Executive Summary

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

In our LED & Solar segment, we design and manufacture MOCVD systems, MBE systems and sources, and other types of deposition systems such as web coaters, which we sell to manufacturers of HB-LEDs, solar panels and wireless telecommunications devices and to universities and scientific research centers.

In our Data Storage segment, we design and manufacture ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, and dicing and slicing products primarily used to create TFMHs that read and write data on hard drives.

In our Metrology segment, we design and manufacture AFMs, SPMs, stylus profilers, and optical interferometers used to provide critical surface measurements in research and production environments. This broad line of products is used in universities, research facilities and scientific centers worldwide. In production environments such as semiconductor, data storage and other industries, our metrology instruments enable customers to monitor their products throughout the manufacturing process to improve yields, reduce costs, and improve product quality.

During 2008, we continued our multi-quarter plan to improve profitability and reduce and contain spending. During 2008, we made progress against the initiatives that management set, continued our restructuring plan and executed activities with a focus on creating a more variable cost effective organization. These activities included downsizing and consolidating some locations, reducing our workforce, consultants and discretionary expenses and realigning our sales organization and engineering groups. In conjunction with these activities, we recognized a restructuring charge of approximately $10.6 million, an inventory write-off of $2.9 million in cost of sales related to legacy semiconductor products and $1.5 million in cost of sales related to the required purchase accounting adjustment to write up inventory to fair value in connection with the purchase of Mill Lane during the year ended December 31, 2008. In addition, due to a weakened and deteriorating business environment, we incurred an asset impairment charge of $73.3 million consisting of $52.3 million related to goodwill and $21.0 million related to other long-lived assets.

Summary of Results for 2008

Despite the extremely challenging market environment that necessitated a significant impairment charge, in 2008 we reported higher revenues, positive impact from its cost containment initiatives, and a significantly improved balance sheet as a result of the cash flow from operations and the repayment of debt. We made progress to refocus the business and drive R&D investments to higher-growth end market opportunities.

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º Orders were $424.4 million in 2008 compared to $451.6 million in the prior year;

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º Our gross margin increased to 40% from 39% in 2007. While gross margins were up in both LED & Solar and Data Storage, they were down in Metrology due primarily to the significant decline in sales volume;

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º Our selling, general and administrative expenses increased by $1.9 million, or 2.1% from the prior year. Selling general and administrative expenses were 21.0% of net sales in 2008, compared with 22.6% of net sales in the prior year;

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º Our research and development expenses decreased $0.8 million from the prior year. As a percentage of net sales, research and development expense decreased to 13.6% from 15.2% in the prior year;

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º Net loss for 2008 was ($71.1) million compared to a net loss of ($17.4) million in 2007. Our results include the impact of $88.3 million and $12.6 million in asset impairment, restructuring and other charges in 2008 and 2007, respectively;

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º Net loss per share was ($2.27) compared to ($0.56) in 2007; and

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º We used cash of $13.3 million during 2008, principally due to the repurchase and repayment of long-term debt of $32.7 million and capital expenditures of $12.8 million, partially offset by cash provided by operating activities of $44.3 million.

Business Highlights of 2008 included:

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º Increased growth and profitability in our "green" equipment business, or LED & Solar segment, which included securing new customers for MOCVD, realigning R&D spending and increasing our revenues from solar products;

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º Realigning our Data Storage Process Equipment segment, including consolidation of overhead and locations, increased outsourcing and remaining aligned with customers on key technology requirements;

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º Strengthening the organization and increasing effectiveness across the Company: better product development, improved manufacturing efficiency and supply chain management, and strengthening the sales channel.

Outlook/Opportunities

At the end of 2008, the global economy entered a period of what appears to be an unprecedented slowdown, which is impacting all of our end markets. We expect 2009 to be a very difficult year for us as we continue to experience weak new order conditions and customers foregoing capacity and technology investments. As evidence of this decline, our trailing six month order rate decreased 27% compared to the first six months of 2008. In addition, customers have delayed approximately $30.0 million of shipments originally scheduled for the first quarter of 2009 until later in the year. We are forecasting a very weak start to 2009, with first quarter revenues between $60 million and $70 million, well below prior quarter levels.

In light of the declining business conditions, in the fall of 2008 we initiated a significant restructuring program. The details of this program were formally announced in February 2009.

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º Increased variable cost percentage for better performance through the cycles;

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º Simplified organizational structure and lower company breakeven point;

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º An improved balance sheet;

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º Excellent connectivity and relationships with customers; and

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º Alignment to customers' technology roadmaps by driving R&D spend toward high growth markets and leveraging Veeco's market positions in core technologies.

Specifically, our restructuring program includes:

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º 26% reduction in force to be completed by the end of 2009 (from 1,318 at September 30, 2008); 70% of these actions will be completed by the end of the first quarter;

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º Centralizing supply chain and operational organizations;

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º Decreasing the number of manufacturing sites through increased outsourcing for many of our product lines;

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º Decreasing the number of individual business units;

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º Changing compensation structure for our senior management and Board of Directors; and

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º Decreasing discretionary spending in all categories.

We have moved swiftly to restructure the Company to lower its quarterly breakeven level to $80 million from over $100 million in the third quarter of 2008. We anticipate that these restructuring actions will result in annualized savings of over $36 million: approximately $20 million reduction in manufacturing labor and overhead and service costs which are included in cost of goods sold, and $16 million reduction in operating spending.

While we are dramatically changing the organization and cutting overall spending in 2009, we are also continuing to invest in R&D for high-growth opportunities, with particular emphasis on LED & Solar and new applications for Metrology instruments. Despite the current pause in capacity spending, we anticipate strong multi-year LED industry growth tied to further adoption of applications such as TVs and laptops. Our solar growth strategy is based on building an integrated equipment offering for CIGS thin film solar cells, emerging as the next generation low cost, high efficiency solar technology. We also remain aligned with our key data storage customers' on their technology roadmaps in order to secure future growth opportunities.

Years Ended December 31, 2008 and 2007

    The following table shows our Consolidated Statements of Operations,
percentages of sales, and comparisons between 2008 and 2007 (dollars in 000s):

                                                                                Dollar and
                                      Year ended December 31,                   Percentage
                                                                                  Change
                                    2008                   2007                Year to Year
  Net sales                  $ 442,809     100.0 %  $ 402,475     100.0 %  $  40,334        10.0 %
  Cost of sales                266,215      60.1      244,964      60.9       21,251         8.7

  Gross profit                 176,594      39.9      157,511      39.1       19,083        12.1
  Operating expenses:
     Selling, general, and
     administrative
     expense                    92,838      21.0       90,972      22.6        1,866         2.1
     Research and
     development expense        60,353      13.6       61,174      15.2         (821 )      (1.3 )
     Amortization expense       10,745       2.4       10,250       2.5          495         4.8
     Restructuring expense      10,562       2.4        6,726       1.7        3,836        57.0
     Asset impairment
     charge                     73,322      16.6        1,068       0.3       72,254     6,765.4
     Other income, net            (668 )    (0.2 )       (618 )    (0.2 )        (50 )       8.1

  Total operating expenses     247,152      55.8      169,572      42.1       77,580        45.8

  Operating loss               (70,558 )   (15.9 )    (12,061 )    (3.0 )    (58,497 )     485.0
  Interest expense               6,400       1.4        6,976       1.7         (576 )      (8.3 )
  Interest income               (2,588 )    (0.6 )     (3,963 )    (1.0 )      1,375       (34.7 )
  Gain on extinguishment
  of debt                       (4,969 )    (1.1 )       (738 )    (0.1 )     (4,231 )     573.3

  Loss before income taxes
  and noncontrolling
  interest                     (69,401 )   (15.7 )    (14,336 )    (3.6 )    (55,065 )     384.1
  Income tax provision           1,892       0.4        3,651       0.9       (1,759 )     (48.2 )
  Noncontrolling interest         (230 )    (0.1 )       (628 )    (0.2 )        398       (63.4 )

  Net loss                   $ (71,063 )   (16.0 )% $ (17,359 )    (4.3 )% $ (53,704 )     309.4 %

Net Sales and Orders

    Net sales of $442.8 million for the year ended December 31, 2008, were up
10.0%, compared to 2007. The following is an analysis of sales and orders by
segment and by region (dollars in 000s):

                                               Sales                                                      Orders
                                                      Dollar and Percentage                                       Dollar and Percentage
                       Year ended December 31,               Change                Year ended December 31,               Change                  Book to Bill Ratio
                         2008            2007             Year to Year               2008            2007             Year to Year               2008          2007
Segment Analysis
  LED & Solar
  Process
  Equipment           $    165,812     $ 115,863    $  49,949             43.1 %  $    160,162     $ 163,970    $  (3,808 )           (2.3 )%       0.97          1.42
  Data Storage
  Process
  Equipment                149,123       136,169       12,954              9.5         138,653       141,663       (3,010 )           (2.1 )        0.93          1.04
  Metrology                127,874       150,443      (22,569 )          (15.0 )       125,622       145,939      (20,317 )          (13.9 )        0.98          0.97

  Total               $    442,809     $ 402,475    $  40,334             10.0 %  $    424,437     $ 451,572    $ (27,135 )           (6.0 )%       0.96          1.12

Regional Analysis
  Americas            $    165,926     $ 130,500    $  35,426             27.1 %  $    145,082     $ 150,748    $  (5,666 )           (3.8 )%       0.87          1.16
  Europe, Middle
  East and Africa
  ("EMEA")                  94,142        77,985       16,157             20.7          86,518       106,178      (19,660 )          (18.5 )        0.92          1.36
  Japan                     38,453        55,815      (17,362 )          (31.1 )        31,593        48,764      (17,171 )          (35.2 )        0.82          0.87
  Asia Pacific             144,288       138,175        6,113              4.4         161,244       145,882       15,362             10.5          1.12          1.06

  Total               $    442,809     $ 402,475    $  40,334             10.0 %  $    424,437     $ 451,572    $ (27,135 )           (6.0 )%       0.96          1.12

By segment, LED & Solar Process Equipment sales increased 43.1% due to an increase in end user demand from expanding applications for HB-LEDs, strong customer acceptance of Veeco's newest generation systems, successful introduction of new thermal deposition sources for CIGS solar cells, and $12.9 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 9.5% primarily as a result of customers' technology and capacity requirements. Partially offsetting these increases was a decline in Metrology sales of 15.0%, primarily due to the slowdown in the semiconductor and research and industrial markets. LED & Solar Process Equipment sales represented 37.4% of total sales for the year ended December 31, 2008, up from 28.8% in the prior year period. Data Storage Process Equipment sales accounted for 33.7% of net sales, down slightly from 33.8% in the prior year period. Metrology sales accounted for 28.9% of net sales for the year ended December 31, 2008, down from 37.4% in the prior year period. By region, net sales increased by 27.1%, 20.7% and 4.4% in the Americas, EMEA and Asia Pacific, respectively, while sales in Japan declined 31.1%. We believe that there will continue to be period-to-period variations in the geographic distribution of sales.

Orders in 2008 decreased 6.0% compared to 2007, primarily attributable to a 13.9% decline in Metrology orders due to a decrease in orders for AFM products resulting from lower demand in the semiconductor and research and industrial markets. The 2.3% decrease in orders for LED & Solar Process Equipment was due primarily to the decline in MOCVD orders as the HB-LED industry absorbs the significant number of new MOCVD systems purchased in the past two years. Data Storage Process Equipment orders declined 2.1% due to the reduction in customers' future capital equipment requirements. In addition, the global credit crisis has caused our customers to delay or forego capacity and technology purchases for our products.

Our book-to-bill ratio for 2008, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 0.96 to 1. Our backlog as of December 31, 2008, was $147.2 million, compared to $173.5 million as of December 31, 2007. During the year ended December 31, 2008, we experienced net backlog adjustments of approximately $8.0 million, consisting of $18.7 million for order cancellations, primarily from Asia Pacific MOCVD customers, and $2.0 million of adjustments related to foreign currency translation, partially offset by $12.7 million

dollars of backlog acquired in the Mill Lane acquisition in the second quarter of 2008. For certain sales arrangements we require a deposit for a portion of the sales price before shipment. As of December 31, 2008 we have deposits and advanced billings of $18.0 million. Due to changing business conditions and weak capital equipment spending by customers in our businesses, we may continue to experience cancellations and/or rescheduling of orders, particularly as the economic downturn has become more significant and wide ranging as credit availability has tightened and financial conditions have deteriorated. We expect 2009 to be a very difficult year for the Company as we continue to experience weak new order conditions and customers foregoing capacity and technology investments. In addition, customers have delayed approximately $30.0 million of shipments originally scheduled for the first quarter of 2009 until later in the year.

Gross Profit

Gross profit for 2008 was 39.9%, compared to 39.1% in 2007. Strong performance in both our LED & Solar and Data Storage Process Equipment businesses were due primarily to a 25% increase in sales volume and favorable product mix. LED & Solar Process Equipment gross margins increased from 37.8% in the prior year to 38.5%, primarily due to a 43.1% increase in sales volume as well as favorable pricing on new MOCVD products, despite a reduction in gross profit of $1.5 million during 2008 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 during 2008. Data Storage Process Equipment gross margins increased from 34.7% in the prior year to 40.5% mainly due to increased sales volume, as well as favorable pricing and product mix compared to the prior year. In 2007, Data Storage Process Equipment gross margin was also negatively impacted by a charge of $4.8 million for the write-off of inventory associated with certain discontinued data storage product lines. Metrology gross margins declined from 44.1% in the prior year to 41.0%, principally due to 15.0% lower sales volume, partially offset by a reduction in spending associated with cost savings initiatives. Metrology gross margins were also negatively impacted by a charge to cost of sales of $2.9 million during 2008 for the write off of inventory associated with legacy semiconductor products.

Operating Expenses

Selling, general and administrative expenses increased by $1.9 million, or 2.1%, from the prior year primarily due to an increase in bonus and profit sharing, an increase in equity compensation, salaries and fringe expense, and an increase in spending associated with the acquisition of Mill Lane in the second quarter of 2008. This was partially offset by reductions in consulting, travel and entertainment and insurance and facilities costs associated with our continuing cost savings initiatives. Selling, general and administrative expenses were 21.0% of net sales in 2008, compared with 22.6% of net sales in the prior year.

Research and development expense decreased $0.8 million from the prior year, primarily due to a more focused approach to data storage and metrology product development, offset by an increase in product improvement efforts and new product development in our LED & Solar segment. As a percentage of net sales, research and development expense decreased to 13.6% from 15.2% in the prior year.

Amortization expense was $10.7 million in 2008, compared to $10.2 million in 2007. The increase was primarily due to additional amortization associated with intangible assets acquired as part of the acquisition of Mill Lane in the second quarter of 2008, partially offset by certain technology-based intangible assets becoming fully amortized during 2007.

Restructuring expense of $10.6 million for the year ended December 31, 2008, consisted of personnel severance costs of $6.5 million, including $3.7 million related to the mutually agreed-upon termination of our former CEO's employment agreement and $2.8 million associated with the

reduction of approximately 74 employees, or 6%, of the Company's workforce. Additionally, we incurred a $3.7 million charge during 2008 for lease-related costs associated with the consolidation of our Corporate headquarters into our Plainview, New York facility, and $0.4 million associated with the termination of a leased facility in Santa Barbara, California, that we vacated during the third quarter. Restructuring expense of $6.7 million for the year ended December 31, 2007, was principally a result of personnel severance costs of $4.9 million associated with a cost reduction plan initiated by management during 2007 and $1.8 million of costs for purchase commitments associated with certain discontinued product lines.

During 2008, the Company recorded a $73.3 million asset impairment charge, of which $73.0 million was recorded during the fourth quarter and $0.3 million was recorded during the first quarter. The fourth quarter charge consisted of $52.3 million related to goodwill, $19.6 million related to intangible assets and $1.1 million in property, plant and equipment, as more fully described below. The first quarter charge consisted of $0.3 million associated with property and equipment abandoned as part of the consolidation of our Corporate headquarters into our Plainview facility. Asset impairment charges of $1.1 million incurred during 2007 were attributable to the write-off of certain property and equipment associated with the discontinued product lines.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we conducted our annual impairment test of goodwill and indefinite-lived intangible assets during the fourth quarters of 2008 and 2007, using October 1st as our measurement date, and utilizing a discounted future cash flow approach as described in the Application of Critical Accounting Policies section that follows. This was consistent with the approach used in previous years. Based upon the results of such assessments, we determined that no goodwill and indefinite-lived intangible asset impairment existed in any of our reporting units, as of October 1, 2008 and 2007, respectively.

During the fourth quarter of 2008, the economic downturn became more significant and wide ranging as credit availability tightened and overall business and economic conditions deteriorated. It became apparent that the revenue, profitability, growth and other assumptions we used in its fair value determination at October 1, 2008, required revisions. Additionally, we realized a significant decline in our market capitalization which resulted in the carrying value of our net assets exceeding our market capitalization. Given these factors we were required to perform an interim goodwill impairment assessment as of December 31, 2008.

In performing the impairment assessment as of December 31, 2008, we updated our financial forecast and growth rate assumptions based upon current market conditions and determined that the carrying amounts of our Data Storage Process Equipment and AFM reporting units were in excess of their respective estimated fair values. As such, we were required to allocate the estimated fair value to all assets and liabilities in these two reporting units and determined there was no implied value related to goodwill or indefinite-lived intangible assets. We recorded an asset impairment charge of $52.3 million in the fourth quarter of 2008 relating to goodwill, which consisted of $30.4 million in our Data Storage Process Equipment reporting unit and $21.9 million in our AFM reporting unit, and recorded a charge of $5.0 million in our Data Storage Process Equipment reporting unit relating to indefinite-lived intangible assets, pertaining to trademarks.

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we performed an analysis as of December 31, 2008 of our definite-lived intangible and long-lived assets due to impairment indicators noted during the fourth quarter of 2008, pertaining to its Data Storage Process Equipment and AFM reporting units. Indications of impairment included deteriorating economic conditions, reduced orders, reduced revenue projections, losses in its AFM reporting unit and a significant reduction in our market capitalization. No impairment indicators were present in the other two reporting units. For the purposes of recognition and measurement of an impairment loss, a long-lived asset or assets are grouped with other assets and liabilities at the lowest level for which

identifiable cash flows are largely independent of cash flows of other assets and liabilities. For the Data Storage Process Equipment reporting unit the long-lived assets were grouped at one level below the reporting unit and at the reporting unit level for AFM. The recoverability of long-lived asset groups was measured by a comparison of the carrying amount of the assets to the estimated undiscounted future cash flows expected to be generated by such assets. Developing the estimate of the undiscounted future cash flows requires significant judgment and projection of future financial performance, including projection of future revenue and expenses, working capital requirements and the time period in which the assets will be utilized. We used the economic life of the primary asset in the long-lived asset group to determine the forecast period of the future cash flows. For the AFM reporting unit, we analyzed long-lived assets with a carrying value of $27.8 million (consisting of $16.6 million of property, plant and equipment and $11.2 million of intangible assets principally patent defense and capitalized software costs) at December 31, 2008 for impairment and determined that no impairment existed. For the Data Storage Process Equipment reporting unit, we analyzed long-lived assets with a carrying value of $38.6 million at December 31, 2008 for impairment and determined that no impairment existed for one of the identifiable long-lived asset groups with a carrying value of $12.8 million (consisting principally of property, plant and equipment). Since the carrying amount of long-lived assets within the other identifiable asset group exceeded the estimated future cash flows of such assets, an impairment existed. This long-lived asset group consists of intangible assets of $24.0 million (primarily purchased technology) and $1.8 million of property, plant and equipment pertaining to its mechanical processing product line of Saws and Lappers. The amount of the impairment is determined by comparing the fair value of the long-lived asset group to the carrying value. As permitted under SFAS 144 we determined the fair value of our long-lived asset groups utilizing a discounted cash flow approach applying a risk free interest rate. The carrying value of the long-lived assets exceeded the fair value by $15.7, million which was recorded as an impairment charge and was allocated on a pro rata basis to the long-lived assets with $14.6 million allocated to intangible assets and $1.1 million allocated to property, plant and equipment. We currently expect to recover the remaining carrying value of the asset group of $10.1 million by cash flows generated by the use of the assets over their remaining useful life.

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