UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the transition period from              to              .

Commission file number 0-16244

VEECO INSTRUMENTS INC.

(Exact Name of Registrant as Specified in Its Charter)

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

31,867,852 shares of common stock, $0.01 par value per share, were outstanding as of the close of business on April 28, 2008.

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 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.

·                  The timing of our orders, shipments, and revenue recognition may cause our quarterly operating results to fluctuate significantly.

·                  Changes in our product mix may cause our quarterly operating results to fluctuate significantly.

·                  Our customers may cancel or reschedule their orders with us.

·                  Our sales cycle is long and unpredictable.

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

·                  We rely on a limited number of suppliers.

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

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

·                  We are subject to foreign currency exchange risks.

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

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

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

·                  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.

·                  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, 2007 of Veeco Instruments Inc. (“Veeco,” the “Company,” or “we”).

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

Available Information

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

Internet Address

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

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VEECO INSTRUMENTS INC.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

See accompanying notes.

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

See accompanying notes.

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

See accompanying notes.

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

Note 1—Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the three months ended March 31, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.  For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Consistent with prior years, we report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period.  The interim quarter ends are determined at the beginning of each year based on the 13-week quarters.  The 2008 interim quarter ends are March 30, June 29, and September 28.  The 2007 interim quarter ends were April 1, July 1, and September 30.  For ease of reference, we report these interim quarter ends as March 31, June 30, and September 30 in our interim condensed consolidated financial statements.

Net (Loss) Income Per Common Share

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

Net (loss) income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is computed using the weighted average number of common shares and common equivalent shares outstanding during the period. The effect of approximately 140,000 common equivalent shares for the three months ended March 31, 2008 were excluded from the diluted weighted average shares outstanding due to a net loss sustained for the period.

During the periods ended March 31, 2008 and 2007, options to purchase 5.6 million shares of common stock (at prices ranging from $0.27 to $72.00 per share) and options to purchase 4.7 million shares of common stock (at prices ranging from $19.54 to $72.00 per share) that were outstanding, respectively, were excluded from the computation of diluted earnings per share.  In the first quarter of 2008, because we recorded a net loss, the effect of all options outstanding was anti-dilutive. In 2007, the exercise price of these options exceeded the average market price of our common stock, thereby causing their effect to be anti-dilutive.

For the three months ended March 31, 2007, the weighted-average effect of the assumed conversion using the “if converted” method of accounting of our unsecured 4.125% convertible subordinated notes due December 2008 (the “Old Notes”) was approximately 4.5 million shares. The convertible shares were anti-dilutive and, therefore, were not included in the weighted shares outstanding for the three months ended March 31, 2007.

During the second quarter of 2007, we exchanged $118.8 million of the Old Notes for $117.8 million of a

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new series of 4.125% convertible subordinated notes (the “New Notes”) due April 15, 2012.   For the three months ended March 31, 2008, the weighted-average effect of the assumed conversion of the remaining $25.2 million of Old Notes is approximately 0.7 million shares.  The convertible shares were anti-dilutive and, therefore, were not included in the weighted shares outstanding for the three months ended March 31, 2008.

The New Notes meet the criteria for determining the effect of the assumed conversion using the treasury stock method of accounting, as long as we have the ability and the intent to settle the principal amount of the New Notes in cash.  Under the terms of the New Notes, we may pay the principal amount of converted New Notes in cash or in shares of common stock.  We have indicated that we intend to pay such amounts in cash.  Using the treasury stock method, the impact of the assumed conversion of the New Notes is anti-dilutive for the three months ended March 31, 2008, as the average stock price was below the conversion price of $27.23 for the period.  The effect of the assumed converted shares is dependent on the stock price at the time of the conversion.  The maximum number of common equivalent shares issuable upon conversion is approximately 6.0 million.  See Note 7 for further details on our debt.

Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”).  SFAS 157 establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.  In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically excluded from the scope of the Statement) at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as an adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings.

Effective January 1, 2008, we adopted SFAS 157 and SFAS 159.  Since we do not have any financial assets and liabilities that are required to be recorded at fair value, the only impact of these adoptions will be on the disclosures required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments in our Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Accounting Pronouncements

On February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”).  FSP 157-2 amends SFAS 157 to delay the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually).  For items within its scope, FSP 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.  Currently we believe the impact of the adoption of FSP 157-2 in 2009 will be on our disclosures only.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”) and Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51 (“SFAS 160”).   Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date at fair value with limited exceptions.  SFAS 141(R) also changes the accounting treatment for certain other items that relate to business combinations. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The purpose of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements.  The most significant provisions of this statement result in changes to the presentation of noncontrolling interests in the consolidated financial statements.  SFAS 160 is effective for fiscal years beginning after December 15, 2008.  The adoption of this statement will impact the manner in which we present noncontrolling interests, but will not impact our consolidated financial position or results of operations.

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Note 2—Share-Based Payments

Stock Option and Restricted Stock Compensation

Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period in accordance with FASB Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”).  The following compensation expense was included in the condensed consolidated statements of operations for the three months ended March 31, 2008 and 2007 (in thousands):

As of March 31, 2008, the total unrecognized compensation cost related to nonvested stock awards is $9.7 million and to stock option awards is $3.8 million.  The related weighted average period over which we expect 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.

A summary of our restricted stock awards including restricted stock units as of March 31, 2008, is presented below:

A summary of our stock option plans as of and for the three months ended March 31, 2008, is presented below:

Note 3—Balance Sheet Information

Inventories

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

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Accrued Warranty

We estimate the costs that may be incurred under the warranty we provide and recognize a liability in the amount of such costs at the time the related revenue is recognized.  Factors that affect our warranty liability include product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period.  We periodically assess the adequacy of our recognized warranty liability and adjust the amount as necessary.  Changes in our warranty liability during the period are as follows (in thousands):

Note 4—Segment Information

In 2008, we began to manage the business, review operating results and assess performance, as well as allocate resources, based upon three separate reporting segments to more accurately reflect the market focus of each business.  The Light Emitting Diode (“LED”) & Solar Process Equipment segment consists of the molecular beam epitaxy (“MBE”) and metal organic chemical vapor deposition (“MOCVD”) products primarily sold to customers in the high-brightness light emitting diode (“HB-LED”), solar, and wireless industries. This segment has production facilities in St. Paul, Minnesota and Somerset, New Jersey. The Data Storage Process Equipment segment consists of the ion beam etch, ion beam deposition, diamond like carbon, physical vapor deposition, and dicing and slicing products (collectively Ion Beam and Slider products) sold primarily to customers in the data storage industry.  This segment has production facilities in Plainview, New York, Ft. Collins, Colorado, and Camarillo, California.  The Metrology segment consists of products that are used to provide critical surface measurements on items such as semiconductor devices and thin film magnetic heads (“TFMHs”), as well as biological, nanoscience, and material science samples, and includes our broad line of atomic force microscopes, optical interferometers and stylus profilers sold to customers in the semiconductor and data storage industries and thousands of research facilities and scientific centers. This segment has production facilities in Camarillo and Santa Barbara, California and Tucson, Arizona

Prior to 2008, we managed the business based on two segments, Process Equipment and Metrology.  The Process Equipment segment combined the ion beam etch, ion beam deposition, diamond like carbon, physical vapor deposition, and dicing and slicing products with the MBE and MOCVD products. This change in segment composition was based upon management’s view that the business segments should coincide more precisely with the markets in which each segment sells its products.  The Metrology segment has remained unchanged.

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

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The following tables present certain data pertaining to our reporting segments and a reconciliation of EBITA to income (loss) before income taxes and noncontrolling interest for the three months ended March 31, 2008 and 2007,  and goodwill and total assets as of March 31, 2008 and December 31, 2007 (in thousands):

Corporate total assets are comprised principally of cash and cash equivalents and property and equipment at March 31, 2008 and December 31, 2007.

Note 5—Income Taxes

We adopted FASB Interpretation Number 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. As a result of adopting FIN 48, we recognized a $0.8 million increase to our reserves for uncertain tax positions during the first quarter of 2007, which was recorded as a reduction to the January 1, 2007 retained earnings balance.  At the adoption date of January 1, 2007, we had approximately $2.3 million of unrecognized tax benefits, including the cumulative effect increase to our reserve for uncertain tax positions.  For the year ended December 31, 2007, we released approximately $0.4 million of the reserve relating to foreign unrecognized tax benefits.  As a result, we had $1.9 million of unrecognized tax benefits at December 31, 2007.  For the three months ended March 31, 2008, our reserve for unrecognized tax benefits decreased by approximately $0.4 million primarily due to the expiration of the statute of limitations relating to certain foreign tax positions.  As a result, we had $1.5 million of unrecognized tax benefits at March 31, 2008, all of which relate to positions taken on our foreign tax returns and represent the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate in future periods.

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

We are continuing our practice of recognizing interest and penalties related to income tax matters in income tax expense. The total accrual for interest and penalties related to uncertain tax positions was approximately $0.3 million as of March 31, 2008.

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Note 6—Comprehensive Income

Total comprehensive income for the three months ended March 31, 2008 and 2007 was as follows (in thousands):

Note 7—Debt

Convertible Debt

During the first quarter of 2007, we repurchased $56.0 million of our Old Notes for $54.8 million, reducing the amount of the Old Notes outstanding from $200.0 million to $144.0 million.  As a result of these repurchases, we recorded a net gain from the extinguishment of debt of $0.7 million.

During the second quarter of 2007, we issued New Notes pursuant to privately negotiated exchange agreements with certain holders of the Old Notes.  Under these agreements, such holders agreed to exchange $118.8 million aggregate principal amount of the Old Notes for approximately $117.8 million aggregate principal amount of New Notes. Following the exchange transactions, approximately $25.2 million of the Old Notes, with a conversion price of $38.51 per common share, remained outstanding.  No net gain or loss was recorded on the exchange transactions since the carrying value of the Old Notes including unamortized deferred financing costs approximated the exchange value of the New Notes.

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

Credit Agreement

During the third quarter of 2007, we entered into a Credit Agreement with HSBC Bank USA, National Association, as administrative agent (“HSBC”), and the lenders named therein (the “New Credit Agreement”).  The New Credit Agreement amends and restates, and effectively replaced, the prior Credit Agreement, dated as of March 15, 2005, among Veeco, HSBC and the lenders named therein (the “Prior Credit Agreement”).  The Prior Credit Agreement was set to expire on March 15, 2008.  The New Credit Agreement provides for revolving credit borrowings of up to $100.0 million. As of March 31, 2008 and December 31, 2007, there were no borrowings outstanding.  Interest expense associated with the credit agreement recorded during the period was $0.1 million, of which the majority is included in accrued expenses as of March 31, 2008.

Note 8 — Commitments, Contingencies and Other Matters

Litigation

Three shareholder derivative lawsuits were filed against our directors and certain of our officers in March and April of 2005 in federal court in the Southern District of New York (the “Court”).  The plaintiffs in the consolidated derivative action asserted that our directors and certain of our officers breached fiduciary duties in connection with improper accounting transactions that we had discovered at our TurboDisc business unit which led to the restatement in March 2005 of our financial statements for the quarterly periods and nine months ended September 30, 2004.  On November 5, 2007, we entered into a Memorandum of Understanding to settle and fully resolve the consolidated shareholder derivative action for a payment of approximately $0.5 million and for our agreement to

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adopt certain changes to our Corporate Governance Guidelines.  The settlement was approved by the Court on March 28, 2008.  Insurance proceeds covered the settlement amount and legal expenses related to the settlement.  The settlement dismissed all pending claims against us and the other defendants with no admission or finding of wrongdoing by us or any of the other defendants, and Veeco and the other defendants received a full release of all claims pending in the litigation.  This settlement, together with the earlier settlement of the related securities class action lawsuit as described in our Annual Report on Form 10-K for the year ended December 31, 2007, concludes the litigation which arose from the restatement of our financial statements in March 2005.

Restructuring Expenses

During 2007, management initiated a profit improvement plan, resulting in personnel severance costs for approximately 90 employees, or approximately 7.5% of total employees, which included management, administration, and manufacturing employees companywide.  Furthermore, we took additional measures to improve profitability, including a reduction of discretionary expenses, realignment of our sales organization to more closely match current market and regional opportunities, and consolidation of certain engineering groups within our data storage business, which included the discontinuation of two products. In conjunction with these activities, we recognized a restructuring charge of approximately $6.7 million during 2007.

During the first quarter of 2008, we consolidated our Corporate headquarters into our Plainview, New York location.  As a result, we incurred an additional restructuring charge, representing the remaining lease rentals and property taxes for the facility we vacated, offset by the estimated expected sublease income to be received.  We made certain assumptions in determining the charge, which included estimated sublease income and terms of the sublease as well as the estimated discount rate to be used in determining the fair value of the liability.  We developed these assumptions based on our understanding of the current real estate market as well as current market interest rates.  The assumptions are based on management’s best estimates, and will be adjusted periodically if better information is obtained.  During the quarter we also incurred additional personnel severance costs.  The total charge for the quarter is as follows (in thousands):

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The following is a reconciliation of the liability for the restructuring charge from inception through March 31, 2008 (in thousands):

(1)                                  In 2007, a charge of $0.6 million for the modification of stock options was recorded as part of a termination agreement with each of five key employees as an increase to additional paid-in capital.  No such charge was recorded in the first quarter of 2008.

The balance of the restructuring accrual is expected to be paid over the next thirty-nine months, or the remaining life of the lease for the former Corporate headquarters.  We do not expect to incur any additional costs in connection with this restructuring plan during 2008.

In addition to restructuring expenses, during the first quarter of 2008, we recorded $0.3 million of asset impairment charges associated with property and equipment abandoned as part of the consolidation of our Corporate headquarters into our Plainview facility.

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

Executive Summary

We design, manufacture, market, and service enabling solutions for customers in the HB-LED, solar, data storage, semiconductor, scientific research and industrial markets.  We have leading technology positions in our three businesses:  LED & Solar Process Equipment, Data Storage Process Equipment, and Metrology Instruments.

Our LED & Solar Process Equipment products, which include MOCVD and MBE technologies,  are used in the manufacturing of HB-LEDs and wireless devices (such as power amplifiers and laser diodes) and solar panels.  Our Data Storage Process Equipment products, which include ion beam etch and deposition, physical vapor deposition and other technologies, are used primarily in the manufacturing of TFMHs for the data storage industry.  Our Metrology equipment is used to provide critical surface measurements in research and production environments. In production, our equipment allows customers, such as those in semiconductor and data storage, to monitor their products throughout the manufacturing process in order to improve yields, reduce costs, and improve product quality. We also sell our broad line of atomic force microscopes (“AFMs”), scanning probe microscopes (“SPMs”), optical interferometers, and stylus profilers to thousands of universities, research facilities and scientific centers worldwide to enable a variety of nanotechnology related research.

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

During 2007, management established a profit improvement plan, resulting in a 7.5% reduction in our employment levels, a reduction of discretionary expenses, the realignment of our sales organization to more closely match current market and regional opportunities, and the consolidation of certain engineering groups within our data storage business, which included the discontinuation of two products.  In conjunction with these activities, we recognized a restructuring charge of approximately $6.7 million during the year ended December 31, 2007, as well as an inventory write-off of $4.8 million and an asset impairment charge of $1.1 million.  During the first quarter of 2008, we incurred additional restructuring and asset impairment charges of $3.2 million, primarily due to the consolidation and relocation of our Corporate headquarters into our Plainview, New York location.

Highlights of the First Quarter of 2008

·                  Revenue was $102.3 million, a 3% increase over the first quarter of 2007.

·                  Orders were $109.3 million, up 3% from the first quarter of 2007.

·                  Net loss was $1.6 million, or ($0.05) per share, compared to net income of $0.3 million, or $0.01 per share, in the first quarter of 2007.

·                  Gross margins were 41.7%, compared to 44.1% in the first quarter of 2007.

·                  Restructuring and asset impairment charges totaled $3.2 million.  No such charges were recorded in the first quarter of 2007.

Outlook

We expect 2008 to be a recovery year for Veeco in both revenue growth and profitability.  In mid 2007, John Peeler joined Veeco as its new Chief Executive Officer (“CEO”) and has initiated a turnaround-plan focused on the following key initiatives:

·                  Directing Veeco’s resources to the best growth opportunities;

·                  Strengthening the global sales and services organization;

·                  Improving profitability in the short term through revenue growth, gross margin improvement and cost containment activities;

·                   Ensuring that each of Veeco’s product businesses, LED & Solar Process Equipment, Data Storage  Process Equipment, and Metrology, are executing well; and

·                    Improving Veeco’s business processes to increase effectiveness, predictability and profitability.

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As we enter 2008, we see growth opportunities in several of our core markets, particularly in our LED & Solar Process Equipment business.  It is our intention to significantly increase the research and development spending in this business to drive new product introductions. During the fourth quarter of 2007, as part of management’s profit improvement plan, we discontinued two product lines, consolidated facilities, and made other changes to our Data Storage Process Equipment business to better reflect the volume of business in that product segment.  As a result of these actions, we believe that Veeco is positioned for improved profitability while staying well-aligned to our customers’ technology requirements.

In February, 2008 Veeco provided annual guidance that revenues will grow a minimum of 10% this year to approximately $440 million based upon significant new product introductions and continued investments in technology by our customers across our various end markets.  Some of these technology investment trends include the opportunity for our MOCVD and MBE to further penetrate emerging HB-LED and solar applications; the transition to perpendicular recording and larger wafer sizes in data storage;  the adoption of our  automated AFMs as reference metrology tools for sub 65nm applications, and the continued funding of  nanoscience research.

While we currently expect our 2008 operating spending to increase due to necessary raises, incentive compensation and other variable costs, we believe that our significant cost-cutting actions in 2007 and continued cost containment focus will allow us to decrease our operating spending as a percentage of sales in 2008. In 2008, Veeco is undergoing a significant period of transition to improve its financial performance after a disappointing 2007.  Our goal is to increase gross margins in 2008, with improvements in each of our businesses, specifically in the latter half of 2008 as revenues are forecasted to increase. We anticipate that progress in this area will continue to come from activities such as better supply chain management, including outsourcing of new products, differentiated, value-added new product introductions, and development of common hardware and software platforms.

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Results of Operations:

Three Months Ended March 31, 2008 and 2007

Consistent with prior years, we report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period.  The interim quarter ends are determined at the beginning of each year based on the 13-week quarters.  The 2008 interim quarter ends are March 30, June 29 and September 28.  The 2007 interim quarter ends were April 1, July 1 and September 30.  For ease of reference, we report these interim quarter ends as March 31, June 30, and September 30 in our interim condensed consolidated financial statements.

The following table shows our Consolidated Statements of Operations, percentages of sales, and comparisons between the three months ended March 31, 2008 and 2007 (dollars in thousands):

Net Sales and Orders

Net sales of $102.3 million for the three months ended March 31, 2008 were up 3.2% compared to the comparable 2007 quarter.  The following is an analysis of sales and orders by segment and by region (dollars in thousands):