint; provided, however, that in no event shall the Participant retain physical custody of any certificates representing unvested Restricted Stock issued to him.  The deposited certificates shall remain in escrow until all of the Restrictions lapse or shall have been removed.

Section 4.2             Restricted Stock Not Transferable.  No Restricted Stock or any interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Participant or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that this Section 4.2 shall not prevent transfers by will or by applicable laws of descent and distribution.

Section 4.3             Rights as Stockholder.  Except as otherwise provided herein, upon issuance of the shares of Restricted Stock pursuant to Section 4.1, the Participant shall have all the rights of a stockholder with respect to said shares, subject to the Restrictions herein, including the right to vote the shares and to receive all dividends or other distributions paid or made with respect to the shares or Restricted Stock; provided, however, that any and all shares of Common Stock received by the Participant with respect to such Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization shall also be subject to the Restrictions until the Restrictions on the underlying shares of Restricted Stock lapse or are removed pursuant to these Terms and Conditions.

Section 4.4             No Right to Continued Employment.  Nothing in these Terms and Conditions or in the Plan shall confer upon the Participant any right to continue in the employ of the Company or any of its Subsidiaries or shall interfere with or restrict in any way the rights of the Company or its Subsidiaries, which are hereby expressly reserved, to discharge the Participant at any time for any reason whatsoever, with or without cause, except as may otherwise be provided by any written agreement entered into by and between the Company and the Participant.

Section 4.5             Governing Law.   The laws of the State of Delaware shall govern the interpretation, validity, administration, enforcement and performance of the terms of these Terms and Conditions regardless of the law that might be applied under principles of conflicts of laws.

Section 4.6             Conformity to Securities Laws.  The Participant acknowledges that the Plan and these Terms and Conditions are intended to conform to the extent necessary with all provisions of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and any and all regulations and rules promulgated thereunder by the Securities and Exchange Commission, including without limitation Rule 16b-3 under the

5

Exchange Act.  Notwithstanding anything herein to the contrary, the Plan shall be administered, and the Awards are granted, only in such a manner as to conform to such laws, rules and regulations.  To the extent permitted by applicable law, the Plan and these Terms and Conditions shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.

Section 4.7             Amendment, Suspension and Termination.  The Award and these Terms and Conditions may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Committee or the Board, provided that, except as may otherwise be provided by the Plan, neither the amendment, suspension nor termination of the Award or these Terms and Conditions shall, without the consent of the Participant, alter or impair any rights or obligations under any Award.

Section 4.8             Notices.  Notices required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the Participant to his address shown in the Company records, and to the Company at its principal executive office.

Section 4.9             Severability. The invalidity or unenforceability of any paragraph or provision of these Terms and Conditions shall not affect the validity or enforceability of any other paragraph or provision, and all other provisions shall remain in full force and effect.  If any provision of these Terms and Conditions is held to be excessively broad, then such provision shall be reformed and construed by limiting and reducing it so as to be enforceable to the maximum extent permitted by law.

Section 4.10           Certain Provisions Applicable to Participants Employed at International Locations.  The Company will assess its requirements regarding tax, social insurance and any other payroll tax (“Tax-Related Items”) withholding and reporting in connection with the shares of Restricted Stock.  These requirements may change from time to time as laws or interpretations change.  Regardless of the actions of the Company in this regard, Participant hereby acknowledges and agrees that the ultimate liability for any and all Tax-Related Items is and remains his or her responsibility and liability and that the Company makes no representations nor undertakings regarding treatment of any Tax-Related Items in connection with any aspect of the grant of Restricted Stock and does not commit to structure the terms of the grant or any aspect of the Restricted Stock to reduce or eliminate the Participant’s liability regarding Tax-Related Items.  In the event that the Company must withhold any Tax-Related Items as a result of the grant or vesting of the Restricted Stock, Participant agrees to make arrangements satisfactory to the Company to satisfy all withholding requirements.  Participant authorizes the Company to withhold all applicable Tax-Related Items legally due from the Participant from his or her wages or other cash compensation paid him or her by the Company and/or to reduce the number of vested shares of Restricted Stock delivered to Participant at the time the restrictions lapse, as contemplated by Section 3.4(a) above, to satisfy such Tax-Related Items.

Section 4.11           Data Privacy.  Participant consents to the collection, use and transfer of personal data as described in this Section.  Participant understands that the Company and its Subsidiaries hold certain personal information about the Participant, including the Participant’s name, home address and telephone number, date of birth, social security number or identification number, salary, nationality, job title, any shares of stock or directorships held in the

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Company, details of all options or any other entitlement to shares of stock (restricted or otherwise) awarded, cancelled, exercised, vested, unvested or outstanding in Participant’s favor, for the purpose of managing and administering the Plan (“Data”).  Participant further understands that the Company and/or its Subsidiaries will transfer Data amongst themselves as necessary for the purpose of implementation, administration and management of Participant’s participation in the Plan, and that the Company and/or any of its Subsidiaries may each further transfer Data to any third parties assisting the Company in the implementation, administration and management of the Plan (“Data Recipients”).  Participant understands that these Data Recipients may be located in the Participant’s country of residence, the European Economic Area, or elsewhere throughout the world, such as the United States.  Participant authorizes the Data Recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing Participant’s participation in the Plan, including any transfer of such Data, as may be required for the administration of the Plan and/or the subsequent holding of shares on the Participant’s behalf, to a broker or other third party with whom Participant may elect to deposit any shares of stock acquired upon vesting of the shares of Restricted Stock.  Participant understands that he or she may, at any time, review the Data, require any necessary amendments to it or withdraw the consent herein in writing by contacting the Company.  Withdrawal of consent may, however, affect Participant’s ability to participate in the Plan.

*     *     *     *     *

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
RULE 13a — 14(a) or RULE 15d — 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

I, Edward H. Braun, Chairman and Chief Executive Officer of Veeco Instruments Inc., certify that:

1.             I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2006 of Veeco Instruments Inc.;

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ EDWARD H. BRAUN

Edward H. Braun

Chairman and Chief Executive Officer

Veeco Instruments Inc.

November 3, 2006

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
RULE 13a — 14(a) or RULE 15d — 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

I, John F. Rein, Jr., Executive Vice President, Chief Financial Officer and Secretary of Veeco Instruments Inc., certify that:

1.             I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2006 of Veeco Instruments Inc.;

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ JOHN F. REIN, JR.

John F. Rein, Jr.

Executive Vice President, Chief Financial Officer and Secretary

Veeco Instruments Inc.

November 3, 2006

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Veeco Instruments Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward H. Braun, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ EDWARD H. BRAUN

Edward H. Braun

Chairman and Chief Executive Officer

Veeco Instruments Inc.

November 3, 2006

A signed original of this written statement required by Section 906 has been provided to Veeco Instruments Inc. and will be retained by Veeco Instruments Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Veeco Instruments Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John F. Rein, Jr., Executive Vice President, Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ JOHN F. REIN, JR.

John F. Rein, Jr.

Executive Vice President, Chief Financial Officer and Secretary

Veeco Instruments Inc.

November 3, 2006

A signed original of this written statement required by Section 906 has been provided to Veeco Instruments Inc. and will be retained by Veeco Instruments Inc. and furnished to the Securities and Exchange Commission or its staff upon request.