Good day, and welcome to VeecoInstruments Third Quarter 2007 Results Conference Call. Today's call is beingrecorded. For opening remarks andintroductions, I'd like to turn the conference over to Senior Vice President ofCorporate Communications and Investor Relations, Ms. Debra Wasser. Ms. Wasser,please go ahead.

Thank you, operator. Thank youall for joining today's third quarter 2007 results conference call. I'm DebWasser, Veeco's Senior Vice President of IR. Joining me today are John Peeler,our Chief Executive Office; and Jack Rein, our Chief Financial Officer. Today's earnings release wasdistributed at 4 PM this afternoon. If you haven't yet received a copy, pleasevisit the veeco.com website or call 516-677-0200, extension 1305, to get acopy. As announced previously, we have prepared a slide presentation toaccompany today's conference call and webcast, which you can follow along withon our website. This call is being recorded by Veeco Instruments and iscopyrighted material. It cannot be recorded or rebroadcast without Veeco'sexpressed permission. Your participation implies consent to our taping. To the extent this call discussesexpectations about market conditions, market acceptance and future sales of thecompany's products, future disclosures, future earnings expectations orotherwise make statements about the future, such statements are forward-lookingand are subject to a number of risks and uncertainties that could cause actualresults to differ materially from the statements made. These factors arediscussed in the business description in management's discussion and analysissections of the company's report on Form 10-K and any report to shareholders,and in our subsequent quarterly reports on Form 10-Q, current reports on Form8-K and press releases. Veeco does not undertake any obligation to update anyforward-looking statements, including those made on this call, to reflectfuture events or circumstances after the date of such statements. During this call, management mayaddress non-GAAP financial measures. Information regarding such non-GAAPfinancial measures, including reconciliation to GAAP measures of performance,is available on our website. I'd now like to turn the callover to John for opening remarks.

Thanks, Deb, and thank you allfor joining us today. Our agenda for the call is to review the third quarter2007 results, provide outlook and guidance for the fourth quarter, and reviewour plans to improve Veeco's performance. I will also cover market trends thatare currently impacting Veeco and provide some thoughts on next steps for thecompany. As stated in our press release,Veeco reported revenue of $98 million, which is in line with our guidance of$92 million to $97 million. Revenues were flat on a sequential basis and down13% from the $112 million reported in the third quarter of 2006. We are pleased that our thirdquarter bookings were ahead of our guidance at $118 million. This improvedbookings result in what is normally a seasonally weak quarter for Veeco speaksto our unique breadth of technologies and market opportunities. Third quarterbookings were up 3% versus the third quarter of 2006 and up 5% sequentially. The strength in bookings wasprimarily due to the strength in high-brightness LED and wireless andscientific research markets. We had sequential bookings declines in both datastorage and semiconductor, but we believe these markets have stabilized. Veeco'sloss per share, excluding certain items, was $0.05 compared to the earnings pershare last year of $0.21. This was in line with our guidance. I'll now turn the call over toJack to review further details of Veeco's third quarter results and the fourthquarter outlook. I'll come back afterwards to discuss our plans to improveVeeco's performance.

Thank you, John. Since threemonths ended September 30, 2007, sales were $98 million, a decrease of 13%versus the third quarter of 2006. The decrease was due to $8.5 million or 11.8%decrease in process equipment sales due to delayed sales of new products todata storage market. Metrology sales were $34.8million, a decrease of $6.2 million or 15.1% versus the third quarter of 2006,mainly due to lower sales of optical metrology products to the data storagemarket as well as lower automated AFM product sales to the semiconductormarket. By market, data storage was 30%of revenues, semiconductor was 12%, high-brightness LED/wireless was 32% andscientific research was 26%. Sales were up compared to the prior year by 14% inLED/wireless and up 8% in research, but down 35% in data storage and down 26%in semiconductor. Sequentially, sales declined $1.1 million. By region, North Americarepresented 30% of our sales, APAC 38%, Europe 19% and Japan13%. Third quarter 2007 orders improved to 118 million or up 5% sequentiallyfrom the second quarter of 2007 and also were up 3% from the third quarter of2006. Process equipment represented 68%of the orders at $80.9 million and metrology represented 32% of the orders at$37 million. By market, high-brightness LED/wireless represented 37% of orders,data storage was 30%, scientific research was 28%, and semiconductor was 5%. By region, North America was 41%of orders, Asia Pacific was 30%, Europe 19%, and Japan10%. Veeco's book-to-bill ratio was 1.21 to 1 for the quarter. Gross profit was$35.9 million for the quarter or 36.7% of sales compared to $47.9 million or42.6% of sales for the third quarter of 2006. We had previously forecasteddifficult gross margins in the third quarter due to delivery of beta version ofnew products. Products equipments marginsdeclined to 33.5%, down from 38.1% in the third quarter of '06. This 4.6%margin decrease was due to the…

Thanks, Jack. I've learned a lotduring my first hundred days at Veeco. At the onset of joining the company inJuly, I established a timeline for getting to know our employees, ourtechnologies and our customers, and I've also spent time with our seniormanagement team to assess Veeco's strengths and weaknesses and to identify thetop opportunities, issues and resource priorities. In my assessment of Veeco, Ifound the following. We have a very impressive products and technology. We haveleading market positions in all of our major markets. We have strong customerrelationships in a solid global sales and support network. We have attractivegrowth opportunities in several markets, a motivated and committed work force,excellent teamwork between engineering, marketing and operations, and asignificant number of new products coming from our R&D programs. However, even with all of thesepositives, as today's results show, we need increased and more consistentgrowth, increased profitability and better predictability of our revenuestream. It's my short-term goal to help Veeco get both its growth andprofitability up and, to accomplish this, we have initiated a performanceimprovement plan that's focused on five areas that I'll take you throughshortly. Our plan will focus on, first,directing our resources to the best growth opportunities; second, strengtheningour global sales and services organization so that it's a competitive advantagefor Veeco and an engine for growth; third, improving profitability in theshort-term from the levels that we're experiencing in the third and fourthquarters, and this will include both expense reduction, gross marginimprovement and cost containment; fourth, ensuring that each of our productbusinesses within process equipment and metrology is executing well; andfinally, fifth, at improving our business processes to increase effectiveness,predictability and profitability. Let me give you a little moredetail on each of these five points. I think that one of Veeco's challenges isthat our breadth of technology can make it difficult to…

Thank you. If you'd like to ask aquestion, please press "*, 1" on your telephone keypad at this time.If you are using a speakerphone, please pick up your handset before pressing"*, 1" today. We'll take as many questions as time permits and we'llproceed in the order that you signal us. Again, that's "*, 1" forquestions. And if you found your question has been answered, you may removeyourself from the queue by pressing the "#" key. We'll go first to Bill Ong fromAmerican Technology Research.

Yes, hi. You talked about a slowrecovery in the first half of '08. As you start to see the business pick upagain, what type of growth rates are you expecting over the four business unitsover the next, say, 18 to 24 months?

Bill, we're not ready to giveguidance on 2008 yet. What you do see in our numbers is that we have beensignificantly building our backlog. We do expect 2008 to be a growth year. Itwill ramp up through the year, because we're already building and taking ordersfor products in the second half. So, it will be a growth year; too early tocall it in absolute numbers.

Okay. Do you have any operatingmargin targets given that you already starting to layout some initiatives inboth sales and R&D?

Well, we did indicate thatoperating expense would improve as a percentage of sales, but we're not at thispoint, since we've got a variety of categories that we're still studying in thefourth quarter. It's a little bit premature to give that guidance. But wecertainly are looking at reducing spending and improving the percentage ofoperating expenses as a metric compared to sales. So, that certainly is anobjective. But, as I said, we've got a lot of pieces in motion, and we want tocomplete our analysis before we give you guidance on that.

Sure. That's fair. And then mylast question is the MOCVD market. We're clearly seeing a lot of activity inthe white LEDs with a lot of the municipalities upgrading garages and buildinglighting and so on. Are you seeing a lot more strength coming out from thegallium nitride tools versus the also phosphate, red versus blue, maybe alittle bit of color, would you see that trending over the next year-and-a-halfto two years?

We're seeing a really stronggrowth in both areas.

Okay. Thank you very much.

Our next question will come fromTimothy Arcuri from City.

Hi. A couple of things. Jack, canyou walk me through some of the deferrals? I guess I had in my model that therewas $21 million of deferred revenue that had already shipped that was sittingin backlog at the end of September. So I'm a little surprised that the revenueguidance in December is not a little better and that the commentary in the Q1is not better either. So it sounds like there was two different pushouts. Therewas some of the deferred pushed out and then there was some other that alsopushed out. Is that right?

There were some deferrals that wedid not recognize in the third quarter. We did have a relatively low number ofbifurcation acceptance in the quarter. We expect those to come in, in thefourth quarter. There are, I would say, probably $31 million of backlog at thispoint related to data storage. That's really half of which is earmarked for thesecond half of 2008, and the other half of which still represents new productsthat we're still working on final specifications with the customers on. So, thedata is not completely known as to when the revenue will be recognized, andthat's the reason for our caution at this point.

Okay. So the product is stillchanging, but it's still sitting in backlog?

The final specs are changing. Inother words, the customer have a specific spec that they're requesting, andwe're still working through those final issues on new products, certain new products.

Okay. So, how much of the $21million that was supposedly shipped as of the end of September, how much ofthat is still left in deferred revenue?

I think there is about $5 millionof that.

Okay. So, most of that flowedthrough revenue. So now, the pushouts are related to bookings that you bookedthis quarter that the shipment date is out into the back half of next year. Isthat the issue?

That's true. There is $15 millionin that of the bookings that we got in the third quarter, that are second halfrevenue in 2008.

Okay, okay. Is that an industryissue or is that specific to the product itself or is that customer specific?

I believe it's really customerspecific, and I can't go into the details of the customers. I'll say it's a newtechnology, and it has to do with them getting their facility ready and beingready to accept the product.

I see. Okay. And then, I guessthis is probably a tough question to answer. But I know that there are someactions that you are not even sure that you'll take in December. But knowingwhat you know now, if you take the risk you did in September and kind of themidpoint of what you think you'll do in December and if we look out into theback half of next year when you'd get most of the benefits from whatever isdone by the end of December, what would your operating margin look like at,say, the midpoint of your revenue guidance? So, like 108. What would theincremental benefit be based upon what is already kind of in the pipeline to bedone?

I'm not going to speculate atthis point on actions that we haven't decided upon, but the actions that we'veoutlined that we have determined, it's probably $2.5 to $3 million a quarter interms of benefit.

Okay. And then last question, processequipment margins were kind of 33%, is there some way to segment that outbetween storage and LED? Were they meaningfully different in the storage marketversus the LED market?

No, they were remarkably similar.

Okay. Thanks.

We'll move on to Robert Mairefrom Needham & Company. Robert Maire - Needham & Company: Yes. A couple of questions. Inlooking through the presentation, I didn't see any mention of a sort of targetfinancial model. Is there a target or perhaps you could give us some sort of arange you're looking at in terms of gross margin, SG&A, R&D or is thatstill sort of a work in progress? And second question, in terms ofrolling out of the plans and the changes, is this two or three quarters, threeor four quarters? When are you looking to sort of get to sort of a steadystate, I guess, is the question? And, in terms of solar, it soundslike the initial reaction was fairly good to the solar stuff, and maybe youcould give us a little more details as to your expectations for that part ofthe market.

I'll take the first part of that,Robert. I would say that since we are working through a lot of additional costreductions and structural things, it's a little bit premature to talk at themodel. But suffice it to say, we want to make progress in each quarter startingin the fourth quarter, and certainly not satisfied with the 40% gross margin ora single-digit operating margin. So, we'll give further guidance as we developthe specific activities and then develop the model that sort of is predicatedupon those actions. Robert Maire - Needham & Company: Does that mean that businesseshave some minimal gross margin in terms of what they should be doing in orderto continue to get funding or continue to get internal support?

I think we are encouraged thatwith the new products that we see, although some of them are, as we indicated,coming in the second half of the year that there is improvement in grossmargin. And we did have, as I outlined, anomalies in the third quarter, socertainly 40% is kind of minimal margin that we would like to see. Robert Maire - Needham & Company: Okay.

So, Robert, regarding how manyquarters, this is a multi-quarter plan. We rolled out the first wave of itemshere. There are some items related to real estate and other things that willtake longer, and we've put some ranges in for those items. So, it is going totake several quarters. On the solar market, we have beendoing quite well with our category 3-5 solar cells, our new thermal sources forthe CIGS market and metrology products for the solar market. So, our keyproduct lines are seeing some good growth here. We did do about $5 million inorders this quarter. So, we think there is a lot of opportunity and we'relooking for more ways to capitalize on that. Robert Maire - Needham & Company: Okay. Thank you.

Brett Hodess from Merrill Lynchhas our next question.

I know you don't want to givetargets yet, but I was wondering if you could talk a little bit about what kindof gross margins the two different product areas, metrology and processequipment, should be able to get if you were past the beta stage and you'reexecuting the way you think you ultimately can? What type of gross marginentitlement might these product lines see?

Well, Brett, I would certainlyuse last year, 2006, as a benchmark of the minimal acceptable gross margin thatwe would like to see in equipment. We're about a 40% margin. Certainly, thatwould be where we at a minimum would like to get to. And on the metrology side,I think that high 40s to 50 is really where we want to be. But, again, wehaven't finished the activities that we've outlined today. We haven't lookedat, in complete detail, a bottoms-up 2008 plan. So, it's really a bit prematureto give more granular guidance at this point.

Maybe returning to those kind of2006 kind of numbers is achievable, given the market environment and theproduct technologies and what not?

We certainly hope so, yes.

And then my next question was,when you talked about refocusing R&D, you gave some specific areas you'dlook at. Could that mean that you might move away from some of the things likelapping and dicing and maybe PVD or things like that that might not be quite asdifferentiated or something like that? Could those be areas that you could evendivest of over time?

Well, we are focusing our productlines within data storage. We're focusing on the alumina applications. We'refocusing on PVD research, and we'll continue to do lapping and dicing. So, weare focusing. We're being more careful with customer commitments, and we'reworking to do a smaller number of things really well rather than do a whole lotof things and not quite get some of them done.

And then my final question was,if you look on the LED side with the two product lines, the case areas for thegallium nitride type of products and the new E series, I believe it is, for theolder red, yellow, orange type of LEDs, how similar are those systems? Are youable to drive as they both start to ramp up? Are they going to give someleverage to you in terms of commonality of systems and manufacturingcommonality and what not to be able to drive the profitability in thatbusiness?

There is some level ofcommonalty, but there is a fair amount of difference also.

Thank you.

Our next question will come fromDavid Duley with Merriman.

Yes. I have two simple questions.And I'm afraid the answers will probably be detailed. But the first one is,could you give me the detail, as largest to smallest, the several things thatimpacted the gross margin percentage this quarter as it went down 600 basispoints? And then to get it back to 40%, what are the two or three mostimportant things for us to monitor to make sure that you can achieve thatprogress you're talking about?

Okay, Dave. Obviously, we indicatedboth on this call and in prior guidance that we had some lower margin new betatools that impacted margin. And so, that probably took us from a 42% or 43%gross margin in the second quarter down to, let's say, 39%. So, that wasprobably three points on the decline. There were also things like delayedacceptances of bifurcated products and that was a number that was probably $2.5million, in terms of gross margin. In addition, we had some, what Iwould call, after manufacturing variances, material, labor and overhead relatedto reconfiguring of product to try to maximize the revenue in the quarter, andthere was some inefficiencies in those type of things. So, I think we've seen certainlywithin the data storage world the management of CapEx, and that has impactedsort of the timing of acceptance of new products, as I indicated earlier, thescheduling of products in the second half of the year, and also just the signoff of products that we have currently in the mix. So, I think that that might be anindicator as we start to see more aggressive pursuit of acceptances by the datastorage industry, that would be an indicator that we'll get back to more normalgross margins in that sector.

And so the things that will, likeyou're articulating, I think a 40% margin target for this current quarter,which is up 3.5 points.

Right.

And the reasons why you're confidentthat you can get that improvement immediately are -- what are the three biggestreasons? I imagine this 2.5 million of revenue bifurcation, I'm sure that's acouple of million bucks that's going to come through with no costs nextquarter. So it sounds like the biggest impact?

That's a big impact, and we'vealso given revenue guidance of $104 million to $112 million. So obviously,there is a volume impact, up from roughly $98 million that we did in the thirdquarter. So that and some better margins in the backlog that we see now, thoseare, I'd say, the three things that we would point to.

Okay. I guess I do have one otherquestion. You talked about the restructuring and emphasizing certain thingsless and reinvesting more money in certain areas that you think are worthwhileand you went through and talked about the areas that you're going to continueto invest in. I'm just wondering, for endmarkets and the many products in all those end markets, what is somethingyou're definitely not going to be investing in going in the future and wherecan we expect you to cut back your R&D dollars to refocus them to morerespectable areas?

First of all, we have combinedseveral different engineering groups in the data storage process equipmentgroup. We believe there are some significant efficiencies to be gained bycombining those engineering groups. We have focused on the PVD researchapplications and the alumina applications.

And when you mean PVD research,that means that you're no longer trying to get the production PVD business,which you have low market share in now?

We are not trying to get it whenit doesn't relate to areas of strength in our core competency, in our marketshare position. So, we are specifically targeting areas where we have a strongcore competency and not chasing market share in areas that have very, very lowgross margins.

Okay, great.

And we'll move on to Mark Millerfrom Brean Murray, Carret.

Good afternoon. I see you justreported a record quarter. I think units were up 17%. Western Digital isexpected to have a similar result, plus they are expanding their wafer fab. Howdo we reconcile that in relation to what you're seeing in terms of your orders?Is there something going on? I think you mentioned maybe some technologychanges, some process changes. Is that what's causing some of the weaknesswe're seeing short term?

Mark, there is clearly growth inunit demand, and you can read the press releases. As you, as you said, thereare some good trends. We have not seen a strength in orders for near-termproduct to support these. We believe that some of our keycustomers are focusing their investment on improving their technology andmoving their capability up over a little bit of the longer term and are holdingback on some near-term capacity expansion due to that. So, we have not seen as muchnear-term growth activity as we would have expected from the news. We dobelieve the growth is there, and we are getting orders for six and nine monthsout.

Where are we at on theconversion? I know it's still early. As the conversion 8-inch wafers are goingto really start to power up sometime in '08? If so, is that first half, secondhalf?

Several of our customers areplanning conversions in '08. Mostly later in the year.

Finally, recently there has been someproduct announcements about organic LEDs. Is there any threat or opportunitythere for you guys in relation to your high-brightness business?

We think it's a different marketand a different application, probably has a good place, but we don't see it asa threat. And the real key for our business is getting the cost down to makehigh-quality LEDs, high quality, high-brightness LEDs. And we will continue toprovide the tools that enable that cost to continue going down.

Thank you.

Next we'll hear from MarkFitzgerald from Banc of America Securities.

Thank you. I'm a little confusedin terms of the restructuring here relative to what the previous management'srestructuring over the last 18 months had accomplished. So, I guess the basicquestion is, has something dramatically changed in terms of businessfundamentals at where the previous management was shooting after a year's worthof restructuring for mid kind of 40% type of gross margins, and now we're downat much lower levels again, and it sounds like we're shooting again for mid-40stype of gross margin. So, what happened here that made all those cost cuts overthe last 18 months kind of irrelevant?

Mark, I don't think they areirrelevant at this point. I think what's happened is that there has been, aswe've indicated, a slowed down in the data storage market. We've got obviouslya new CEO that's come in to take a look at the cost structure and is attemptingto align the cost of the business with the current revenue levels of thebusiness. We have full expectations thatthe second half of the year, as we indicated, we will have a growth year in'08. We will have a profitable year. We will be back-end loaded. So we'redealing with trying to restructure and trying to get costs in line for theshort term here. And that's really what, I guess, the difference is.

With the cost cuts that were madeover the last year or so, and these additional cost cuts, I mean if nothing hasreally changed, then we should be looking for something far better than themid-40s type of gross margins. I mean is that a fair thing to start buildinginto our models here when you do get a recovery? I mean you don't seem to havegarnered anything from that 18 months of cost cutting.

Again, we're looking at our coststructure and we'll give guidance as we go forward. But at this point, we'renot going to give a model. We just don't have that guidance to give at thispoint.

But, I mean is it fair to saynothing has changed in terms of pricing environment or something that'sdeteriorated gross margins?

No, I don't think that thepricing environment has changed, no.

Okay. Thank you.

Still, Mark, the data storagemarket is substantially smaller for our business area than it was a year ago or18 months ago. And the semiconductor markets for our auto AFM business is in avery different state, and we are awaiting our new product year to really hitthe revenue ramp-up. It is doing well, but those two factors drive a largechange in the business versus where it was 18 months ago.

But if those were to come back tomore normalized levels, then given additional cost cuts, again, I would arguewe should, if the math works here properly, get much better margins than we originallytargeted?

We would hope so.

Okay. Thank you.

We'll move on to Matt Petkun fromD.A. Davidson & Company. Matt Petkun - D.A. Davidson & Company: Hi there. I think in one of yourprevious comments you said that the margin was pretty similar in the datastorage, and in the bright LED business or more specifically looking at ionbeam equipment versus epi equipment. So, I understand the significant falloffin revenues in the ion beam area, but by my math, this is a record quarter forepitaxial deposition and your margins were significantly lower than the 40% runrate you had had there. So, what specifically was going on in that productgroup or those two product groups to reduce the gross margin this quarter?

Again, we had some bifurcationacceptance issues in that particular group of products. We also had, as Iindicated in general comments, some end of quarter activities in restructuringsome products, material variances in labor and overhead variances in trying toget maximum sales up for the quarter. So, there were some inefficiencies thatwe hope wouldn't recur in the fourth quarter. Matt Petkun - D.A. Davidson & Company: So do you think that you can be-- you said I think next quarter you expect margins closer to 40%.

That's correct. Matt Petkun - D.A. Davidson & Company: In that business.

Overall, we said 40%, yes. Matt Petkun - D.A. Davidson & Company: Okay, okay. And then in your semibusiness specifically, and you may have commented on this earlier, when wouldyou expect, especially talking to your customers, some volume orders for the[Hawk]?

You know, that's a little hard totell. We have two units in beta. They are doing well. And as I've talked tocustomers, I've received some good feedback. It is a whole next generationplatform with substantially better performance, but the semiconductor market isin a very much down stage. So it is all dependent on timing of gaining acceptanceand revenue ramp. We would expect to see a substantially different level ofbusiness in the second half of 2008. Matt Petkun - D.A. Davidson & Company: Okay. Recognizing that theequipment market is a little bit softer than it has been, your orders areobviously well below that, and some of that has to do with just the lack ofavailability of the Hawk until now. What are your customers doing that had beenusing, you, say, at 90 nanometers for AFM metrology. Do you know what they'redoing for the similar process steps now for metrology, 65?

They're using alternatetechnologies in some cases or postponing buying decisions where they can. Matt Petkun - D.A. Davidson & Company: Okay, okay. Well, thanks so much.

Thank you.

Doug Reid from Thomas WeiselPartners has our next question.

Thanks. Two questions. First,trying to get a better sense of what your assumptions are in the comment youmade that the second half of '08 would be much stronger than first half '08,some enhanced visibility there would be helpful. And the second question is on thenew auto AFM. I want to understand how extendible or how much, rather,additional improvement you can get in throughput beyond the 3x you'redelivering with this iteration? Does this platform rather have a life beyondthis iteration is the question?

Well, the, the second halfrevenue improvement is really auto AFM ramp-up and buys for the data storagebusiness to support new technologies. So, on one hand, we have orders forproducts in the second half. And on the other hand, we have a new platformthat's in beta now, seems to be getting good reviews and has real concreteperformance and productivity improvements. So, we believe that that willramp in the second half. So those are the two things that are driving our viewthere. We put a lot of work into this platform, from both the software and ahardware point of view. It is an entirely next generation product, and weexpect it to have a long lifetime. That's probably about as far as I canreasonably go until we are really seeing the business ramp.

Thank you.

Okay. I think we'll close it offat this point. I want to thank you all for joining us today. Jack, Debra and Iare planning to attend several investor conferences in the coming months, and Ilook forward to meeting many of you at that time. Operator, that concludes ourcall.

Thank you. Thank you, everyone,for joining us today. That does conclude our conference.