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.

Our LED & Solar Process Equipment products, which include MOCVD and MBE technologies, and web coaters for flexible photovoltaic applications, are used in the manufacturing of HB-LEDs and wireless devices (such as power amplifiers) 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 includes atomic force microscopes ("AFMs"), scanning probe microscopes ("SPMs"), optical interferometers, and stylus profilers, and 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. Our instruments are also sold 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, New York, and Massachusetts, with sales and service locations in North America, Europe, Japan, and the Asia Pacific region.

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 match more closely market and regional opportunities, consolidation of our Corporate headquarters, and the consolidation of certain engineering groups within our Data Storage Process Equipment 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 nine months ended September 30, 2008, we incurred additional restructuring charges of $7.0 million and asset impairment charges of $0.3 million, discussed further in Results of Operations below. Through the first nine months of 2008, we have seen the positive impact of these restructuring activities on the Company's operating expenses.

Highlights of the Third Quarter of 2008



†          Revenue was $115.7 million, an 18% increase over the third quarter of
2007.

†          Orders were $90.2 million, down 24% from the third quarter of 2007.

†          Net loss was ($1.7) million, or ($0.05) per share, compared to net

† Gross margins were 39.8%, compared to 36.7% in the third quarter of 2007.

Highlights of the First Nine Months of 2008



†          Revenue was $332.5 million, a 12% increase over the comparable 2007
period.

†          Orders were $335.9 million, consistent with the comparable 2007
period.

†          Net income was $0.9 million, or $0.03 per share, compared to a net

† Gross margins were 41.0%, compared to 41.2% in 2007.

Outlook

For the first nine months of 2008, the Company has reported a meaningful recovery year in both revenue growth and profitability. While Veeco has delivered strong revenue growth and profit improvement in 2008, in the third quarter we experienced a deterioration in business conditions with a sharp decline in orders of MOCVD systems as the HB-LED industry digests the significant number of new tools purchased this past year, and the global credit crisis caused customers to delay or forego capacity and technology purchases. Third quarter orders of $90.2 million were significantly below our prior expectations, and the Company also experienced some push-outs and cancellations of equipment purchases.

While the Company has a healthy prospect list for new orders in the fourth quarter, it appears that the global economic climate and constrained financing environment may cause a broad slowdown in capital equipment purchases by our customers, with uncertainty as to the depth and duration of the downturn. Due to this limited visibility, we are unable to give an accurate assessment of fourth quarter orders, and we currently anticipate order rates to come under pressure for the foreseeable future. Veeco estimates that its revenues for the fourth quarter of 2008 will be $110-$118 million.

The Company is taking corrective actions to lower our cost structure in preparation for what is likely to be a reduced revenue year in 2009. Our goal is to lower our spending while maintaining strategic investments in research and development, particularly in our LED & Solar business. It is our intent to emerge from the present economic environment in a strong position to enable future revenue and profit growth. Since the Company is currently evaluating various cost cutting actions, it is likely that Veeco will incur restructuring charges in the fourth quarter, depending upon the timing and extent of actions under consideration. We are not able to estimate the extent of these charges at this time.

Despite the recent deteriorating business conditions, Veeco has forecasted revenues in the range of $440 to $450 million in 2008, up approximately 10% from the $402.5 million reported in 2007, as well as a meaningful profit improvement as compared to 2007. The Company believes that it is well-positioned to capitalize on exciting multi-year technology trends across our LED & Solar, Data Storage and Metrology businesses, and we have made significant progress this year in refocusing our businesses and improving our performance. We have a strong balance sheet and positive cash flow, and we expect at this time that we can manage Veeco through the global economic crisis while maintaining our commitment to R&D to ensure our long-term growth and success.

Veeco will remain focused on executing our core strategies to improve the Company's performance:

† Directing Veeco's resources to the best growth opportunities;

† Strengthening the global sales and services organization;

† Maximizing profitability through a continued focus on 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 maximize effectiveness, predictability and profitability.

Results of Operations:

Three Months Ended September 30, 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 September 30, 2008 and 2007 (dollars in thousands):

                                       Three Months Ended                    Dollar and
                                          September 30,                      Percentage
                                   2008                   2007                 Change
Net sales                  $ 115,709      100.0 %  $ 97,718      100.0 %  $ 17,991     18.4 %
Cost of sales                 69,626       60.2      61,824       63.3       7,802     12.6
Gross profit                  46,083       39.8      35,894       36.7      10,189     28.4
Operating expenses:
Selling, general, and
administrative expense        23,589       20.4      22,723       23.3         866      3.8
Research and
development expense           15,302       13.2      15,049       15.4         253      1.7
Amortization expense           3,148        2.7       1,959        2.0       1,189     60.7
Restructuring expense          4,120        3.6         529        0.5       3,591    678.8
Other income, net               (213 )     (0.2 )      (179 )     (0.2 )        34     19.0
Total operating
expenses                      45,946       39.7      40,081       41.0       5,865     14.6
Operating income (loss)          137        0.1      (4,187 )     (4.3 )     4,324    103.3
Interest expense, net          1,052        0.9         665        0.7         387     58.2
Loss before income
taxes and
noncontrolling interest         (915 )     (0.8 )    (4,852 )     (5.0 )    (3,937 )  (81.1 )
Income tax provision             812        0.6         954        0.9        (142 )  (14.9 )
Noncontrolling interest          (54 )     (0.0 )      (123 )     (0.1 )       (69 )  (56.1 )
Net loss                   $  (1,673 )     (1.4 )% $ (5,683 )     (5.8 )% $  4,010    (70.6 )%

Net Sales and Orders



Net sales of $115.7 million for the three months ended September 30, 2008 were
up 18.4% compared to the comparable 2007 quarter.  The following is an analysis
of sales and orders by segment and by region (dollars in thousands):



                                           Sales                                                   Orders
                     Three Months Ended         Dollar and Percentage         Three Months Ended         Dollar and Percentage          Book-to-Bill
                        September 30,                   Change                   September 30,                   Change                    Ratio
                      2008          2007             Year to Year              2008         2007              Year to Year            2008       2007
Segment
Analysis
LED & Solar
Process
Equipment          $    40,983    $ 31,824    $       9,159         28.8 %  $   25,775    $  48,679    $      (22,904 )     (47.1 )%    0.63       1.53
Data Storage
Process
Equipment               43,256      31,099           12,157         39.1        32,359       32,239               120         0.4       0.75       1.04
Metrology               31,470      34,795           (3,325 )       (9.6 )      32,031       37,399            (5,368 )     (14.4 )     1.02       1.07
Total              $   115,709    $ 97,718    $      17,991         18.4 %  $   90,165    $ 118,317    $      (28,152 )     (23.8 )%    0.78       1.21
Regional
Analysis
North America      $    38,865    $ 29,014    $       9,851         34.0 %  $   31,256    $  48,196    $      (16,940 )     (35.1 )%    0.80       1.66
Europe                  28,578      18,244           10,334         56.6        22,650       22,220               430         1.9       0.79       1.22
Japan                    6,604      12,585           (5,981 )      (47.5 )       7,769       12,330            (4,561 )     (37.0 )     1.18       0.98
Asia Pacific            41,662      37,875            3,787         10.0        28,490       35,571            (7,081 )     (19.9 )     0.68       0.94
Total              $   115,709    $ 97,718    $      17,991         18.4 %  $   90,165    $ 118,317    $      (28,152 )     (23.8 )%    0.78       1.21

By segment, LED & Solar Process Equipment sales were up 28.8% due to an increase in end user demand from expanding applications for HB-LEDs, strong customer acceptance of Veeco's newest generation systems, and $5.0 million in sales from the solar equipment product line, which was acquired in the second quarter of 2008 as a result of the Mill Lane

acquisition. Additionally, Data Storage Process Equipment sales were up 39.1%, primarily as a result of customers' technology and capacity requirements. These increases were partially offset by a decrease in Metrology sales of 9.6%, primarily due to a slowdown in the semiconductor and research and industrial markets. By region, net sales increased by 34.0%, 56.6% and 10.0% in North America, Europe, and Asia Pacific, respectively, and decreased by 47.5% in Japan. We believe that there will continue to be quarter-to-quarter variations in the geographic distribution of sales.

Orders for the third quarter of 2008 decreased by 23.8% from the comparable 2007 period. By segment, the 47.1% decrease in orders for LED & Solar Process Equipment was a result of the HB-LED industry's slower absorption of the significant number of new MOCVD tools purchased during the past two years. Additionally, the global credit crisis has caused customers to delay or forego capacity and technology purchases. The 14.4% decrease in Metrology orders was due to decreased orders for AFM products due to lower demand in the semiconductor and research and industrial markets. Data Storage Process Equipment orders remained flat when compared to the 2007 period.

Our book-to-bill ratio for the third quarter of 2008, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 0.78 to 1. Our backlog as of September 30, 2008 was $176.0 million, compared to $173.5 million as of December 31, 2007. During the quarter ended September 30, 2008, we experienced a decrease in backlog of $9.7 million primarily from order cancellations. The outlook for orders in the fourth quarter is uncertain, and it appears that the global economic climate and constrained financing environment may cause a broad slowdown in capital equipment purchases by our customers. Due to these changing business conditions and weak capital equipment spending by customers in our business, as well as the global credit crisis, we expect to experience continued volatility in the form of cancellations and/or rescheduled orders.

Gross Profit

Gross profit for the quarter ended September 30, 2008, was 39.8%, compared to 36.7% in the third quarter of 2007 primarily due to strong performance in Process Equipment. Data Storage Process Equipment gross margins increased from 33.5% in the prior-year period to 39.8%, primarily from an increase in sales volume due to increased capacity spending, a favorable product mix and favorable pricing when compared to the prior comparable period, and cost reductions resulting from management's profit improvement plan, introduced in the fourth quarter of 2007. LED & Solar Process Equipment gross margins increased from 33.4% in the prior-year period to 36.0%, primarily due to an increase in sales volume, as well as a favorable product mix, as compared to the prior-year period. The current-year period includes a reduction in gross profit of $0.9 million related to the acquisition of Mill Lane. This reduction was the result of purchase accounting, which requires adjustments to capitalize inventory at fair value. This impact is reflected in cost of sales. Metrology gross margins increased from 42.6% in the prior year period to 44.9%, despite a reduction in sales volume, principally due to a richer product mix, as well as a reduction in costs.

Operating Expenses

Selling, general and administrative expenses increased by $0.9 million, or 3.8%, from the prior-year period primarily due to increased bonus incentives as a result of improved profitability, and an increase in non-cash compensation expense related to stock options and shares of restricted stock. These increases were partially offset by reductions in consulting services and travel and entertainment expense resulting from our cost reduction efforts. As a percentage of sales, selling, general and administrative expenses decreased from 23.3% in the third quarter of 2007 to 20.4% in the third quarter of 2008.

Research and development expense increased $0.3 million from the third quarter of 2007, primarily due to research efforts in LED & Solar Process Equipment. As a percentage of sales, research and development decreased from 15.4% in the third quarter of 2007 to 13.2% in the third quarter of 2008.

Amortization expense increased by $1.2 million, or 60.7% from the third quarter of 2007, due primarily to amortization of intangible assets acquired as part of the acquisition of Mill Lane in the second quarter of 2008.

Restructuring expense of $4.1 million in the third quarter of 2008 consisted of $3.7 million associated with the acceleration of equity awards and other severance costs resulting from the mutually agreed upon termination of the employment agreement of our former CEO, as well as $0.4 million for severance and lease-related charges in Metrology. Restructuring expense of $0.5 million in the third quarter of 2007 consisted of personnel severance costs incurred across all divisions.

Interest Expense, Net

Net interest expense in the third quarter of 2008 was $1.1 million, compared to $0.7 million in the third quarter of 2007. The increase in net interest expense is due to a reduction in interest income resulting primarily from lower interest rates during the current period.

Income Taxes

Income tax provision for the quarter ended September 30, 2008 was $0.8 million, compared to $1.0 million in the third quarter of 2007. The 2008 provision for income taxes included $0.5 million relating to our foreign operations which continue to be profitable, and $0.3 million relating to our domestic operations. The 2007 provision for income taxes included $0.6 million relating to our foreign operations and $0.4 million relating to our domestic operations.

Nine Months Ended September 30, 2008 and 2007



The following table shows our Consolidated Statements of Operations, percentages
of sales, and comparisons between the nine months ended September 30, 2008 and
2007 (dollars in thousands):



                                     Nine Months Ended                       Dollar and
                                       September 30,                         Percentage
                               2008                    2007                    Change
Net sales              $ 332,465      100.0 %  $ 295,653       100.0 %  $  36,812        12.5 %
Cost of sales            196,026       59.0      173,819        58.8       22,207        12.8
Gross profit             136,439       41.0      121,834        41.2       14,605        12.0
Operating expenses:
Selling, general,
and administrative
expense                   70,528       21.2       69,347        23.4        1,181         1.7
Research and
development expense       45,173       13.6       46,341        15.7       (1,168 )      (2.5 )
Amortization
expense                    7,530        2.3        8,236         2.8         (706 )      (8.6 )
Restructuring
expense                    6,995        2.1        1,974         0.7        5,021       254.4
Asset impairment
charge                       285        0.1            -         0.0          285       100.0
Other income, net           (591 )     (0.2 )       (605 )      (0.2 )        (14 )      (2.3 )
Total operating
expenses                 129,920       39.1      125,293        42.4        4,627         3.7
Operating income
(loss)                     6,519        1.9       (3,459 )      (1.2 )      9,978       288.5
Interest expense,
net                        2,913        0.8        2,256         0.7          657        29.1
Gain on
extinguishment of
debt                           -        0.0         (738 )      (0.2 )       (738 )    (100.0 )
Income (loss)
before income taxes
and noncontrolling
interest                   3,606        1.1       (4,977 )      (1.7 )      8,583       172.5
Income tax
provision                  2,860        0.9        3,490         1.2         (630 )     (18.1 )
Noncontrolling
interest                    (200 )     (0.1 )       (482 )      (0.2 )       (282 )     (58.5 )
Net income (loss)      $     946        0.3 %  $  (7,985 )      (2.7 )% $   8,931       111.8 %

Net Sales and Orders



Net sales of $332.5 million for the nine months ended September 30, 2008 were up
12.5% compared to the comparable 2007 period.  The following is an analysis of
sales and orders by segment and by region (dollars in thousands):



                                         Sales                                                   Orders
                    Nine Months Ended         Dollar and Percentage         Nine Months Ended         Dollar and Percentage          Book-to-Bill
                      September 30,                   Change                  September 30,                   Change                    Ratio
                    2008         2007              Year to Year             2008         2007              Year to Year            2008       2007
Segment
Analysis
LED & Solar
Process
Equipment         $ 128,205    $  82,188    $      46,017         56.0 %  $ 116,513    $ 121,448    $      (4,935 )       (4.1 )%    0.91       1.48
Data Storage
Process
Equipment           104,096       98,840            5,256          5.3      124,685      105,837           18,848         17.8       1.20       1.07
Metrology           100,164      114,625          (14,461 )      (12.6 )     94,738      109,392          (14,654 )      (13.4 )     0.95       0.95
Total             $ 332,465    $ 295,653    $      36,812         12.5 %  $ 335,936    $ 336,677    $        (741 )       (0.2 )%    1.01       1.14

Regional
Analysis
North America     $ 116,631    $  95,516    $      21,115         22.1 %  $ 124,666    $ 121,696    $       2,970          2.4 %     1.07       1.27
Europe               69,607       53,199           16,408         30.8       57,664       63,396           (5,732 )       (9.0 )     0.83       1.19
Japan                29,347       43,732          (14,385 )      (32.9 )     24,548       42,125          (17,577 )      (41.7 )     0.84       0.96
Asia Pacific        116,880      103,206           13,674         13.2      129,058      109,460           19,598         17.9       1.10       1.06
Total             $ 332,465    $ 295,653    $      36,812         12.5 %  $ 335,936    $ 336,677    $        (741 )       (0.2 )%    1.01       1.14

By segment, LED & Solar Process Equipment sales were up 56.0% due to an increase in end user demand from expanding applications for HB-LEDs, as well as strong customer acceptance of Veeco's newest generation systems. Additionally, Data Storage Process Equipment sales increased by 5.3% due to customers' technology and capacity requirements. This was partially offset by a decrease in Metrology sales of 12.6%, primarily due to a slowdown in the semiconductor and research and industrial markets. By region, net sales increased by 22.1%, 30.8% and 13.2% in North America, Europe, and Asia Pacific, respectively, and decreased by 32.9% in Japan. We believe that there will continue to be quarter-to-quarter variations in the geographic distribution of sales.

Orders for the nine-month period ended September 30, 2008 were essentially flat with the comparable 2007 period. By segment, the 13.4% decrease in Metrology orders was due to decreased orders for AFM products resulting from lower demand in the semiconductor, research, and industrial markets. The 4.1% decrease in orders for LED & Solar Process Equipment was due primarily to the third quarter 2008 decline in MOCVD orders as the HB-LED industry absorbs the significant number of new MOCVD tools purchased in the past two years. These decreases are principally offset by a 17.8% increase in Data Storage Process Equipment orders, primarily for slicing and dicing products used to create TFMHs.

Our book-to-bill ratio for the nine months ended September 30, 2008 was 1.01 to
1. Our backlog as of September 30, 2008 was $176.0 million, compared to $173.5 million as of December 31, 2007. During the nine months ended September 30, 2008, we experienced an increase in backlog of $12.7 million due to the acquisition of Mill Lane, offset by order cancellations of $13.7 million. The outlook for orders in the fourth quarter is uncertain, and it appears that the global economic climate and constrained financing environment may cause a broad slowdown in capital equipment purchases by our customers. Due to these changing business conditions and weak capital equipment spending by customers in our businesses, as well as the global credit crisis, we expect to experience continued volatility in the form of cancellations and/or rescheduled orders.

Gross Profit

Gross profit for the nine months ended September 30, 2008, was 41.0%, compared to 41.2% in the comparable 2007 period. Strong performance in Process Equipment due primarily to an increase in sales volume was offset primarily by unfavorable sales volume in Metrology. LED & Solar Process Equipment gross margins increased from 37.0% in the prior-year period to 39.6%, primarily due to a significant overall increase in sales volume as compared to the prior-year period as well as favorable pricing on new MOCVD products and a favorable product mix in MBE products. The current-year period includes a reduction in gross profit of $0.9 million related to the acquisition of Mill Lane. The reduction was the result of purchase accounting, which requires adjustments to capitalize inventory at fair value. This impact is reflected in cost of sales. Data Storage Process Equipment gross margins decreased from 39.5% in the prior-year period to 38.9%, due to favorable warranty and pricing in the prior-year period. Metrology gross margins decreased from 45.6% in the prior-year period to 45.2%, principally due to lower sales volume offset by a reduction in spending and favorable product mix.

Operating Expenses

Selling, general and administrative expenses increased by $1.2 million, or 1.7%, from the prior-year period primarily due to increased bonus incentives and profit sharing as a result of better profitability performance, as well as an increase in non-cash compensation expense related to stock options and shares of restricted stock. This was partially offset by reductions in travel and entertainment expense and consulting services associated with our cost reduction initiatives. As a percentage of sales, selling, general and administrative expenses decreased from 23.4% in 2007 to 21.2% in 2008.

Research and development expense decreased $1.2 million from the comparable 2007 period, primarily due to a more focused approach to data storage product development as a result of the decision made in the fourth quarter of 2007 by management to discontinue two product lines and consolidate facilities to better reflect the volume of business

. . .