This paper presents a method for analyzing overlay data to provide an estimate of the contributions of the various subsystems to the 3 (sigma) budget. This information can be used to evaluate the performance of these subsystems and to provide insight into problem areas. The method was initially developed using empirical statistical modeling and later verified theoretically. The empirical analysis was performed using the overlay analysis code developed initially at Perkin Elmer and then at SVG Lithography. The results of the code can also be used to predict the overlay performance improvements that can be attained through system corrections or subsystem improvements. The method has been used to evaluate the performance of a number of Micrascan tools using acceptance test data and simulated product data. Results for a typical tool are presented and acceptable tolerances for system corrections are derived.