<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
         QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

     (Mark One)
     [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
          EXCHANGE ACT OF 1934

                        FOR THE QUARTERLY PERIOD ENDED     JUNE 30, 2000
                                                          ----------------

     []   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
          EXCHANGE ACT OF 1934

     For the transition period from                       to
                                      ----------------        -----------------

                  Commission File Number                 0-22248
                                               --------------------------

                             ULTRATECH STEPPER, INC.
-------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                  DELAWARE                                   94-3169580
-------------------------------------------------------------------------------
(State or other jurisdiction of incorporation            (I.R.S. employer
              or organization)                        identification number)

        3050 Zanker Road, San Jose, California                95134
-------------------------------------------------------------------------------
       (Address of principal executive offices)            (Zip Code)

      Registrant's telephone number, including area code   (408) 321-8835
                                                          --------------------


--------------------------------------------------------------------------------
         (Former name, former address and former fiscal year, if changed
                              since last report.)


     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
                          --------------                         -------------

     Indicate the number of shares of the issuer's class of common stock, as of
the latest practical date:


                Class                      Outstanding as of August 8, 2000
     -------------------------------    ---------------------------------------
      common stock, $.001 par value                    21,108,329



<PAGE>

                             ULTRATECH STEPPER, INC.

                                      INDEX
<TABLE>
<CAPTION>
                                                                                            Page No.
                                                                                            --------
<S>               <C>                                                                       <C>
PART 1.           FINANCIAL INFORMATION

ITEM 1.           CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31,
                  1999..................................................................................   3

                  Condensed Consolidated Statements of Operations for the three months ended
                  June 30, 2000 and 1999 and the six months ended June 30, 2000 and 1999................   4

                  Condensed Consolidated Statements of Cash Flows for the six months ended June
                  30, 2000 and 1999.....................................................................   5

                  Notes to Condensed Consolidated Financial Statements..................................   6

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................   10

ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................   25


PART 2.           OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS.....................................................................   26

                  CHANGES IN SECURITIES AND USE OF
ITEM 2.           PROCEEDS..............................................................................   26

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES.......................................................   26

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................  26

ITEM 5.           OTHER INFORMATION......................................................................  26

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K.......................................................  27


SIGNATURES...............................................................................................  28
</TABLE>


                                       2

<PAGE>

PART 1.  FINANCIAL  INFORMATION
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                    ULTRATECH STEPPER, INC.
                             CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
(In thousands)                                                   Jun. 30, 2000      Dec. 31, 1999*
-------------------------------------------------------------------------------------------------
ASSETS                                                            (Unaudited)
<S>                                                             <C>                <C>
Current assets:
      Cash, cash equivalents and
        short-term investments                                        $ 133,482        $ 143,544
      Accounts receivable, net                                           13,153           19,993
      Inventories                                                        30,294           28,975
      Current portion of leases receivable                                  680            1,354
      Prepaid expenses and other
        current assets                                                    4,525            2,040
-------------------------------------------------------------------------------------------------
Total current assets                                                    182,134          195,906

Equipment and leasehold
      improvements, net                                                  21,994           20,486

Restricted long-term investments                                          5,635            5,479

Leases receivable, net                                                        -              282

Intangible assets, net                                                    7,872            8,940

Other assets                                                              4,781            5,715
-------------------------------------------------------------------------------------------------

Total  assets                                                         $ 222,416        $ 236,808
=================================================================================================

-------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Notes payable                                                     $ 1,139            $ 490
      Accounts payable                                                   11,645            7,931
      Deferred income                                                    21,174              353
      Other current liabilities                                          20,427           23,531
-------------------------------------------------------------------------------------------------
Total current liabilities                                                54,385           32,305

Other liabilities                                                           262              289

Stockholders' equity:
      Common stock                                                           21               21
      Additional paid-in capital                                        175,651          175,573
      Accumulated other comprehensive loss, net                          (2,336)          (2,408)
      Treasury stock                                                     (6,867)               -
      Retained earnings                                                   1,300           31,028
-------------------------------------------------------------------------------------------------
Total stockholders' equity                                              167,769          204,214
-------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                            $ 222,416        $ 236,808
=================================================================================================
</TABLE>

*    The Balance Sheet as of December 31, 1999 has been derived from the audited
     financial statements at that date.

         SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                       3

<PAGE>

                              ULTRATECH STEPPER, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                     Three Months Ended            Six Months Ended
                                                                  -------------------------    -------------------------
                                                                      Jun. 30,    Jun. 30,        Jun. 30,     Jun. 30,
(In thousands, except per share amounts)                                2000        1999            2000          1999
------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>            <C>          <C>
Net sales:
       Products                                                        $29,565     $24,431         $55,292      $46,071
       Services                                                          3,963       4,853           8,136        8,992
------------------------------------------------------------------------------------------------------------------------
Total net sales                                                         33,528      29,284          63,428       55,063
Cost of sales:
       Cost of products sold                                            18,365      15,111          35,578       29,060
       Cost of services                                                  2,880       2,878           6,154        5,987
------------------------------------------------------------------------------------------------------------------------
Total cost of sales                                                     21,245      17,989          41,732       35,047
------------------------------------------------------------------------------------------------------------------------
Gross profit                                                            12,283      11,295          21,696       20,016

OPERATING EXPENSES:
       Research, development, and
           engineering                                                   6,082       6,765          13,158       13,302
       Amortization of goodwill                                            550         430           1,069          737
       Selling, general, and
           administrative                                                7,161       6,825          13,714       13,079
       Shutdown of operations                                            7,984           -           7,984            -
------------------------------------------------------------------------------------------------------------------------
Operating loss                                                          (9,494)     (2,725)        (14,229)      (7,102)
Interest expense                                                           (71)       (120)           (142)        (241)
Interest and other income, net                                           1,743       1,771           3,526        3,740
------------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of a change in accounting
       principle                                                        (7,822)     (1,074)        (10,845)      (3,603)
Cumulative effect on prior years of the application of SAB 101
       "Revenue Recognition in Financial Statements"                         -           -         (18,883)           -
------------------------------------------------------------------------------------------------------------------------
Net loss                                                               ($7,822)    ($1,074)       ($29,728)     ($3,603)
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE-BASIC:
Loss before cumulative effect of a change in accounting
       principle                                                        ($0.37)     ($0.05)         ($0.51)      ($0.17)
Cumulative effect on prior years of the application of
       SAB 101 "Revenue Recognition in Financial Statements"             $0.00       $0.00          ($0.89)       $0.00
Net loss                                                                ($0.37)     ($0.05)         ($1.40)      ($0.17)
Number of shares used in
       per share computations - basic                                   21,178      21,264          21,310       21,194

EARNINGS PER SHARE-DILUTED:
Loss before cumulative effect of a change in accounting
       principle                                                        ($0.37)     ($0.05)         ($0.51)      ($0.17)
Cumulative effect on prior years of the application of
       SAB 101 "Revenue Recognition in Financial Statements"             $0.00       $0.00          ($0.89)       $0.00
Net loss                                                                ($0.37)     ($0.05)         ($1.40)      ($0.17)
Number of shares used in
       per share computations - diluted                                 21,178      21,264          21,310       21,194
------------------------------------------------------------------------------------------------------------------------
</TABLE>

      SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                       4

<PAGE>


                             ULTRATECH STEPPER, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                 Six Months Ended
                                                                          -------------------------------
(In thousands)                                                            Jun. 30, 2000     Jun. 30, 1999
---------------------------------------------------------------------------------------------------------
<S>                                                                     <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                      ($29,728)          ($3,603)
Charges to income not affecting cash                                             8,396             6,293
Change in accounting principle - SAB 101 "Revenue Recognition
     in Financial Statements"                                                   18,883                 -
Net effect of changes in operating assets
     and liabilities                                                             7,006             3,102
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                        4,557             5,792

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures                                                            (8,194)           (3,210)
Net reduction  in available-for-sale securities                                    499             3,342
Segregation of restricted long-term investments                                   (144)              (46)
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                             (7,839)               86

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayment) from issuance of notes payable                            649              (226)
Buy back of common stock                                                        (6,866)                -
Net proceeds from issuance of common stock
     pursuant to employee stock plans                                               78               101
---------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                           (6,139)             (125)

Net increase (decrease) in cash and cash equivalents                            (9,421)            5,753

Cash and cash equivalents at beginning
     of period                                                                  46,978            54,142
---------------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of period                                     $37,557           $59,895
=========================================================================================================
</TABLE>


      SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



                                       5

<PAGE>

                             ULTRATECH STEPPER, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                  JUNE 30, 2000

(1)  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles 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 generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for fair presentation have been included.

COMPANY AND INDUSTRY INFORMATION - The Company operates in one business segment,
which is the manufacture and distribution of photolithography equipment to
manufacturers of integrated circuits, thin film heads and micromachined
components.

USE OF ESTIMATES - The preparation of the accompanying unaudited condensed
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

REVENUE RECOGNITION - Sales of the Company's products are recorded after the
contractual obligation for installation has been satisfied and customer
acceptance provisions have lapsed, provided collections of the related
accounts receivable are probable. The Company also sells service contracts
for which revenue is recognized ratably over the contract period.

From time to time, the Company leases its products to customers typically as
sales-type leases, in accordance with the provisions of the Statement of
Financial Accounting Statement No. 13, "Accounting for Leases." These leases
generally have a five-year term.

The Company previously recognized revenue from the sales of its products
generally upon shipment, which usually preceded installation and final
customer acceptance, provided that final customer acceptance and collection
of the related receivable were probable. Effective January 1, 2000, the
Company changed its method of accounting for product sales to recognize such
revenues when the contractual obligation for installation has been satisfied,
or when installation is substantially complete, and customer acceptance
provisions have lapsed, provided collections of the related receivable are
probable. The Company believes the change in accounting principle is
preferable based on guidance provided in SEC Staff Accounting Bulletin No.
101 (SAB 101), "Revenue Recognition in Financial Statements." The cumulative
effect of the change in accounting principle, $18,883,000 (or $0.89 per
share, basic and diluted) was reported as a charge in the quarter ended March
31, 2000 in the accompanying statement of operations.

The cumulative effect of this change in accounting principle includes system
revenue, cost of sales and certain expenses, including warranty and
commission expenses, that will be recognized when both installation and
customer acceptance provisions are satisfied, subsequent to January 1, 2000.

During 2000, the Company substantially changed its operations to implement
SAB 101. Approximately 35% of the Company's net sales for the quarter ended
June 30, 2000 resulted from systems shipped in 1999 and accepted during the
quarter. Additionally, nearly all system revenue for the quarter ended March
31, 2000 resulted from systems shipped prior to January 1, 2000 and accepted
during the quarter. This reflects the Company's traditional time frame for
shipment, installation and customer acceptance. The net result of shipments
and acceptances during the quarter was a reduction of approximately $6.4
million in deferred income. On a year-to-date basis,



                                       6

<PAGE>

the net result of shipments and acceptances for the six-month period ended
June 30, 2000 was a reduction of approximately $11.4 million in deferred
income. The Company believes that estimates of its system revenue under its
prior method of accounting would not be indicative of results that would have
been achieved if the Company had not substantially changed its operations to
implement SAB 101.

FISCAL PERIODS: The Company's second fiscal quarter in 2000 and 1999 ended on
July 1, 2000 and July 3, 1999, respectively. For convenience of presentation,
the Company's financial statements have been shown as having ended on June
30, 2000 and June 30, 1999.

Operating results for the three and six-month periods ended June 30, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000, or any future period.

(2) INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                               Jun. 30, 2000            Dec. 31, 1999
                                              -----------------        ---------------
(In thousands)                                  (Unaudited)
<S>                                          <C>                       <C>
Raw materials...............................      $12,101                  $12,589
Work-in-process.............................       12,207                   13,484
Finished products ..........................        5,986                    2,902
                                                  -------                  -------
                                                  $30,294                  $28,975
                                                  -------                  -------
</TABLE>

(3) OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

<TABLE>
<CAPTION>
                                               Jun. 30, 2000            Dec. 31, 1999
                                              -----------------        ---------------
(In thousands)                                  (Unaudited)
<S>                                          <C>                       <C>
Salaries and benefits......................      $ 4,689                  $ 3,369
Warranty reserves..........................        3,555                    3,997
Advance billings...........................        2,227                    4,845
Income taxes payable.......................        4,626                    5,081
Sales returns and allowances...............            -                    1,471
Reserve for losses on purchase order
  commitments..............................        2,664                    2,423
Other......................................        2,666                    2,345
                                                  -------                  -------
                                                  $20,427                  $23,531
                                                  -------                  -------
</TABLE>


(4) COMPUTATION OF NET INCOME (LOSS) PER SHARE

The following sets forth the computation of basic and diluted net income (loss)
per share:


                                       7

<PAGE>

<TABLE>
<CAPTION>
                                                                       Three Months Ended           Six Months Ended
                                                                    --------------------------  --------------------------
                                                                      Jun. 30       Jun. 30      Jun. 30        Jun. 30
(Unaudited, in thousands, except per share amounts)                    2000          1999          2000          1999
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>             <C>           <C>            <C>
Numerator:
      Loss before cumulative effect of a change in
           accounting principle                                         ($7,822)      ($1,074)    ($10,845)       ($3,603)
      Cumulative effect on prior years of the application
           of SAB 101 "Revenue Recognition in Financial
           Statements"                                                        -             -      (18,883)             -
                                                                    ------------  ------------  -----------   ------------
      Net loss                                                          ($7,822)      ($1,074)    ($29,728)       ($3,603)
                                                                    ------------  ------------  -----------   ------------
Denominator:
      Denominator for basic net loss per share                           21,178        21,264       21,310         21,194
      Effect of dilutive employee stock options                               -             -            -              -
                                                                    ------------  ------------  -----------   ------------
      Denominator for diluted net loss per share                         21,178        21,264       21,310         21,194
                                                                    ------------  ------------  -----------   ------------

EARNINGS PER SHARE - BASIC:
      Loss before cummulative effect of a change in
           accounting principle                                          ($0.37)       ($0.05)      ($0.51)        ($0.17)
                                                                    ============  ============  ===========   ============
      Cumulative effect on prior years of the application
           of SAB 101 "Revenue Recognition in Financial
           Statements"                                                    $0.00         $0.00       ($0.89)         $0.00
                                                                    ============  ============  ===========   ============
      Net loss                                                           ($0.37)       ($0.05)      ($1.40)        ($0.17)
                                                                    ============  ============  ===========   ============

EARNINGS PER SHARE - DILUTED:
      Loss before cummulative effect of a change in
           accounting principle                                          ($0.37)       ($0.05)      ($0.51)        ($0.17)
                                                                    ============  ============  ===========   ============
      Cumulative effect on prior years of the application
           of SAB 101 "Revenue Recognition in Financial
           Statements"                                                    $0.00         $0.00       ($0.89)         $0.00
                                                                    ============  ============  ===========   ============
      Net loss                                                           ($0.37)       ($0.05)      ($1.40)        ($0.17)
                                                                    ============  ============  ===========   ============
</TABLE>

For the three and six-months period ended June 30, 2000, options to purchase
4,140,000 shares of Common Stock at an average exercise price of $15.40 were
excluded from the computation of diluted net loss per share as the effect would
have been anti-dilutive. This compares to the exclusion of 3,668,000 options at
an average exercise price of $16.27 for the three and six-months periods ended
June 30, 1999. Options are anti-dilutive when the Company has a net loss or when
the exercise price of the stock option is greater than the average market price
of the Company's Common Stock.


(5) COMPREHENSIVE LOSS

The components of comprehensive loss are as follows:

<TABLE>
<CAPTION>
                                                            Three Months Ended Jun. 30,     Six Months Ended Jun. 30,
                                                            ---------------------------     -------------------------
(Unaudited, in thousands)                                      2000              1999          2000           1999
----------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>             <C>             <C>            <C>
Net loss................................................     ($7,822)        ($1,074)        ($29,728)      ($3,603)
Accumulated other comprehensive income (loss)...........
     Unrealized holding gain (loss) on
        available-for-sale securities...................         301          (1,083)              72        (2,100)
     Tax  effect........................................           -               -                -             -
----------------------------------------------------------------------------------------------------------------------
Comprehensive loss                                           ($7,521)        ($2,157)        ($29,656)      ($5,703)
----------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       8

<PAGE>

Accumulated other comprehensive income (loss) presented in the accompanying
condensed consolidated balance sheets consists entirely of accumulated
unrealized holding gain (loss) on available-for-sale securities. The
unrealized holding gain (loss) on available-for-sale securities is not
currently adjusted for income taxes as a result of the Company's operating
losses.

(6) TREASURY STOCK

Treasury stock is comprised of 475,000 shares of the Company's Common Stock.
These shares were purchased in open market transactions at a total cost of
$6,866,000, pursuant to the stock repurchase program approved by the
Company's Board of Directors in April 2000.

(7) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.

In June 1999, the Financial Accounting Standards Board issued Statement No.
137 (FAS 137), "Accounting for Derivative Instruments and Hedging Activities
-Deferral of the Effective Date of FASB Statement No. 133." FAS 137 amends
the Financial Accounting Standards Board issued Statement No. 133 (FAS 133),
"Accounting for Derivative Instruments and Hedging Activities" which was
issued in June 1998 and was to be effective for all fiscal quarters of fiscal
year beginning after June 15, 1999. FAS 137 defers the effective date of FAS
133 to be effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. Accordingly, the Company will adopt the provisions of
FAS 133 for its 2001 fiscal year. FAS 133 establishes accounting and
reporting standards for derivative instruments and requires recognition of
all derivatives as assets or liabilities in the statement of financial
position and measurement of those instruments at fair value. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.

(8) SHUTDOWN OF OPERATIONS

During the quarter ended June 30, 2000, the Company shutdown the operations
of its UltraBeam unit. As a direct result of this decision, the Company
recognized a charge in the period of $8.0 million, or $0.38 per share. Of
this charge, approximately $5.5 million related to operating and capital
assets disposed of during the quarter, $1.7 million related to shutdown and
employee severance costs and $0.8 million related to outstanding lease and
purchase order commitments. As of June 30, 2000, approximately $1.3 million
of the total charge of $8.0 million remained in accounts payable or accrued
liabilities.

In conjunction with the shutdown, the Company in arriving at the related
charge to operations used significant estimates relating to future events.
These estimates include assumptions as to the sale of certain assets and the
termination of certain leases. Actual results may differ materially from
these estimates, which would result in additional charges to operations in
the quarter ending September 30, 2000, or to subsequent periods.

(9) SUBSEQUENT EVENTS

In July 2000, the Company entered into an agreement with Applied Materials,
Inc. under which Applied Materials will license the laser thermal processing
technology of the Company's Verdant Technologies Division, which involves
projection optics and short pulse laser technology.



                                       9

<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS



OVERVIEW

Certain of the statements contained in this report may be considered
forward-looking statements under Section 21E of the Securities Exchange Act
of 1934, as amended, that may involve a number of risks and uncertainties. In
addition to the factors discussed herein, other factors that could cause
actual results to differ materially include the following: cyclicality in the
Company's served markets; high degree of industry competition; lengthy sales
cycles, including the timing of system acceptances; manufacturing
inefficiencies and the ability to volume produce systems; inventory
obsolescence; delays, deferrals and cancellations of orders by customers; mix
of products sold; integration and development of Verdant operations; impact
of the shutdown of the UltraBeam operations; failure to develop and
commercialize the Company's reduction stepper products; international sales;
customer concentration; rapid technological change and the importance of
timely product introductions; future acquisitions; changes to financial
accounting standards, dependence on key personnel; degree of success of
technologies licensed to outside parties; sole or limited sources of supply;
intellectual property matters; environmental regulations; effects of certain
anti-takeover provisions; volatility of stock price; and the other risk
factors listed from time to time in the Company's SEC reports.

Due to these and additional factors, certain statements, historical results
and percentage relationships discussed below will not necessarily be
indicative of the results of operations for any future period.

Ultratech develops, manufactures and markets photolithography equipment
(steppers) designed to reduce the cost of manufacturing integrated circuits,
thin film heads for disk drives and micromachined components. The Company
supplies step-and-repeat systems based on one-to-one and reduction optical
technologies to customers located throughout North America, Europe, Japan and
the rest of Asia. These products range from low-cost systems for high-volume
manufacturing to advanced systems for cost-effective production of
leading-edge devices and for research and development applications.

Additionally, Ultratech develops, manufactures and markets laser thermal
processing systems used in the development and production of advanced
transistors. These transistors are used in the manufacture of microprocessors
and advanced memory devices. Additionally, thin film transistors are used in
the manufacture of flat panel displays.

In July 2000, the Company entered into an agreement with Applied Materials,
Inc. ("Applied Materials") under which Applied Materials will license the
laser thermal processing technology of the Company's Verdant Technologies
Division, which involves projection optics and short pulse laser technology.

In April 2000, the Company reached a decision to shut down its UltraBeam
operations. As a result of this decision, the Company recognized a charge
during the quarter ended June 30, 2000 of $8.0 million, or $0.38 per share.
In conjunction with the shutdown, the Company in arriving at the related
charge to operations used significant estimates relating to future events.
These estimates include assumptions as to the sale of certain assets and the
termination of certain leases. Actual results may differ materially from
these estimates, which would result in additional charges to operations in
the quarter ending September 30, 2000, or to subsequent periods.

During the quarter ended June 30, 2000, the Company entered into an agreement
to exercise an option it holds to purchase 6.34 acres of undeveloped land it
presently leases in San Jose, California and entered into a separate
agreement to sell this property to a third party. The Company presently




                                       10

<PAGE>

anticipates these transactions will be completed, and the resulting gain will
be recognized, in the quarter ending September 30, 2000.

Additionally, during the quarter ended June 30, 2000, the Company settled
litigation it had initiated against Nikon Inc. ("Nikon"). In conjunction with
the agreement, the Company will recognize licensing revenue in future
quarters consistent with the terms of settlement. Among other terms, the
agreement includes cross-covenants not to sue. The Company is presently
proceeding with related actions against Canon Inc. ("Canon") and ASM
Lithography, Ltd. ("ASM"). There can be no assurance that the Company will
prevail in those actions.

The Applied Materials, Nikon and land agreements may result in additional
income tax expense in the quarter ending September 30, 2000.

The following discussion should be read in conjunction with the Company's
1999 Annual Report on Form 10-K, which is available upon request.

RESULTS OF OPERATIONS

The Company's operating results have fluctuated significantly in the past and
will continue to fluctuate significantly in the future. Such variability
depends upon a variety of factors, including substantial cyclicality in the
Company's target markets; various competitive factors including price-based
competition and competition from vendors employing other technologies; the
timing and terms of significant orders; the timing of shipments and customer
acceptances; lengthy sales cycles for the Company's products; the mix of
products sold; inventory and open purchase commitment reserve positions;
changes to financial accounting standards; concentration of credit risk;
lengthy development cycles for new products; market acceptance of new
products and enhanced versions of the Company's products; delayed shipments
to customers due to customer configuration changes and other factors;
acquisition activities requiring the devotion of substantial management
resources; lengthy manufacturing cycles for the Company's products; the
timing of new product announcements and releases by the Company or its
competitors; manufacturing inefficiencies associated with the startup of new
product introductions; customer concentration; ability to volume produce
systems and meet customer requirements; patterns of capital spending by
customers; product discounts; changes in pricing by the Company, its
competitors or suppliers; shutdown of operations; sale of assets; outcome of
litigation; success of technologies licensed to outside parties; political
and economic instability throughout the world, in particular the Asia/Pacific
region; changes in sales or distribution agreements; natural disasters;
regulatory changes; and business interruptions related to the Company's
occupation of its facilities. The Company's gross profit as a percentage of
sales has been and will continue to be significantly affected by a variety of
factors, including product discounts and competition in the Company's
targeted markets; the mix of products sold; inventory and open purchase
commitment reserve provisions; the rate of capacity utilization; nonlinearity
of shipments during the quarter; the introduction of new products, which
typically have higher manufacturing costs until manufacturing efficiencies
are realized and are typically discounted more than existing products until
the products gain market acceptance; the percentage of international sales,
which typically have lower gross margins than domestic sales principally due
to higher field service and support costs; and the implementation of
subcontracting arrangements.

The Company derives a substantial portion of its total net sales from sales
of a relatively small number of newly manufactured systems, which typically
range in price from $800,000 to $2.4 million for the Company's 1X steppers,
and $1.5 million to more than $6.0 million for the Company's reduction
steppers. As a result of these high sale prices, the timing of recognition of
revenue from a single transaction has had and will continue to have a
significant impact on the Company's net sales and operating results. The
Company's backlog at the beginning of a period typically does not include all
of the sales needed to achieve the Company's objectives for that period. In
addition, orders in backlog are subject to cancellation, shipment or customer
acceptance delays, and deferral or rescheduling by a customer with limited or
no penalties. Consequently, the Company's net sales and operating results for
a period have been and will continue to be dependent



                                       11

<PAGE>

upon the Company obtaining orders for systems to be shipped and accepted in
the same period in which the order is received. The Company's business and
financial results for a particular period could be materially adversely
affected if an anticipated order for even one system is not received in time
to permit shipment and customer acceptance during a particular period.
Furthermore, a substantial portion of the Company's shipments has
historically been realized near the end of each quarter. Delays in
installation and customer acceptance due, for example, to the inability of
the Company to successfully demonstrate the agreed upon specifications or
criteria at the customer's facility, or to the failure of the customer to
permit installation of the system in the agreed upon time, may cause net
sales in a particular period to fall significantly below the Company's
expectations, which may materially adversely affect the Company's operating
results for such period. Additionally, the failure to receive anticipated
orders or delays in shipments due, for example, to reschedulings, delays,
deferrals or cancellations by customers, additional customer configuration
requirements, or to unexpected manufacturing difficulties or delays in
deliveries by suppliers due to their long production lead times or otherwise,
has caused and may continue to cause net sales in a particular period to fall
significantly below the Company's expectations, which has and could continue
to materially adversely affect the Company's operating results for such
period. In particular, the long manufacturing cycles of the Company's Saturn
Wafer Stepper(R), and the Company's reduction stepper product offerings, and
the long lead time for lenses and other materials, could cause shipments of
such products to be delayed from one quarter to the next, which could
materially adversely affect the Company's financial condition and results of
operations for a particular quarter.

The Company's business has in prior years been subject to seasonality,
although the Company believes such seasonality has been masked in recent
years by cyclical trends within the semiconductor and thin film head
industries. In addition, the need for continued expenditures for research and
development, capital equipment, ongoing training and worldwide customer
service and support, among other factors, will make it difficult for the
Company to reduce its operating expenses in a particular period if the
Company fails to achieve its net sales goals for the period. Additionally,
the Company continues to operate at less than optimal capacity utilization,
resulting in manufacturing inefficiencies that adversely affect the Company's
gross margins and results of operations. The Company presently anticipates
that this trend will continue for at least the next few quarters.

The Company presently expects that net sales for the three-month period
ending September 30, 2000 may be higher than net sales in the comparable
period in 1999. However, due to lack of order visibility and uncertainty as
to the timing of shipments and customer acceptances, the Company can give no
assurance that it will be able to achieve or maintain its current sales
levels, or that it will be able to achieve or maintain its current level of
profitability.

NET SALES

Net sales consist of revenue from system sales, spare parts sales, and
service. For the quarter ended June 30, 2000, net sales were $33.5 million,
an increase of 14% as compared with net sales of $29.3 million for the
comparable period in 1999. On a year-to-date basis, net sales were $63.4
million for the six-month period ended June 30, 2000, an increase of 15% as
compared with net sales of $55.1 million in the comparable period in 1999.
Both the current quarter and year-to-date increases, relative to the
comparable 1999 periods, were primarily attributed to improved conditions
within the semiconductor industry, which has resulted in higher capital
spending levels, partially offset by lower equipment sales to the thin film
head industry. Approximately 35% of the Company's net sales for the quarter
ended June 30, 2000 resulted from systems shipped in 1999 (see discussion of
SAB 101, below). The net result of shipments and acceptances during the
quarter was a reduction of approximately $6.4 million in deferred income.
However, total deferred income increased $5.1 million during the quarter, due
to higher deferred income relative to future license revenue. Overall, unit
sales for the three and six-month periods ended June 30, 2000 increased 25%
and 35%, respectively, from the comparable periods in 1999. The
weighted-average selling price of all units sold for both the three and
six-month periods ended June 30, 2000 decreased 7%, relative to the



                                       12

<PAGE>

comparable periods in 1999. Service revenue for the three and six-month
periods ended June 30, 2000 decreased 18% and 10%, respectively, as compared
to the comparable periods in 1999, primarily as a result of lower contract
revenue.

The Company previously recognized revenue from the sales of its products
generally upon shipment, which usually preceded installation and final
customer acceptance, provided that final customer acceptance and collection
of the related receivable were probable. Effective January 1, 2000, the
Company changed its method of accounting for product sales to recognize such
revenues when the contractual obligation for installation has been satisfied,
or when installation is substantially complete, and customer acceptance
provisions have lapsed, provided collections of the related receivable are
probable. The Company believes the change in accounting principle is
preferable based on guidance provided in SEC Staff Accounting Bulletin No.
101 (SAB 101), "Revenue Recognition in Financial Statements."

The Company has substantially changed its operations to implement SAB 101.
The Company believes that estimates of its system revenue under its prior
method of accounting would not be indicative of results that would have been
achieved if the Company had not substantially changed its operations to
implement SAB 101.

For the quarter ended June 30, 2000, international net sales were $16.7
million, as compared with $19.7 million for the comparable period in 1999. On
a year-to-date basis, international net sales for the six-month period ended
June 30, 2000 were $31.1 million, as compared with $31.3 million in the
comparable period in 1999. The decrease in international sales, both in terms
of absolute dollars and as a percentage of total net sales, was primarily
attributed to lower sales of thin film head systems to Asia, excluding Japan.
The Company anticipates that an increasing percentage of its overall sales
for the remainder of 2000 will come from semiconductor manufacturers in Asia,
including Japan, utilizing the Company's systems in the production of
flip-chip devices. The Company's operations in foreign countries are not
generally subject to significant exchange rate fluctuations, principally
because sales contracts for the Company's systems are generally denominated
in U.S. dollars. In Japan, however, orders are typically denominated in
Japanese yen. This may subject the Company to a higher degree of risk from
currency fluctuations. The Company attempts to mitigate this exposure through
the use of foreign exchange contracts; however, there can be no assurance of
the success of any such efforts. International sales expose the Company to a
number of additional risks, including fluctuations in the value of local
currencies relative to the U.S. dollar, which, in turn, impact the relative
cost of ownership of the Company's products. (See "Additional Risk Factors:
International Sales; Japanese Market").

Although the Company's backlog of system orders increased substantially
during the quarter, the anticipated timing of shipments and customer
acceptances of those orders will require the Company to fill a number of
production slots in the current quarter in order to meet its near-term sales
targets. If the Company is unsuccessful in its efforts to secure those
production orders, its results of operations will be materially adversely
impacted in the near-term. Additionally, in prior years, the Company
experienced significant shipment delays and purchase order restructuring by
several of its customers, and also experienced purchase order cancellations.
There can be no assurance that this trend will not occur in the future.
Accordingly, the Company can give no assurance that it will be able to
achieve or maintain its current or prior level of sales. Additionally, the
thin film head industry is presently in a state of over-capacity. This has
resulted, and will continue to result, in reduced order levels from this
important market in the near-term, which will continue to materially
adversely effect the Company's results of operations.

The Company presently expects that net sales for the three-month period
ending September 30, 2000 may be higher than net sales in the comparable
period in 1999. However, due to lack of order visibility and uncertainty as
to the timing of shipments and customer acceptances, the Company can give no
assurance that it will be able to achieve or maintain its current sales
levels.



                                       13

<PAGE>

Because the Company's net sales are subject to a number of risks, including
intense competition in the capital equipment industry and the timing and
market acceptance of the Company's products, there can be no assurance that
the Company will exceed or maintain its current level of net sales for any
period in the future. Additionally, the Company believes that the market
acceptance and volume production of its Saturn Spectrum 3, its XLS advanced
reduction steppers and its 1000 series family of wafer steppers, are of
critical importance to its future financial results. To the extent that these
products do not achieve significant sales due to difficulties involving
manufacturing or engineering, the inability to reduce the current long
manufacturing cycles for such products, competition, excess capacity in the
semiconductor of thin film industry, customer acceptances, or any other
reason, the Company's business, financial condition and results of operations
would be materially adversely affected.

GROSS PROFIT

The Company's gross profit as a percentage of net sales, or gross margin, was
36.6% for the quarter ended June 30, 2000, as compared with a gross margin of
38.6% for the comparable period in 1999. On a year-to-date basis, gross
margin for the six-month period ended June 30, 2000 was 34.2%, as compared
with 36.4% for the comparable period a year ago. On a comparative basis,
gross margins for both the three and six-month periods in 2000 were adversely
impacted by competitive pressure on selling prices.

The Company believes that gross profit as a percentage of net sales for the
quarter ending September 30, 2000 will be significantly lower than levels
achieved during the comparable period a year ago, primarily as a result of
anticipated product sales mix and continued pricing pressure from orders
presently in backlog, partially offset by higher licensing income. However,
the Company expects that total gross profit dollars may increase for the
quarter ending September 30, 2000, as compared with the comparable period in
1999, based on an anticipated increase in system sales and licensing income.
Intense competition in the markets the Company serves and continued low
levels of capacity utilization may make it difficult for the Company to
increase or maintain its current gross margin percentages in the near term.
The Company is presently increasing inventory purchases based on current and
forecasted demand for its Saturn Spectrum 3 wafer stepper, its Verdant laser
thermal processing system and its 157nm advanced reduction stepper. The
purchase of such additional inventories will result in a significantly higher
risk of obsolescence, which may require inventory write-offs, which would
negatively impact gross margins. Additionally, new products generally have
lower gross margins until there is widespread market acceptance and until
production and after-sales efficiencies can be achieved. Should the Saturn
Spectrum 3, Verdant laser thermal processing system or the Company's
reduction stepper offerings, fail to develop or generate significant market
demand, the Company's business, financial condition and results of operations
would be materially adversely affected.

RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES

The Company's research, development and engineering expenses were $6.1
million for the quarter ended June 30, 2000, as compared with $6.8 million
for the comparable period in 1999. On a year-to-date basis, research,
development and engineering expenses for the six-month period ending June 30,
2000 were $13.2 million, as compared with $13.3 million in the comparable
period in 1999. This decrease in spending, relative to the comparable periods
in 1999, was primarily attributed to the shutdown of the Company's UltraBeam
operations, which occurred early in the second quarter, and lower spending on
the Company's laser thermal processing technology.

The Company continues to invest significant resources in the development and
enhancement of its Verdant laser thermal processing/laser doping systems and
technologies, together with continuing expenditures for its 1X and reduction
optical products and technologies. The Company presently expects that the
absolute dollar amount of research, development and engineering expenses for
the quarter ending September 30, 2000 may be similar to levels incurred in
the comparable period in



                                       14

<PAGE>

1999, as the decline in spending relative to the UltraBeam shutdown is offset
by increased investments in the Company's Verdant and photolithography
technologies.

AMORTIZATION OF GOODWILL

Amortization of goodwill was $0.5 million for the quarter ended June 30,
2000, as compared with $0.4 million for the comparable period in 1999. On a
year-to-date basis, amortization of goodwill for the six-month period ended
June 30, 2000 was $1.1 million, as compared with $0.7 million for the
comparable period in 1999. The additional amortization expense was directly
related to intangible assets purchased in December 1999.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $7.2 million for the
quarter ended June 30, 2000, as compared with $6.8 million for the comparable
period in 1999. As a percentage of net sales, selling, general and
administrative expenses declined to 21.4%, as compared with 23.3% of net
sales for the comparable period in 1999. On a year-to-date basis, selling,
general, and administrative expenses for the six-month period ended June 30,
2000 were $13.7 million, as compared with $13.1 million for the comparable
period in 1999. As a percentage of net sales, selling, general and
administrative expenses declined to 21.6% for the six-month period ended June
30, 2000, as compared to 23.8% of net sales for the comparable period in
1999. Both the current quarter and year-to-date increases in absolute
dollars, as compared with the comparable periods in 1999, were primarily due
to higher sales, service and support expenses typically associated with an
increase in sales, partially offset by the impact of the shutdown of the
UltraBeam operations. The Company presently anticipates that selling, general
and administrative expenses for the three-month period ending September 30,
2000 will increase significantly, relative to the comparable period in 1999,
due primarily to higher anticipated sales, service and support expenses
resulting from an anticipated increase in net sales.

SHUTDOWN OF OPERATIONS

During the quarter ended June 30, 2000, the Company shutdown the operations
of its UltraBeam unit. As a direct result of this decision, the Company
recognized a charge in the period of $8.0 million, or $0.38 per share. Of
this charge, approximately $5.5 million related to operating and capital
assets disposed of during the quarter, $1.7 million related to shutdown and
employee severance costs and $0.8 million related to outstanding lease and
purchase order commitments. As of June 30, 2000, approximately $1.3 million
of the total charge of $8.0 million remained in accounts payable or accrued
liabilities.

In conjunction with the shutdown, the Company in arriving at the related
charge to operations used significant estimates relating to future events.
These estimates include assumptions as to the sale of certain assets and the
termination of certain leases. Actual results may differ materially from
these estimates, which would result in additional charges to operations in
the quarter ending September 30, 2000, or to subsequent periods.

INTEREST AND OTHER INCOME, NET

Interest and other income, net, which consists primarily of interest income,
was $1.7 million for the quarter ended June 30, 2000, as compared with $1.8
million for the comparable period in 1999. On a year-to-date basis, interest
and other income, net, for the six-month period ended June 30, 2000 was $3.5
million, as compared with $3.7 million for the comparable period in 1999.
Both the current quarter and year-to-date decreases, as compared with the
comparable periods in 1999, were primarily attributed to lower invested
balances.



                                       15

<PAGE>

INCOME TAX EXPENSE

The Company did not recognize an income tax benefit on its pre-tax losses for
the quarter and six-month periods ended June 30, 2000 and 1999, due to
uncertainty related to the utilization of its net operating loss
carry-forward.

The Applied Materials, Nikon and land agreements may result in additional
income tax expense in the quarter ending September 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $4.6 million for the six-month
period ended June 30, 2000, as compared with net cash provided by operating
activities of $5.8 million during the comparable period in 1999. Cash flow
generated by operating activities was primarily attributed to non-cash
charges to income of $8.4 million and a net change in operating assets and
liabilities of $7.0 million, partially offset by the Company's net loss for
the six-month period of $10.8 million, exclusive of the cumulative adjustment
for a change in accounting principal. The primary components of the $7.0
million net change in operating assets and liabilities were a decrease in
accounts receivable of $6.8 million, an increase in accounts payable of $3.7
million and an increase in deferred income of $2.6 million (net of the impact
of the cumulative charge relating to the implementation of SAB 101),
partially offset by a decrease in customer deposits of $2.6 million, an
increase in other receivables of $1.9 million and an increase in inventories
of $1.3 million.

The Company sells certain of its accounts receivable in order to mitigate its
credit risk and to enhance cash flow. Sales of accounts receivable typically
precede final customer acceptance of the system. Among other terms and
conditions, the agreements include provisions that require the Company to
repurchase receivables if certain conditions are present including, but not
limited to, disputes with the customer regarding suitability of the product,
and from time-to-time the Company has repurchased certain accounts and leases
receivable in accordance with these terms. At June 30, 2000, $5.8 million of
sold accounts receivable were outstanding to third party financial
institutions. The Company may continue to attempt to mitigate the impact of
extended payment terms and non-linear shipments by selling a substantial
portion of its accounts receivable in the future. There can be no assurance
that this financing will be available on reasonable terms, or at all.

The Company believes that because of the relatively long manufacturing cycle
of certain of its systems, particularly newer products, the Company's
inventories will continue to represent a significant portion of working
capital. In particular, the Company is increasing its purchases of inventory
for its Saturn Spectrum 3 wafer stepper, Verdant laser thermal processing
system and its XLS 157nm advanced reduction stepper. Higher inventory levels
may increase the risk of inventory obsolescence, which may adversely impact
the Company results of operations. Additionally, in conjunction with its XLS
157nm system, the Company anticipates that it will be required to make
advanced payments related to lens production of approximately $2.0 million
during the quarter ending September 30, 2000. The Company intends to
characterize this expenditure as a long-term prepayment of inventories.

During the six months ended June 30, 2000, net cash used in investing
activities was $7.8 million, primarily attributed to capital expenditures for
the relocation of certain of the Company's facilities and further expansion
in San Jose, California.

During the quarter ended June 30, 2000, the Company entered into an agreement
to exercise an option it holds to purchase 6.34 acres of undeveloped land it
presently leases in San Jose, California and entered into a separate
agreement to sell this property to a third party. The Company presently
anticipates these transactions will be completed, and the resulting gain
realized, in the quarter ending September 30, 2000.

Cash used in financing activities was $6.1 million during the six-month
period ended June 30, 2000, primarily attributed to the Company's previously
announced share buyback. As of June 30, 2000, the Company had repurchased
475,000 shares of its common stock at an average purchase price of



                                       16

<PAGE>

$14.45 per share. The Company has authorized the repurchase of up to 2.0
million of its common shares at prevailing market prices. The Company intends
to finance the repurchase of its shares from its existing cash, cash
equivalents and short term investments.

At June 30, 2000, the Company had working capital of $127.7 million. The
Company's principal source of liquidity at June 30, 2000 consisted of $133.5
million in cash, cash equivalents and short-term investments.

The development and manufacture of new lithography systems and enhancements
are highly capital-intensive. In order to be competitive, the Company must
continue to make significant expenditures for capital equipment, sales,
service, training and support capabilities; investments in systems,
procedures and controls and expansion of operations and research and
development, among many other items. The Company expects that anticipated
cash flows from operations and its cash, cash equivalents and short-term
investments will be sufficient to meet the Company's cash requirements for
the next twelve months. Beyond the next twelve months, the Company may
require additional equity or debt financing to address its working capital or
capital equipment needs. Additionally, the Company may in the future pursue
additional acquisitions of complementary product lines, technologies or
businesses. Future acquisitions by the Company may result in potentially
dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and
other intangible assets, which could materially adversely affect any Company
profitability. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products
of the acquired companies; the diversion of management's attention from other
business concerns; risks of entering markets in which the Company has no or
limited direct experience; and the potential loss of key employees of the
acquired company. In the event the Company acquires product lines,
technologies or businesses which do not complement the Company's business, or
which otherwise do not enhance the Company's sales or operating results, the
Company may incur substantial write-offs and higher recurring operating
costs, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event that any such
acquisition does occur, there can be no assurance as to the effect thereof on
the Company's business or operating results. Additionally, the Company may
experience renewed interest in its equipment leasing program and this may
result in the further formation of significant long-term receivables, which,
in turn, would require the use of substantial amounts of working capital. The
formation of significant long-term receivables and the granting of extended
customer payment terms exposes the Company to additional risks, including
potentially higher customer concentration and higher potential operating
expenses relating to customer defaults. If reserves on lease receivables were
required in the future, the Company's business, financial condition and
results of operations could be materially adversely affected. To the extent
that the Company's financial resources are insufficient to fund the Company's
activities, additional funds will be required. There can be no assurance that
additional financing will be available on reasonable terms, or at all.

ADOPTION OF THE EURO

The introduction of a European single currency, the Euro, was initially
implemented as of January 1, 1999, and the transition period will continue
through Jan 1, 2002. As of June 30, 2000, the adoption of the Euro has not
had a material effect on the Company's foreign exchange and hedging
activities or the Company's use of derivative instruments. While the Company
will continue to evaluate the impact of the Euro introduction over time,
based on currently available information, management does not believe that
the introduction of the Euro currency will have a material adverse impact on
the Company's financial condition or overall trends in results of operations.



                                       17

<PAGE>

ADDITIONAL RISK FACTORS

CYCLICALITY OF SEMICONDUCTOR AND THIN FILM HEAD INDUSTRIES The Company's
business depends in significant part upon capital expenditures by
manufacturers of semiconductors and thin film head magnetic recording
devices, which in turn depend upon the current and anticipated market demand
for such devices and products utilizing such devices. The semiconductor
industry is highly cyclical and historically has experienced recurring
periods of oversupply. This has, from time to time, resulted in significantly
reduced demand for capital equipment including the systems manufactured and
marketed by the Company. The Company believes that markets for new
generations of semiconductors will also be subject to similar fluctuations.
Accordingly, the Company can give no assurance that it will be able to
achieve or maintain its current level of sales.

The Company attempts to mitigate the risk of cyclicality by participating in
both the semiconductor and thin film head markets, as well as diversifying
into new markets such as photolithography for micromachining. Despite such
efforts, when one or more of such markets experiences a downturn or a
situation of excess capacity, such as is currently occurring in the thin film
head market, the Company's net sales and operating results are materially
adversely affected. The Company presently expects that net sales for the
three-month period ending September 30, 2000 may be higher than net sales in
the comparable period in 1999. However, due to lack of order visibility and
uncertainty as to the timing of shipments and customer acceptances, the
Company can give no assurance that it will be able to achieve or maintain its
current sales levels, or that it will be able to achieve or maintain its
current level of profitability.

During 1999 and 1998, approximately 30% and 50%, respectively, of the
Company's net sales were derived from sales to thin film head manufacturers
and micromachining customers. For the first six months of 2000, sales to thin
film head manufacturers and micromachining customers accounted for
approximately 20% of total net sales. The Company believes the TFH market is
currently in a state of over-capacity and expects this situation to last for
at least the next several quarters. This has and will continue to result in
lower sales and delays or deferrals of customer orders from these industries,
which will continue to materially adversely affect the Company's business,
financial condition and results of operations in the near term. Additionally,
the Company is experiencing increased competition in this market from Nikon,
Canon and ASML. The Company's business and operating results would be
materially adversely affected by continued downturns or slowdowns in the thin
film head market or by loss of market share.

HIGHLY COMPETITIVE INDUSTRY The capital equipment industry in which the
Company operates is intensely competitive. A substantial investment is
required to install and integrate capital equipment into a semiconductor or
thin film head production line. The Company believes that once a device
manufacturer has selected a particular vendor's capital equipment, the
manufacturer generally relies upon that equipment for the specific production
line application and, to the extent possible, subsequent generations of
similar products. Accordingly, it is difficult to achieve significant sales
to a particular customer once another vendor's capital equipment has been
selected. The Company experiences intense competition worldwide from a number
of leading foreign and domestic stepper manufacturers, such as Nikon Inc.
("Nikon"), Canon Inc. ("Canon"), ASM Lithography, Ltd. ("ASML") and Silicon
Valley Group ("SVG"), Inc.'s Micralign products, all of which have
substantially greater financial, marketing and other resources than the
Company. Nikon supplies a 1X stepper for use in the manufacture of liquid
crystal displays and Canon, Nikon and ASML offer reduction steppers for thin
film head fabrication. Additionally, the Company's XLS reduction stepper
product line competes directly with advanced reduction steppers offered by
Canon, Nikon and ASML. Current thin film head front-end production involves
manufacturing steps that require critical feature sizes. Although the
reduction stepper product lines address critical feature sizes, additional
development of these product lines may be necessary to fully address the
unique requirements of thin film head manufacturing. Additionally, ASML has
entered the low-cost lithography market. ASML and Nikon have each introduced
an i-line step-and-scan system as a lower cost alternative to the deep
ultra-violet step-and-scan system for use on the less critical layers. These
systems compete with widefield steppers, such as the Company's Saturn and
Titan steppers, for advanced mix-and-match applications. In addition, the
Company believes that the high cost of



                                       18

<PAGE>

developing new lithography tools has increasingly caused its competitors to
collaborate with customers and other parties in various areas such as
research and development, manufacturing and marketing, or to acquire other
competitors, thereby resulting in a combined competitive threat with
significantly enhanced financial, technical and other resources. The Company
expects its competitors to continue to improve the performance of their
current products. These competitors have stated that they will introduce new
products with improved price and performance characteristics that will
compete directly with the Company's products. This could cause a decline in
sales or loss of market acceptance of the Company's steppers, and thereby
materially adversely affect the Company's business, financial condition and
results of operations. There can be no assurance that enhancements to, or
future generations of, competing products will not be developed that offer
superior cost of ownership and technical performance features. The Company
believes that to be competitive, it will require significant financial
resources in order to continue to invest in new product development, features
and enhancements, to introduce next generation stepper systems on a timely
basis, and to maintain customer service and support centers worldwide. In
marketing its products, the Company may also face competition from vendors
employing other technologies. In addition, increased competitive pressure has
led to intensified price-based competition, resulting in lower prices and
margins. Should these competitive trends continue, the Company's business,
financial condition and operating results would continue to be materially
adversely affected. There can be no assurance that the Company will be able
to compete successfully in the future.

Foreign integrated circuit manufacturers have a significant share of the
worldwide market for certain types of ICs for which the Company's systems are
used. The Japanese stepper manufacturers are well established in the Japanese
stepper market, and it is extremely difficult for non-Japanese lithography
equipment companies to penetrate the Japanese stepper market. To date, the
Company has not established itself as a major competitor in the Japanese
equipment market and there can be no assurance that the Company will be able
to achieve significant sales to Japanese manufacturers in the future. (See
"International Sales; Japanese Market").

DEVELOPMENT OF NEW PRODUCT LINES; EXPANSION OF OPERATIONS Currently, the
Company is devoting significant resources to the development, introduction
and commercialization of its Verdant laser thermal processing system and its
advanced XLS 157nm reduction stepper, and to the volume production for its
Saturn Spectrum 3 wafer stepper. During the remainder of 2000, the Company
will continue to develop these products and will continue to incur
significant operating expenses in the areas of research, development and
engineering, manufacturing and general and administrative costs in order to
further develop, produce and support these new products. Additionally, gross
profit margins and inventory levels may be further adversely impacted in the
future by costs associated with the initial production of these new product
lines. These costs include, but are not limited to, additional manufacturing
overhead, additional inventory write-offs, costs associated with managing
multiple sites and the establishment of additional after-sales support
organizations. Additionally, there can be no assurance that operating
expenses will not increase, relative to sales, as a result of adding
additional marketing and administrative personnel, among other costs, to
support the Company's new products. If the Company is unable to achieve
significantly increased net sales or its sales fall below expectations, the
Company's operating results will be materially adversely affected until,
among other factors, costs and expenses can be reduced.

LENGTHY SALES CYCLE Sales of the Company's systems depend, in significant
part, upon the decision of a prospective customer to increase manufacturing
capacity or to restructure current manufacturing facilities, either of which
typically involves a significant commitment of capital. In view of the
significant investment involved in a system purchase, the Company has
experienced and may continue to experience delays following initial
qualification of the Company's systems as a result of delays in a customer's
approval process. Additionally, the Company is presently receiving orders for
systems that have lengthy delivery schedules, which may be due to longer
production lead times or a result of customers' capacity scheduling
requirements. In order to maintain or exceed the Company's present level of
net sales, the Company is dependent upon obtaining orders for systems that
will ship and be accepted in the current period. There can be no assurance
that the Company will be able to obtain those orders. For these and other
reasons, the Company's systems typically



                                       19

<PAGE>

have a lengthy sales cycle during which the Company may expend substantial
funds and management effort in securing a sale. Lengthy sales cycles subject
the Company to a number of significant risks, including inventory
obsolescence and fluctuations in operating results, over which the Company
has little or no control.

CUSTOMER CONCENTRATION Historically, the Company has sold a substantial
portion of its systems to a limited number of customers. In 1999, no single
customer accounted for 10% or more of the Company's net sales. However, sales
to one customer accounted for approximately 25% in 1998. The Company expects
that sales to a relatively few customers will continue to account for a high
percentage of its net sales in the foreseeable future and believes that the
Company's financial results depend in significant part upon the success of
these major customers, and the Company's ability to meet their future capital
equipment needs. Although the composition of the group comprising the
Company's largest customers may vary from period to period, the loss of a
significant customer or any reduction in orders by any significant customer,
including reductions due to market, economic or competitive conditions in the
semiconductor or magnetic recording head industries or in the industries that
manufacture products utilizing integrated circuits or thin film heads, may
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's ability to maintain or increase its
sales in the future will depend, in part, upon its ability to obtain orders
from new customers as well as the financial condition and success of its
customers, the semiconductor and thin film head industries and the economy in
general, of which there can be no assurance. (See "Additional Risk Factors:
Cyclicality of Semiconductor and Thin Film Head Industries").

In addition to the business risks associated with the dependence on these
major customers, these significant customer concentrations have in the past
resulted in significant concentrations of accounts receivable and leases
receivable. Additionally, the Company markets and sells its products in
Taiwan through an outside representative firm. The Company is presently
experiencing increased order activity in this territory. In addition to the
significant business risks associated with this strategy, this relationship
may result in the formation of significant receivable balances. The formation
of significant and concentrated receivables exposes the Company to additional
risks, including the risk of default by one or more customers representing a
significant portion of the Company's total receivables. If additional lease
and accounts receivable reserves were to be required, the Company's business,
financial condition and results of operations would be materially adversely
affected.

RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION The
semiconductor and magnetic recording head manufacturing industries are
subject to rapid technological change and new product introductions and
enhancements. The Company's ability to be competitive in these and other
markets will depend, in part, upon its ability to develop new and enhanced
systems and related software tools, and to introduce these systems and
related software tools at competitive prices and on a timely and
cost-effective basis to enable customers to integrate them into their
operations either prior to or as they begin volume product manufacturing. The
Company will also be required to enhance the performance of its existing
systems and related software tools. Any success of the Company in developing
new and enhanced systems and related software tools depends upon a variety of
factors, including product selection, timely and efficient completion of
product design, timely and efficient implementation of manufacturing and
assembly processes, product performance in the field and effective sales and
marketing. Because new product development commitments must be made well in
advance of sales, new product decisions must anticipate both future demand
and the technology that will be available to supply that demand. There can be
no assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products and related software tools or
enhancing its existing products and related software tools. Any such failure
would materially adversely affect the Company's business, financial condition
and results of operations.

Because of the large number of components in the Company's systems,
significant delays can occur between a system's introduction and the
commencement by the Company of volume production of

                                       20

<PAGE>

such systems. The Company has experienced delays from time to time in the
introduction of, and technical and manufacturing difficulties with, certain
of its systems and enhancements and related software tools and may experience
delays and technical and manufacturing difficulties in future introductions
or volume production of new systems or enhancements and related software
tools.

There can be no assurance that the Company will not encounter additional
technical, manufacturing or other difficulties that could further delay
future introductions or volume production of systems or enhancements. The
Company's inability to complete the development or meet the technical
specifications of any of its systems or enhancements and related software
tools, or its inability to manufacture and ship these systems or enhancements
and related software tools in volume and in time to meet the requirements for
manufacturing the future generation of semiconductor or thin film head
devices would materially adversely affect the Company's business, financial
condition and results of operations. In addition, the Company may incur
substantial unanticipated costs to ensure the functionality and reliability
of its products early in the products' life cycles. If new products have
reliability or quality problems, reduced orders or higher manufacturing
costs, delays in collecting accounts receivable and additional service and
warranty expenses may result. Any of such events may materially adversely
affect the Company's business, financial condition and results of operations.

INTERNATIONAL SALES; JAPANESE MARKET International sales accounted for
approximately 53% and 47% of total net sales for the years 1999 and 1998,
respectively. During the six-month period ended June 30, 2000, international
sales accounted for approximately 49% of total net sales, as compared to 57%
for the comparable period in 1999. The Company anticipates that international
sales, which typically have lower gross margins than domestic sales,
principally due to increased competition and higher field service and support
costs, will continue to account for a significant portion of total net sales
and may increase as a percentage of total net sales in the near-term. As a
result, a significant and growing portion of the Company's net sales will
continue to be subject to certain risks, including dependence on outside
sales representative organizations, unexpected changes in regulatory
requirements, difficulty in satisfying existing regulatory requirements,
exchange rate fluctuations, tariffs and other barriers, political and
economic instability, difficulties in accounts receivable collections,
natural disasters, difficulties in staffing and managing foreign subsidiary
and branch operations and potentially adverse tax consequences. Although the
Company generally transacts its international sales in U.S. dollars,
international sales expose the Company to a number of additional risk
factors, including fluctuations in the value of local currencies relative to
the U.S. dollar, which, in turn, impact the relative cost of ownership of the
Company's products and may further impact the purchasing ability of its
international customers. In Japan, however, the Company has commenced direct
sales operations and orders are often denominated in Japanese yen. This may
subject the Company to a higher degree of risk from currency fluctuations.
The Company attempts to mitigate this exposure through the use of foreign
exchange contracts. The Company is also subject to the risks associated with
the imposition of legislation and regulations relating to the import or
export of semiconductors and magnetic recording head products. The Company
cannot predict whether changes to quotas, duties, taxes or other charges or
restrictions will be implemented by the United States, Japan or any other
country upon the importation or exportation of the Company's products in the
future. There can be no assurance that any of these factors or the adoption
of restrictive policies will not have a material adverse effect on the
Company's business, financial condition and results of operations.

Although the Company has sold a number of its systems to Japanese thin film
head manufacturers, to date, the Company has made limited sales of its
systems to Japanese semiconductor manufacturers. The Japanese semiconductor
market segment is large, represents a substantial percentage of the worldwide
semiconductor manufacturing capacity, and is difficult for foreign companies
to penetrate. The Company is at a competitive disadvantage with respect to
Japanese semiconductor capital equipment suppliers that have been engaged for
some time in collaborative efforts with Japanese semiconductor manufacturers,
and currently dominate the Japanese stepper market. The Company believes that
increased penetration of the Japanese market is critical to its



                                       21

<PAGE>

financial results and intends to continue to invest significant resources in
Japan in order to meet this objective.

INTELLECTUAL PROPERTY RIGHTS Although the Company attempts to protect its
intellectual property rights through patents, copyrights, trade secrets and
other measures, it believes that any success will depend more upon the
innovation, technological expertise and marketing abilities of its employees.
Nevertheless, the Company has a policy of seeking patents when appropriate on
inventions resulting from its ongoing research and development and
manufacturing activities. The Company owns various United States and foreign
patents, which expire on dates ranging from December 2000 to December 2018,
and has various United States and foreign patent applications pending. The
Company also has various registered trademarks and copyright registrations
covering mainly software programs used in the operation of its stepper
systems. The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that the
Company will be able to protect its technology adequately or that competitors
will not be able to develop similar technology independently. There can be no
assurance that any of the Company's pending patent applications will be
issued or that foreign intellectual property laws will protect the Company's
intellectual property rights. In addition, litigation may be necessary to
enforce the Company's patents, copyrights or other intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of
infringement. Such litigation could result in substantial costs and diversion
of resources and could have a material adverse effect on the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation. There can be no assurance that any patent issued
to the Company will not be challenged, invalidated or circumvented or that
the rights granted thereunder will provide competitive advantages to the
Company. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or,
if patents are issued to the Company, design around the patents issued to the
Company. Additionally, the Company presently has several agreements in force
to license certain of its technologies. Challenges or invalidation to patents
relative to those technologies would expose the Company to the risk of
forfeiture of revenues and further risk of litigation.

Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patent or any other
intellectual property right, the Company has from time to time been notified
of claims that it may be infringing intellectual property rights possessed by
third parties. Certain of the Company's customers have received notices of
infringement from Technivision Corporation and the Lemelson Medical,
Education and Research Foundation, Limited Partnership alleging that the
manufacture of certain semiconductor products and/or the equipment used to
manufacture those semiconductor products infringes certain issued patents.
The Company has been notified by certain of such customers that the Company
may be obligated to defend or settle claims that the Company's products
infringe any of such patents and, in the event it is subsequently determined
that the customer infringes any of such patents, they intend to seek
reimbursement from the Company for damages and other expenses resulting from
this matter.

Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patents or any other
intellectual property rights, there can be no assurance that infringement
claims by third parties or claims for indemnification resulting from
infringement claims in the future will not be asserted, or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations, regardless
of the outcome of any litigation. With respect to any such future claims, the
Company may seek to obtain a license under the third party's intellectual
property rights. There can be no assurance, however, that a license will be
available on reasonable terms or at all. The Company could decide, in the
alternative, to resort to litigation to challenge such claims. Such
challenges could be extremely expensive and time consuming and could
materially adversely affect the Company's business, financial condition and
results of operations, regardless of the outcome of any litigation.



                                       22

<PAGE>

SOLE OR LIMITED SOURCES OF SUPPLY The Company procures many of its critical
systems' components, subassemblies and services from a single outside
supplier or a limited group of outside suppliers in order to ensure overall
quality and timeliness of delivery. Many of these components and
subassemblies have significant production lead times. To date, the Company
has been able to obtain adequate services and supplies of components and
subassemblies for its systems in a timely manner. However, disruption or
termination of certain of these sources could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company's reliance on sole or a limited group of suppliers and the Company's
increasing reliance on subcontractors involve several risks, including a
potential inability to obtain an adequate supply of required components due
to the suppliers' failure or inability to provide such components in a timely
manner, or at all, and reduced control over pricing and timely delivery of
components. Although the timeliness, yield and quality of deliveries to date
from the Company's subcontractors have been acceptable, manufacture of
certain of these components and subassemblies is an extremely complex
process, and long lead-times are required. Any inability to obtain adequate
deliveries or any other circumstance that would require the Company to seek
alternative sources of supply or to manufacture such components internally
could delay the Company's ability to ship its products, which could damage
relationships with current and prospective customers and therefore would have
a material adverse effect on the Company's business, financial condition and
results of operations.

DEPENDENCE ON KEY PERSONNEL The Company's future operating results depend, in
significant part, upon the continued contributions of key personnel, many of
whom would be difficult to replace. None of such persons has an employment or
noncompetition agreement with the Company. The Company does not maintain any
life insurance on any of its key persons. The loss of key personnel could
have a material adverse effect on the business, financial condition and
results of operations of the Company. In addition, the Company's future
operating results depend in significant part upon its ability to attract and
retain other qualified management, manufacturing, and technical, sales and
support personnel for its operations. There are only a limited number of
persons with the requisite skills to serve in these positions and it may
become increasingly difficult for the Company to hire such personnel over
time. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The failure to attract or retain such persons would materially
adversely affect the Company's business, financial condition and results of
operations.

In particular, the Company is presently experiencing a high degree of
turnover due to the extremely competitive labor market in Northern
California. This competition has resulted, and may continue to result, in
significantly higher labor costs. As a result of these higher labor costs,
the Company's results of operations and financial condition will be
materially adversely impacted if it is unable to achieve higher levels of net
sales and adequate gross margins on its products.

CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT THE COMPANY'S REPORTED
RESULTS OF OPERATIONS The Company prepares its financial statements to
conform with generally accepted accounting principles, or GAAP. GAAP are
subject to interpretation by the American Institute of Certified Public
Accountants, the SEC and various bodies formed to interpret and create
appropriate accounting policies. A change in those policies can have a
significant effect on the Company's reported results and may even affect its
reporting of transactions completed before a change is announced.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), entitled "Revenue Recognition in
Financial Statements." The Company implemented the provisions of SAB 101
effective January 1, 2000. The Company previously recognized revenue from the
sales of its products generally upon shipment, which usually preceded
installation and final customer acceptance, provided that final customer
acceptance and collection of the related receivable were probable. Effective
January 1, 2000, the Company changed its method of accounting for product
sales to recognize such revenues when the contractual obligation for
installation has been satisfied, or when installation is substantially
complete, and customer



                                       23

<PAGE>

acceptance provisions have lapsed, provided collection of the related
receivable are probable. The Company believes the change in accounting
principle is preferable based on guidance provided in SAB 101. The cumulative
effect of the change in accounting principle, $18,883,000 (or $0.89 per
share, basic and diluted) was reported as a charge in the quarter ended March
31, 2000 in the accompanying statement of operations.

The cumulative effect of the change in accounting principle includes system
revenue, cost of sales and certain expenses, including warranty and
commission expenses, that will be recognized when both installation and
customer acceptance provisions are satisfied, subsequent to January 1, 2000.

During 2000, the Company substantially changed its operations to implement
SAB 101. Approximately 35% of the Company's net sales for the quarter ended
June 30, 2000 resulted from systems shipped in 1999 and accepted during the
quarter. Additionally, nearly all system revenue for the quarter ended March
31, 2000 resulted from systems shipped prior to January 1, 2000 and accepted
during the quarter. This reflects the Company's traditional time frame for
shipment, installation and customer acceptance. The net result of shipments
and acceptances during the quarter was a reduction of approximately $6.4
million in deferred income. On a year-to-date basis, the net result of
shipments and acceptances for the six-month period ended June 30, 2000 was a
reduction of approximately $11.4 million in deferred income. The Company
believes that estimate of its system revenue under its prior method of
accounting would not be indicative of results that would have been achieved
if the Company had not substantially changed its operations to implement SAB
101.

Accounting policies affecting many other aspects of our business, including
rules relating to purchase and pooling-of-interests accounting for business
combinations, revenue recognition, in-process research and development
charges, employee stock purchase plans and stock option grants, have recently
been revised or are under review. Changes to those rules or the questioning
of current practices may have a material adverse effect on the Company's
reported financial results or on the way it conducts business. In addition,
the Company's preparation of financial statements in accordance with GAAP
requires that it make estimates and assumptions that affect the recorded
amounts of assets and liabilities, disclosure of those assets and liabilities
at the date of the financial statements and the recorded amounts of expenses
during the reporting period. A change in the facts and circumstances
surrounding those estimates could result in a change to the Company's
estimates and could impact its future operating results.

EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the
Company's Certificate of Incorporation, equity incentive plans, Shareholder
Rights Plan, licensing agreements, Bylaws and Delaware law may discourage
certain transactions involving a change in control of the Company. In
addition to the foregoing, the Company's classified board of directors, the
shareholdings of the Company's officers, directors and persons or entities
that may be deemed affiliates and the ability of the Board of Directors to
issue "blank check" preferred stock without further stockholder approval
could have the effect of delaying, deferring or preventing a change in
control of the Company and may adversely affect the voting and other rights
of holders of Common Stock.

VOLATILITY OF STOCK PRICE The Company believes that factors such as
announcements of developments related to the Company's business, fluctuations
in the Company's operating results, sales of securities of the Company into
the marketplace, general conditions in the semiconductor and magnetic
recording head industries or the worldwide or regional economies, an outbreak
of hostilities, a shortfall in revenue or earnings from, or changes, in
analysts' expectations, announcements of technological innovations or new
products or enhancements by the Company or its competitors, developments in
patents or other intellectual property rights and developments in the
Company's relationships with its customers and suppliers could cause the
price of the Company's Common Stock to fluctuate, perhaps substantially. In
addition, in recent years the stock market in general, and the market for
shares of small capitalization stocks in particular, including the Company's,
have experienced extreme price fluctuations, which have often been unrelated
to the operating performance of affected companies. There can be no assurance
that the market price of the Company's Common Stock will not continue to
experience significant fluctuations in the future, including fluctuations
that may be unrelated to the Company's performance.

                                       24

<PAGE>

ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Reference is made to Part II, Item 7A, "Quantitative and Qualitative Disclosures
About Market Risk" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 and to the subheading "Derivative Instruments and
Hedging" in Item 8, "Financial Statements and Supplementary Data", under the
heading "Notes to Consolidated Financial Statement" of the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.















                                       25

<PAGE>

PART 2:  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.                                      None.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.              None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.                        None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         The following proposals were voted upon by the Company's
         stockholders at the Annual Stockholders' Meeting held on June 1,
         2000.

         1.   The following persons were elected as directors of the Company
              to serve for a term ending upon the Annual Stockholders'
              Meeting indicated beside their respective names and until their
              successors are elected and qualified:

<TABLE>
<CAPTION>
                                        Terms Ending Upon the Annual
                                            Stockholders' Meeting            Votes for         Vote withheld
<S>                                     <S>                                 <C>               <C>
              Joel Gemunder                          2002                     18,108,306           161,184
              Arthur W. Zafiropoulo                  2002                     18,105,574           163,916
</TABLE>

         2.   A proposal to ratify the appointment of Ernst & Young LLP as
              the Company's independent auditors for the fiscal year ending
              December 31, 2000 was approved by the vote of 18,144,523 shares
              for; 65,558 shares voted against the proposal and 59,409 shares
              abstained.

ITEM 5.       OTHER INFORMATION.

              In July 2000, the Company's Board of Directors appointed
              Messrs. Nicholas Konidaris and Vincent F. Sollitto as members
              of its Board of Directors.

              Mr. Nicholas Konidaris, 56, is President and CEO of Advantest
              American Corporation, based in Santa Clara, California, since
              1997. He is also President, CEO and Chairman of Advantest
              America, Inc., the North American sales and distribution arm of
              Advantest Corporation, headquartered in Tokyo, Japan.
              Advantest America was established in 1982, and focuses on
              manufacturing, selling and servicing the semiconductor
              industry's most accurate and reliable testers for memory, logic
              and mixed-signal devices. He served as the Strategic Business
              Manager from 1995 to 1997 and as Business Unit Manager from
              1993 to 1995. Before joining Advantest America, Mr. Konidaris
              served as Managing Director of Depa, S.A., a natural gas
              utility company in Greece. From 1991-1993, he served as Vice
              President of Boreas, Inc., a company founded to commercialize
              cryogenic technologies. He also served as Vice President from
              1988 to 1991 as Vice President of Hypres, Inc., a start-up
              company in superconducting electronics. In addition, his prior
              experience includes 14 years at Teradyne, Inc. where he served
              as Product and Marketing Manager.

              Mr. Vincent F. Sollitto, 52, joined Photon Dynamics as
              President and Chief Executive Officer in June 1996, and was
              appointed to its Board of Directors in July 1996. Photon
              Dynamics, founded in 1986, is a worldwide supplier of yield
              management solutions to the flat panel display, printed circuit
              board assembly and advanced semiconductor packaging industries.
              Prior to joining Photon Dynamics, Mr. Sollitto spent three
              years as General Manager of Business Unit Operations for
              Fujitsu Microelectronics, Inc. from 1993 to 1996. Mr. Sollitto
              served as Executive Vice President of Technical Operations from
              1991 until 1993 for Supercomputer Systems, Inc. His prior
              experience includes 21 years of service in various management
              positions at International Business Machines including Director
              of Technology and Process. Mr. Sollitto now serves as a member
              of the board of directors for Irvine Sensors Corporation and
              Applied Films Corporation.



                                       26

<PAGE>


ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

              (a) EXHIBITS


              Exhibit 27          Financial Data Schedule

              (b) REPORTS ON FORM 8-K

              The Company did not file any reports on Form 8-K during the
three months ended June 30, 2000.




                                       27

<PAGE>

                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                             ULTRATECH STEPPER, INC.
-------------------------------------------------------------------------------
                                  (Registrant)



Date: August 11, 2000          By: /s/ Bruce R. Wright
      ----------------             --------------------------------
                                   Bruce R. Wright
                                   Senior Vice President, Finance and Chief
                                   Financial Officer (Duly Authorized Officer
                                   and Principal Financial and Accounting
                                   Officer)



                                       28