**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark one)**

**x**                               Annual Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934

**Forthe Fiscal Year Ended December 31, 2005**

**Or**

**o**                                  Transition Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934

**Forthe transition periodfrom                     to                     **

 

**CommissionFile Number: 0-22248**

**ULTRATECH, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     | **94-3169580**                        |
|------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification No.) |
| **3050 Zanker Road  San Jose, California**                       | **95134**                             |
| (Address of  principal executive offices)                        | (Zip Code)                            |

 

**(408) 321-8835**

(Registrant’s telephone number, including area code)

Securities registeredpursuant to Section 12(b) of the Act:

**None**

Securities registered pursuant to Section 12(g) ofthe Act:

**CommonStock, $0.001 Par Value Per Share;Preferred Stock Purchase Rights**

Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o* * No x

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o* * No x

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x* * No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o*  *No x

The aggregate market valueof voting stock held by non-affiliates of the Registrant, as of July 2,2005, was approximately $352,983,000 (based upon the closing price for sharesof the Registrant’s Common Stock as reported by the Nasdaq National Market onthat date, the last trading date of the Registrant’s most recently completedsecond quarter). Shares of Common Stock held by each officer, director andholder of 5% or more of the outstanding Common Stock have been excluded in thatsuch persons may be deemed to be affiliates. This determination of affiliatestatus is not necessarily a conclusive determination for other purposes.

As of March 1, 2006,the Registrant had 23,876,423 shares of Common Stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the Registrant’s Proxy Statement for the 2006 Annual Meeting of Stockholdersare incorporated by reference into Part III of this Annual Report on Form 10-K.

 

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**PART I**

**ITEM 1.**                *BUSINESS*

This Annual Report on Form 10-K may contain, inaddition to historical information, certain forward-looking statements thatinvolve significant risks and uncertainties. Our actual results could differmaterially from the information set forth in any such forward-lookingstatements. Factors that could cause or contribute to such differences includethose discussed below, as well as those discussed under “Item 1A RiskFactors” and elsewhere in this Annual Report on Form 10-K.

**The Company**

Ultratech, Inc. (“Ultratech”or “we”) develops, manufactures and markets photolithography and laserprocessing equipment designed to reduce the cost of ownership for manufacturersof integrated circuits, including advanced packaging processes and variousnanotechnology components, thin film head magnetic recording devices (“thinfilm heads” or “TFHs”), optical networking devices, laser diodes and LEDs(light emitting diodes). 

*Lithography*

We supply step-and-repeat systems based onone-to-one (“1X”) technology to customers located throughout NorthAmerica, Europe, Japan and the rest of Asia. We believe that our 1X steppersutilizing the Wynne Dyson optical design offer cost and performance advantages,as compared with competitors’ contact aligners or reduction steppers, tosemiconductor device manufacturers for applications involving line geometriesof 0.75 microns or greater (“non-critical feature sizes”) and tonanotechnology manufacturers. 

Advanced packaging forintegrated circuits, specifically bump or wafer level chip scale packaging (“CSP”)techniques, require lithography steps in the device fabrication process. Wecontinue to enhance our product offerings for bump, wafer level CSP processingand post passivation lithography (“PPL”). In addition, our steppers are used tomanufacture high volume, low cost semiconductors used in a variety ofapplications such as telecommunications, automotive control systems, powersystems and consumer electronics. We also supply 1X photolithography systems tothin film head manufacturers and believe that our steppers offer advantagesover certain competitive reduction lithography tools with respect to fieldsize, throughput, specialized substrate handling and cost. Additionally, wesupply 1X photolithography equipment to various other nanotechnology markets,where certain technical features, such as high resolution at gh-linewavelengths, depth of focus and special size substrates, may offer advantagesover certain competing tools. 

*Laser AnnealTechnology*

Device scaling has been the predominant means pursuedby the semiconductor industry to achieve the gains in productivity andperformance quantified by Moore’s Law. In the past several years, scaled deviceperformance has been compromised because traditional transistor materials suchas silicon, silicon dioxide, and polysilicon, have been pushed to theirfundamental materials limits. Continued scaling thus requires the introductionof new materials. For example, the traditional gate dielectric has been silicondioxide and as devices are scaled below 45 nm high K material such as halfniumoxide must be considered because silicon dioxide begins to lose itseffectiveness at level below 45nm. These new materials impose added challengesto the methods used to dope and activate silicon to produce very shallow,highly activated junctions. The main challenges regarding short channel effectsinclude achieving maximum activation and minimal diffusion with abruptjunctions.

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By leveraging its core competencies in optics engineeringand system integration and its extensive knowledge of laser processing,Ultratech introduced the LSA100 laser spike annealing system to enable thermalannealing solutions at the 65 nm technology node and below. This advancedannealing technology provides solutions to the difficult challenge offabricating ultra-shallow junctions and highly activated source/drain contacts.Laser processing offers the flexibility to operate at near-instantaneoustimeframes (microseconds to milliseconds) at temperatures below the meltingpoint of silicon (1412° C). At these temperatures and anneal times, fullactivation is achieved with negligible diffusion. In addition, Ultratech’sproprietary hardware design minimizes the pattern density effect, reducingabsorptivity variations. 

Our products and marketsare more fully described below.

**General Background**

The fabrication of devices such as integrated circuits(“semiconductors” or “ICs”) requires a large number of complex processingsteps, including deposition, photolithography and etching. Deposition is aprocess in which a layer of either electrically insulating or electricallyconductive material is deposited on the surface of a wafer. Typicallydeposition is followed by the photolithography imaging process in which thedeposited layer is coated with a photosensitive layer called photoresist orresist. Exposure of the resist to an image formed by ultraviolet light resultsin some of the resist being removed after development. A subsequent etchingstep selectively removes the deposited material from areas not protected by theremaining resist pattern.

Photolithography is one of the most critical andexpensive steps in IC device manufacturing. Photolithography exposure equipmentis used to create device features by selectively exposing a light-sensitivepolymer coating on the wafer surface, through a photomask containing the masterimage of a particular device layer. Typically, each exposure results in thepatterning of a different deposited layer and therefore, requires a differentpattern on the device. Each new device layer must be properly aligned topreviously defined layers before imaging takes place, so that structures formedon the wafers are correctly placed, one on top of the other, in order to ensurea functioning device.

Since the introduction of the earliest commercialphotolithography tools for IC manufacturing in the early 1960s, a number oftools have been introduced to enable manufacturers to produce increasinglycomplex devices with virtually zero defects that incorporate progressivelyfiner line widths. In the early 1970s, photolithography tools included contactprinters and proximity aligners, which required the photomask to physicallycontact or nearly contact the wafer in order to transfer the entire patternduring a single exposure. By the mid 1970s, there were also projectionscanners, which transferred the device image through reflective optics having avery narrow annular field that spanned the width of the wafer. Exposure wasachieved by scanning the entire photomask and wafer in a single, continuousmotion across the annular field. Scanners were followed by steppers, whichexpose a square or rectangular portion of the wafer in a single exposure, thenmove or “step” the wafer to an adjacent site to repeat the exposure. Thisstepping process is repeated as often as necessary until the entire wafer hasbeen exposed. By imaging a small area, steppers are able to achieve finerresolution, improved image size control and better alignment between the multipledevice layers resulting in higher yield and productivity in certain devicesthan was possible with earlier tools.

The two principal types of steppers currently in useby the semiconductor industry are reduction steppers, which are the most widelyused steppers, and 1X steppers. Reduction steppers, which typically havereduction ratios of four or five-to-one, are tools in which thephotomask pattern containing the design is typically four or five times largerthan the device pattern that is to be exposed on the wafer surface. Inaddition, there is now a fourth generation of lithography tools, known asstep-and-scan systems, that address device sizes of 0.35 micron and below. Incontrast to steppers, which expose the entire field in a 

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single exposure, step-and-scansystems scan the mask and wafer through a narrow illuminated region to produceone field and repeat this operation over multiple fields to expose the entirewafer.

The principal advantage of reduction steppers andstep-and-scan systems is that they may be used in manufacturing steps requiringcritical feature sizes and are therefore necessary for manufacturing advancedICs. 1X steppers, on the other hand, are tools in which the photomask patternis the same scale as the device pattern that is exposed on the wafer surface.Ultratech’s 1X, Wynne Dyson optics steppers, unlike most reduction steppers,are based on a technology which incorporates both reflective and refractiveelements in its imaging system. This design is much simpler than a reductionstepper’s imaging system, which incorporates only refractive elements. As aresult, 1X steppers for non-critical features are generally less expensive thanthe reduction steppers required for critical feature sizes. Because of theiroptical design, 1X steppers typically are also able to deliver greater exposureenergy to the wafer surface, which may result in higher throughput than isachievable with certain reduction steppers in particular applications. However,1X steppers are currently limited to use in manufacturing steps involvingless-critical, larger feature sizes. Accordingly, we believe that sales ofthese systems are highly dependent upon capacity expansions by our current 1Xcustomers, or by customers making the transition to advanced bump type chips,which employ a different means of electrically connecting the chip to othercomponents.

In the past, manufacturers of ICs and similar devicespurchased capital equipment based principally on technological capabilities. Inview of the significant capital expenditures required to construct, equip andmaintain advanced fabrication facilities, relatively short product cycles andmanufacturers’ increasing concern for overall fabrication costs, we believethat manufacturers of ICs with flip chip (bump) packaging now focus on reducingtheir total cost of ownership. A major component of this cost is the cost ofownership of the equipment used for a particular application in a fabricationfacility. Cost of ownership is measured in terms of the costs associated withthe acquisition of equipment, as well as factors such as throughput, yield, up-time,service, labor overhead, maintenance, and various other costs of owning andusing the equipment. With increasing importance being placed upon a system’soverall cost of ownership, in many cases the system with the mosttechnologically advanced capabilities will not necessarily be the manufacturingsystem of choice. As part of the focus on cost reduction, we believe thatdevice manufacturers are attempting to extend the useful life and enhance theproduction capabilities of fabrication facilities by selecting equipment thatcan replace existing tools while offering better, more cost-effectiveperformance.

In addition to enhancing our current lithographysolutions, we have been developing new tools for our existing markets. We havedeveloped a new laser annealing technology for volume production of advancedstate of the art devices and are now offering a Laser Processing (“LP”)product. Our first commercial product based on the new LP technology platformemploys a process called laser spike annealing (“LSA”), for activatingultra-shallow junctions. This technology is expected to be useful for multipleIC generations. We anticipate that eventually this technology will be supersededby an even faster laser processing technology that will take the processingtime below one microsecond, thereby achieving even higher performancecharacteristics while using almost “zero” thermal budget. As a result, thesenew LP technologies—for which we have been awarded 42 patents and have 70patent applications pending—are expected to remove several critical barriers tofuture device scaling.

Device scaling has beenthe predominant means pursued by the semiconductor industry to achieve thegains in productivity and performance quantified by Moore’s Law. In the pastseveral years, scaled device performance has been compromised becausetraditional transistor materials such as silicon, silicon dioxide, andpolysilicon, have been pushed to their fundamental materials limits. Continuedscaling thus requires the introduction of new materials. For example, thetraditional gate dielectric has been silicon dioxide and as devices are scaledbelow 45 nm high K material such as halfnium oxide must be considered becausesilicon dioxide begins to lose its effectiveness at level below 45nm. These newmaterials impose added challenges to the methods used to dope and activatesilicon to produce very shallow, highly activated 

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junctions.The main challenges regarding short channel effects include achieving maximumactivation and minimal diffusion with abrupt junctions. 

**Products**

We currently offer two different series of 1Xlithography systems for use in the semiconductor fabrication process: the 1000Family, which addresses the markets for scanner replacement, high volume/lowcost semiconductor fabrication and R&D packaging activities andnanotechnology applications; and the AP series, which was designed to meet therequirements in the advanced packaging market. These steppers currently offerminimum feature size capabilities ranging from 2.0 microns to 0.75 microns.

In advanced packaging, we offer our AP series built onthe Unity PlatformTM.These advanced packaging systems were developed for high volume bump and waferlevel chip scale packaging (CSP) manufacturing and post passivation lithographyapplications. In addition, we offer the Prisma-ghi system, which ismanufactured on the 1000-series platform, for R&D packaging applications orwhere wafer volume requirements are not important. These systems providebroadband (ghi-line) exposure or selective exposure (gh or i-line), and areused in conjunction with electroplating to produce a pattern of bumps, or metalconnections for flip chip devices. This pattern can be placed in a tight arrayacross the entire die, as opposed to the conventional method of wire bondingwhich is generally limited to pads on the periphery of the die. This allowsmanufacturers to shrink the die size. The flip chip device can then be placedin a small outline package or directly on a printed circuit board.

The AP series, consisting of the AP200 &AP300, feature a customer-configurable design that supports flexiblemanufacturing requirements as well as tool extendibility for multiple devicegenerations. Designed to optimize productivity, the AP systems integrate theproven optics and processing advantages associated with our advanced packaginglithography equipment with the productivity benefits of our new Unity Platform.We believe that these new lithography systems support a lower cost-of-ownershipstrategy due to significant throughput enhancements, higher reliability, andsuperior alignment and illumination systems. 

The 1000 family is a small field system available withgh-line and i-line illumination options. In semiconductor applications, wherewe offer the Star 100 as well as the more mature 1500MVS. This platform istypically used in the manufacture of power devices, ASICs, analog devices and compoundsemiconductors. In addition, this platform is well suited for a number ofnanotechnology applications.

Nanotechnology manufacturing combines electronics withmechanics in small devices. We have defined that a nanotechnology device has atleast one dimention in the XYZ direction less than 0.1 microns. Examplesinclude accelerometers used to activate air bags in automobiles and membranepressure sensors used in industrial control systems. These micro-machineddevices are manufactured on silicon substrates using photolithographytechniques similar to those used for manufacturing semiconductors and thin filmhead devices. In addition, these systems are used in applications such as LEDand laser diodes. In 2002, we introduced the NanoTech product family thatconsists of the NanoTech 100, NanoTech 160 and NanoTech 190. The NanoTech 160system utilizes a platform based on the previous 1000 Series steppers,incorporating Dual Side Alignment (“DSA”) capability for applications requiringlithography on both sides of a wafer. The NanoTech 160 is an extension of themodel 1600DSA stepper, and enhances the capabilities of the 1000 Series steppersby offering Dual Side Alignment capability, providing customers with a 1Xstepper solution for this special processing requirement. Additionally, webelieve that our NanoTech steppers offer resolution and depth of focusadvantages over alternative technologies to the manufacturers of nanotechnologycomponents.

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The NanoTech 190 steppers, have enhanced capabilitiesdirected at TFH backend, or rowbar processing applications. These steppers areused to expose the Air Bearing Surface (ABS) patterns on rowbars.

We also sell upgrades to systems in our installed baseand refurbished systems. These refurbished systems typically have a purchaseprice that is lower than the purchase price for our new systems.

We also offer an advanced laser-based thermalannealing tool, the LSA100, built on essentially the same Unity Platform.Thermal annealing is used by the semiconductor industry for a variety ofprocess steps, including activation of implanted impurities, dielectric filmformation, formation of silicides and stabilization of copper grain structure.Annealing tools currently in use by manufacturers of semiconductor devices arefurnaces and rapid thermal annealing, or Rapid Thermal Processing (“RTP”),systems. We believe there is a need for tools that anneal at highertemperatures for shorter periods of time and that our laser annealing tools mayultimately provide this capability to the industry. The near-term applicationof our laser-based thermal annealing tools is anticipated to be in the area ofsource/drain dopant activation. However, we are also researching the use ofthese tools for other applications. In 2005 we shipped and revenued productionsystems for multiple customers. 

Ourcurrent systems are set forth below:

| **Product Line**  | ** ** | ** ** | ** ** | **Wavelength** | ** ** | **Minimum  Feature Size  (microns)** | ** ** |
|------------------------|------------|------------|------------|----------------|------------|-------------------------------------------|------------|
| **1X  Steppers:**      |       |       |       |           |       |                                      |       |   |
| 1000 Series:           |       |       |       |           |       |                                      |       |   |
| Star 100TM         |       |       | gh-line    |           |       | 0.8 - 1.0                                 |       |   |
| NanoTech 100           |       |       | gh-line    |           |       | 0.8 - 1.0                                 |       |   |
| NanoTech 160           |       |       | gh-line    |           |       | 1.0 - 2.0                                 |       |   |
| NanoTech 190           |       |       | gh-line    |           |       | 1.0 - 2.0                                 |       |   |
| Prisma-ghi             |       |       | ghi-line   |           |       | 4.0                                       |       |   |
| Saturn Spectrum  300e2 |       |       | ghi-line   |           |       | 2.0                                       |       |   |
| AP200                  |       |       | ghi-line   |           |       | 2.0                                       |       |   |
| AP300                  |       |       | ghi-line   |           |       | 2.0                                       |       |   |
| **Laser  Processing:** |       |       |       |           |       |                                      |       |   |
| LSA100                 |       |       | NA         |           |       | NA                                        |       |   |

 

**Research,Development and Engineering**

The semiconductor and nanotechnology industries aresubject to rapid technological change and new product introductions andenhancements. We believe that continued and timely development and introductionof new and enhanced systems to serve these markets is essential for us tomaintain our competitive position. We have made and continue to makesubstantial investments in the research and development of our core opticaltechnology, which we believe is critical to our financial results. We intend tocontinue to develop our technology and to develop innovative products andproduct features to meet customer demands. Current engineering projects include:continued research and development and process insertion for our laserprocessing technologies and continued development of our 1X stepper products.Other research and development efforts are currently focused on performanceenhancement and development of new features for existing systems, both forinclusion as a standard component in our systems and to meet special customerorder requirements; other efforts include reliability improvement; andmanufacturing cost reductions. These research and development efforts areundertaken, principally, by our research, development and engineeringorganizations and costs are generally expensed as incurred. Other operatinggroups within our Company support our research, development and engineeringefforts, and the associated costs are charged to those organizations andexpensed as incurred.

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We work with many customers to jointly developtechnology required to manufacture advanced devices or to lower the customer’scost of ownership. We also have a worldwide engineering support organizationincluding reticle engineering, photo processing capability and applicationssupport.

We have historicallydevoted a significant portion of our financial resources to research anddevelopment programs and expect to continue to allocate significant resourcesto these efforts in the future. As of December 31, 2005, we hadapproximately 66 full-time employees engaged in research, development,and engineering. For 2005, 2004 and 2003, total research, development, andengineering expenses were approximately $27.0 million, $25.9 million and $21.3million, respectively, and represented 22%, 24% and 21% of our net sales,respectively.

**Sales and Service**

We market and sell our products in North America,Europe, Japan, Taiwan and the rest of Asia principally through our direct salesorganization. We also have service personnel based throughout the UnitedStates, Europe, Japan and the rest of Asia.

Ultratech believes that as semiconductor andnanotechnology device manufacturers produce increasingly complex devices, theywill require an increased level of support. Global support capability as wellas product reliability, performance, yield, cost, uptime and mean time betweenfailures are increasingly important factors by which customers evaluate potentialsuppliers of photolithography equipment. We believe that the strength of ourworldwide service and support organization is an important factor in ourability to sell our systems, maintain customer loyalty and reduce themaintenance costs of our systems. In addition, we believe that working with oursuppliers and customers is necessary to ensure that our systems are costeffective, technically advanced and designed to satisfy customer requirements.

We support our customers with field service,applications, technical service engineers and training programs. We provide ourcustomers with comprehensive support and service before, during and afterdelivery of our systems. To support the sales process and to enhance customerrelationships, we work closely with prospective customers to develop hardware,software and applications test specifications and benchmarks, and often designcustomized applications to enable prospective customers to evaluate ourequipment for their specific needs. Prior to shipment, our support personneltypically assist the customer in site preparation and inspection, and providecustomers with training at our facilities or at the customer’s location. Wecurrently offer our customers various courses of instruction on our systems,including instructions in system hardware, software and applications tools foroptimizing our systems to fit a customer’s particular needs. Our customertraining program also includes instructions in the maintenance of our systems.Our field support personnel work with the customer’s employees to install thesystem and demonstrate system readiness. Technical support is also availablevia telephone and through on-site Ultratech personnel.

In general, we warrant ournew systems against defects in design, materials and workmanship for one year.We offer our customers additional support after the warranty period for a feein the form of service contracts for specified time periods. Service contractsinclude various options such as priority response, planned preventive maintenance,scheduled one-on-one training, daily on-site support, andmonthly system and performance analysis.

**Manufacturing**

We perform all of our manufacturing activities (finalassembly, system testing and certain subassembly) in clean room environments totalingapproximately 27,000 square feet located in San Jose, California. Performingmanufacturing operations in California exposes us to a higher risk of naturaldisasters, including earthquakes. In addition, in the past California hasexperienced power shortages, which have interrupted our operations. Suchshortages could occur in the future and could again interrupt our 

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operations resulting inproduct shipment delays, increased costs and other problems, any of which couldhave a material adverse effect on our business, customer relationships andresults of operations. We are not insured against natural disasters and powershortages and the occurrence of such an event could have a material adverseimpact our results of operations.

Our manufacturing activities consist of assembling andtesting components and subassemblies, which are then integrated into finishedsystems. We rely on a limited number of outside suppliers and subcontractors tomanufacture certain components and subassemblies. We order one of the mostcritical components of our technology, the glass for our 1X lenses, fromexternal suppliers. We design the 1X lenses and provide the lensspecifications and the glass to other suppliers, who then machine the lenselements. We then assemble and test the optical 1X lenses. We have recorded thecritical parameters of each of our optical lenses sold since 1982, and believethat such information enables us to supply lenses to our customers that matchthe characteristics of our customers’ existing lenses.

We procure some of our other critical systems’components, subassemblies and services from single outside suppliers or alimited group of outside suppliers in order to ensure overall quality andtimeliness of delivery. Many of these components and subassemblies havesignificant production lead times. To date, we have been able to obtainadequate services and supplies of components and subassemblies for our systemsin a timely manner. However, disruption or termination of certain of thesesources could result in a significant adverse impact on our ability tomanufacture our systems. This, in turn, would have a material adverse effect onour business, financial condition and results of operations. Our reliance on asole or a limited group of suppliers and our reliance on subcontractors involveseveral risks, including a potential inability to obtain an adequate supply ofrequired components due to the suppliers’ failure or inability to provide suchcomponents in a timely manner, or at all, and reduced control over pricing andtimely delivery of components. Although the timeliness, yield and quality ofdeliveries to date from our subcontractors have been acceptable, manufacture ofcertain of these components and subassemblies is an extremely complex process,and long lead-times are required. Any inability to obtain adequate deliveriesor any other circumstance that would require us to seek alternative sources ofsupply or to manufacture such components internally could delay our ability toship our products, which could damage relationships with current andprospective customers and have a material adverse effect on our business,financial condition and results of operations.

We maintain a company-widequality program. Our operations achieved ISO 9001:1994 certification in 1996and ISO 14001:1996 certification in March 2001. Our ISO 9001 certificationwas upgraded to the ISO 9001:2000 standard in January 2002. Allcertifications have been maintained uninterrupted through the date of thisreport.

**Competition**

The capital equipmentindustry in which we operate is intensely competitive. A substantial investmentis required to install and integrate capital equipment into a semiconductor,semiconductor packaging or nanotechnology device production line. We believethat once a device manufacturer or packaging subcontractor has selected aparticular supplier’s capital equipment, the manufacturer generally relies uponthat equipment for the specific production line application and, to the extentpossible, subsequent generations of similar products. Accordingly, it isdifficult to achieve significant sales to a particular customer once anothersupplier’s capital equipment has been selected.

**Advanced Packaging**

We experience competition in advanced packaging fromvarious proximity aligner companies such as Suss Microtec AG (Suss Microtec)and projection companies such as Ushio, Inc. (Ushio) and TamarackScientific Co., Inc. (Tamarack). We expect our competitors to continue toimprove the performance of 

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their current products andto introduce new products with improved price and performance characteristics.This could cause a decline in sales or loss of market acceptance of oursteppers in our served markets, and thereby materially adversely affect ourbusiness, financial condition and results of operations. Enhancements to, orfuture generations of, competing products may be developed that offer superiorcost of ownership and technical performance features. We believe that to becompetitive will require significant financial resources in order to continueto invest in new product development, to invest in new features andenhancements to existing products, to introduce new generation stepper systemsin our served markets on a timely basis, and to maintain customer service andsupport centers worldwide. In marketing our products, we may also facecompetition from suppliers employing other technologies. In addition, increasedcompetitive pressure has led to intensified price-based competition in certainof our markets, resulting in lower prices and margins. Should these competitivetrends continue, our business, financial condition and operating results may bematerially adversely affected.

We have obtained aleadership position in the advanced packaging market. Our primary competitionin this market comes from contact aligners offered by companies such as SussMicrotec. Although contact and proximity aligners generally have lower purchaseprices than 1X steppers, 1X steppers offer lower operating costs and total costof ownership in most applications. We believe that most device manufacturersand wafer bump foundries choose 1X steppers due to the yield improvementoffered by the use of non-contact lithography. Ushio, a Japanese semiconductorequipment company has also introduced a 1X refractive stepper for the advancedpackaging market. However, we believe 1X refractive steppers do not offer thesame productivity and cost saving advantages as our 1X stepper based on theWynne Dyson optical design. Tamarack has a 1X scanner for wafer bumpingapplications. We believe that Tamarack’s 1X scanners have higher operatingcosts as compared to our 1X steppers. In addition to contact and proximityaligners, Ultratech also faces competition from the reduction stepper market.While reduction steppers are typically more expensive and offer lessflexibility in processing thick resists, some device manufacturers may considerthis technology option.

**Laser Processing**

With respect to our laser annealing technologies,marketed under the LSA100 product name, our primary competition comes fromcompanies such as Applied Materials, Inc., and Dainippon ScreenManufacturing Co., LTD. Many of these companies offer products utilizing rapidthermal processing (RTP), which is the current manufacturing technology. RTPdoes not prevent semiconductor device manufacturers from scaling the lateraldimensions of their transistors to obtain improved performance, but diffusionresulting from the time scales associated with RTP seriously limits thevertical dimension of the junctions. Faster annealing times result in shallowerand more abrupt junctions and faster transistors. We believe our annealingtechnology results in faster transistors for a given size. We believe that RTPmanufacturers recognize the need to reduce thermal cycle times and are workingtoward this goal. Several companies have published papers on annealing toolsthat incorporate flash lamp anneal (FLA) technology in order to reduceannealing times and increase anneal temperatures. Developers of FLA technologyclaim to have overcome annealing difficulties at the 65nm node. This technique,which employs xenon flash lamps, has shown improvements over RTP in junctiondepth and sheet resistance, but we believe FLA will suffer from pattern-relatednon-uniformities and could require additional, costly processes to reducethe reflectivity of different areas within the chip or wafer. Our proprietarylaser processing solution has been specifically developed to provide junctionannealing on near-instantaneous timescales, while maintaining low sheetresistance. LSA, our first implementation of laser processing, activatesdopants in the microsecond-to-millisecond time frame without melting. Ourresearch indicates that, at temperatures just below the melting point ofsilicon, time durations in the microsecond to millisecond range, are requiredto achieve full activation, and dopant diffusion is minimal.

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In July 2000, welicensed certain rights to our then existing laser processing technology, withreservations, to a competing manufacturer of semiconductor equipment. Wepresently anticipate that this company and others intend to offer laserannealing tools to the semiconductor industry that will compete with ourofferings. We believe that Applied Materials is working to introduce a laserbased system, although we believe their solution will suffer from the samepattern-related non-uniformities as flash lamps.

**Intellectual Property Rights**

Although we attempt to protect our intellectualproperty rights through patents, copyrights, trade secrets and other measures,we believe that our success will depend more upon the innovation, technologicalexpertise and marketing abilities of our employees. Nevertheless, we have apolicy of seeking patents when appropriate on inventions resulting from ourongoing research and development and manufacturing activities. We own 107United States and foreign patents, which expire on dates ranging from April 2006to April 2023 and have 97 United States and foreign patent applicationspending. We also have various registered trademarks and copyright registrationscovering mainly software programs used in the operation of our systems. We alsorely upon trade secret protection for our confidential and proprietaryinformation. We may not be able to protect our technology adequately andcompetitors may be able to develop similar technology independently. Ourpending patent applications may not be issued or U.S. or foreign intellectualproperty laws may not protect our intellectual property rights. In addition,litigation may be necessary to enforce our patents, copyrights or otherintellectual property rights, to protect our trade secrets, to determine thevalidity and scope of the proprietary rights of others or to defend againstclaims of infringement. Such litigation has resulted in, and in the futurecould result in, substantial costs and diversion of resources and could have amaterial adverse effect on our business, financial condition and results ofoperations, regardless of the outcome of the litigation. Patents issued to usmay be challenged, invalidated or circumvented and the rights grantedthereunder may not provide competitive advantages to us. Furthermore, othersmay independently develop similar technology or products, or, if patents areissued to us, design around the patents issued to us. Invalidation of ourpatents related to those technologies could allow our competitors to moreeffectively compete against us, which could result in less revenue for us.

On February 29, 2000, we filedlawsuits asserting patent infringement and related claims against Nikon, Canon,and ASML in the U.S. District Court for the Eastern District of Virginia. InApril 2000, we reached a settlement with Nikon, and in September 2001, wereached a settlement with Canon. In the patent litigation against ASML, a jurytrial was conducted during the three-month period ended July 2, 2005. The jury reacheda verdict that the patent was infringed, but that the asserted claims of thepatent were invalid. We filed a post-trial motion for a new trial and forjudgment as a matter of law in our favor. ASML also filed a motion for judgmentas a matter of law seeking to invalidate three of the asserted claims for lackof enablement and requested that the court awards costs. On February 13th, 2006,the Court denied our post-trial motions, including the motion for a new trial,and entered judgment in favor of ASML invalidating three claims of the patentfor lack of enablement. The Court also awarded ASML approximately $330,000 incosts. Ultratech intends to appeal the final judgment.

On July 11, 2003, we filed a lawsuit against a SouthernCalifornia company asserting infringement of certain claims related to U.S.patent No. 5,621,813 in the U.S. District Court in and for the NorthernDistrict of California. On May 17, 2005, the court found the subject patentto be invalid. We have appealed this decision and that appeal is pending. Thedefendant subsequently brought a motion for reimbursement of its attorneys’fees and costs in a total asserted amount of approximately $2 million. Weopposed this motion, and on October 12, 2005, the District Court deniedthe defendant’s request for attorneys’ fees in its entirety. On November 3,2005, the defendant filed a notice of appeal with respect to the court’s rulingon its motion for attorneys’ fees.

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We have from time to time been notified of claims thatwe may be infringing intellectual property rights possessed by third parties.We believe that the outcome of these matters will not be material to ourbusiness or financial condition.

Infringement claims bythird parties or claims for indemnification resulting from infringement claimsmay be asserted in the future and such assertions could materially adverselyaffect our business, financial condition and results of operations, regardlessof the outcome of any litigation. With respect to any such future claims, wemay seek to obtain a license under the third party’s intellectual propertyrights. However, a license may not be available on reasonable terms or at all.We could decide, in the alternative, to resort to litigation to challenge suchclaims. Such challenges could be expensive and time consuming and couldmaterially adversely affect our business, financial condition and results ofoperations, regardless of the outcome of any litigation.

**Environmental Regulations**

We are subject to avariety of governmental regulations relating to the use, storage, discharge,handling, emission, generation, manufacture and disposal of toxic or otherhazardous substances. We believe that we are currently in compliance in allmaterial respects with such regulations and that we have obtained all necessaryenvironmental permits to conduct our business. Nevertheless, the failure tocomply with current or future regulations could result in substantial finesbeing imposed on us, suspension of production, alteration of the manufacturingprocess or cessation of operations. Such regulations could require us toacquire expensive remediation equipment or to incur substantial expenses tocomply with environmental regulations. Any failure by us to control the use,disposal or storage of, or adequately restrict the discharge of, hazardous ortoxic substances could subject us to significant liabilities.

**Customers, Applications and Markets**

We sell our systems to semiconductor, advancedpackaging, thin film head, ink jet printer/accelerometer and various othernanotechnology manufacturers located throughout North America, Europe, Japan,Taiwan and the rest of Asia. Semiconductor manufacturers have purchased the1000 Series steppers, the AP series of steppers, and the NanoTech steppersfor the fabrication and/or packaging of microprocessors, microcontrollers,DRAMs, ASICs and a host of other devices. Such systems could be used in mix-and-matchapplications with other lithography tools, as replacements for scanners andcontact proximity printers, in packaging for flip chip applications and forhigh volume, low cost, less critical feature size production. In addition tothe business risks associated with dependence on major customers, thesesignificant customer concentrations have in the past resulted in significantconcentrations of accounts receivable. These significant and concentratedreceivables expose us to additional risks, including the risk of default by oneor more customers representing a significant portion of our total receivables.If we were required to take additional accounts receivable reserves, ourbusiness, financial condition and results of operations would be materiallyadversely affected.

On a market application basis, sales to thesemiconductor industry, primarily for advanced packaging applications,accounted for approximately 79% of system revenue for the year ended December 31,2005, as compared to 75% for each of the years ended December 31, 2004 and2003. During 2005, 2004 and 2003, approximately 21%, 25% and 25%, respectively,of our systems revenue was derived from sales to nanotechnology manufacturers,including micro systems, thin film head and optical networking devicemanufacturers. Our future results of operations and financial position would bematerially adversely impacted by a downturn in any of these market segments, orby loss of market share in any of these segments.

International sales accounted for approximately 69%,65% and 61% of total net sales for the years 2005, 2004 and 2003, respectively,with Japan representing 13%, 32% and 28% of sales for those same years.

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Sales of our systemsdepend, in significant part, upon the decision of a prospective customer toincrease manufacturing capacity or to restructure current manufacturingfacilities, either of which typically involves a significant commitment ofcapital. Many of our customers in the past have cancelled the development ofnew manufacturing facilities and have substantially reduced their capitalequipment budgets. In view of the significant investment involved in a systempurchase, we have experienced and may continue to experience delays followinginitial qualification of our systems as a result of delays in a customer’sapproval process. Additionally, we are presently receiving orders for systemsthat have lengthy delivery schedules, which may be due to longer productionlead times or a result of customers’ capacity scheduling requirements. Forthese and other reasons, our systems typically have a lengthy sales cycleduring which we may expend substantial funds and management effort in securinga sale. Lengthy sales cycles subject us to a number of significant risks,including inventory obsolescence and fluctuations in operating results, overwhich we have little or no control. In order to maintain or exceed our presentlevel of net sales, we are dependent upon obtaining orders for systems thatwill ship and be accepted in the current period. We may not be able to obtain thoseorders.

**Backlog**

We schedule production ofour systems based upon order backlog, informal customer commitments and generaleconomic forecasts for our targeted markets. We include in our backlog allaccepted customer orders for our systems with assigned shipment dates withinone year, as well as all orders for service, spare parts and upgrades, in eachcase, that management believes to be firm. However, all orders are subject tocancellation or rescheduling by the customer with limited or no penalties. Becauseof changes in system delivery schedules, cancellations of orders and potentialdelays in system shipments, our backlog at any particular date may notnecessarily be representative of actual sales for any succeeding period. As of December 31,2005 and 2004, our backlog was approximately $108.8 million and $82.5 million,respectively, including $0.0 million and $1.0 million, respectively, ofproducts shipped but not yet installed and accepted. Cancellation, deferrals orrescheduling of orders by these customers would have a material adverse impacton our future results of operations.

**Employees**

At December 31, 2005,we had approximately 328 full-time employees, including 66 engaged inresearch, development, and engineering, 39 in sales and marketing, 100 incustomer service and support, 73 in manufacturing and 50 in generaladministration and finance. We believe our future success depends, in largepart, on our ability to attract and retain highly skilled employees. None ofour employees are covered by a collective bargaining agreement. We have,however, entered into employment agreements with a limited number of ouremployees, including our executive officers. We consider our relationships withour employees to be good.

**InformationAvailable on Our Web-site**

Our web-site is located at*www.ultratech.com*. We make available,free of charge, through our web-site, our annual report on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K(and amendments to those reports), as soon as reasonably practicable after suchreports are filed electronically with the SEC. We have adopted a Code of Ethicsfor our principal executive officer, principal financial officer, principalaccounting officer or controller, or persons performing similar functions. Wehave posted this Code of Ethics on our website. Any future amendments to thisCode will also be posted on our website.

**Item 1A**                   *Risk Factors*

In addition to risks described in the foregoingdiscussions under “Business,” including but not limited to those under “Products,”“Research, Development and Engineering,” “Sales and Service,” 

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“Manufacturing,” “Competition,”“Intellectual Property Rights,” “Environmental Regulations,” “Customers,Applications and Markets,” “Backlog,” and “Employees,” the following risksapply to us and our business:

**We currently spend, and expect to continue to spend,significant resources to develop, introduce and commercialize our laserprocessing systems and AP wafer stepper products, and we may not be successfulin achieving or increasing sales of these products.**

Currently, we are devoting significant resources tothe development, introduction and commercialization of our laser products aswell as our lithography wafer steppers. We intend to continue to develop theseproducts and technologies during 2006, and will continue to incur significantoperating expenses in the areas of research, development and engineering,manufacturing and general and administrative costs in order to develop, produceand support these new products. Additionally, gross profit margins andinventory levels may be further adversely impacted in the future by costsassociated with the initial production of our laser processing systems and byfuture generations of our 1X lithography systems. Introduction of new productsgenerally involves higher installation costs and product performanceuncertainties that could delay customer acceptance of our systems, resulting ina delay in recognizing revenue associated with those systems and a reduction ingross margins. These costs include, but are not limited to, additionalmanufacturing overhead, additional inventory write-offs, costs of demonstrationsystems and facilities, costs associated with the establishment of additionalafter-sales support organizations. Additionally, operating expenses mayincrease, relative to sales, as a result of adding additional marketing andadministrative personnel, among other costs, to support our new products. If weare unable to achieve significantly increased net sales or if our sales fallbelow expectations, our operating results will be materially adverselyaffected.

Our ability to commercialize our laser processingtechnologies depends on our ability to demonstrate a manufacturing-worthy tool.We do not presently have in-house capability to fabricate devices. As a result,we must rely on partnering with semiconductor companies to develop the annealprocess. The development of new process technologies is largely dependent uponour ability to interest potential customers in working on joint processdevelopment. Our ability to deliver timely solutions is also limited by waferturnaround at the potential customer’s fabrication facility.

**Our sales cycle istypically lengthy and involves a significant commitment of capital by ourcustomers, which has subjected us, and is likely to continue to subject us, todelays in customer acceptances of our products and other risks, any of whichcould adversely impact our results of operations by, among other things,delaying recognition of revenue with respect to those orders and resulting inincreased installation, qualification and similar costs.**

Sales of our systems depend, in significant part, uponthe decision of a prospective customer to increase manufacturing capacity or torestructure current manufacturing facilities, either of which typicallyinvolves a significant commitment of capital. Many of our customers in the pasthave cancelled the development of new manufacturing facilities and havesubstantially reduced their capital equipment budgets. In view of thesignificant investment involved in a system purchase, we have experienced andmay continue to experience delays following initial qualification of oursystems as a result of delays in a customer’s approval process. Additionally,we are presently receiving orders for systems that have lengthy deliveryschedules, which may be due to longer production lead times or a result ofcustomers’ capacity scheduling requirements. For these and other reasons, oursystems typically have a lengthy sales cycle during which we may expendsubstantial funds and management effort in securing a sale. Lengthy salescycles subject us to a number of significant risks, including inventoryobsolescence and fluctuations in operating results, over which we have littleor no control. In order to maintain or exceed our present level of net sales,we are dependent upon obtaining orders for systems that will ship and beaccepted in the current period. We may not be able to obtain those orders.

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**We may not besuccessful in protecting our intellectual property rights or we could be foundto have infringed the intellectual property rights of others, either of whichcould weaken our competitive position and adversely affect our results ofoperations.**

**Although we attempt to protect our intellectualproperty rights through patents, copyrights, trade secrets and other measures,we believe that our success will depend more upon the innovation, technologicalexpertise and marketing abilities of our employees. Nevertheless, we have apolicy of seeking patents when appropriate on inventions resulting from ourongoing research and development and manufacturing activities. We own 107United States and foreign patents, which expire on dates ranging from April 2006to April 2023 and have 97 United States and foreign patent applicationspending. In addition, we have various registered trademarks and copyrightregistrations covering mainly software programs used in the operation of oursystems. We also rely upon trade secret protection for our confidential andproprietary information. We may not be able to protect our technologyadequately and competitors may be able to develop similar technologyindependently. Our pending patent applications may not be issued or U.S. orforeign intellectual property laws may not protect our intellectual propertyrights. In addition, litigation may be necessary to enforce our patents,copyrights or other intellectual property rights, to protect our trade secrets,to determine the validity and scope of the proprietary rights of others or todefend against claims of infringement. Such litigation has resulted in, and inthe future could result in, substantial costs and diversion of resources andcould have a material adverse effect on our business, financial condition andresults of operations, regardless of the outcome of the litigation. Patentsissued to us may be challenged, invalidated or circumvented and the rightsgranted thereunder may not provide competitive advantages to us. Furthermore,others may independently develop similar technology or products, or, if patentsare issued to us, design around the patents issued to us. Invalidation of ourpatents related to those technologies could allow our competitors to moreeffectively compete against us, which could result in less revenue for us.**

On February 29, 2000, we filedlawsuits asserting patent infringement and related claims against Nikon, Canon,and ASML in the U.S. District Court for the Eastern District of Virginia. InApril 2000, we reached a settlement with Nikon, and in September 2001, wereached a settlement with Canon. In the patent litigation against ASML, a jurytrial was conducted during the three-month period ended July 2, 2005. The juryreached a verdict that the patent was infringed, but that the asserted claimsof the patent were invalid. We filed a post-trial motion for a new trial andfor judgment as a matter of law in our favor. ASML also filed a motion forjudgment as a matter of law seeking to invalidate three of the asserted claimsfor lack of enablement and requested that the court awards costs. On February13th, 2006, the Court denied our post-trial motions, including the motion for anew trial, and entered judgment in favor of ASML invalidating three claims ofthe patent for lack of enablement. The Court also awarded ASML approximately$330,000 in costs. Ultratech intends to appeal the final judgment.

On July 11, 2003, we filed a lawsuit against a SouthernCalifornia company asserting infringement of certain claims related to U.S.patent No. 5,621,813 in the U.S. District Court in and for the NorthernDistrict of California. On May 17, 2005, the court found the subject patentto be invalid. We have appealed this decision and that appeal is pending. Thedefendant subsequently brought a motion for reimbursement of its attorneys’fees and costs in a total asserted amount of approximately $2 million. Weopposed this motion, and on October 12, 2005, the District Court deniedthe defendant’s request for attorneys’ fees in its entirety. On November 3,2005, the defendant filed a notice of appeal with respect to the court’s rulingon its motion for attorneys’ fees.

We have from time to time been notified of claims thatwe may be infringing intellectual property rights possessed by third parties.We believe that the outcome of these matters will not be material to ourbusiness or financial condition. 

Infringement claims by third parties or claims forindemnification resulting from infringement claims may be asserted in thefuture and such assertions could materially adversely affect our business,financial 

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condition and results ofoperations, regardless of the outcome of any litigation. With respect to anysuch future claims, we may seek to obtain a license under the third party’sintellectual property rights. However, a license may not be available onreasonable terms or at all. We could decide, in the alternative, to resort tolitigation to challenge such claims. Such challenges could be expensive andtime consuming and could materially adversely affect our business, financialcondition and results of operations, regardless of the outcome of anylitigation.

**We operate in ahighly competitive industry in which customers are required to investsubstantial resources in each product, which makes it difficult to achievesignificant sales to a particular customer once another vendor’s equipment hasbeen purchased by that customer.**

The capital equipment industry in which we operate isintensely competitive. A substantial investment is required to install andintegrate capital equipment into a semiconductor, semiconductor packaging ornanotechnology device production line. We believe that once a devicemanufacturer or packaging subcontractor has selected a particular supplier’scapital equipment, the manufacturer generally relies upon that equipment forthe specific production line application and, to the extent possible,subsequent generations of similar products. Accordingly, it is difficult toachieve significant sales to a particular customer once another supplier’scapital equipment has been selected.

We experience competition in advanced packaging fromvarious proximity aligner companies such as Suss Microtec AG (Suss Microtec)and projection companies such as Ushio, Inc. (Ushio). In nanotechnology,we experience competition from proximity aligner companies, such as SussMicrotec, as well as other stepper manufacturers who have developed or are developingtools specifically designed for nanotechnology applications. We expect ourcompetitors to continue to improve the performance of their current productsand to introduce new products with improved price and performancecharacteristics. This could cause a decline in sales or loss of marketacceptance of our steppers in our served markets, and thereby materiallyadversely affect our business, financial condition and results of operations.Enhancements to, or future generations of, competing products may be developedthat offer superior cost of ownership and technical performance features.

With respect to our laser annealing technologies,marketed under the LSA100 product name, the primary competition comes fromcompanies such as Applied Materials, Inc., and Dainippon ScreenManufacturing Co., LTD. Many of these companies offer products utilizing rapidthermal processing, or RTP, which is the current prevailing manufacturingtechnology. RTP does not prevent semiconductor device manufacturers fromscaling the lateral dimensions of their transistors to obtain improvedperformance, but diffusion resulting from the time scales associated with RTPlimits the vertical dimension of the junctions. Faster annealing times resultin shallower and more abrupt junctions and faster transistors. We believe ourannealing technology results in faster transistors for a given size. We believethat RTP manufacturers recognize the need to reduce thermal cycle times and areworking toward this goal. In July 2000, we licensed certain rights to ourthen existing laser processing technology, with reservations, to a competingmanufacturer of semiconductor equipment. We presently anticipate that thiscompany will offer laser-annealing tools to the semiconductor industry thatwill compete with our offerings.

Another potential advanced annealing solution utilizesflash lamp annealing technology, or FLA. Several companies have publishedpapers on annealing tools that incorporate flash lamp technology in order toreduce annealing times and increase anneal temperatures. Developers of FLAtechnology claim to have overcome annealing difficulties at the 65nm node. Thistechnique, which employs xenon flash lamps, has shown improvements over RTP injunction depth and sheet resistance, but we believe FLA will suffer frompattern-related non-uniformities and could require additional, costly processesto reduce the reflectivity of different areas within the chip or wafer. Ourproprietary laser processing solution has been specifically developed to providejunction annealing on near-instantaneous time-scales, while maintaining 

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low sheet resistance.Laser spike annealing, the first implementation of laser processing, activatesdopants in the microsecond-to-millisecond time frame without melting. Our researchindicates that, at temperatures just below the melting point of silicon, timedurations in the microsecond to millisecond range, are required to achieve fullactivation, and dopant diffusion is minimal.

Additionally, competition to our laser processingproducts may come from other laser annealing tools, including those presentlybeing used by the flat panel display industry to re-crystallize silicon.Manufacturers of these tools may try to extend the use of their technologies tosemiconductor device applications.

We believe that in order to be competitive, we willneed to continue to invest significant financial resources in new productdevelopment, new features and enhancements to existing products, theintroduction of new stepper systems in our served markets on a timely basis,and maintaining customer service and support centers worldwide. In marketingour products, we may also face competition from vendors employing othertechnologies. In addition, increased competitive pressure has led to intensifiedprice-based competition in certain of our markets, resulting in lower pricesand margins. Should these competitive trends continue, our business, financialcondition and operating results may be materially adversely affected.

**We sell ourproducts primarily to a limited number of customers and to customers in alimited number of industries, which subjects us to increased risks related tothe business performance of our customers, and therefore their need for ourproducts, and the business cycles of the markets into which we sell.**

Historically, we have sold a substantial portion ofour systems to a limited number of customers. In 2005, 2004, and 2003, IntelCorporation accounted for 13%, 10%, and 26% of our net sales. We expect thatsales to a relatively few customers will continue to account for a highpercentage of our net sales in the foreseeable future and believe that ourfinancial results depend in significant part upon the success of these majorcustomers and our ability to meet their future capital equipment needs.Although the composition of the group comprising our largest customers may varyfrom period to period, the loss of a significant customer or any reduction inorders by a significant customer, including reductions due to market, economicor competitive conditions in the semiconductor, semiconductor packaging ornanotechnology industries or in the industries that manufacture productsutilizing integrated circuits, thin film heads or other nanotechnologycomponents, would likely have a material adverse effect on our business,financial condition and results of operations. Our ability to maintain orincrease our sales in the future depends, in part, on our ability to obtainorders from new customers as well as the financial condition and success of ourexisting customers, the semiconductor and nanotechnology industries and theeconomy in general.

In addition to the business risks associated withdependence on a few major customers, these significant customer concentrationshave in the past resulted in significant concentrations of accounts receivable.These significant and concentrated receivables expose us to additional risks,including the risk of default by one or more customers representing asignificant portion of our total receivables. If we were required to takeadditional accounts receivable reserves, our business, financial condition andresults of operations would be materially adversely affected.

On a market application basis, sales to thesemiconductor industry, primarily for advanced packaging applications,accounted for approximately 79% and 75% of system revenue for the years ended2005 and 2004, respectively. In 2005 and 2004, approximately 21% and 25%,respectively, of our systems revenue was derived from sales to nanotechnology manufacturers,including micro systems, thin film head and optical device manufacturers. Ourfuture operating results and financial condition would be materially adverselyimpacted by a downturn in any of these market segments, or by loss of marketshare in any of these segments. A growing portion of our backlog of systemorders is comprised of laser spike annealing 

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tools. To date, we havelimited experience with this technology. Should significant demand notmaterialize, due to technical, production, market, or other factors, ourbusiness, financial position and results of operations would be materiallyadversely impacted.

**We rely on alimited number of outside suppliers and subcontractors to manufacture certaincomponents and subassemblies, and on single or a limited group of outsidesuppliers for certain materials for our products, which could result in apotential inability to obtain an adequate supply of required components due tothe suppliers’ failure or inability to provide such components in a timelymanner, or at all, and reduced control over pricing and timely delivery ofcomponents and materials, any of which could adversely affect our results ofoperations.**

**Our manufacturing activitiesconsist of assembling and testing components and subassemblies, which are thenintegrated into finished systems. We rely on a limited number of outsidesuppliers and subcontractors to manufacture certain components andsubassemblies. We order one of the most critical components of our technology,the glass for our 1X lenses, from external suppliers. We design the 1X lensesand provide the lens specifications and the glass to other suppliers, who thengrind and polish the lens elements. We then assemble and test the optical 1Xlenses.**

We procure some of our other critical systems’components, subassemblies and services from single outside suppliers or alimited group of outside suppliers in order to ensure overall quality andtimeliness of delivery. Many of these components and subassemblies havesignificant production lead times. To date, we have been able to obtainadequate services and supplies of components and subassemblies for our systemsin a timely manner. However, disruption or termination of certain of thesesources could have a significant adverse impact on our ability to manufactureour systems. This, in turn, would have a material adverse effect on ourbusiness, financial condition and results of operations. Our reliance on a solesupplier or a limited group of suppliers and our reliance on subcontractorsinvolve several risks, including a potential inability to obtain an adequatesupply of required components due to the suppliers’ failure or inability toprovide such components in a timely manner, or at all, and reduced control overpricing and timely delivery of components. Although the timeliness, yield andquality of deliveries to date from our subcontractors have been acceptable,manufacture of certain of these components and subassemblies is an extremelycomplex process, and long lead-times are required. Any inability to obtainadequate deliveries or any other circumstance that would require us to seekalternative sources of supply or to manufacture such components internallycould delay our ability to ship our products, which could damage relationshipswith current and prospective customers and have a material adverse effect onour business, financial condition and results of operations.

**The semiconductor industry historically has beenhighly cyclical and has experienced periods of oversupply, which has in turnaffected the market for semiconductor equipment such as ours and which canadversely affect our results of operations during such periods.**

**Our**business depends in significant part upon capital expenditures by******manufacturers of semiconductors,advanced packaging semiconductors and nanotechnology components, including thinfilm head magnetic recording devices, which in turn depend upon the current andanticipated market demand for such devices and products utilizing such devices.The semiconductor industry historically has been highly cyclical and hasexperienced recurring periods of oversupply. This has, from time to time,resulted in significantly reduced demand for capital equipment including thesystems manufactured and marketed by us. We believe that markets for newgenerations of semiconductors and semiconductor packaging will also be subjectto similar fluctuations. Our business and operating results would be materiallyadversely affected by downturns or slowdowns in the semiconductor packagingmarket or by loss of market share. Accordingly, we may not be able to achieveor maintain our current or prior level of sales. We attempt to mitigate therisk of cyclicality by participating in multiple markets includingsemiconductor, semiconductor packaging, and nanotechnology sectors, as well asdiversifying into new markets such as laser-based 

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annealing for implantactivation and other applications. Despite such efforts, when one or more ofsuch markets experiences a downturn or a situation of excess capacity, our netsales and operating results are materially adversely affected.

**Our industry is subject to rapid technological changeand product innovation, which could result in our technologies and productsbeing replaced by those of our competitors, which would adversely affect ourbusiness and results of operations.**

**The semiconductor andnanotechnology manufacturing industries are subject to rapid technologicalchange and new product introductions and enhancements. Our ability to becompetitive in these and other markets will depend, in part, upon our abilityto develop new and enhanced systems and related software tools, and tointroduce these systems and related software tools at competitive prices and ona timely and cost-effective basis to enable customers to integrate them intotheir operations either prior to or as they begin volume product manufacturing.We will also be required to enhance the performance of our existing systems andrelated software tools. Our success in developing new and enhanced systems andrelated software tools depends upon a variety of factors, including productselection, timely and efficient completion of product design, timely andefficient implementation of manufacturing and assembly processes, productperformance in the field and effective sales and marketing. Because new productdevelopment commitments must be made well in advance of sales, new productdecisions must anticipate both future demand and the technology that will beavailable to meet that demand. We may not be successful in selecting,developing, manufacturing or marketing new products and related software toolsor enhancing our existing products and related software tools. Any such failurewould materially adversely affect our business, financial condition and resultsof operations.**

Because of the large number of components in oursystems, significant delays can occur between a system’s introduction and ourcommencement of volume production of such systems. We have experienced delaysfrom time to time in the introduction of, and technical and manufacturingdifficulties with, certain of our systems and enhancements and related softwarefeatures and options, and may experience delays and technical and manufacturingdifficulties in future introductions or volume production of new systems orenhancements and related software features and options.

We may encounter additional technical, manufacturingor other difficulties that could further delay future introductions or volumeproduction of systems or enhancements. Our inability to complete thedevelopment or meet the technical specifications of any of our systems orenhancements and related software tools, or our inability to manufacture andship these systems or enhancements and related software tools in volume and intime to meet the requirements for manufacturing the future generation ofsemiconductor or nanotechnology devices would materially adversely affect ourbusiness, financial condition and results of operations. In addition, we mayincur substantial unanticipated costs to ensure the functionality andreliability of our products early in the products’ life cycles. If new productshave reliability or quality problems, reduced orders or higher manufacturingcosts, delays in customer acceptance, revenue recognition and collectingaccounts receivable and additional service and warranty expenses may result.Any of such events may materially adversely affect our business, financialcondition and results of operations.

**A substantialportion of our sales are outside of the United States, which subjects us torisks related to customer service, installation, foreign economic and politicalstability, uncertain regulatory and tax rules, and foreign exchange ratefluctuations, all of which make it more difficult to operate our business.**

**International sales accounted forapproximately 69%, 65% and 61% of total net sales for the years 2005, 2004 and2003, respectively. We anticipate that international sales, which typicallyhave lower gross margins than domestic sales, principally due to increasedcompetition and higher field service and support costs, will continue toaccount for a significant portion of total net sales. As a result, asignificant portion of our net sales will continue to be subject to certainrisks, including unexpected changes in regulatory**

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**requirements;difficulty in satisfying existing regulatory requirements; exchange ratefluctuations; 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 we generally transact our international salesin U.S. dollars, international sales expose us to a number of additional riskfactors, including fluctuations in the value of local currencies relative tothe U.S. dollar, which, in turn, impact the relative cost of ownership of ourproducts and may further impact the purchasing ability of our international customers.However, in Japan, we have direct sales operations and orders are oftendenominated in Japanese yen. This may subject us to a higher degree of riskfrom currency fluctuations. We attempt to mitigate this exposure through theuse of foreign currency forward exchange contracts. We are also subject to therisks associated with the imposition of legislation and regulations relating tothe import or export of semiconductors and nanotechnology products. We cannotpredict whether the United States or any other country will implement changesto quotas, duties, taxes or other charges or restrictions upon the importationor exportation of our products. These factors, or the adoption of restrictivepolicies, may have a material adverse effect on our business, financialcondition and results of operations.

**We are dependent on our key personnel, especiallyMr. Zafiropoulo our Chief Executive Officer, and our business and resultsof operations would be adversely affected if we were to lose our key employees.**

Our future operating results depend, in significantpart, upon the continued contributions of key personnel, many of whom would bedifficult to replace. We have entered into employment agreements with only alimited number of our employees, including our Chief Executive Officer,President, Chief Financial Officer and Senior Vice President World-wide Salesand Customer Operations, and our employees are employed “at will.” Some ofthese agreements contain vesting acceleration and severance payment provisionsthat could result in significant costs or charges to us should the employee beterminated without cause, die or have a disability. We do not maintain any lifeinsurance on any of our key people. The loss of key personnel could have amaterial adverse effect on our business, financial condition and results ofoperations. In addition, our future operating results depend in significantpart upon our ability to attract and retain other qualified management,manufacturing, technical, sales and support personnel for our operations. Thereare only a limited number of persons with the requisite skills to serve inthese positions and it may become increasingly difficult for us to hire suchpersonnel over time. At times, competition for such personnel has been intense,particularly in the San Francisco Bay Area where we maintain our headquartersand principal operations, and there can be no assurance that we will besuccessful in attracting or retaining such personnel. The failure to attract orretain such persons would materially adversely affect our business, financialcondition and results of operations.

**Changes in financial accounting standards or policies inthe past have affected, and in the future may, affect, our reported results ofoperations.**

We prepare our financial statements in conformity withaccounting principles generally accepted in the United States, or U.S. GAAP.These principles are subject to interpretation by the Financial AccountingStandards Board (FASB), the American Institute of Certified Public Accountants(AICPA), the Securities and Exchange Commission (SEC) and various bodies formedto interpret and create appropriate accounting policies. A change in thosepolicies can have a significant effect on our reported results and may affectour reporting of transactions completed before a change is announced.

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Accounting policies affecting many other aspects ofour business, including rules relating to revenue recognition, off-balancesheet transactions, employee stock options, restructurings, asset disposals andasset retirement obligations, intangible assets, derivative and other financialinstruments, and in-process research and development charges, have recentlybeen revised or are under review. Changes to those rules or thequestioning of how we interpret or implement those rules may have amaterial adverse effect on our reported financial results or on the way weconduct business. In addition, our preparation of financial statements inaccordance with U.S. GAAP requires that we make estimates and assumptions thataffect the recorded amounts of assets and liabilities, disclosure of thoseassets and liabilities at the date of the financial statements and the recordedamounts of expenses during the reporting period. A change in the facts andcircumstances surrounding those estimates could result in a change to ourestimates and could impact our future operating results.

**Changes insecurities laws and listing standards, in particular those that have resultedfrom the passage of the Sarbanes-Oxley Act of 2002 and related rules andregulations, have increased our legal and financial costs, and we expect tocontinue to spend significant resources to comply with these requirements.**

The Sarbanes-Oxley Act of 2002 required changes in ourcorporate governance, public disclosure and compliance practices. The number ofrules and regulations applicable to us have increased and will continue toincrease our legal and financial compliance costs, and have made someactivities more difficult, such as by requiring stockholder approval of newoption plans. In addition, we have incurred and expect to continue to incursignificant costs in connection with compliance with Section 404 of theSarbanes-Oxley Act regarding internal controls over financial reporting. Weincurred significant costs to achieve initial compliance with Section 404,and we expect ongoing annual costs to maintain compliance to also be substantial.We also expect these developments to make it more difficult and more expensiveto obtain director and officer liability insurance, and we may be required toaccept reduced coverage or incur substantially higher costs to obtain coverage.These developments could make it more difficult for us to attract and retainqualified members of our board of directors, particularly to serve on our auditcommittee, and qualified executive officers. In addition, in connection withour Section 404 certification process, we may identify from time to timedeficiencies in our internal controls. Any material weakness or deficiency inour internal controls over financial reporting could materially and negativelyimpact our reported financial results and the market price of our stock couldsignificantly decline. Additionally, adverse publicity related to thedisclosure of a material weakness or deficiency in internal controls over financialreporting could have a negative impact on our reputation, business and stockprice.

**Our shareholder rights plan, equity incentive plans,certain provisions of our Certificate of Incorporation and Bylaws, and Delawarelaw may discourage third parties from pursuing a change of control transactionwith us.**

Certain provisions of our Certificate ofIncorporation, equity incentive plans, Shareholder Rights Plan, licensingagreements, Bylaws and Delaware law may discourage certain transactionsinvolving a change in control of our company. In addition to the foregoing, ourclassified board of directors, the shareholdings of Ultratech’s officers,directors and persons or entities that may be deemed affiliates and the abilityof the Board of Directors to issue “blank check” preferred stock withoutfurther stockholder approval could have the effect of delaying, deferring orpreventing us from experiencing a change in control and may adversely affectthe voting and other rights of holders of our Common Stock.

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**Our stock price hasexperienced significant volatility in the past and we expect this to continuein the future as a result of many factors, some of which could be unrelated toour operating performance, and such volatility can have a major impact on the numberof shares subject to outstanding stock options that are included in calculatingour earnings per share.**

We believe that factors such as announcements ofdevelopments related to our business, fluctuations in our operating results, ashortfall in revenue or earnings, changes in analysts’ expectations, generalconditions in the semiconductor and nanotechnology industries or the worldwideor regional economies, sales of our securities into the marketplace, anoutbreak or escalation of hostilities, announcements of technologicalinnovations or new products or enhancements by us or our competitors,developments in patents or other intellectual property rights and developmentsin our relationships with our customers and suppliers could cause the price ofour Common Stock to fluctuate, perhaps substantially. The market price of ourCommon Stock has fluctuated significantly in the past and we expect it tocontinue to experience significant fluctuations in the future, includingfluctuations that may be unrelated to our performance.

As of March 1, 2006, we had approximately6,268,866 million stock options outstanding. Among other determinants, themarket price of our stock has a major bearing on the number of stock optionsoutstanding that are included in the weighted-average shares used indetermining our net income (loss) per share. During periods of extremevolatility, the impact of higher stock prices can have a materially dilutiveeffect on our net income (loss) per share.****Additionally,****options are excluded from the calculation of net income(loss) per share when we have a net loss or when the exercise price of thestock option is greater than the average market price of our Common Stock, asthe impact of the stock options would be anti-dilutive.

**Our results of operations and business could beadversely affected by wars and other military action, as well as terroristattacks and threats and government responses thereto, especially if any suchactions were directed at us or our facilities or customers.**

Terrorist attacks in theUnited States and elsewhere, government responses thereto, and military actionsin Iraq, Afghanistan and elsewhere, may disrupt our operations or those of ourcustomers and suppliers and may affect the availability of materials needed tomanufacture our products or the means to transport those materials tomanufacturing facilities and finished products to customers. In addition, anyof these events could increase volatility in the United States and worldfinancial markets which may depress the price of our Common Stock and may limitthe capital resources available to us or our customers or suppliers, whichcould result in decreased orders from customers, less favorable financing termsfrom suppliers, and scarcity or increased costs of materials and components ofour products. Additionally, terrorist attacks directly upon us maysignificantly disrupt our ability to conduct our business. Any of theseoccurrences could have a significant impact on our operating results, revenuesand costs and may result in increased volatility of the market price of ourCommon Stock.

**ITEM 1B.****      ***UNRESOLVED STAFF COMMENTS*

***Not applicable.***

**ITEM 2.****               ***PROPERTIES*

Ultratech maintains itsheadquarters and manufacturing operations in San Jose, California in two leasedfacilities, totaling approximately 177,000 square feet, which contain generaladministration and finance, marketing and sales, customer service and support,manufacturing and research, development, and engineering. The leases for thesefacilities expire at various dates from March 2010****toJanuary 2011. We also lease sales and support offices in the United Statesin Dallas, Texas and Woburn, Massachusetts under leases expiring in 2006 and2008, respectively. We maintain offices outside the United States in Taiwan,the Philippines, Japan, Korea, France, China and the United Kingdom, with termsexpiring 

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betweenseven months and ten years from December 31, 2005. We believe that ourexisting facilities will be adequate to meet our currently anticipatedrequirements and that suitable additional or substitute space will be availableas needed.

**ITEM 3.****                *LEGAL PROCEEDINGS***

On February 29, 2000, we filedlawsuits asserting patent infringement and related claims against Nikon, Canon,and ASML in the U.S. District Court for the Eastern District of Virginia. InApril 2000, we reached a settlement with Nikon, and in September 2001, wereached a settlement with Canon. In the patent litigation against ASML, a jurytrial was conducted during the three-month period ended July 2, 2005. The juryreached a verdict that the patent was infringed, but that the asserted claimsof the patent were invalid. We filed a post-trial motion for a new trial andfor judgment as a matter of law in our favor. ASML also filed a motion forjudgment as a matter of law seeking to invalidate three of the asserted claimsfor lack of enablement and requested that the court awards costs. On February13th, 2006, the Court denied our post-trial motions, including the motion for anew trial, and entered judgment in favor of ASML invalidating three claims ofthe patent for lack of enablement. The Court also awarded ASML approximately$330,000 in costs. Ultratech intends to appeal the final judgment.

On July 11, 2003, wefiled a lawsuit against a Southern California company asserting infringement ofcertain claims related to U.S. patent No. 5,621,813 in the U.S. DistrictCourt in and for the Northern District of California. On May 17, 2005, thecourt found the subject patent to be invalid. We have appealed this decisionand that appeal is pending. The defendant subsequently brought a motion forreimbursement of its attorneys’ fees and costs in a total asserted amount of approximately$2 million. We opposed this motion, and on October 12, 2005, the DistrictCourt denied the defendant’s request for attorneys’ fees in its entirety. On November 3,2005, the defendant filed a notice of appeal with respect to the court’s rulingon its motion for attorneys’ fees.

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

No matters were submittedto a vote of security holders during the fourth quarter ended December 31,2005.

**ExecutiveOfficers of the Registrant**

**As of December 31,2005, the executive officers of Ultratech, who are appointed by and serve atthe discretion of the Board of Directors, were as follows:**

| **Name**               | ** ** | ** ** | ** ** | **Age** | ** ** | **Position with the Company**                           | ** ** |
|------------------------|------------|------------|------------|---------|------------|------------------------------------------------------------------------|------------|
| Arthur W.  Zafiropoulo |       |       | 66         |    |       | Chairman  of the Board of Directors and Chief Executive Officer        |       |
| John E. Denzel         |       |       | 46         |    |       | President and Chief Operating Officer                                  |       |
| Bruce R. Wright        |       |       | 57         |    |       | Senior Vice President, Finance, Chief Financial  Officer and Secretary |       |
| Rick P. Friedman       |       |       | 49         |    |       | Senior Vice  President of World-wide Sales and Customer Operations     |       |

 

Mr. Zafiropoulo founded Ultratech in September 1992to acquire certain assets and liabilities of the Ultratech Stepper Division(the “Predecessor”) of General Signal Technology Corporation (“General Signal”)and, since March 1993, has served as Chief Executive Officer and Chairmanof the Board. Additionally, Mr. Zafiropoulo served as President ofUltratech from March 1993 to March 1996, from May 1997 until April 1999and from April 2001 to January 2004. Between September 1990 and March 1993,he was President of the Predecessor. From February 1989 to September 1990,Mr. Zafiropoulo was President of General Signal’s Semiconductor EquipmentGroup International, a semiconductor equipment company. From August 1980to February 1989, Mr. Zafiropoulo was President 

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and Chief ExecutiveOfficer of Drytek, Inc., a plasma dry-etch company that he foundedin August 1980, and which was later sold to General Signal in 1986. From July 1987to September 1989, Mr. Zafiropoulo was also President of Kayex, asemiconductor equipment manufacturer, which was a unit of General Signal. From July 2001to July 2002, Mr. Zafiropoulo served as Vice Chairman of SEMI(Semiconductor Equipment and Materials International), an international tradeassociation representing the semiconductor, flat panel display equipment andmaterials industry. From July 2002 to June 2003, Mr. Zafiropouloserved as Chairman of SEMI; and Mr. Zafiropoulo has been on the Board ofDirectors of SEMI since July 1995.

Mr. Denzel has served as President and ChiefOperating Officer since January 2004. From January 2002 until January 2004,Mr. Denzel served as Senior Vice President, Operations. From December 1999to December 2001, Mr. Denzel served as Vice President of Operationsresponsible for all Engineering and Manufacturing activities. From July 1996to November 1999, Mr. Denzel served as the Vice President ofManufacturing. Prior to joining Ultratech, Mr. Denzel was Vice Presidentat Trend Plastics Inc. from 1995 to 1996, responsible for Finance, Sales, Marketing,Human Resources and Information Systems. From 1993 to 1995, Mr. Denzel wasthe Director of Technology at the J-I-T Institute of Technology. Prior to that,Mr. Denzel worked in various positions at Watkins-Johnson Company, asemiconductor equipment, electronics and environmental services company.

Mr. Wright has served as Senior Vice President,Finance, Chief Financial Officer and Secretary since joining Ultratech on June 1,1999. From May 1997 to May 1999, Mr. Wright served as ExecutiveVice President, Finance and Chief Financial Officer of Spectrian Corporation, aradio frequency (RF) amplifier company. From November 1994 through May 1997,Mr. Wright was Senior Vice President of Finance and Administration, andChief Financial Officer of Tencor Instruments until its acquisition by KLAInstruments Corporation in 1997, which formed KLA-Tencor Corporation, and from December 1991through October 1994, Mr. Wright was Vice President and ChiefFinancial Officer of Tencor Instruments. Mr. Wright serves on the Board ofDirectors of Credence Systems Corporation, a provider of products and equipmentused for the testing of semiconductor integrated circuits.

Mr. Friedman has served as Senior Vice Presidentof Worldwide Sales and Customer Operations since August 2005. From June 2004to August 2005, Mr. Friedman served as Senior Vice President ofWorldwide Sales and Marketing. Prior to joining Ultratech, Mr. Friedmanserved as Vice President, Worldwide Sales and Field Operations for AsystTechnologies, Inc. from January 2002 to June 2004. Prior tojoining Asyst, Mr. Friedman spent nine years with Lam Research Corp, wherehe held a number of leadership positions with both regional and world-wideresponsibility for sales and service. He joined Lam Research Corporation as aresult of its 1993 acquisition of Drytek, Inc., where he served in keysales roles at both the regional and national level.

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**PART II**

**ITEM5.**                *MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES*

OurCommon Stock is traded on the Nasdaq National Market under the symbol UTEK. Thefollowing table sets forth, for the periods indicated, the range of high andlow reported sale prices of our Common Stock on the Nasdaq National Market

| **Fiscal 2005—Fiscal Quarter Ended** | ** ** | ** ** | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|----------------------------------------------------------|------------|------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
| Market Price:                                            | High       |       |       | $                 | 19.12      |             |       | $                     | 21.64      |                 |       | $ | 22.93 |   |   |   | $ | 17.87 |   |   |
|                                                     | Low        |       |       | $                 | 13.50      |             |       | $                     | 14.29      |                 |       | $ | 13.57 |   |   |   | $ | 13.21 |   |   |
|                                                          |            |            |            |                   |            |                  |            |                       |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

| **Fiscal 2004—Fiscal Quarter Ended** | ** ** | ** ** | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|----------------------------------------------------------|------------|------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
| Market Price:                                            | High       |       |       | $                 | 35.55      |             |       | $                     | 24.95      |                 |       | $ | 17.75 |   |   |   | $ | 19.45 |   |   |
|                                                     | Low        |       |       | $                 | 20.37      |             |       | $                     | 13.69      |                 |       | $ | 10.99 |   |   |   | $ | 15.11 |   |   |
|                                                          |            |            |            |                   |            |                  |            |                       |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

As of March 1, 2006,we had approximately 336 stockholders of record.

Ultratech’s fiscalquarters in 2005 ended on April 2, 2005, July 2, 2005, October 1,2005 and December 31, 2005, and our fiscal quarters in 2004 ended on April 3,2004, July 3, 2004, October 2, 2004 and December 31, 2004. Forconvenience of presentation, our fiscal quarters in each year have been shownas ending on March 31, June 30, September 30, and December 31.

We have not paid cashdividends on our Common Stock since inception, and our Board of Directorspresently plans to reinvest our earnings in our business. Accordingly, it isanticipated that no cash dividends will be paid to holders of Common Stock inthe foreseeable future.

On August 24, 2005,we issued 1,500 shares of our common stock in an unregistered, privateplacement under Section 4(2) of the Securities Act of 1933 to SEMIFoundation, a non-profit global trade organization, to support their efforts toeducate youth interested in science and math about career opportunities in thesemiconductor industry.

In August 2004, weissued 1,250 shares of our Common Stock in an unregistered, private placementunder Section 4(2) of the Securities Act of 1933 to SEMI Foundation,a non-profit global trade organization, to support their efforts to educateyouth interested in science and math about career opportunities in thesemiconductor equipment industry.

In November 2003, weissued 1,000 shares of our Common Stock in an unregistered, private placementunder Section 4(2) of the Securities Act of 1933 to SEMI Foundation,a non-profit global trade organization, to support their efforts to educateyouth interested in science and math about career opportunities in thesemiconductor equipment industry.

The following table setsforth our repurchases of our securities during the fourth quarter of fiscal2005:

| **Issuer Purchases of Equity Securities** | ** ** |
|---------------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Maximum number (or** | ** ** |
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **approximate dollar** | ** ** |
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total number of shares** | ** ** | **value) of shares that** | ** ** |
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **purchased as part of** | ** ** | **may yet be purchased** | ** ** |
| **Period**                                                    | ** ** | ** ** | ** ** | **Total number of  shares purchased** | ** ** | **Average price  paid per share** | ** ** | **publicly announced  plans or programs(1)** | ** ** | **under the plans or  programs** | ** ** |
| October 1-29                                             |       |   | 147,000 |   |   |   | 13.69 |   |   |   | 147,000 |   |   |   | $ | 27,987,310 |   |   |
| October 30-November 26                                        |       |   | 497,535 |   |   |   | 14.42 |   |   |   | 497,535 |   |   |   | $ | 20,812,188 |   |   |
| November 27-December 31                                       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 20,812,188 |   |   |
| Total                                                         |       |   | 644,535 |   |   |   | 14.25 |   |   |   | 644,535 |   |   |   |   |   |   |

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(1)          Weannounced on September 19, 2005 that our Board of Directors authorized therepurchase of up to $30 million of our common stock in the open market at thenprevailing market prices during the 

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period commencing September 19, 2005 through September 30,2007.

**ITEM6.**                *SELECTED FINANCIAL DATA*

| **In thousands, except per share data  and percentage information** | ** **   | ** **   | ** **   | **2005**     | ** ** | **2004** | ** ** | **2003(c)** | ** ** | **2002(b)** | ** ** | **2001(a)** | ** ** |
|--------------------------------------------------------------------------------------------------------|--------------|--------------|--------------|--------------|------------|----------|------------|-------------|------------|-------------|------------|-------------|------------|
| ***Operations:***                                                                                      | *** *** | *** *** | *** *** | *** *** |       |     |       |        |       |        |       |
| Net sales                                                                                              |         | $            | 122,366      |         | $          | 109,892  |       | $           | 100,121    |        | $          | 68,506      |       | $ | 130,680 |   |
| Gross profit                                                                                           |         | 52,047       |         | 52,693       |       | 46,611   |       | 14,850      |       | 44,781      |       |
| Gross profit as a  percentage of net sales                                                             |         | 43           | %            | 48           | %          | 47       | %          | 22          | %          | 34          | %          |
| Operating income  (loss)                                                                               |         | $            | (4,875       | )            | $          | (2,429   | )          | $           | 2,972      |        | $          | (36,506     | )          | $ | (24,465 | ) |
| Income (loss)  before income taxes and cumulative effect of a change in accounting principle           |         | $            | (522         | )            | 1,069      |     | 6,996      |        | (30,248    | )           | (16,806    | )           |
| Pre-tax income  (loss) as a percentage of net sales                                                    |         | (0.4         | )%           | 1.0          | %          | 7.0      | %          | (44.2       | )%         | (12.9       | )%         |
| Provision  (benefit) for income taxes                                                                  |         | 699          |         | $            | 445        |     | $          | (570        | )          | $           | (4,866     | )           | $          | 1,038 |   |
| Income (loss)  before cumulative effect of a change in accounting principle                            |         | $            | (1,221       | )            | 624        |     | 7,566      |        | (25,382    | )           | (17,844    | )           |
| Cumulative effect  of the adoption of FIN 47                                                           |         | $            | (1,122       | )            | —     |     | —     |        | —     |        | —     |        |
| Net income (loss)                                                                                      |         | (2,343       | )            | 624          |       | 7,566    |       | (25,382     | )          | (17,844     | )          |
| Income (loss)  before cumulative effect of a change in accounting principle per share—basic       |         | $            | (0.05        | )            | $          | 0.03     |       | $           | 0.33       |        | $          | (1.12       | )          | $ | (0.81 | ) |
| Cumulative effect  of the adoption of FIN 47 per share—basic                                      |         | $            | (0.05        | )            | —     |     | —     |        | —     |        | —     |        |
| Net income (loss)  per share—basic                                                                |         | $            | (0.10        | )            | $          | 0.03     |       | $           | 0.33       |        | $          | (1.12       | )          | $ | (0.81 | ) |
| Number of shares  used in per share computation—basic                                             |         | 23,964       |         | 23,733       |       | 23,017   |       | 22,586      |       | 22,143      |       |
| Income (loss)  before cumulative effect of a change in accounting principle per share—diluted     |         | $            | (0.05        | )            | $          | 0.03     |       | $           | 0.31       |        | $          | (1.12       | )          | $ | (0.81 | ) |
| Cumulative effect  of the adoption of FIN 47 per share—diluted                                    |         | $            | (0.05        | )            | —     |     | —     |        | —     |        | —     |        |
| Net income (loss)  per share—diluted                                                              |         | $            | (0.10        | )            | $          | 0.03     |       | $           | 0.31       |        | $          | (1.12       | )          | $ | (0.81 | ) |
| Number of shares  used in per share computation—diluted                                           |         | 23,964       |         | 24,734       |       | 24,476   |       | 22,586      |       | 22,143      |       |
| ***Balance  sheet:***                                                                                  | *** *** | *** *** |         |         |       |     |       |        |       |        |       |
| Cash, cash  equivalents and short-term investments                                                     |         | $            | 141,067      |         | $          | 151,627  |       | $           | 165,902    |        | $          | 157,529     |       | $ | 169,154 |   |
| Working capital                                                                                        |         | 165,181      |         | 169,621      |       | 170,501  |       | 152,160     |       | 162,826     |       |
| Total assets                                                                                           |         | 222,309      |         | 230,546      |       | 220,748  |       | 222,366     |       | 243,419     |       |
| Stockholders’  equity                                                                             |         | 188,950      |         | 193,290      |       | 190,739  |       | 171,754     |       | 195,281     |       |
| ***Other  data****:*                                                                                   | *** *** | *** *** |         |         |       |     |       |        |       |        |       |
| Return on average  equity                                                                              |         | (1           | )%           | 0            | %          | 4        | %          | (14         | )%         | (9          | )%         |
| Book value per  common share outstanding                                                               |         | $            | 7.96         |         | $          | 8.10     |       | $           | 8.09       |        | $          | 7.59        |       | $ | 8.70 |   |
| Current ratio                                                                                          |         | 7.46         |         | 6.31         |       | 7.49     |       | 4.29        |       | 4.39        |       |
| Capital  expenditures                                                                                  |         | $            | 8,596        |         | $          | 9,868    |       | $           | 6,073      |        | $          | 4,800       |       | $ | 5,389 |   |
| Income tax  provision (benefit) as percentage of pre-tax  income (loss)                           |         | (349         | )%           | 42           | %          | (8       | )%         | 16          | %          | (6          | )%         |

 

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***Pro FormaPresentation (unaudited)***

| ** **                                                                                                                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Net income (loss)  as reported, excluding cumulative effect of change in accounting principle                             |       | $                                      | (1,221     | ) | $ | 624 |   | $ | 7,566 |   | $ | (25,382 | ) | $ | (17,844 | ) |
| Net income (loss)  per share, excluding cumulative effect of change in accounting principle—basic,  as reported |       | $                                      | (0.05      | ) | $ | 0.03 |   | $ | 0.33 |   | $ | (1.12 | ) | $ | (0.81 | ) |
| Net income (loss)  per share, excluding cumulative effect of change in accounting principle—diluted,  as reported    |       | $                                      | (0.05      | ) | $ | 0.03 |   | $ | 0.31 |   | $ | (1.12 | ) | $ | (0.81 | ) |
| Net income  (loss), including pro forma adjustment for the retroactive application of FIN  47                             |       | $                                      | (1,571     | ) | $ | 432 |   | $ | 7,398 |   | $ | (25,528 | ) | $ | (17,978 | ) |
| Pro forma net  income (loss) per share—basic                                                                         |       | $                                      | (0.07      | ) | $ | 0.02 |   | $ | 0.32 |   | $ | (1.13 | ) | $ | (0.81 | ) |
| Pro forma net income  (loss) per share—diluted                                                                       |       | $                                      | (0.07      | ) | $ | 0.02 |   | $ | 0.30 |   | $ | (1.13 | ) | $ | (0.81 | ) |

 

***Quarterly Data***

| **Unaudited, in thousands, except per share data** | ** ** | ** ** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|---------|------------|---------|------------|---------|------------|---------|------------|
| **2005**                                                                         |       |       |       |    |       |    |       |    |       |
| Net sales                                                                        |       | $          | 27,962     |    | $          | 28,826  |       | $       | 30,349     |    | $          | 35,229 |   |
| Gross profit                                                                     |       | 12,278     |       | 11,689  |       | 13,014  |       | 15,066  |       |
| Operating income (loss)                                                          |       | (2,855     | )          | (3,340  | )          | (214    | )          | 1,534   |       |
| Income before cumulative  effect of change in accounting principle               |       | —     |       | —  |       | —  |       | 2,474   |       |
| Cumulative effect of the  adoption of FIN 47                                     |       | —     |       | —  |       | —  |       | (1,122  | )          |
| Net income (loss)                                                                |       | (1,896     | )          | (1,994  | )          | 195     |       | 1,352   |       |
| Net income (loss) per share—basic:                                          |       |       |       |    |       |    |       |    |       |
| Income before cumulative  effect of change in accounting principle               |       | $          | (0.08      | )       | $          | (0.08   | )          | $       | 0.01       |    | $          | 0.10 |   |
| Cumulative effect of the  adoption of FIN 47                                     |       | —     |       | —  |       | —  |       | $       | (0.04      | )       |
| Net income (loss)                                                                |       | $          | (0.08      | )       | $          | (0.08   | )          | $       | 0.01       |    | $          | 0.06 |   |
| Number of shares used in  per share computation—basic                       |       | 23,877     |       | 23,944  |       | 24,129  |       | 23,905  |       |
| Net income (loss) per share—diluted:                                        |       |       |       |    |       |    |       |    |       |
| Income before cumulative  effect of change in accounting principle               |       | $          | (0.08      | )       | $          | (0.08   | )          | $       | 0.01       |    | $          | 0.10 |   |
| Cumulative effect of the  adoption of FIN 47                                     |       | —     |       | —  |       | —  |       | $       | (0.04      | )       |
| Net income (loss)                                                                |       | $          | (0.08      | )       | $          | (0.08   | )          | $       | 0.01       |    | $          | 0.06 |   |
| Number of shares used in  per share computation—diluted                     |       | 23,877     |       | 23,944  |       | 25,067  |       | 24,323  |       |
| **2004**                                                                         |       |       |       |    |       |    |       |    |       |
| Net sales                                                                        |       | $          | 26,611     |    | $          | 22,497  |       | $       | 32,393     |    | $          | 28,391 |   |
| Gross profit                                                                     |       | 13,060     |       | 10,173  |       | 16,210  |       | 13,250  |       |
| Operating income (loss)                                                          |       | (332       | )          | (3,330  | )          | 2,203   |       | (970    | )          |
| Net income (loss)                                                                |       | 527        |       | (2,266  | )          | 2,845   |       | (482    | )          |
| Net income (loss) per  share—basic                                          |       | $          | 0.02       |    | $          | (0.10   | )          | $       | 0.12       |    | $          | (0.02 | ) |
| Number of shares used in  per share computation—basic                       |       | 23,683     |       | 23,705  |       | 23,764  |       | 23,819  |       |
| Net income (loss) per  share—diluted                                        |       | $          | 0.02       |    | $          | (0.10   | )          | $       | 0.12       |    | $          | (0.02 | ) |
| Number of shares used in per share computation—diluted                      |       | 25,663     |       | 23,705  |       | 24,044  |       | 23,819  |       |
|                                                                                  |            |            |            |         |            |         |            |         |            |         |            |  |  |  |  |  |  |  |

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(a)           Operating loss in 2001includes a charge of $11,070,000 related to cost of discontinued products, and$12,278,000 related to restructure of operations.

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(b)          Operating loss in 2002includes a charge of: $5,305,000 related to cost of inventory write-downs;$1,425,00 related to cost of discontinued products; and $4,090,000 related torestructure of operations.

(c)           Operating income (loss)in 2003, in the second, third and fourth quarters, includes the favorableimpact of selling inventory and discontinued products previously written downof $740,000, $363,000 and $569,000, respectively. Operating income (loss) in2003, in the second and fourth quarters, also includes the favorable impact ofreducing reserves established in prior years for the restructuring ofoperations of $114,000 and $614,000, respectively.

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**ITEM 7.**                *MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS*

Certain of the statementscontained herein, which are not historical facts and which can generally beidentified by words such as “anticipates”, “expects”, “intends”, “will”, “could”,“believes”, “estimates”, “continue”, and similar expressions, areforward-looking statements under Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, that involve risks and uncertainties, such as risks related to ourdependence on new product introductions and market acceptance of new productsand enhanced versions of our existing products; lengthy sales cycles, includingthe timing of system installations and acceptances; lengthy and costlydevelopment cycles for laser-processing and lithography technologies andapplications; integration, development and associated expenses of the laserprocessing operation; delays, deferrals and cancellations of orders by customers;cyclicality in the semiconductor and nanotechnology industries; pricingpressures and product discounts; high degree of industry competition;intellectual property matters; expiration of licensing arrangements, and theresulting adverse impact on our licensing revenues; changes to financialaccounting standards; changes in pricing by us, our competitors or suppliers;customer concentration; international sales; timing of new productannouncements and releases by us or our competitors; ability to volume producesystems and meet customer requirements; sole or limited sources of supply;ability and resulting costs to attract or retain sufficient personnel toachieve our targets for a particular period; dilutive effect of employee stockoption grants on net income per share, which is largely dependent upon usachieving and maintaining profitability and the market price of our stock; mixof products sold; rapid technological change and the importance of timelyproduct introductions; outcome of litigation; manufacturing variances andproduction levels; timing and degree of success of technologies licensed tooutside parties; product concentration and lack of product revenuediversification; inventory obsolescence; asset impairment; effects of certainanti-takeover provisions; future acquisitions; volatility of stock price;foreign government regulations and restrictions, the political restrictions inTaiwan regarding offshore investments and the exporting of sensitivetechnologies and jobs to certain countries; business interruptions due to natural disasters or utility failures;environmental regulations; and any adverse effects of terrorist attacks in theUnited States or elsewhere, or government responses thereto, or militaryactions in Iraq, Afghanistan and elsewhere, on the economy in general, or onour business in particular. Due to these and additional factors, thestatements, historical results and percentage relationships set forth below arenot necessarily indicative of the results of operations for any future period.These forward-looking statements are based on management’s current beliefs andexpectations, some or all of which may prove to be inaccurate, and which maychange. We undertake no obligation to revise or update any forward-lookingstatements to reflect any event or circumstance that may arise after the dateof this report.

**OVERVIEW**

Ultratech, Inc. develops, manufactures andmarkets photolithography and laser thermal processing equipment formanufacturers of integrated circuits and nanotechnology components locatedthroughout North America, Europe, Japan, Taiwan and the rest of Asia.

We supply step-and-repeatphotolithography systems based on one-to-one imaging technology. Within theintegrated circuit industry, we target the market for advanced packagingapplications. Within the nanotechnology industry, our target markets includethin film head magnetic recording devices, optical networking devices, laserdiodes and LEDs (light emitting diodes). Our laser thermal processing equipmentis targeted at advanced annealing applications within the semiconductorindustry.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

The discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles 

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generally accepted in theUnited States. The preparation of these consolidated financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements. By their nature, these estimates and judgments are subject to aninherent degree of uncertainty. On an on-going basis, we evaluate ourestimates, including those related to inventories, warranty obligations,purchase order commitments, bad debts, income taxes, intangible assets,restructuring and contingencies and litigation. Management bases its estimatesand judgments on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

We believe the followingcritical accounting policies are affected by our more significant judgments andestimates used in the preparation of our consolidated financial statements. Wehave reviewed these policies with our Audit Committee.

**Revenue Recognition**

We recognize revenue when persuasive evidence of anarrangement exists, delivery has occurred or services have been rendered, theseller’s price is fixed or determinable, and collectibility is reasonablyassured. We derive revenue from four sources—system sales, spare parts sales,service contracts and license fees.

Provided all other criteria are met, we recognizerevenues on system sales when we have received customer acceptance of thesystem and have completed the system installation obligations or are otherwisereleased from our installation obligations. In the event that terms of the saleprovide for a lapsing customer acceptance period, we recognize revenue upon theexpiration of the lapsing acceptance period or customer acceptance, whicheveroccurs first. In these instances, revenue is recorded only if the product hasmet product specifications prior to shipment and management deems that nosignificant uncertainties as to product performance exist.

Our transactions frequently include the sale ofsystems and services under multiple element arrangements. In situations withmultiple deliverables, revenue is recognized upon the delivery of the separateelements and when we receive customer acceptance or are otherwise released fromour customer acceptance obligations. Consideration from multiple elementarrangements is allocated among the separate accounting units based on theresidual method under which the revenue is allocated to undelivered elementsbased on fair value of such undelivered elements and the residual amounts ofrevenue allocated to delivered elements, provided the undelivered elements havevalue on a stand alone basis, there is objective and reliable evidence of fairvalue for the undelivered elements, the arrangement does not include a generalright of return relative to the delivered item and delivery or performance ofthe undelivered item(s) is considered probable and substantially in ourcontrol. The maximum revenue recognized on a delivered element is limited tothe amount that is not contingent upon the delivery of additional items.

We generally recognize revenue from spare parts salesupon shipment, as our products are generally sold on terms that transfer titleand risk of ownership when it leaves our site. We sell service contracts forwhich revenue is deferred and recognized ratably over the contract period andservice contracts based on a purchased quantity of hours under which revenue isrecognized as service hours are delivered. We recognize revenue from licensingand technology support agreements ratably over the contract period, or theestimated useful life of the licensed technologies, whichever is shorter.

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Costs related to deferredproduct revenues are capitalized (deferred) and recognized at the time ofrevenue recognition. Deferred product revenue and costs are netted on ourbalance sheet, under the caption “deferred product and services income.”

**Inventoriesand Purchase Order Commitments**

The semiconductor industryis characterized by rapid technological change, changes in customerrequirements and evolving industry standards. We perform a detailed assessmentof inventory at each balance sheet date, which includes a review of, amongother factors, demand requirements and market conditions. Based on thisanalysis, we record adjustments, when appropriate, to reflect inventory atlower of cost or market. Although we make every effort to ensure the accuracyof our forecasts of product demand, any significant unanticipated changes indemand, product mix or technological developments would significantly impactthe value of our inventory and our reported operating results. In the future,if we find that our estimates are too optimistic and we determine that ourinventory needs to be written down, we will be required to recognize such costsin our cost of sales at the time of such determination. For example, if thedemand assumption used in our assessment at December 31, 2005 was reducedby 10%, assuming all other assumptions such as product mix are kept the sameand that mitigation efforts were not possible, we would have had to write downour inventory and open purchase commitments by $48,000. Conversely, if we findour estimates are too pessimistic and we subsequently sell product that haspreviously been written down, our gross margin in that period will be favorablyimpacted. During 2002, we recorded a write down of inventory of $6.7 millionand subsequently we realized favorable gross margin impacts of $0.1 million,$1.0 million and $1.7 million, respectively, in 2005, 2004 and 2003 due tosales of inventory that was previously written down.

**Warranty Obligations**

We recognize the estimatedcost of our product warranties at the time revenue is recognized. Our warrantyobligation is affected by product failure rates, material usage rates and theefficiency by which the product failure is corrected. Should actual productfailure rates, material usage rates and labor efficiencies differ from ourestimates, revisions to the estimated warranty liability would be requiredwhich could result in future charges or credits to our gross margins. Duringthe three years ended December 31, 2005, our estimates and assumptionshave not changed significantly and our estimates have approximated actual costsincurred. In 2005, the Company commenced volume shipments of its unity-basedlithography systems. As may occur with new product introductions, after-sales(warranty) costs were higher than anticipated. The Company believes itswarranty accrual, as of December 31, 2005, will be sufficient to satisfyoutstanding obligations as of that date.

**Allowance for Bad Debt**

We maintain an allowancefor estimated losses resulting from the inability of our customers to makerequired payments. This reserve is established based upon historical trends,current economic conditions, delinquency status based on contractual terms andan analysis of specific exposures. If the financial condition of our customerswere to deteriorate, or even a single customer was otherwise unable to makepayments, additional allowances may be required. The average selling price ofour systems is in excess of $2.0 million. Accordingly, a single customerdefault could have a material adverse effect on our results of operations. Ourbad debt reserve as a percentage of gross accounts receivable increased from1.5% at December 31, 2003 to 2.9% at December 31, 2005 due to theimpact of bad debt expense associated with a customer bankruptcy filing ($0.3million) during 2005.

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**Deferred Income Taxes**

We record a valuationallowance to reduce our deferred tax assets to the amount that is more likelythan not to be realized. As of December 31, 2005, we had recorded avaluation allowance of $74.0 million to fully reserve our U.S. net deferred taxassets. As of December 31, 2005, we had recorded approximately $0.3million of foreign deferred tax assets related to our Japanese operations.Based on projected future pre-tax income in Japan, these assets were notsubject to a valuation allowance as it is more likely than not that they willbe realized in the future.

**RESULTS OF OPERATIONS**

We derive a substantial portion of our total net salesfrom sales of a relatively small number of newly manufactured systems, whichtypically range in price from $1.2 million to $4.5 million. As a result ofthese high sale prices, the timing and recognition of revenue from a singletransaction has had and most likely will continue to have a significant impacton our net sales and operating results for any particular period.

Our backlog at the beginning of a period typicallydoes not include all of the sales needed to achieve our sales objectives forthat period. In addition, orders in backlog are subject to cancellation,shipment or customer acceptance delays, and deferral or rescheduling by acustomer with limited or no penalties. Consequently, our net sales andoperating results for a period have been and will continue to be dependent uponour obtaining orders for systems to be shipped and accepted in the same periodin which the order is received. Our business and financial results for aparticular period could be materially adversely affected if an anticipatedorder for even one system is not received in time to permit shipment andcustomer acceptance during that period. Furthermore, a substantial portion ofour shipments have historically occurred near the end of each quarter. Delaysin installation and customer acceptance due, for example, to our inability tosuccessfully demonstrate the agreed-upon specifications or criteria at thecustomer’s facility, or to the failure of the customer to permit installationof the system in the agreed upon time, may cause net sales in a particularperiod to fall significantly below our expectations, which may materiallyadversely affect our operating results for that period. This risk is especiallyapplicable in connection with the introduction and initial sales of a newproduct line. Additionally, the failure to receive anticipated orders or delaysin shipments due, for example, to rescheduling, delays, deferrals orcancellations by customers, additional customer configuration requirements, orto unexpected manufacturing difficulties or delays in deliveries by suppliersdue to their long production lead times or otherwise, have caused and maycontinue to cause net sales in a particular period to fall significantly belowour expectations, materially adversely affecting our operating results for thatperiod. In particular, the long manufacturing and acceptance cycles of ouradvanced packaging family of wafer steppers and laser thermal processingsystems and the long lead time for lenses and other materials, could causeshipments and acceptances of such products to be delayed from one quarter to thenext, which could materially adversely affect our financial condition andresults of operations for a particular quarter.

Additionally, the need forcontinued expenditures for research and development, capital equipment, ongoingtraining and worldwide customer service and support, among other factors, willmake it difficult for us to reduce our operating expenses in a particularperiod if we fail to achieve our net sales goals for the period.

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**Net sales**

**2005 vs. 2004**

| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|------------------------|------------|------------|------------|------------|------------|--------------------|------------|----------------|------------|
| **(in millions)** | ** ** | ** ** | ** ** | **2005**   | ** ** | **2004**           | ** ** | **Change**     | ** ** | **change** | ** ** |
| Sales of:              | ** ** | ** ** | ** ** | ** ** | ** ** |               | ** ** | ** **     |       |   | ** ** | ** ** |   |
| Systems                |       | $          | 93.2       |       | $          | 82.0               |       |           | $          | 11.2 |   |   |   | 14 | % |   |
| Spare parts            |       | 15.2       |       | 11.4       |       |               | 3.8        |           |       |   | 33 | % |   |
| Services               |       | 12.5       |       | 12.3       |       |               | 0.2        |           |       |   | 2 | % |   |
| Licenses               |       | 1.5        |       | 4.2        |       |               | (2.7       | )              |       |   | -64 | % |   |
| Total Net Sales        |       | $          | 122.4      |       | $          | 109.9              |       |           | $          | 12.5 |   |   |   | 11 | % |   |
|                        |            |            |            |            |            |                    |            |                |            |  |  |  |  |  |  |  |  |  |

 

Net sales consist of revenues from system sales, spareparts sales, services and licensing of technologies. System sales increased14%, to $93.2 million. The average selling price of systems sold increased 29%from the prior year primarily as a result of increased sales to laser thermalprocessing and advanced packaging customers. The number of systems solddeclined by 12% as a result of decreased sales of the Company’s 1000 and 100series products. In 2005, refurbished systems accounted for approximately 18%of units sold as compared to 30% of units sold in 2004. This percentage canfluctuate from year to year and, as refurbished units generally have loweraverage selling prices than new units, any such fluctuation will impact the weightedaverage selling price of the systems sold.

On a product market application basis, system sales tothe semiconductor industry were $ 73.4 million for the year ended December 31,2005, an increase of 19% as compared with system sales of $61.5 million in 2004.This increase was due to an 18% increase in sales to the advanced packagingmarkets and a 217% increase in laser thermal processing system sales. Thesesystems typically have significantly higher average selling prices, as comparedto the Company’s nanotechnology offerings. System sales to the nanotechnologymarket were $19.8 million for the year ended December 31, 2005, a decreaseof 3% as compared with sales of $20.5 million in 2004.

Sales of spare parts for 2005 increased 33%, to $15.2million, as compared to 11.4 million in 2004. This increase was mainly due tomore revenue from system upgrades in 2005 as compared to 2004. Revenues fromservices grew 2% to $12.5 million for the year ended December 31, 2005 ascompared with $12.3 million in 2004.

Revenues from licensing and licensing supportarrangements declined to $1.5 million, as compared with $4.2 million in 2004,as a result of the completion of the amortization period of prior-periodproceeds from licensing agreements. Future revenues from licensing activities,if any, will be contingent upon existing and future licensing and royaltyarrangements, including those, if any, resulting from litigation. The Companymay not be successful in generating licensing revenues in the future.

At December 31, 2005, we had approximately $2.0million of deferred product and services income resulting from products shippedbut not yet installed and accepted and deferred service revenue, as comparedwith $1.2 million at December 31, 2004.

For the year ended December 31,2005, international net sales were $84.9 million, or 69% of total net sales, ascompared with $71.7 million, or 65% of total net sales for 2004. We expectsales to international customers to continue to represent a significantmajority of our revenues during 2006. Our revenue derived from sales in foreigncountries is not generally subject to significant exchange rate fluctuations,principally because sales contracts for our systems are generally denominatedin U.S. dollars. In Japan, however, orders are often denominated in Japaneseyen. For the year ended December 31, 2005, we recorded system sales inJapan of $12.5 million, of which 26% were denominated in Japanese yen. Thissubjects us to the risk of currency fluctuations. We attempt to mitigate thisrisk by entering into foreign currency forward 

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exchangecontracts for the period between when an order is received and when it isrecorded as revenue. After recording revenue, we use various mechanisms, suchas foreign currency forward exchange contracts and natural hedges, to offsetsubstantial portions of the gains or losses associated with our Japanese yendenominated receivables due to exchange rate fluctuations. We had approximately$1.6 million of Japanese yen-denominated receivables at December 31, 2005.International sales expose us to a number of additional risks, includingfluctuations in the value of local currencies relative to the U.S. dollar,which impact the relative cost of ownership of our products and, thus, thecustomer’s willingness to purchase our product. (See “Risk Factors:International Sales”).

**2004 vs. 2003**

| **(millions)**  | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003** | ** ** | **Amount of  Change** | ** ** | **Percentage  change** | ** ** |
|-----------------|------------|------------|------------|------------|------------|----------|------------|----------------------------|------------|------------------------|------------|
| Sales of:       | ** ** | ** ** | ** ** | ** ** | ** ** |     | ** ** | ** **                 |       |                   | ** ** | ** ** |   |
| Systems         |       | $          | 82.0       |       | $          | 73.6     |       |                       | $          | 8.4                    |       |   |   | 11 | % |   |
| Spare parts     |       | 11.4       |       | 12.3       |       |     | (0.9       | )                          |       |                   | (7         | )% |   |
| Services        |       | 12.3       |       | 10.6       |       |     | 1.7        |                       |       |                   | 16         | % |   |
| Licenses        |       | 4.2        |       | 3.7        |       |     | 0.5        |                       |       |                   | 14         | % |   |
| Total Net Sales |       | $          | 109.9      |       | $          | 100.1    |       |                       | $          | 9.8                    |       |   |   | 10 | % |   |

 

System sales in 2004 increased 11%, to $82.0 million,on a unit volume increase of 14% as compared to 2003. The weighted-average sellingprices of systems sold declined 2% from 2003 due to an increase in thepercentage of refurbished systems sold as compared to 2003. In 2004,refurbished systems accounted for approximately 30% of units sold as comparedto 22% of units sold in 2003.

On a product market application basis, system sales tothe semiconductor industry, primarily for advanced packaging applications, were$61.5 million for the year ended December 31, 2004, an increase of 11% ascompared with system sales of $55.4 million in 2003. This increase was due to a7% increase in volume and a 4% increase in the weighted average selling priceresulting from a small decrease in the percentage of refurbished systems soldin 2004 as compared to 2003. System sales to the nanotechnology market were$20.5 million for the year ended December 31, 2004, an increase of 13% ascompared with sales of $18.1 million in 2003. This increase was due to a 27%increase in volume, primarily as a result of increased sales to thin film headcustomers, partially offset by a decrease in the weighted average sellingprice. The decrease in the weighted average selling price resulted from anincrease in the percentage of refurbished systems sold in 2004 as compared to2003. In 2004, refurbished systems accounted for approximately 42% of unitssold as compared to 27% of units sold in 2003.

Sales of spare parts for 2004 decreased 7%, to $11.4million, as compared to 2003. This decrease was due to less revenue from systemupgrades and a lower level of spare parts sales activity in Asia. Revenues fromservices increased 16%, to $12.3 million, primarily as a result of an increasein system relocations and new service contracts for existing customers in NorthAmerica and Asia.

Revenues from licensing and licensing support arrangementsincreased to $4.2 million in 2004, as compared with $3.7 million in 2003, as aresult of a payment we received from a company under a licensing agreement.

At December 31, 2004, we had approximately $1.2million of deferred product and services income resulting from products shippedbut not yet installed and accepted and deferred service revenue, essentiallythe same level as reported at December 31, 2003. During 2004, deferredlicense revenue decreased by $3.7 million, to $1.0 million, as a result ofamortization of proceeds received in prior periods. Amortization of deferredlicense income results in current period license revenue. Deferred income 

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related to our products isrecognized upon satisfying the contractual obligations for installation and/orcustomer acceptance.

For the year ended December 31,2004, international net sales were $ 71.7 million, or 65 % of total net sales,as compared with $61.4 million, or 61% of total net sales for 2003.

**Gross profit**

**2005 vs. 2004**

On a comparative basis, gross margins were 42.5% and47.9% for 2005 and 2004, respectively. The 5.4 percentage point decline ingross margin in 2005 was due to changes in revenue mix resulting primarily fromthe three laser thermal processing systems accepted during the fourth quarterof 2005 (2.5 points), certain manufacturing costs (1.3 points) and installationcosts (0.9 points) resulting from the production and shipment ramp of our laserthermal processing systems and unity platform lithography systems and highermanufacturing costs resulting from facilities upgrades completed in late 2004(0.7 points).

Exclusive of licensing revenues, gross margin was41.8% for 2005 as compared with 45.9% for 2004. We believe disclosure of grossmargins without reference to licensing revenues provides additional appropriatedisclosure to allow comparison of our product and service gross margins overtime because there is little, if any, cost of sales associated with ourlicensing revenues.

Our gross profit as apercentage of sales has been and most likely will continue to be significantlyaffected by a variety of factors, including the mix of products sold; theintroduction of new products, which typically have higher manufacturing,installation and after-sale support costs until efficiencies are realized andwhich are typically discounted more than existing products until the productsgain market acceptance; the rate of capacity utilization; writedowns ofinventory and open purchase commitments; technology support and licensingrevenues, which have no associated cost of sales; product discounts, pricingand competition in our targeted markets; non-linearity of shipments during thequarter which can result in manufacturing inefficiencies; the percentage ofinternational sales, which typically have lower gross margins than domesticsales principally due to higher field service and support costs; and start-upcosts and inefficiencies associated with the implementation of subcontractingarrangements.

**2004 vs. 2003**

On a comparative basis, gross margins were 47.9% and46.6% for 2004 and 2003, respectively. The 1.3 percentage point improvement ingross margin in 2004 was due primarily to costs associated with increasedproduction and services activity (2.1 points) and increased license revenuewhich has little, if any, cost of sales associated with it (.5 points) offsetpartially by the favorable impact in 2003 from the sale of 3 XLS reductionlithography systems which had been previously written down (0.7 percentagepoints) and the favorable impact in 2003 due primarily to the sale of inventorypreviously written down (0.6 percentage points).

Exclusive of licensingrevenues, gross margin was 45.9% for 2004 as compared with 44.5% for 2003. Webelieve disclosure of gross margins without reference to licensing revenuesprovides additional appropriate disclosure to allow comparison of our productand service gross margins over time because there is little, if any, cost ofsales associated with our licensing revenues.

**Research,development and engineering expenses**

**2005 vs. 2004**

| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|--------------------|------------|----------------|------------|
| **(in millions)**                          | ** ** | ** ** | ** ** | **2005**   | ** ** | **2004**           | ** ** | **Change**     | ** ** | **change** | ** ** |
| Research,  development and engineering expenses |       | $          | 27.0       |       | $          | 25.9               |       |           | $          | 1.1 |   |   |   | 4 | % |   |
|                                                 |            |            |            |            |            |                    |            |                |            |  |  |  |  |  |  |  |  |  |

 

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The increase in research,development and engineering expenses in 2005, as compared to 2004, wasprimarily due to increased investments in the development of our laserprocessing technologies during the first half of 2005. We continue to investsignificant resources in the development and enhancement of our laser processingsystems and technologies and our 1X products and related technologies. In 2005,the Company revenued three laser thermal processing systems which was theresult of our 2005 research, development and engineering effort. Given thatthere is an inherent delay between the time product development activities andexpenditures occur and when resultant product revenue is ultimately realized,current year research, development and engineering investments contributed willcontinue to contribute to revenue in future years.

**2004 vs. 2003**

| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|--------------------|------------|----------------|------------|
| **(in millions)**                          | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**           | ** ** | **Change**     | ** ** | **change** | ** ** |
| Research,  development and engineering expenses |       | $          | 25.9       |       | $          | 21.3               |       |           | $          | 4.6 |   |   |   | 22 | % |   |
|                                                 |            |            |            |            |            |                    |            |                |            |  |  |  |  |  |  |  |  |  |

 

The increase in research,development and engineering expenses in 2004, as compared to 2003, was due toincreased investments in the development of our laser processing technologiesand our next generation 1X stepper products.

**Amortization of intangible assets**

Amortization of intangibleassets was $0.1 million, $0.4 million and $0.4 million for the years ended December 31,2005, 2004 and 2003, respectively. Intangible assets consist of royaltiesreceived from prior-period proceeds from licensing agreements. It was fullyamortized during the year ended December 31, 2005.

**Selling,general and administrative expenses**

**2005 vs. 2004**

| ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|--------------------|------------|----------------|------------|
| **(in millions)**                        | ** ** | ** ** | ** ** | **2005**   | ** ** | **2004**           | ** ** | **Change**     | ** ** | **change** | ** ** |
| Selling, general  and administrative expenses |       | $          | 29.9       |       | $          | 28.8               |       |           | $          | 1.1 |   |   |   | 4 | % |   |
|                                               |            |            |            |            |            |                    |            |                |            |  |  |  |  |  |  |  |  |  |

 

Selling, general andadministrative expenses increased by $1.1 million, or 4%, in 2005, as comparedto 2004. This increase was due to an increase in legal costs, primarily relatedto our being a plaintiff in several patent infringement lawsuits ($2.1million),partially offset by decreased selling expenses in North America ($0.5 million)and lower sales commission expenses ($0.5 million). 

**2004 vs. 2003**

| **(in millions)**                        | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **Amount of  Change** | ** ** | **Percentage  change** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------------------------|------------|------------------------|------------|
| Selling, general  and administrative expenses |       | $          | 28.8       |     | $          | 22.7     |       |                       | $          | 6.1                    |       |   |   | 27 | % |   |
|                                               |            |            |            |          |            |          |            |                            |            |                        |            |  |  |  |  |  |  |  |

 

The year-over-yearincrease in selling, general and administrative expense was $6.1 million. Thisincrease was due to increased marketing and sales activity primarily driven byour efforts in laser processing ($2.2 million), increased legal costs primarilyrelated to our being a plaintiff in a patent infringement lawsuit ($1.3million), increased costs associated with our compliance with theSarbanes-Oxley Act of 2002 and related SEC and Nasdaq rules ($0.5million), increased sales commission expense due to increased revenues ($0.5million), and other individually insignificant items which in total increased$1.6 million.

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**Interestand other income, net**

| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|------------------------------|------------|
| **(in thousands)**         | ** ** | ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest income                 |       | $                            | 4,752      |   | $ | 3,624 |   | $ | 4,338 |   |
| Other income  (expense), net    |       | (19                          | )          | (12 | ) | (61 | ) |
| Interest and other  income, net |       | $                            | 4,733      |   | $ | 3,612 |   | $ | 4,277 |   |
|                                 |            |                              |            |  |  |  |  |  |  |  |  |  |

 

Interest income was $4.8million for the year ended December 31, 2005, as compared with $3.6million for 2004. The increase in 2005 from 2004 was primarily due to higherinterest rates on our investments. 

Included in the amountreported for 2003 was $0.3 million, relating to interest on tax settlements orrefunds. The decrease in 2004 from 2003, excluding the interest income on taxsettlements or refunds, was primarily due to lower interest rates on ourinvestments. 

We presently maintain aninvestment portfolio with a weighted-average maturity of less than two years.Consequently, changes in short-term interest rates have a significant impact onour interest income. Future changes are expected to have a similar impact.

**Provision(benefit) for income taxes**

For the year ended December 31,2005, we recorded an income tax expense of $0.7 million, comprised primarily offoreign taxes. The actual expense recorded differs from the federal tax benefitat 35% primarily due to current tax expense in foreign jurisdictions and thefact that the tax benefit of U.S. losses is not recognized.

For the year ended December 31,2004, we recorded an income tax expense of $0.4 million which included a $0.1million benefit related to the settlement of tax audit issues in the UnitedKingdom. The actual expense recorded, excluding the benefit related to thesettlement of tax audit issues in the United Kingdom, represents 51% of pre-taxincome. This rate is higher than the U.S. federal rate of 35% because the taxbenefit of U.S. losses was not recognized as domestic deferred tax assets arefully reserved.

For the year ended December 31,2003, we recorded an income tax benefit of $0.6 million, inclusive of a specialtax benefit of $0.4 million related to the settlement of a research and developmenttax credit claim with the California Franchise Tax Board and $0.4 millionrelated to the resolution of certain tax audit issues in the United Kingdom.Additionally, we recorded a $0.5 million benefit from the reversal of reservesassociated with deferred tax assets carried on the balance sheet of our Japansubsidiary, reflecting improved operating trends in that region. Offsettingthese tax benefits was a tax expense of approximately $0.7 million related,primarily, to taxable income in our foreign entities, for which there is nocorresponding net operating loss carry-forward benefit.

In October 2004, theUnited States enacted The American Jobs Creation Act of 2004 (“the Act”). TheAct provides for a three year phase-out of current extraterritorial income tax(“ETI”) benefits and replaces ETI with a phased-in nine percent domesticproduction activity deduction that will not be fully effective until 2010. Wedo not currently realize ETI tax benefits. This provision of the Act is notexpected to have a material effect on our results of operations or financialposition in the near future. The Act also includes a temporary deduction of 85%for certain foreign earnings that are repatriated, as defined in the Act. Wedid not repatriate any of our foreign earnings during the effective period ofthis deduction under the Act. 

Income taxes can beaffected by estimates of whether, and within which jurisdictions, futureearnings will occur and how and when cash is repatriated to the United States,combined with other aspects of an overall income tax strategy. Additionally,taxing jurisdictions could retroactively disagree with our tax treatment ofcertain items, and some historical transactions have income tax effects goingforward. Accounting rules require these future effects to be evaluatedusing current laws, rules and regulations, each of which can change at anytime and in an unpredictable manner. We believe we have adequately 

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providedfor any reasonably foreseeable outcome related to these matters, and we do notanticipate any material earnings impact from their ultimate resolutions.

**Cumulativeeffect of the adoption of FIN 47**

In December 2005 weadopted FASB Interpretation No. 47, “Accounting for Contingent AssetRetirement Obligations” (“FIN 47”), an interpretation of FASB Statement No. 143,“Asset Retirement Obligations” (“SFAS 143”). FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in SFAS 143 refers to a legal obligationto perform an asset retirement activity in which the timing and (or) method ofsettlement are conditional on a future event that may or may not be within thecontrol of the entity. An entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fair value ofthe liability can be reasonably estimated, even if conditional on a futureevent. As permitted, we recognized the effect of applying FIN 47 as acumulative effect of a change in accounting principle. Our adoption of FIN 47resulted in an increase in net equipment and leasehold improvements of approximately$1.0 million, recognition of an asset retirement obligation (the “ARO”)liability of $2.1 million, and a cumulative effect of adoption of $1.1 millionor $0.05 per share, for the year ended December 31, 2005. The AROliability is principally for estimable asset retirement obligations related toremediation costs, which we estimate will be incurred upon the expiration ofcertain operating leases.

**Outlook**

Although we believe thatour served markets have generally strengthened during the last twelve months,the anticipated timing of orders, shipments and customer acceptances usuallyrequires us to fill a number of production slots in any given quarter in orderto meet our sales targets. If we are unsuccessful in our efforts to securethose production orders, or if existing production orders are delayed orcancelled, our results of operations will be materially adversely impacted.Accordingly, we may not be able to achieve or maintain our current or priorlevel of sales. We presently expect that net sales for 2006 will increase 10%to 20% from the level of net sales reported in 2005 of $122.4 million.

Because our net sales aresubject to a number of risks, including risks associated with the introduction ofour new laser processing product line, delays in customer acceptance, intensecompetition in the capital equipment industry, uncertainty relating to thetiming and market acceptance of our products, and the condition of themacro-economy and the semiconductor industry, we may not exceed or maintain ourcurrent or prior level of net sales for any period in the future. Additionally,we believe that the market acceptance and volume production of our advancedpackaging systems, laser processing systems, and our 1000 series family ofwafer steppers are of critical importance to our future financial results. At December 31,2005, these critical systems represented 90% of our backlog. To the extent thatthese products do not achieve or maintain significant sales due to difficultiesinvolving manufacturing or engineering, the inability to reduce the currentlong manufacturing cycles for these products, competition, excess capacity inthe semiconductor or nanotechnology device industries, or any other reason, ourbusiness, financial condition and results of operations would be materiallyadversely affected.

We believe that grossmargin for 2006 will be between 45% and 46%, as compared to gross margin of 43%for 2005. The final gross margin achieved will depend heavily upon salesvolumes and the resulting product mix. Should our sales not reach the levelexpected, we may incur a higher risk of inventory obsolescence and excesspurchase commitments and lower utilization of our manufacturing infrastructure,which would materially adversely impact our results of operations. New productsgenerally have lower gross margins until there is widespread market acceptanceand until production and after-sales efficiencies can be achieved. Shouldsignificant market demand fail to develop for our laser processing systems andour new advanced packaging offerings, our business, financial condition andresults of operations would be materially adversely affected. In addition,higher costs associated with extended manufacturing and customer acceptanceperiods on shipments of our new laser processing products have had, and willcontinue to have, an adverse impact on our gross margins.

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We believe operatingmargin for 2006 will be between 2% and 5% and net income per share will bebetween $0.25 and $0.45.

**LIQUIDITYAND CAPITAL RESOURCES**

Net cash provided byoperating activities was $4.1 million for the year ended December 31,2005, as compared with net cash used in operations of $10.5 million for thecomparable period in 2004. Net cash provided by operating activities during theyear ended December 31, 2005 was attributable to the non-cash charges toincome for depreciation and amortization of $7.5 million, cumulative effect ofthe adoption of FIN47 of $1.1 million, offset partially by the net loss of$2.3 million, and a net change in operating assets and liabilities of $2.4million. The $2.4 million use of cash from the net change in operating assetsand liabilities was primarily a result of a decrease in accounts payable of$5.2 million due to investments in our facilities and inventory purchasesrelated to our laser processing product during the fourth quarter of 2004; anincrease in inventories of $1.1 million due to the increase in the number of laserthermal processing evaluation units at our customer sites; and a decrease indeferred license revenue of $1.0 million due to the completion of theamortization period of prior-period proceeds from licensing agreements. Theseuses were partially offset by an increase in accrued expenses of $1.6 million,due primarily to an increase in various tax liabilities of $1.5 million; adecrease in accounts receivable of $0.8 million; an increase in income taxpayable of $0.7 million; an increase in deferred product and servicesincome of $0.7 million, and an increase in other liabilities of $0.5 million,due to a $0.4 million increase in our deferred compensation liability.

We believe that because ofthe relatively long manufacturing cycle of certain of our systems, particularlynewer products, our inventories will continue to represent a significantportion of working capital. Currently, we are devoting significant resources tothe development, introduction and commercialization of our laser processingsystem and to the development of our next generation 1X lithographytechnologies. We currently intend to continue to incur significant operatingexpenses in the areas of research, development and engineering, manufacturing,and selling, general and administrative costs in order to further develop,produce and support these new products. Additionally, gross profit margins,inventory and capital equipment levels may be adversely impacted in the futureby costs associated with the initial production of the laser processing systemand by future generations of our 1X wafer steppers. These costs include, butare not limited to, additional manufacturing overhead, costs of demonstrationsystems and facilities and the establishment of additional after-sales supportorganizations. Additionally, there can be no assurance that operating expenseswill not increase, relative to sales, as a result of adding technical,marketing and administrative personnel, among other costs, to support our newproducts. If we are unable to achieve significantly increased net sales or ifour sales fall below expectations, our cash flow and operating results will bematerially adversely affected until, among other factors, costs and expensescan be reduced. Our failure to achieve our sales targets for these new productscould result in additional inventory write-offs and asset impairment charges,either of which could materially adversely impact our results of operations.

During the year ended December 31,2005, net cash used in investing activities was $11.0 million due to capitalexpenditures of $8.6 million and a net increase in available-for-salesecurities of $2.5 million. We are planning to incur capital expenditures in2006 of approximately $5.4 million for equipment and facility improvements drivenprimarily by our new product introductions. 

Net cash used in financingactivities was $5.3 million during the year ended December 31, 2005,attributable to stock repurchases of $9.2 million, net repayment of notespayable of $3.6 million, offset by $7.5 million in proceeds received from theissuance of Common Stock under our employee stock option plans. 

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At December 31, 2005,we had working capital of $165.2 million. Our principal source of liquidity at December 31,2005 consisted of $136.8 million in cash, cash equivalents and short-terminvestments, net of related borrowings under our line of credit.

We have approximately$10.9 million of retained earnings in our foreign subsidiaries. Although it isnot our intent to repatriate these earnings, possible adverse tax consequencesassociated with repatriating these funds may effectively restrict their use tocash requirements in those specific jurisdictions.

In December 2004, weentered into a line of credit agreement with a brokerage firm replacing a similararrangement that we had with a different firm. Under the terms of thisagreement, we may borrow funds at a cost equal to the current Federal fundsrate plus 100 basis points (5.25% as of December 31, 2005). Certain of ourcash, cash equivalents and short-term investments secure borrowings outstandingunder this facility. Funds are advanced to us under this facility based onpre-determined advance rates on the cash and securities held by us in thisbrokerage account. This agreement has no set expiration date and there are noloan covenants. As of December 31, 2005, $4.3 million was outstandingunder this facility, with a related collateral requirement of approximately$5.7 million of our cash, cash equivalents and short-term investments. As of December 31,2004, $7.9 million was outstanding under a similar facility, with a relatedcollateral requirement of approximately $10.5 million of our cash, cashequivalents and short-term investments.

On September 19,2005, the Company’s Board of Directors authorized the repurchase of up to $30million of its common stock in the open market at then prevailing market pricesduring the period commencing September 19, 2005 through September 30,2007. At December 31, 2005, the Company had repurchased 644,535 shares ofits common stock at a total purchase price of $9.2 million. Future repurchasesof its common stock could have a significant impact on the Company’s cashposition.

Thefollowing summarizes our contractual obligations at December 31, 2005, andthe effect such obligations are expected to have on our liquidity and cashflows in future periods:

| ** **                                  | ** ** | ** ** | ** ** | **Less than** | ** ** | ** **      | ** ** | ** **         | ** ** | **After**          | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------|------------|-----------------|------------|--------------------|------------|--------------------|------------|
| **(in millions)**                      | ** ** | ** ** | ** ** | **Total**          | ** ** | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **5 years** | ** ** |
| Notes payable  obligations                  |       | $          | 4.3        |               |       | $               | 4.3        |               |       |               | $          | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Non-cancelable operating  lease obligations |       | 22.1       |       |               | 4.8        |            |       |               | 9.5        |               |       |   | 7.4 |   |   |   | 0.4 |   |   |
| Long-term  payables                         |       | 0.7        |       |               | —     |            |       |               | —     |               |       |   | — |   |   |   | 0.7 |   |   |
| Asset retirement  obligations               |       | 2.8        |       |               | —     |            |       |               | —     |               |       |   | 1.5 |   |   |   | 1.3 |   |   |
| Open purchase  order commitments            |       | 29.6       |       |               | 25.4       |            |       |               | 4.2        |               |       |   | — |   |   |   | — |   |   |
| Total contractual cash  obligations         |       | $          | 59.5       |               |       | $               | 34.5       |               |       |               | $          | 13.7 |   |   |   | $ | 8.9 |   |   |   | $ | 2.4 |   |   |
|                                             |            |            |            |                    |            |                 |            |                    |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amounts shown in thetable above for open purchase order commitments are primarily related to thepurchase of inventories, equipment and leasehold improvements. We recordcharges to operations for purchase order commitments we deem in excess ofnormal operating requirements (see “Critical Accounting Policies and Estimates”).

The development andmanufacture of new lithography systems and enhancements are highlycapital-intensive. In order to be competitive, we believe we must continue tomake significant expenditures for capital equipment; sales, service, trainingand support capabilities; systems, procedures and controls; and expansion ofoperations and research and development, among many other items. We expect thatcash generated from operations and our cash, cash equivalents and short-terminvestments will be sufficient to meet our cash requirements for at least thenext twelve months. However, in the near-term, we may continue to utilizeexisting and future lines of credit, and other sources of financing, in orderto maintain our present levels of cash, cash equivalents and short-terminvestments. Beyond the next twelve months, we may require additional equity ordebt financing to address our working capital or capital equipment needs. Inaddition, we may seek to raise equity or debt capital at any time that we deemmarket conditions to be favorable. Additional financing, if needed, may not beavailable on reasonable terms, or at all.

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We may in the futurepursue additional acquisitions of complementary product lines, technologies orbusinesses. Future acquisitions may result in potentially dilutive issuances ofequity securities, the incurrence of debt and contingent liabilities and amortizationexpenses and impairment charges related to goodwill and other intangibleassets, which could materially adversely affect our financial condition andresults of operations. In addition, acquisitions involve numerous risks,including difficulties in the assimilation of the operations, technologies,personnel and products of the acquired companies; the diversion of management’sattention from other business concerns; risks of entering markets in which wehave limited or no direct experience; and the potential loss of key employeesof the acquired company. In the event we acquire product lines, technologies orbusinesses which do not complement our business, or which otherwise do notenhance our sales or operating results, we may incur substantial write-offs andhigher recurring operating costs, which could have a material adverse effect onour business, financial condition and results of operations. In the event thatany such acquisition does occur, there can be no assurance as to the effectthereof on our business or operating results.

**Off-BalanceSheet Transactions**

Our off-balance sheettransactions consist of certain financial guarantees, both expressed andimplied, related to indemnification for product liability, patent infringementand latent product defects. Other than liabilities recorded pursuant to knownproduct defects, at December 31, 2005, we did not record a liabilityassociated with these guarantees, as we have little or no history of costsassociated with such indemnification requirements.

**Foreign currency**

As part of our overallstrategy to manage the level of exposure to the risk of foreign currencyexchange rate fluctuations, we attempt to hedge most of our Japanese yendenominated foreign currency exposures. We use foreign currency forwardcontracts to hedge the risk that unremitted Japanese yen denominated receiptsfrom customers for actual or forecasted sales of equipment after receipt ofcustomer orders may be adversely affected by changes in foreign currencyexchange rates. After recording revenue, we use various mechanisms, such asforeign currency forward exchange contracts and natural hedges, to offsetsubstantial portions of the potential gains or losses associated with ourJapanese yen denominated assets and liabilities due to exchange ratefluctuations. At December 31, 2005, we had taken action to hedgeapproximately 100% of these Japanese yen denominated exposures. In addition tonatural hedges resulting from having both assets and liabilities denominated inJapanese yen, we enter into foreign currency forward contracts that generallyhave maturities of nine months or less. We often close foreign currency forwardcontracts by entering into an offsetting contract. At December 31, 2005,we had contracts for the sale of $6.5 million of foreign currencies at fixedrates of exchange.

**ITEM7A.**        *QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*

**Interest rate risk**

Our exposure to marketrisk due to potential changes in interest rates, relates primarily to ourinvestment portfolio, which consisted primarily of fixed interest rateinstruments as of December 31, 2005 and 2004. We maintain an investmentpolicy designed to ensure the safety and preservation of our invested funds bylimiting market risk and the risk of default.

Certain of our cash, cashequivalents and short-term investments serve as collateral for a line of creditwe maintain with a brokerage firm. The line of credit is used for liquiditypurposes, mitigating the need to liquidate investments in order to meet ourcurrent operating cash requirements.

Thefollowing table presents the hypothetical changes in fair values in thefinancial instruments held by us at December 31, 2005 that are sensitiveto changes in interest rates. These instruments are comprised of cash, cash equivalentsand short-term investments. These instruments are held for purposes other thantrading. The modeling techniques used measure the change in fair values arisingfrom selected 

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hypothetical changes in interest rates. Assumed marketvalue changes to our portfolio reflects immediate hypothetical parallel shiftsin the yield curve of plus or minus 50 basis points (BPS), 100 BPS, and150 BPS:

| **Cash equivalents and  Available-for-sale   Short-term investments,** | ** ** | ** ** | ** ** | **Valuation of securities  given an interest rate decrease  of X basis points** | ** ** | **No change in  interest rate** | ** ** | **Valuation of securities  given an interest rate decrease  of X basis points** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| **in thousands:**                                                                | ** ** | ** ** | ** ** | **(150 BPS)**                                                                                                           | ** ** | **(100 BPS)**                             | ** ** | **(50 BPS)**                                                                                                            | ** ** | **0 BPS** | ** ** | **50 BPS** | ** ** | **100 BPS** | ** ** | **150 BPS** | ** ** |
| U.S. Treasury  securities and obligations of U.S. government agencies                 |       | $          | 72,031     |                                                                                                                         | $          | 71,338                                         |       | $                                                                                                                            | 70,659     |   |   | $ | 69,992 |   |   | $ | 69,338 |   | $ | 68,696 |   | $ | 68,066 |   |
| U.S. corporate  debt securities                                                       |       | 68,471     |       | 68,248                                                                                                                       |       | 68,029                                         |       |                                                                                                                         | 67,814     |   |   | 67,603 |   | 67,396 |   | 67,192 |   |
| Total short-term  investments                                                         |       | $          | 140,502    |                                                                                                                         | $          | 139,586                                        |       | $                                                                                                                            | 138,688    |   |   | $ | 137,806 |   |   | $ | 136,941 |   | $ | 136,092 |   | $ | 135,258 |   |

 

We have not materiallyaltered our investment objectives or criteria and believe that, although thecomposition of our portfolio has changed from the preceding year, the portfolio’ssensitivity to changes in interest rates is materially the same.

**Credit risk**

We mitigate credit defaultrisk by attempting to invest in high credit quality securities and bypositioning our portfolio to respond appropriately to a significant reductionin a credit rating of any investment issuer or guarantor. The portfolioincludes only marketable securities with active secondary or resale markets toensure portfolio liquidity and is diversified in accordance with our investmentpolicy. To date, we have not experienced significant liquidity problems withour portfolio. Our largest holding at December 31, 2005, excluding theUnited States government and its agencies, was $4.3 million.

**Foreign exchangerisk**

The majority of ourrevenue, expense and capital purchasing activities are transacted in U.S.dollars. However, we do enter into these transactions in other currencies,primarily Japanese Yen. To protect against reductions in value and thevolatility of future cash flows caused by changes in currency exchange rates wehave established transaction and balance sheet hedging programs. We use foreigncurrency forward contracts to hedge the risk that unremitted Japanese yendenominated receipts from customers for actual or forecasted sales of equipmentafter receipt of customer orders may be adversely affected by changes inforeign currency exchange rates. After recording revenue, we use variousmechanisms, such as foreign currency forward exchange contracts and naturalhedges, to offset substantial portions of the potential gains or lossesassociated with our Japanese yen denominated assets and liabilities due toexchange rate fluctuations. At December 31, 2005, we had taken action tohedge approximately 100% of these Japanese yen denominated exposures. Inaddition to natural hedges resulting from having both assets and liabilitiesdenominated in Japanese yen, we enter into foreign currency forward contractsthat generally have maturities of nine months or less. We often close foreigncurrency forward contracts by entering into an offsetting contract. At December 31,2005, we had contracts for the sale of $6.5 million of Japanese yen at fixedrates of exchange. Our hedging programs reduce, but do not always entirelyeliminate, the impact of currency movements. (See “Derivative instruments andhedging” in Footnote 4 of Notes to Consolidated Financial Statements foradditional disclosures.)

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**ITEM 8.**                *FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA*

The Selected FinancialData information contained in Item 6 of Part II hereof is herebyincorporated by reference into this Item 8 of Part II of this Form 10-K.

**ULTRATECH, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSAND FINANCIAL STATEMENT SCHEDULE**

ConsolidatedFinancial Statements included in Item 8:

|                                                                                                               | ** ** | **Page Number** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------|
| Consolidated Balance  Sheets—December 31, 2005 and 2004                                             |       | 43                   |
| Consolidated Statements of  Operations—Years ended December 31, 2005, 2004, and 2003      |       | 44                   |
| Consolidated Statements of  Cash Flows—Years ended December 31, 2005, 2004, and 2003      |       | 45                   |
| Consolidated Statements of  Stockholders’ Equity—Years ended December 31, 2005, 2004, and 2003 |       | 46                   |
| Notes to Consolidated  Financial Statements                                                                   |       | 47-65                |
| Reports  of Ernst & Young LLP, Independent Registered Public Accounting Firm                         |       | 66                   |

 

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**CONSOLIDATEDBALANCE SHEETS**

| ** **                                                                                                                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **In thousands, except share and per share amounts**                                               | ** ** | ** **            | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ***Assets***                                                                                                                          |       |                  |       |                  |       |   |   |   |   |
| Current assets:                                                                                                                       |       |                  |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                             |       |                  | $          | 36,344                |       |   |   | $ | 47,985 |   |   |
| Short-term investments                                                                                                                |       |                  | 104,723    |                  |       |   | 103,642 |   |   |
| Accounts receivable, less allowance for doubtful accounts  of $577 in 2005 and $237 in 2004                                           |       |                  | 19,110     |                  |       |   | 19,907 |   |   |
| Inventories                                                                                                                           |       |                  | 28,969     |                  |       |   | 27,842 |   |   |
| Taxes receivable                                                                                                                      |       |                  | —     |                  |       |   | 509 |   |   |
| Prepaid expenses and other current assets                                                                                             |       |                  | 1,589      |                  |       |   | 1,654 |   |   |
| Total current  assets                                                                                                                 |       |                  | 190,735    |                  |       |   | 201,539 |   |   |
| Equipment and leasehold improvements, net                                                                                             |       |                  | 25,117     |                  |       |   | 21,992 |   |   |
| Intangible  assets, net                                                                                                               |       |                  | —     |                  |       |   | 95 |   |   |
| Demonstration  inventory                                                                                                              |       |                  | 3,367      |                  |       |   | 4,223 |   |   |
| Other assets                                                                                                                          |       |                  | 3,090      |                  |       |   | 2,697 |   |   |
| Total assets                                                                                                                          |       |                  | $          | 222,309               |       |   |   | $ | 230,546 |   |   |
| ***Liabilities  and Stockholders’ Equity***                                                                                      |       |                  |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                                                  |       |                  |       |                  |       |   |   |   |   |
| Notes payable                                                                                                                         |       |                  | $          | 4,289                 |       |   |   | $ | 7,900 |   |   |
| Accounts payable                                                                                                                      |       |                  | 8,403      |                  |       |   | 13,587 |   |   |
| Accrued expenses                                                                                                                      |       |                  | 9,270      |                  |       |   | 7,700 |   |   |
| Deferred license revenue                                                                                                              |       |                  | —     |                  |       |   | 1,041 |   |   |
| Deferred product and services income                                                                                                  |       |                  | 1,970      |                  |       |   | 1,244 |   |   |
| Advance billings                                                                                                                      |       |                  | 854        |                  |       |   | 415 |   |   |
| Income taxes payable                                                                                                                  |       |                  | 768        |                  |       |   | 31 |   |   |
| Total current  liabilities                                                                                                            |       |                  | 25,554     |                  |       |   | 31,918 |   |   |
| Accrued rent                                                                                                                          |       |                  | 3,157      |                  |       |   | 3,294 |   |   |
| Other liabilities                                                                                                                     |       |                  | 4,648      |                  |       |   | 2,044 |   |   |
| Commitments and  contingencies                                                                                                        |       |                  |       |                  |       |   |   |   |   |
| Stockholders’  equity:                                                                                                           |       |                  |       |                  |       |   |   |   |   |
| Preferred Stock,  $.001 par value:                                                                                                    |       |                  |       |                  |       |   |   |   |   |
| 2,000,000 shares authorized; none issued                                                                                              |       |                  | —     |                  |       |   | — |   |   |
| Common Stock,  $.001 par value:                                                                                                       |       |                  |       |                  |       |   |   |   |   |
| 40,000,000 shares authorized; issued and  outstanding: 23,749,789 at December 31, 2005 and 23,853,538 at  December 31, 2004 |       |                  | 25         |                  |       |   | 24 |   |   |
| Additional paid-in capital                                                                                                            |       |                  | 221,225    |                  |       |   | 213,660 |   |   |
| Treasury stock, 1,107,756 shares at  December 31, 2005 and 464,721 shares at December 31, 2004                              |       |                  | (15,904    | )                     |       |   | (6,738 | ) |   |
| Accumulated other comprehensive loss, net                                                                                             |       |                  | (886       | )                     |       |   | (489 | ) |   |
| Accumulated deficit                                                                                                                   |       |                  | (15,510    | )                     |       |   | (13,167 | ) |   |
| Total  stockholders’ equity                                                                                                      |       |                  | 188,950    |                  |       |   | 193,290 |   |   |
| Total liabilities and  stockholders’ equity                                                                                      |       |                  | $          | 222,309               |       |   |   | $ | 230,546 |   |   |
|                                                                                                                                       |            |                       |            |                       |            |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

43

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

| ** **                                                                                                        | ** ** | **Years Ended December 31,** | ** ** |     |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------|
| **In thousands, except per share amounts**                                               | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |   |
| Net sales                                                                                                         |       |                                        |       |     |   |   |   |   |
| Products                                                                                                          |       | $                                           | 108,377    |     | $ | 93,392 |   | $ | 85,799 |   |   |
| Services                                                                                                          |       | 12,472                                      |       | 12,289   |   | 10,611 |   |   |
| Licenses                                                                                                          |       | 1,517                                       |       | 4,211    |   | 3,711 |   |   |
| Total net sales                                                                                                   |       | 122,366                                     |       | 109,892  |   | 100,121 |   |   |
| Cost of sales                                                                                                     |       |                                        |       |     |   |   |   |   |
| Cost of products  sold                                                                                            |       | 60,647                                      |       | 48,466   |   | 46,999 |   |   |
| Cost of services                                                                                                  |       | 9,672                                       |       | 8,733    |   | 6,511 |   |   |
| Gross profit                                                                                                      |       | 52,047                                      |       | 52,693   |   | 46,611 |   |   |
| Research, development, and engineering                                                                            |       | 26,963                                      |       | 25,936   |   | 21,309 |   |   |
| Amortization of  intangible assets                                                                                |       | 95                                          |       | 381      |   | 381 |   |   |
| Selling, general,  and administrative                                                                             |       | 29,864                                      |       | 28,805   |   | 22,677 |   |   |
| Restructure of  operations                                                                                        |       | —                                      |       | —   |   | (728 | ) |   |
| Operating income (loss)                                                                                           |       | (4,875                                      | )          | (2,429   | ) | 2,972 |   |   |
| Interest expense                                                                                                  |       | (380                                        | )          | (114     | ) | (253 | ) |   |
| Interest and  other income, net                                                                                   |       | 4,733                                       |       | 3,612    |   | 4,277 |   |   |
| Income (loss) before income taxes and cumulative  effect of change in accounting principle                   |       | (522                                        | )          | 1,069    |   | 6,996 |   |
| Provision  (benefit) for income taxes                                                                             |       | 699                                         |       | 445      |   | (570 | ) |   |
| Income (loss)  before cumulative effect of change in accounting principle                                         |       | $                                           | (1,221     | )        | $ | 624 |   | $ | 7,566 |   |   |
| Cumulative effect  of the adoption of FIN 47 “Accounting for Conditional Asset Retirement  Obligations” |       | (1,122                                      | )          | —   |   | — |   |   |
| Net income (loss)                                                                                                 |       | $                                           | (2,343     | )        | $ | 624 |   | $ | 7,566 |   |   |
| *Net  income (loss) per share—basic*                                                                         |       |                                        |       |     |   |   |   |   |
| Income (loss) before cumulative effect of change in  accounting principle                                         |       | $                                           | (0.05      | )        | $ | 0.03 |   | $ | 0.33 |   |   |
| Cumulative effect of the adoption of FIN 47  “Accounting for Conditional Asset Retirement Obligations”  |       | $                                           | (0.05      | )        | $ | — |   | $ | — |   |   |
| Net income (loss)                                                                                                 |       | $                                           | (0.10      | )        | $ | 0.03 |   | $ | 0.33 |   |   |
| Number of shares used in per share computations—basic                                                        |       | 23,964                                      |       | 23,733   |   | 23,017 |   |   |
| *Net  income (loss) per share—diluted*                                                                       |       |                                        |       |     |   |   |   |   |
| Income (loss) before cumulative effect of change in  accounting principle                                         |       | $                                           | (0.05      | )        | $ | 0.03 |   | $ | 0.31 |   |   |
| Cumulative effect of the adoption of FIN 47  “Accounting for Conditional Asset Retirement Obligations”  |       | $                                           | (0.05      | )        | $ | — |   | $ | — |   |   |
| Net income (loss)                                                                                                 |       | $                                           | (0.10      | )        | $ | 0.03 |   | $ | 0.31 |   |   |
| Number of shares  used in per share computations—diluted                                                     |       | 23,964                                      |       | 24,734   |   | 24,476 |   |   |
|                                                                                                                   |            |                                             |            |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

| ** **                                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands**                                                                               | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| *Cash flows from operating  activities:*                                                            |       |                                        |       |   |   |   |   |
| Net income (loss)                                                                                   |       | $                                           | (2,343     | ) | $ | 624 |   | $ | 7,566 |   |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities: |       |                                        |       |   |   |   |   |
| Cumulative effect of adoption of FIN 47                                                             |       | 1,122                                       |       | — |   | — |   |
| Depreciation                                                                                        |       | 6,413                                       |       | 6,235 |   | 6,621 |   |
| Amortization                                                                                        |       | 1,118                                       |       | 2,306 |   | 2,492 |   |
| Non-cash  restructuring and asset impairment charges (recoveries):                                  |       |                                        |       |   |   |   |   |
| Equipment and leasehold improvements, net                                                           |       | —                                      |       | — |   | (128 | ) |
| Inventories                                                                                         |       | —                                      |       | — |   | (393 | ) |
| Loss on disposal of equipment                                                                       |       | 1                                           |       | 122 |   | 189 |   |
| Stock compensation                                                                                  |       | 77                                          |       | 235 |   | 311 |   |
| Deferred income taxes                                                                               |       | 46                                          |       | 269 |   | (559 | ) |
| Changes  in operating assets and liabilities:                                                       |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                                 |       | 797                                         |       | (10,509 | ) | 3,472 |   |
| Inventories                                                                                         |       | (1,127                                      | )          | (8,805 | ) | 6,420 |   |
| Taxes receivable                                                                                    |       | 509                                         |       | (160 | ) | 830 |   |
| Prepaid expenses and other current assets                                                           |       | 65                                          |       | 185 |   | (212 | ) |
| Demonstration Inventory                                                                             |       | 191                                         |       | (2,099 | ) | (1,785 | ) |
| Other assets                                                                                        |       | (439                                        | )          | (740 | ) | 187 |   |
| Accounts payable                                                                                    |       | (5,184                                      | )          | 5,858 |   | 1,010 |   |
| Accrued expenses                                                                                    |       | 1,570                                       |       | (183 | ) | (3,078 | ) |
| Deferred license revenue                                                                            |       | (1,041                                      | )          | (3,711 | ) | (3,711 | ) |
| Deferred product and services income, net                                                           |       | 726                                         |       | 156 |   | (5,205 | ) |
| Advance billings                                                                                    |       | 439                                         |       | (1,108 | ) | 499 |   |
| Income taxes payable                                                                                |       | 737                                         |       | (745 | ) | 305 |   |
| Accrued restructuring expenses                                                                      |       | —                                      |       | — |   | (2,558 | ) |
| Accrued rent                                                                                        |       | (137                                        | )          | 510 |   | (522 | ) |
| Other liabilities                                                                                   |       | 540                                         |       | 1,101 |   | (74 | ) |
| Net cash provided by (used in) operating activities                                                 |       | 4,080                                       |       | (10,459 | ) | 11,677 |   |
| *Cash  flows from investing activities:*                                                            |       |                                        |       |   |   |   |   |
| Capital expenditures                                                                                |       | (8,596                                      | )          | (9,868 | ) | (6,073 | ) |
| Investments in securities                                                                           |       | (95,994                                     | )          | (102,513 | ) | (165,056 | ) |
| Proceeds from sales and maturities of investments                                                   |       | 93,549                                      |       | 137,195 |   | 161,938 |   |
| Net cash provided by (used in) investing activities                                                 |       | (11,041                                     | )          | 24,814 |   | (9,191 | ) |
| *Cash  flows from financing activities:*                                                            |       |                                        |       |   |   |   |   |
| Proceeds from notes payable                                                                         |       | 108,929                                     |       | 37,900 |   | 15,315 |   |
| Repayment of notes payable                                                                          |       | (112,541                                    | )          | (32,564 | ) | (22,584 | ) |
| Proceeds from issuance of common stock                                                              |       | 7,511                                       |       | 3,120 |   | 12,055 |   |
| Repurchase of common stock                                                                          |       | (9,188                                      | )          | — |   | — |   |
| Net cash provided by (used in) financing activities                                                 |       | (5,289                                      | )          | 8,456 |   | 4,786 |   |
| **Net effect of exchange rate changes on cash**                                                     |       | 609                                         |       | 25 |   | (301 | ) |
| **Net increase (decrease) in cash and cash equivalents**                                            |       | (11,641                                     | )          | 22,836 |   | 6,971 |   |
| **Cash and cash equivalents at beginning of period**                                                |       | 47,985                                      |       | 25,149 |   | 18,178 |   |
| **Cash and cash equivalents at end of period**                                                      |       | $                                           | 36,344     |   | $ | 47,985 |   | $ | 25,149 |   |
| Supplemental  disclosures of cash flow information:                                                 |       |                                        |       |   |   |   |   |
| Cash  paid during the period for:                                                                   |       |                                        |       |   |   |   |   |
| Interest                                                                                            |       | $                                           | 312        |   | $ | 94 |   | $ | 264 |   |
| Income taxes paid (tax refund received)                                                             |       | (154                                        | )          | 668 |   | (1,086 | ) |
| Other  non-cash changes:                                                                            |       |                                        |       |   |   |   |   |
| Systems transferred from (to) inventory to (from) equipment  and demonstration inventory            |       | $                                           | 5,782      |   | $ | 3,522 |   | $ | 1,232 |   |
| Systems transferred from (to) equipment to (from) demonstration  inventory                          |       | $                                           | 952        |   | $ | 1,097 |   | — |   |
| Increase in net equipment and leasehold improvements  due to adoption of FIN 47                     |       | $                                           | 943        |   | — |   | — |   |
| Asset retirement  obligations resulting from adoption of FIN 47                                     |       | $                                           | 2,064      |   | — |   | — |   |
|                                                                                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

| ** **                                                                              | ** ** | **Stockholders’ Equity** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                              | ** ** | ** **                         | ** ** | ** ** | ** ** | **Additional** | ** ** | ** ** | ** ** | **Accumulated Other** | ** ** | ** ** | ** ** | **Total** | ** ** |
| ** **                                                                              | ** ** | **Common Stock**              | ** ** | **Paid-in** | ** ** | **Treasury** | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| **In thousands**                                                                   | ** ** | ** **                         | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Stock** | ** ** | **Income (Loss)** | ** ** | **(Deficit)** | ** ** | **Equity** | ** ** |
| Balance at December 31, 2002                                                       |       |                               | 22,627     |   |   |   | 23 |   |   |   | 198,069 |   |   |   | (6,867 | ) |   |   | 1,884 |   |   |   | (21,355 | ) |   |   | 171,754 |   |   |
| Net issuance of Common Stock under stock option plans  and employee stock purchase plan |       |                               | 955        |   |   |   | 1 |   |   |   | 11,943 |   |   |   | 111 |   |   |   | — |   |   |   | — |   |   |   | 12,055 |   |   |
| Compensation                                                                            |       |                               | —     |   |   |   | — |   |   |   | 311 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 311 |   |   |
| Components of  comprehensive income:                                                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change  in net unrealized gains (losses) on:                                            |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale investments                                                          |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (646 | ) |   |   | — |   |   |   | (646 | ) |   |
| Foreign exchange contracts                                                              |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (301 | ) |   |   | — |   |   |   | (301 | ) |   |
| Net income                                                                              |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 7,566 |   |   |   | 7,566 |   |   |
| Total comprehensive income                                                              |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 6,619 |   |   |
| Balance at December 31, 2003                                                       |       |                               | 23,582     |   |   |   | 24 |   |   |   | 210,323 |   |   |   | (6,756 | ) |   |   | 937 |   |   |   | (13,789 | ) |   |   | 190,739 |   |   |
| Net issuance of Common Stock under stock option plans  and employee stock purchase plan |       |                               | 272        |   |   |   | — |   |   |   | 3,102 |   |   |   | 18 |   |   |   | — |   |   |   | — |   |   |   | 3,120 |   |   |
| Compensation                                                                            |       |                               | —     |   |   |   | — |   |   |   | 235 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 235 |   |   |
| Components of  comprehensive income:                                                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change  in net unrealized gains (losses) on:                                            |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale investments                                                          |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (1,451 | ) |   |   | — |   |   |   | (1,451 | ) |   |
| Foreign exchange contracts                                                              |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 25 |   |   |   | — |   |   |   | 25 |   |   |
| Net income                                                                              |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 624 |   |   |   | 624 |   |   |
| Total comprehensive loss                                                                |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (802 | ) |   |
| Balance at December 31, 2004                                                       |       |                               | 23,854     |   |   |   | $ | 24 |   |   |   | $ | 213,660 |   |   |   | $ | (6,738 | ) |   |   | $ | (489 | ) |   |   | $ | (13,167 | ) |   |   | $ | 193,290 |   |   |
| Net issuance of Common Stock under stock option plans                                   |       |                               | 541        |   |   |   | 1 |   |   |   | 7,488 |   |   |   | 22 |   |   |   | — |   |   |   | — |   |   |   | 7,511 |   |   |
| Repurchase of common stock                                                              |       |                               | (645       | ) |   |   | — |   |   |   | — |   |   |   | (9,188 | ) |   |   | — |   |   |   | — |   |   |   | (9,188 | ) |   |
| Compensation                                                                            |       |                               | —     |   |   |   | — |   |   |   | 77 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 77 |   |   |
| Components of comprehensive  loss:                                                      |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change  in net unrealized gains (losses) on:                                            |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale investments                                                          |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (1,006 | ) |   |   | — |   |   |   | (1,006 | ) |   |
| Foreign exchange contracts                                                              |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 609 |   |   |   | — |   |   |   | 609 |   |   |
| Net loss                                                                                |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (2,343 | ) |   |   | (2,343 | ) |   |
| Total comprehensive loss                                                                |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (2,740 | ) |   |
| Balance at  December 31, 2005                                                      |       |                               | 23,750     |   |   |   | $ | 25 |   |   |   | $ | 221,225 |   |   |   | $ | (15,904 | ) |   |   | $ | (886 | ) |   |   | $ | (15,510 | ) |   |   | $ | 188,950 |   |   |
|                                                                                         |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

46

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**   COMPANYAND INDUSTRY INFORMATION

***Nature of operations***

Ultratech, Inc. (referred to as “Ultratech” and “we”)develops, manufactures and markets photolithography and laser thermalprocessing equipment for manufacturers of semiconductor and nanotechnologycomponents located throughout North America, Europe, Japan, Taiwan and the restof Asia.

We supply step-and-repeatphotolithography systems based on one-to-one imaging technology. Within theintegrated circuit industry, we target the market for advanced packagingapplications. Within the nanotechnology industry, our target markets includethin film head magnetic recording devices, optical networking devices, laserdiodes and LEDs (light emitting diodes). Our laser thermal processing equipmentis targeted at advanced annealing applications within the semiconductorindustry.

***Major customers***

Intel Corporationaccounted for 13%, 10% and 26% of our net sales for the years ended December 31,2005, 2004 and 2003, respectively. Intel Corporation accounted for less than10% of our accounts receivable at December 31, 2005.

***Business segments***

In evaluating its businesssegments, we gave consideration to the Chief Executive Officer’s review offinancial information and the organizational structure of our management. Basedon this review, we concluded that, at the present time, resources are allocatedand other financial decisions are made based on consolidated financialinformation. Accordingly, we have determined that we operate in one businesssegment, which is the manufacture and distribution of capital equipment tomanufacturers of integrated circuits and nanotechnology components.

***Enterprise-wide disclosures***

Ourproducts are manufactured in the United States and are sold worldwide. Wemarket our products internationally through domestic and foreign-based salesand service. The following table presents enterprise-wide sales to externalcustomers and long-lived assets by geographic region:

| **In thousands**    | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales:               |       |       |       |     |       |     |       |
| United States of America |       | $          | 37,506     |     | $          | 38,152   |       | $        | 38,732     |   |
| Japan                    |       | 16,081     |       | 35,631   |       | 27,987   |       |
| Europe                   |       | 21,156     |       | 4,346    |       | 11,602   |       |
| Taiwan                   |       | 20,890     |       | 13,912   |       | 10,563   |       |
| Rest of world            |       | 26,733     |       | 17,851   |       | 11,237   |       |
| Total                    |       | $          | 122,366    |     | $          | 109,892  |       | $        | 100,121    |   |
| Long-lived  assets:      |       |       |       |     |       |     |       |
| United States of America |       | $          | 30,494     |     | $          | 27,211   |       | $        | 23,017     |   |
| Rest of world            |       | 1,080      |       | 1,796    |       | 948      |       |
| Total                    |       | $          | 31,574     |     | $          | 29,007   |       | $        | 23,965     |   |

 

47

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The rest of the world is comprised of sales tocustomers and long-lived assets in countries that are individuallyinsignificant.

With the exception ofJapan, our operations in foreign countries are not currently subject tosignificant exchange rate fluctuations, principally because sales contracts forour systems are generally denominated in U.S. dollars. In Japan, we sell ourproducts in both U.S. dollars and Japanese yen. However, we attempt to mitigateour currency exposure through the use of currency forward contracts. (See “DerivativeInstruments and Hedging” in Footnote 4)

**2.**   CONCENTRATIONS OF RISKS

Financial instruments that potentially subjectUltratech to concentrations of credit risk consist principally of cashequivalents, short-term investments and trade receivables. These credit risksinclude the potential inability of an issuer or customer to honor theirobligations under the terms of the instrument. We place our cash equivalentsand short-term investments with high credit-quality financial institutions. Weinvest our excess cash in commercial paper, readily marketable debt instrumentsand collateralized funds of U.S. and state government entities. We haveestablished guidelines relative to credit ratings, diversification andmaturities that seek to maintain safety and liquidity.

A majority of our trade receivables are derived fromsales in various geographic areas, principally the U.S., Europe, Japan, Taiwanand the rest of Asia, to large companies within the integrated circuit andnanotechnology industries. We perform ongoing credit evaluations of ourcustomers’ financial condition and require collateral, whenever deemednecessary. We maintain an allowance for uncollectible accounts receivable basedupon expected collectibility and estimated returns and allowances. This reserveis established based upon historical trends, current economic conditions,delinquency status based on contractual terms and an analysis of specificexposures. As of December 31, 2005 and 2004, the recorded value of ouraccounts receivable approximated fair value due to the short-term nature of ouraccounts receivable.

Sole-source andsingle-source suppliers provide critical components and services for themanufacture of our products. The reliance on sole or limited groups ofsuppliers may subject us from time to time to quality, allocation and pricingconstraints.

**3.**   BASIS OFPRESENTATION

The accompanying consolidated financial statementsinclude the accounts of Ultratech and our subsidiaries, all of which are whollyowned. Intercompany balances and transactions have been eliminated.

The U.S. dollar is thefunctional currency for all foreign operations. Foreign exchange gains andlosses, which result from the process of remeasuring foreign currency financialstatements into U.S. dollars or from foreign currency exchange transactionsduring the period, have been immaterial and are included in interest and otherincome, net.

***Use of Estimates***

The preparation of thefinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities at the date of the consolidated financial statements. By theirnature, these estimates and judgments are subject to an inherent degree ofuncertainty. On an ongoing basis, management evaluates its estimates, includingthose related to inventories, warranty obligations, purchase order commitments,asset retirement obligations, bad debts, estimated useful lives of fixedassets, asset impairment, income taxes, intangible assets, restructuring andcontingencies and litigation. Management 

48

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basesits estimates on historical experience and on various other analyses andassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

**4.**   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

***Cash equivalents***

Cash equivalents consistof highly liquid investments with a maturity date at acquisition of threemonths or less. The carrying value of cash equivalents approximates fair value.

***Investments***

Management determines the appropriate classificationof its investments at the time of purchase and re-evaluates the classificationat each balance sheet date. At December 31, 2005 and 2004, all investmentsand cash equivalents in our portfolio were classified as “available for sale”and are stated at fair value, with the unrealized gains and losses, net of tax,reported in accumulated other comprehensive income (loss), as a separatecomponent of stockholders’ equity.

The amortized cost of debtsecurities is adjusted for amortization of premiums and accretion of discountsto maturity. Such amortization, as well as interest, dividends, realized gainsand losses and declines in value judged to be other than temporary are includedin interest and other income, net. The cost of securities sold is based on thespecific identification method.

***Allowances for Bad Debts***

We maintain an allowancefor uncollectible accounts receivable based upon expected collectibility. Thisreserve is established based upon historical trends, current economicconditions, delinquency status based on contractual terms and an analysis ofspecific exposures.

***Inventories***

Inventories are stated atthe lower of cost or market. Cost is determined using the first-in, first-out(FIFO) method. The semiconductor industry is characterized by rapidtechnological change, changes in customer requirements and evolving industrystandards. We perform a detailed assessment of inventory at each balance sheetdate, which includes a review of, among other factors, demand requirements andmarket conditions. Based on this analysis, we record adjustments, whenappropriate, to reflect inventory at lower of cost or market.

***Long-lived assets***

Equipment and leasehold improvements are stated atcost, less accumulated depreciation and amortization. Equipment is depreciatedon a straight-line basis over the estimated useful lives (three to ten years).Leasehold improvements are amortized on a straight-line basis over the life ofthe related assets or the lease term, whichever is shorter. The depreciationexpense for the year ended 2005 was $6.4 million.

Demonstration inventory is stated at cost, lessaccumulated amortization. Demonstration inventory is amortized to its estimatednet realizable value as a used system over its estimated useful life as ademonstration system, generally three years.

Intangible assets are carried at cost, lessaccumulated amortization, which is being recognized on a straight-line basisover the economic lives of the respective assets, generally five to sevenyears. Intangible assets are reviewed for impairment whenever events or changesin circumstances indicate that the carrying 

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amount of the relatedasset may not be recoverable. As of December 31, 2005, all the intangibleassets had been fully amortized. The gross value of intangible assets as of December 31,2004 was $2.0 million. Intangible assets are presented in the statement offinancial position net of accumulated amortization of $1.9 million as of December 31,2004. Amortization of intangible assets was $0.1 million, $0.4 million and $0.4million for the years ended December 31, 2005, 2004 and 2003.

We review long-livedassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of these assets may not be recoverable. We assess theseassets for impairment based on estimated future cash flows from these assets.Other than as noted on Footnote 11, “Restructure of Operations”, no impairmentcharges have been recorded during the three years ended December 31, 2005.

***Asset Retirement Obligation***

In the fourth quarter 2005 we adopted FASBInterpretation No. 47, “Accounting for Contingent Asset RetirementObligations” (“FIN 47”), an interpretation of FASB Statement No. 143, “AssetRetirement Obligations” (“SFAS 143”). FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in SFAS 143 refers to a legal obligationto perform an asset retirement activity in which the timing and (or) method ofsettlement are conditional on a future event that may or may not be within thecontrol of the entity. An entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fair value ofthe liability can be reasonably estimated, even if conditional on a futureevent. As permitted, we recognized the effect of applying FIN 47 as acumulative effect of a change in accounting principle. Our adoption of FIN 47resulted in an increase in net equipment and leasehold improvements of approximately$1.0 million, recognition of an asset retirement obligation (“ARO”) liabilityof $2.1 million, and a cumulative effect of adoption of $1.1 million, or $0.05per share, for the year ended December 31, 2005. The ARO liability isprincipally for estimable asset retirement obligations related to remediationcosts, which we estimate will be incurred upon the expiration of certainoperating leases.

Thefollowing table reflects unaudited pro forma presentations of the Company’sresults of operations and asset retirement obligations as if FIN 47 had beenretrospectively applied:

| ** **                                                                            | ** ** | **Years Ended**                                                             | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **December 31,**                                                            | ** ** |
| ** **                                                                            | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| ** **                                                                            | ** ** | **In thousands, except per share amounts**              | ** ** |
| Results of  operations, as reported:                                                  |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss)*                                                                   |       |                                                                             | $          | (1,221 | ) |   |   | $ | 624 |   |   |   | $ | 7,566 |   |   |
| Net income (loss)  per share—basic*                                              |       |                                                                             | $          | (0.05 | ) |   |   | $ | 0.03 |   |   |   | $ | 0.33 |   |   |
| Net income (loss)  per share—diluted*                                            |       |                                                                             | $          | (0.05 | ) |   |   | $ | 0.03 |   |   |   | $ | 0.31 |   |   |
| Pro forma results of operation, assuming the  retroactive application of FIN 47: |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                     |       |                                                                             | $          | (1,571 | ) |   |   | $ | 432 |   |   |   | $ | 7,398 |   |   |
| Net income (loss)  per share—basic                                               |       |                                                                             | $          | (0.07 | ) |   |   | $ | 0.02 |   |   |   | $ | 0.32 |   |   |
| Net income (loss) per  share—diluted                                             |       |                                                                             | $          | (0.07 | ) |   |   | $ | 0.02 |   |   |   | $ | 0.30 |   |   |

 

| ** **                    | ** ** | **As of December 31,**                                            | ** ** |
|-------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| Asset Retirement  Obligations |       |                                                                             | $          | 2,064 |   |   |   | $ | 1,365 |   |   |   | $ | 1,119 |   |   |
|                               |            |                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

*                    Priorto the cumulative effect of change in accounting principle

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***Derivative Instruments and Hedging***

The majority of our revenue, expense and capitalpurchasing activities are transacted in U.S. dollars. However, we do enter intothese transactions in other currencies, primarily Japanese yen. To protectagainst reductions in value and the volatility of future cash flows caused by changesin currency exchange rates over the ensuing twelve-month period, we haveestablished transaction and balance sheet hedging programs. Currency forwardcontracts are utilized in these programs. These hedging programs reduce, but donot always entirely eliminate, the impact of currency movements.

Currency forward contracts that are used by us tohedge the risk that unremitted Japanese yen denominated receipts from customersfor forecasted sales of equipment after receipt of customer purchase orders maybe adversely affected by changes in foreign currency exchange rates aredesignated as cash flow hedges. The maturity of these instruments is generallynine months or less. At December 31, 2005, we had taken action to hedge100%, or approximately $3.3 million, of these Japanese yen denominatedexposures. We often close currency forward contracts by entering into anoffsetting contract.

Ultratech records these currency forward contracts atfair value in our consolidated balance sheets as prepaid expenses and othercurrent assets or accrued expenses, as appropriate, and the related gains orlosses on these contracts are recorded in accumulated other comprehensiveincome (loss) as a component of stockholders’ equity. These deferred gains andlosses are recognized in income, as a component of revenue, in the period inwhich the forecasted sales being hedged are recognized in income. However, tothe extent that any of these contracts are not considered to be perfectlyeffective in offsetting the change in the value of the forecasted sales beinghedged, any changes in fair value relating to the ineffective portion of thesecontracts are immediately recognized in income as a component of interest andother income, net. The effectiveness of the hedge is measured using the forwardrates to value the forward contract and the underlying hedged transaction. Theineffective portions of the hedges were not material to the periods presented.Should we terminate a derivative designated as a cash-flow hedge, thederivative is settled for cash and the fair value of the asset or liability, asappropriate, is written off.

Currency forward contracts are also used to offset thecurrency risk of Japanese yen denominated assets and liabilities. We recordthese currency forward contracts at fair value in our consolidated balancesheets as prepaid expenses and other current assets or accrued expenses, asappropriate, and the related gains or losses on these contracts are recognizedas a component of interest and other income, net.

At December 31, 2005and 2004, we had currency forward contracts at fixed rates of exchange for thesale of Japanese yen of $6.5 million and $13.9 million, respectively. We hadrecorded $0.3 million accumulated gain and $0.3 million of accumulated lossesas components of other comprehensive income (loss) at December 31, 2005and 2004, respectively. The fair value of derivatives classified as cash-flowhedges at December 31, 2005 and 2004 was an asset of $0.2 million and aliability of $0.3 million, respectively. The fair value of other derivatives atDecember 31, 2004 was a liability of $0.2 million .

***Revenue recognition***

We recognize revenue when persuasive evidence of anarrangement exists, delivery has occurred or services have been rendered, theseller’s price is fixed or determinable, and collectibility is reasonablyassured. We derive revenue from four sources—system sales, spare parts sales,service contracts and license fees.

Provided all other criteria are met, we recognizerevenues on system sales when we have received customer acceptance of thesystem and have completed the system installation obligations or are otherwisereleased from our installation obligations. In the event that terms of the saleprovide for a lapsing customer acceptance period, we recognize revenue upon theexpiration of the lapsing acceptance period or customer acceptance, whicheveroccurs first. In these instances, revenue is recorded only if the product hasmet 

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product specificationsprior to shipment and management deems that no significant uncertainties as toproduct performance exist.

Our transactions frequently include the sale ofsystems and services under multiple element arrangements. In situations withmultiple deliverables, revenue is recognized upon the delivery of the separateelements and when we receive customer acceptance or are otherwise released fromour customer acceptance obligations. Consideration from multiple elementarrangements is allocated among the separate accounting units based on theresidual method under which the revenue is allocated to undelivered elementsbased on fair value of such undelivered elements and the residual amounts ofrevenue allocated to delivered elements, provided the undelivered elements havevalue on a stand alone basis, there is objective and reliable evidence of fairvalue for the undelivered elements, the arrangement does not include a generalright of return relative to the delivered item and delivery or performance ofthe undelivered item(s) is considered probable and substantially in ourcontrol. The maximum revenue recognized on a delivered element is limited tothe amount that is not contingent upon the delivery of additional items.

We generally recognize revenue from spare parts salesupon shipment, as our products are generally sold on terms that transfer titleand risk of ownership when it leaves our site. We sell service contracts forwhich revenue is deferred and recognized ratably over the contract period andservice contracts based on a purchased quantity of hours under which revenue isrecognized as service hours are delivered. We recognize revenue from licensingand technology support agreements ratably over the contract period, or theestimated useful life of the licensed technologies, whichever is shorter.

Costs related to deferred product revenues arecapitalized (deferred) and recognized at the time of revenue recognition.Deferred product revenue and costs are netted on our balance sheet, under thecaption “deferred product and services income.”

Costs incurred forshipping and handling are included in cost of sales.

***Warranty Accrual***

We generally warrant ourproducts for material and labor to repair the product for a period of 12 monthsfor new products, or 3 months for refurbished products, from the date ofcustomer acceptance. Accordingly, an accrual for the estimated cost of thewarranty is recorded at the time the product is shipped and is recorded in thestatement of operations at the time revenue is recognized.

***Research, development, and engineering expenses***

We are actively engaged inbasic technology and applied research programs designed to develop new productsand product applications. In addition, substantial ongoing product and processimprovement engineering and support programs relating to existing products are conductedwithin engineering departments and elsewhere. Research, development andengineering costs are charged to operations as incurred.

***Deferred Income Taxes***

We record a valuationallowance to reduce our net deferred tax assets to the amount that is more likelythan not to be realized. Based on the uncertainty of future taxable income, wehave presently fully reserved our domestic deferred tax assets.

***Impact of recently issued accounting standards***

In June 2005, the FASB issued Statement No. 154,“Accounting Changes and Error Corrections” (SFAS 154), a replacement of APBOpinion No. 20, “Accounting Changes”, and Statement No. 3, 

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“Reporting AccountingChanges in Interim Financial Statements.” SFAS 154 changes the requirements forthe accounting for and the reporting of a change in accounting principle.Previously, most voluntary changes in accounting principles requiredrecognition by recording a cumulative effect adjustment within net income inthe period of change. SFAS 154 requires retrospective application to priorperiods’ financial statements, unless it is impracticable to determine eitherthe specific period effects or the cumulative effect of the change. SFAS 154 iseffective for accounting changes made in fiscal years beginning after December 15,2005.

In March 2005, the SEC released SEC StaffAccounting Bulletin No. 107 (SAB 107). SAB 107 provides the SEC staffposition regarding the application of SFAS 123R, Share-Based Payment. SAB 107contains interpretive guidance relating to the interaction between SFAS 123Rand certain SEC rules and regulations, as well as the staff’s viewsregarding the valuation of share-based payment arrangements for publiccompanies. SAB 107 also highlights the importance of disclosures made relatedto the accounting for share-based payment transactions.

On December 16, 2004, the Financial AccountingStandards Board (FASB) issued FASB Statement No. 123 (revised 2004),Share-Based Payment, which is a revision of FASB Statement No. 123,Accounting for Stock-Based Compensation. Statement 123(R) supersedes APBOpinion No. 25, Accounting for Stock Issued to Employees, and amends FASBStatement No. 95, Statement of Cash Flows. Generally, the approach inStatement 123(R) is similar to the approach described in Statement 123.However, Statement 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure will nolonger be an alternative. In April 2005, the Securities and ExchangeCommission announced the adoption of a new rule that amends the effectivedate of FAS 123(R). The effective date of the new standard under these new rules forour consolidated financial statements is January 1, 2006.

As permitted by Statement123, we account for share-based payments to employees using the intrinsic valuemethod and, as such, generally recognize no compensation cost for employeestock options through the year ended December 31, 2005. Accordingly, theadoption of Statement 123(R)’s fair value method will have a material impact onour results of operations. The actual impact will depend on levels and terms offuture share-based payments granted, as well as other variables. The adoptionof Statement 123(R)’s fair value method will have no impact on our overallfinancial position. However, had we adopted Statement 123(R) in priorperiods, the impact of that standard would have approximated the impact ofStatement 123 as described in the disclosure of pro forma net income (loss) andnet income (loss) per share in Note 5 to our condensed consolidated financialstatements.

**5.**   STOCK-BASEDCOMPENSATION

At December 31, 2005, Ultratech had severalstock-based employee compensation plans, which are described more fully in Note12. We account for these plans under the intrinsic value method because, asdiscussed below, the fair value accounting method requires use of optionvaluation models that were not developed for use in valuing employee stockoptions. Under the intrinsic value method no stock-based employee compensationcost is reflected in net income, as all options granted under those plans hadan exercise price equal to the market value of the underlying common stock onthe date of grant.

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Pro forma information regarding net income (loss) andnet income (loss) per share is required as if we had accounted for our employeestock options (including purchase rights issued under the Employee StockPurchase Plan) under the fair value method. The Black-Scholes option valuationmodel was developed for use in estimating the fair value of traded options thathave no vesting restrictions and are fully transferable. In addition, optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility. Because our employee stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of our employeestock options.

Thefollowing table illustrates the effect on net income and earnings per share ifwe had applied the fair value recognition method to account for stock-basedemployee compensation.

| ** **                                                                                                                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands, except per share amounts**                                                                     | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)  as reported                                                                                                          |       | $                                           | (2,343     | ) | $ | 624 |   | $ | 7,566 |   |
| Total stock-based  employee compensation expense, determined  under fair value based method for all awards, net of related tax  effects |       | $                                           | (10,045    | ) | $ | (25,294 | ) | $ | (9,570 | ) |
| Pro forma net  loss                                                                                                                     |       | $                                           | (12,388    | ) | $ | (24,670 | ) | $ | (2,004 | ) |
| Net income (loss)  per share—basic, as reported                                                                                    |       | $                                           | (0.10      | ) | $ | 0.03 |   | $ | 0.33 |   |
| Pro forma net  loss per share—basic                                                                                                |       | $                                           | (0.52      | ) | $ | (1.06 | ) | $ | (0.09 | ) |
| Net income (loss)  per share—diluted, as reported                                                                                  |       | $                                           | (0.10      | ) | $ | 0.03 |   | $ | 0.31 |   |
| Pro forma net loss per  share—diluted                                                                                              |       | $                                           | (0.52      | ) | $ | (1.06 | ) | $ | (0.09 | ) |
|                                                                                                                                         |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

Included in the fair value stock-based employeecompensation expense above for 2004, was $16.2 million resulting from theacceleration of vesting of options to purchase approximately 2.3 million sharesof common stock for all optionees, except for non-employee members of the Boardof Directors, whose exercise price, which ranges from $13.36 to $31.38 pershare, exceeded the market price of our stock on the respective dates ofacceleration, June 25 , 2004 and July 19, 2004. We have neverrepriced stock options, thus, the exercise prices for the stock optionsaccelerated were unchanged. These unvested “underwater” options, in ouropinion, represented negligible value in retaining or motivating our employees.We believe, however, that fully vesting these options favorably motivates ouremployees to continue with our company and to work to increase stockholdervalue. Further, fully vesting these options also eliminates the need torecognize remaining unrecognized non-cash compensation expense in futureperiods in the Company’s statement of operations upon the adoption of FinancialAccounting Standards Board Statement of Financial Accounting Standards No. 123(Revised 2004), Share-Based Payment (“SFAS 123R”). As the exercise price of allthe stock options affected was greater than their fair market price on the dateof vesting acceleration, there was no impact, under the intrinsic value method,on our consolidated statements of operations.

Thetable above used the following weighted-average assumptions to estimate thefair value of stock options at the date of grant using the Black-Scholesoption-pricing model.

| ** **                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected life (in  years): stock options                |       | 4.1      |       | 2.2      |       | 3.5      |       |
| Expected life (in  years): Employee Stock Purchase Plan |       | N/A      |       | 0.50     |       | 1.25     |       |
| Risk-free  interest rate                                |       | 3.90     | %          | 2.54     | %          | 2.48     | %          |
| Volatility factor                                       |       | 0.51     |       | 0.60     |       | 0.71     |       |
| Dividend yield                                          |       | 0        | %          | 0        | %          | 0        | %          |

 

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The 2004 information inthe table above reflects the termination of our Employee Stock Purchase Plan inJuly 2004 and the impact of the acceleration of vesting of underwaterstock options discussed previously. The weighted-average expected life of stockoptions is computed assuming a multiple-point approach for each grant basedupon either annual average vesting periods or the dates that resalerestrictions are removed, depending upon the specific terms of the grant beingmeasured. The weighted-average fair value per share of stock optionsgranted during 2005, 2004 and 2003 was $7.13, $5.90 and $8.82, respectively.

The weighted average fair value of purchase rights grantedunder our Employee Stock Purchase Plan during 2004 and 2003 was $8.21 and$5.00, respectively.

For purposes of pro formadisclosures, the estimated fair value of options granted is amortized toexpense over the stock options’ vesting period and the Employee Stock PurchasePlan’s six month purchase period. Certain stock option grants are divided intoannual vesting periods, resulting in the recognition of approximately 50% ofthe total compensation expense of the grant in the first year. Other stock optionsgrants, primarily grants with cliff vesting terms, were amortized into expenseson a straight-line basis from grant date to vesting date. Additionally, thepotential tax benefit associated with the issuance of incentive stock optionsis not reflected until realized upon the disqualifying disposition of theshares.

**6.**   BASICAND DILUTED NET INCOME (LOSS) PER SHARE

Thefollowing sets forth the computation of basic and diluted net income (loss) pershare:

| ** **                                                                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands, except per share amounts**       | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator:                                                                |       |                                        |       |   |   |   |   |
| Income (loss)  before cumulative effect of change in accounting principle |       | $                                           | (1,221     | ) | $ | 624 |   | $ | 7,566 |   |
| Cumulative effect  of the adoption of FIN 47                              |       | (1,122                                      | )          | — |   | — |   |
| Net income (loss)                                                         |       | $                                           | (2,343     | ) | $ | 624 |   | $ | 7,566 |   |
| Denominator:                                                              |       |                                        |       |   |   |   |   |
| Denominator for net income (loss) per share—basic                    |       | 23,964                                      |       | 23,733 |   | 23,017 |   |
| Effect of dilutive Employee Stock Options                                 |       | —                                      |       | 1,001 |   | 1,459 |   |
| Denominator for net income (loss) per share—diluted                  |       | 23,964                                      |       | 24,734 |   | 24,476 |   |
| Net income (loss) per  share—basic                                   |       |                                        |       |   |   |   |   |
| Income (loss)  before cumulative effect of change in accounting principle |       | $                                           | 0.05       |   | $ | 0.03 |   | $ | 0.33 |   |
| Cumulative effect  of the adoption of FIN 47                              |       | $                                           | (0.05      | ) | $ | — |   | $ | — |   |
| Net income (loss)                                                         |       | $                                           | (0.10      | ) | $ | 0.03 |   | $ | 0.33 |   |
| Net income (loss) per  share—diluted                                 |       |                                        |       |   |   |   |   |
| Income (loss)  before cumulative effect of change in accounting principle |       | $                                           | (0.05      | ) | $ | 0.03 |   | $ | 0.31 |   |
| Cumulative effect  of the adoption of FIN 47                              |       | $                                           | (0.05      | ) | $ | — |   | $ | — |   |
| Net income (loss)                                                         |       | $                                           | (0.10      | ) | $ | 0.03 |   | $ | 0.31 |   |
|                                                                           |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

For the year ended December 31,2005, options to purchase 6,443,948 shares of Common Stock at an averageexercise price of $17.71 were excluded from the computation of diluted net lossper share as the effect would have been anti-dilutive. This compares to theexclusion of 2,245,000 options at an average exercise price of $25.25 for theyear ended December 31, 2004 and 1,127,000 options at an average exerciseprice of $25.26 for the year ended December 31, 2003. Options areanti-dilutive when we have a net loss or when the exercise price of the stockoption is greater than the average market price of our Common Stock.

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**7.**   ACCUMULATEDOTHER COMPREHENSIVE INCOME (LOSS)

Comprehensiveincome (loss), as presented on the Consolidated Statements of Stockholder’sEquity, includes net income (loss) and other comprehensive income (loss).Accumulated other comprehensive income (loss) is comprised of the followingitems, net of tax:

| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| **In thousands:**                               | ** ** | ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Unrealized gains  (losses) on:                       |       |                  |       |   |   |
| Available-for-sale  investments                      |       | $                     | (1,200     | ) | $ | (194 | ) |
| Foreign exchange  contracts                          |       | 314                   |       | (295 | ) |
| Accumulated other  comprehensive loss at end of year |       | $                     | (886       | ) | $ | (489 | ) |
|                                                      |            |                       |            |  |  |  |  |  |  |

 

The amount of gain (loss)on foreign exchange contracts reclassified to earnings was ($247,000),($655,000) and ($248,000) in 2005, 2004 and 2003, respectively. The amount ofloss on available-for-sale investments reclassified to earnings was immaterialin each year of the three-year period ended December 31, 2005.

**8.   INVESTMENTS**

We classified all of ourinvestments as “available for sale” as of December 31, 2005 and 2004.Accordingly, we state our investments at estimated fair value. Fair values aredetermined based on quoted market prices or pricing models using current marketrates. We deem all investments to be available to meet current working capitalrequirements.

The following is a summary of our investments:

| ** **                                                            | ** ** | **December 31, 2005** | ** ** | **December 31, 2004**       | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|
| **Cash equivalents and Available-for-sale**            | ** ** | **Amortized**                   | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Estimated** | ** ** | **Amortized** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Estimated** | ** ** |
| **Short-term investments, in thousands:**              | ** ** | ** **                      | ** ** | **Cost**                              | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| U.S. Treasury securities and obligations of U.S.  government agencies |       |                            | $          | 70,831                                |       |   |   | $ | — |   |   |   | $ | 839 |   |   |   | $ | 69,992 |   |   |   | $ | 52,613 |   |   |   | $ | 28 |   |   |   | $ | 140 |   |   |   | $ | 52,501 |   |   |
| Obligations of states and political subdivisions                      |       |                            | —     |                                  |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 4,007 |   |   |   | — |   |   |   | — |   |   |   | 4,007 |   |   |
| U.S. corporate debt securities                                        |       |                            | 68,175     |                                  |       |   | 6 |   |   |   | 367 |   |   |   | 67,814 |   |   |   | 90,982 |   |   |   | 111 |   |   |   | 192 |   |   |   | 90,901 |   |   |
|                                                                  |       |                            | $          | 139,006                               |       |   |   | $ | 6 |   |   |   | $ | 1,206 |   |   |   | $ | 137,806 |   |   |   | $ | 147,602 |   |   |   | $ | 139 |   |   |   | $ | 332 |   |   |   | $ | 147,409 |   |   |
|                                                                       |            |                                 |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing is a reconciliation of our investments to the balance sheetclassifications at December 31:

| **In thousands**                 | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Cash equivalents                      |       | $          | 33,083     |     | $          | 43,767   |       |
| Short-term  investments               |       | 104,723    |       | 103,642  |       |
| Investments, at  estimated fair value |       | $          | 137,806    |     | $          | 147,409  |       |

 

Gross realized gains and losses on sales ofinvestments were not material in each of the three-years ended December 31,2005.

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Thegross amortized cost and estimated fair value of our investments at December 31,2005, by contractual maturity, are shown below. Expected maturities will differfrom contractual maturities because the issuers of the securities may have theright to prepay obligations without prepayment penalties.

| ** **                             | ** ** | **Gross**     | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------|------------|------------|------------|
| ** **                             | ** ** | **Amortized** | ** ** | **Fair**   | ** ** |
| **In thousands**                  | ** ** | ** **    | ** ** | **Cost**   | ** ** | **Value** | ** ** |
| Due in one year  or less               |       | $             | 74,702     |       | $          | 74,406 |   |
| Due after one  year through five years |       | 64,304        |       | 63,400     |       |
|                                   |       | $             | 139,006    |       | $          | 137,806 |   |
|                                        |            |               |            |            |            |  |  |  |  |

 

Thefollowing table provides the breakdown of the cash equivalents and short-terminvestments with unrealized losses at December 31, 2005:

| ** **                                                                 | ** ** | **In Loss Position for  Less Than 12 Months** | ** ** | **In Loss Position for  More Than 12 Months** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                 | ** ** | ** **                                                                  | ** ** | **Gross**                                                                   | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                                                                 | ** ** | **Fair**                                                                    | ** ** | **Unrealized**                                                              | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **Short-term investments, in thousands**                    | ** ** | ** **                                                                  | ** ** | **Value**                                                                   | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| U.S. Treasury  securities and obligations of U.S. government agencies |       | $                                                                           | 55,648     |                                                                        |       | $          | 678        |   |   | $ | 14,344 |   |   | $ | 161 |   |   | $ | 69,992 |   |   | $ | 839 |   |   |
| U.S. corporate  debt securities                                            |       | 15,443                                                                      |       |                                                                        | 179        |       |       | 15,914 |   |   | 188 |   |   | 31,357 |   |   | 367 |   |   |
|                                                                       |       | $                                                                           | 71,091     |                                                                        |       | $          | 857        |   |   | $ | 30,258 |   |   | $ | 349 |   |   | $ | 101,349 |   |   | $ | 1,206 |   |   |
|                                                                            |            |                                                                             |            |                                                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We review our investmentportfolio monthly to identify and evaluate investments that have indications ofpossible impairment. Factors considered in determining whether a loss istemporary include credit quality and our ability and intent to hold theinvestment for a period of time sufficient to allow for any anticipatedrecovery in market value. If the credit quality of the investment does not meetthe credit quality requirements of our investment policy, we will also consideradditional factors such as the length of time and extent to which fair valuehas been less than the cost basis and the financial condition and near-termprospects of the investee. The gross unrealized losses associated with our cashequivalents and short-term investments were primarily caused by an increase ininterest rates during 2005. We have determined that the gross unrealized losseson our cash equivalents and short-term investments at December 31, 2005are temporary in nature because each investment meets the credit qualityrequirements of our investment policy.

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**9.**   BALANCESHEET DETAIL

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                            | ** ** | ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Inventories:                                     |       |                  |       |   |   |
| Raw materials                                    |       | $                     | 10,873     |   | $ | 11,362 |   |
| Work-in-process                                  |       | 8,322                 |       | 13,347 |   |
| Finished products                                |       | 9,774                 |       | 3,133 |   |
| Total                                            |       | $                     | 28,969     |   | $ | 27,842 |   |
| Equipment and leasehold  improvements, net:      |       |                  |       |   |   |
| Machinery and equipment                          |       | $                     | 45,421     |   | $ | 39,502 |   |
| Leasehold Improvements                           |       | 8,591                 |       | 7,046 |   |
| Office equipment and furniture                   |       | 14,543                |       | 14,279 |   |
|                                             |       | $                     | 68,555     |   | $ | 60,827 |   |
| Accumulated depreciation and amortization        |       | (43,438               | )          | (38,835 | ) |
| Total                                            |       | $                     | 25,117     |   | $ | 21,992 |   |
| Accrued expenses:                                |       |                  |       |   |   |
| Salaries and benefits                            |       | $                     | 3,723      |   | $ | 2,360 |   |
| Warranty accrual                                 |       | 2,397                 |       | 2,013 |   |
| Accrued taxes-other                              |       | 1,542                 |       | — |   |
| Reserve for losses on purchase order commitments |       | 406                   |       | 1,090 |   |
| Other                                            |       | 1,202                 |       | 2,237 |   |
| Total                                            |       | $                     | 9,270      |   | $ | 7,700 |   |
| Other Liabilities:                               |       |                  |       |   |   |
| Deferred compensation                            |       | $                     | 1,932      |   | $ | 1,572 |   |
| Asset retirement obligations                     |       | 2,064                 |       | — |   |
| Other                                            |       | 652                   |       | 472 |   |
|                                             |       | $                     | 4,648      |   | $ | 2,044 |   |
|                                                  |            |                       |            |  |  |  |  |  |  |

 

***Warranty Accrual***

We generally warrant our products for a period of 12months for new products, or 3 months for refurbished products, from the date ofcustomer acceptance for material and labor to repair the product; accordingly,an accrual for the estimated cost of the warranty is recorded at the time theproduct is shipped. Extended warranty terms, if granted, result in deferral ofrevenue equating to our standard pricing for similar service contracts.Recognition of the related warranty cost is deferred until product revenue isrecognized. Factors that affect our warranty liability include the number ofinstalled units, historical and anticipated rates of warranty claims, and costper claim. We periodically assess the adequacy of our recorded warrantyliabilities and adjust the amounts as necessary.

Changesin our product liability are as follows:

| ** **                                                                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                                                                       | ** ** | ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance,  beginning of the period                                                           |       | $                     | 2,013      |   | $ | 1,257 |   |
| Warranties issued  during the period                                                        |       | 3,444                 |       | 3,979 |   |
| Settlements  during the period                                                              |       | (3,519                | )          | (3,298 | ) |
| Changes in  liability for pre-existing warranties during the period, including  expirations |       | 459                   |       | 75 |   |
| Balance, end of the  period                                                                 |       | $                     | 2,397      |   | $ | 2,013 |   |
|                                                                                             |            |                       |            |  |  |  |  |  |  |

 

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***Deferred Service Income***

We sell service contracts for which revenue isdeferred and recognized ratably over the contract period, for time basedservice contracts, or as service hours are delivered, for contracts based on apurchased quantity of hours. Changes in our deferred service revenue are asfollows:

 

| ** **                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                                  | ** ** | ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance,  beginning of the period                      |       | $                     | 1,332      |   | $ | 821 |   |
| Service contracts  sold during the period              |       | 9,124                 |       | 8,672 |   |
| Service contract  revenue recognized during the period |       | (8,486                | )          | (8,161 | ) |
| Balance, end of the  period                            |       | $                     | 1,970      |   | $ | 1,332 |   |
|                                                        |            |                       |            |  |  |  |  |  |  |

 

**10.**   NOTES PAYABLE

In December 2004, weentered into a line of credit agreement with a brokerage firm. Under the termsof this agreement, we may borrow funds at a cost equal to the current Federalfunds rate plus 100 basis points (5.25% as of December 31, 2005). Certainof our cash, cash equivalents and short-term investments secure borrowingsoutstanding under this facility. Funds are advanced to us under this facilitybased on pre-determined advance rates on the cash and securities held by us inthis brokerage account. This agreement has no set expiration date and there areno loan covenants, other than the aforementioned collateral requirement. As of December 31,2005, $4.3 million was outstanding under this facility, with a relatedcollateral requirement of approximately $5.7 million of our cash, cashequivalents and short-term investments. As of December 31, 2004, $7.9million was outstanding under a similar facility, with a related collateralrequirement of approximately $10.5 million of our cash, cash equivalents andshort-term investments.

**11.**   RESTRUCTURE OFOPERATIONS

In September 2001, Ultratech reached a decisionto consolidate our manufacturing operations. In connection with this decision,we reached a settlement with the landlord of our Wilmington, Massachusettsfacility in October 2003. As a result of this settlement, we recognized acredit to operations of $0.6 million.

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**12.**   STOCKHOLDERS’EQUITY

***1993 Stock Option Plan/Stock Issuance Plan***

Under Ultratech’s 1993Stock Option Plan/Stock Issuance Plan, as amended, qualified employees,non-employee Board members and consultants may receive options to purchaseshares of Common Stock at no less than 100% of fair value at the grant date.These options historically have vested in equal monthly installments over aperiod of approximately four years, with a minimum vesting period of twelvemonths from the grant date, and generally expire ten years from the date ofgrant. In 2005 and 2004, certain options were granted with no vestingrequirements and others were granted with non-standard vesting periods thatprovided full vesting as of December 31, 2005 and 2004. Some of theseoption grants contain sales restrictions and some of these restrictionprovisions were linked to performance targets. In 2003, certain options weregranted with non-standard vesting periods that provided for full vesting asearly as twelve months from date of grant if certain performance targets weremet, and deferred any vesting until fifty months from the date of grant ifperformance targets were not met. In 2003, we also granted options to certainexecutives that call for acceleration of vesting and extension of the earlytermination provisions should certain events occur. The plan terminates on theearlier of February 28, 2011 or the date on which all shares available forissuance under the plan have been issued. The plan contains an automatic shareincrease feature pursuant to which the share reserve will automaticallyincrease on the first trading day in January of each calendar year,through 2006, by an amount equal to four percent (4%) of the total number ofshares of Common Stock outstanding on the last trading day in December ofthe immediately preceding calendar year, but in no event would such annualincrease exceed 1.7 million shares, subject to adjustment in the event ofcertain changes to our capital structure. Under the plan, approximately131,000, 56,000, and 171,000 options were available for issuance at December 31,2005, 2004 and 2003, respectively.

***1998 Supplemental Stock Option/Stock Issuance Plan***

Under our 1998 Supplemental Stock Option/StockIssuance Plan, as amended, qualified employees may receive options to purchaseshares of Common Stock at 100% or above of fair value at certain specifieddates. These options generally vest in equal monthly installments over a periodof approximately four years, with a minimum vesting period of twelve months fromgrant date, and generally expire ten years from date of grant. The plan willterminate on the earlier of October 19, 2008, or the date on which allshares available for issuance under the plan have been issued. Under the plan,approximately 43,000, 16,000, and 18,000 options were available for issuance atDecember 31, 2005, 2004 and 2003, respectively.

Asummary of our stock option activity, and related information follows:

| ** **                       | ** ** | **2005**    | ** ** | **2004**                | ** ** | **2003**    | ** ** |
|----------------------------------|------------|-------------|------------|-------------------------|------------|-------------|------------|
| ** **                       | ** ** | ** **  | ** ** | **Weighted-  Average**  | ** ** | ** **  | ** ** | **Weighted-  Average** | ** ** | ** ** | ** ** | **Weighted-  Average** | ** ** |
| ** **                       | ** ** | **Options** | ** ** | **Exercise Price** | ** ** | **Options** | ** ** | **Exercise Price** | ** ** | **Options** | ** ** | **Exercise Price** | ** ** |
| Outstanding at  January 1   |       | 6,128,142   |       |                    | $          | 18.22       |       |   | 5,200,824 |   |   | $ | 17.11 |   |   | 4,505,397 |   |   | $ | 16.40 |   |   |
| Granted                          |       | 1,388,500   |       |                    | $          | 16.17       |       |   | 1,213,500 |   |   | $ | 22.32 |   |   | 1,656,500 |   |   | $ | 17.19 |   |   |
| Exercised                        |       | (539,286    | )          |                    | $          | 13.86       |       |   | (120,390 | ) |   | $ | 13.62 |   |   | (827,026 | ) |   | $ | 13.08 |   |   |
| Forfeited                        |       | (435,408    | )          |                    | $          | 21.43       |       |   | (143,642 | ) |   | $ | 16.84 |   |   | (134,047 | ) |   | $ | 18.94 |   |   |
| Expired                          |       | (98,000     | )          |                    | $          | 32.22       |       |   | (22,150 | ) |   | $ | 17.85 |   |   | — |   |   | — |   |   |
| Outstanding at  December 31 |       | 6,443,948   |       |                    | $          | 17.71       |       |   | 6,128,142 |   |   | $ | 18.22 |   |   | 5,200,824 |   |   | $ | 17.11 |   |   |

 

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At December 31,2005, options outstanding were as follows:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                          | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Options**                  | ** ** | **Weighted-  Average  Remaining Contractual  Life (Years)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $  8.4100  - $13.6700             |       | 1,206,542                    |       |                                                                  | 6.08       |   |   |   | $ | 12.13 |   |   | 966,133 |   |   | $ | 12.33 |   |   |
| $13.8100 - $14.1200                         |       | 1,296,809                    |       |                                                                  | 7.05       |   |   |   | $ | 14.01 |   |   | 1,236,809 |   |   | $ | 14.00 |   |   |
| $14.2500 - $16.0100                         |       | 1,120,322                    |       |                                                                  | 7.84       |   |   |   | $ | 15.22 |   |   | 752,822 |   |   | $ | 15.31 |   |   |
| $16.1600 - $20.1000                         |       | 1,116,655                    |       |                                                                  | 6.98       |   |   |   | $ | 18.30 |   |   | 652,405 |   |   | $ | 18.46 |   |   |
| $21.8300 - $27.8200                         |       | 1,082,420                    |       |                                                                  | 6.59       |   |   |   | $ | 23.48 |   |   | 1,069,920 |   |   | $ | 23.49 |   |   |
| $28.7500 - $31.3750                         |       | 621,200                      |       |                                                                  | 7.46       |   |   |   | $ | 29.67 |   |   | 621,200 |   |   | $ | 29.67 |   |   |
| $  8.4100 -  $31.3750             |       | 6,443,948                    |       |                                                                  | 6.96       |   |   |   | $ | 17.71 |   |   | 5,299,289 |   |   | $ | 18.18 |   |   |

 

***Employee Stock Purchase Plan***

Under the provisions ofour Employee Stock Purchase Plan, virtually all employees could purchase CommonStock through payroll deductions at 85% of the lower of the fair market valueof the Common Stock on the first or last day of the offering period. In February 2001,we commenced a plan that allows twenty-four month offering periods withsemi-annual purchase dates. In July 2004, we terminated the Employee StockPurchase Plan.

***Treasury Stock***

On September 19,2005, the Company’s Board of Directors authorized the repurchase of up to $30million of its common stock in the open market at then prevailing market pricesduring the period commencing September 19, 2005 through September 30,2007. As of December 31, 2005, the Company had repurchased 644,535 sharesof its common stock for a total of $9.2 million.

***Shareholder Rights Plan***

Our Shareholder Rights Plan provides that PreferredShare Purchase Rights (“Rights”) are attached at the rate of one Right on eachoutstanding share of our Common Stock held by stockholders. These rights expireon February 9, 2007.

The Rights will be exercisable only if a person orgroup acquires 15% or more of our Common Stock or announces a tender offer theconsummation of which would result in ownership by a person or group of 15% ormore of our Common Stock. Each Right will entitle stockholders to buy oneone-hundredth of a share of a new series of Junior Participating PreferredStock at an exercise price of $145.00 upon certain events.

The Rights are redeemable, in whole but not in part,at the option of the Board of Directors at $.01 per Right, at any time within10 days of the date they become exercisable and in certain other circumstancesand will not become exercisable in certain instances where our Board ofDirectors approves a transaction. The Rights will not prevent a takeover ofUltratech, but are designed to encourage anyone seeking to acquire us tonegotiate with our Board of Directors.

Shares reserved forissuance under the plan were 350,000 at December 31, 2005.

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**13.**   EMPLOYEE BENEFITPLANS

***Employee bonus plans***

We currently sponsor aprofit sharing plan and an executive incentive bonus plan that distributeemployee awards based on the achievement of predetermined targets. We have notrecognized expense under these various employee bonus plans for 2005, 2004 and2003.

***Employee savings and retirement plans***

Ultratech sponsors a 401(k) employeesalary deferral plan that allows voluntary contributions by all full-timeemployees of from 1% to 20% of their pretax earnings. During the three yearsended December 31, 2005, company contributions made to this plan were$0.4, $0.0, and $0.0 million, respectively. These company contributionsgenerally become 20 percent vested at the end of an employee’s first year ofservice from the date of hire with the Company, and vest 20 percent per year ofservice thereafter until they become fully vested at the end of five years ofservice. We also sponsor an executive non-qualified deferred compensation plan(the “Plan”) that allows qualifying executives to defer current cashcompensation. At December 31, 2005, Plan assets, representing the cashsurrender value of life insurance policies held by us, and liabilities wereapproximately $2.0 million and $1.9 million, respectively, and are included inour consolidated balance sheets under the captions “other assets” and “otherliabilities.” In conjunction with this plan, we recognized $0.1, $0.1, and $0.0million of expense for the years ended December 31, 2005, 2004 and 2003,respectively.

***Postretirement benefits***

The Company has committedto providing lifetime post-retirement medical and dental benefits to the ChiefExecutive Officer and his spouse, commencing after his retirement. As of December 31,2005, the actuarial present value of these benefits has been estimated to be$475,000. The Company’s liabilities as of December 31, 2005 include$475,000 to cover this obligation. This obligation was measured using adiscount rate of 5.50% and future health care cost increases ranging from 14%in 2006 to 6% in 2014 and later years.

**14.**   INCOMETAXES

The domestic and foreign components of income (loss)before income taxes and cumulative adjustments are as follows:

| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| **In thousands**              | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Domestic                           |       | $                                           | (480       | ) | $ | (1,055 | ) | $ | 4,506 |   |
| Foreign                            |       | (42                                         | )          | 2,124 |   | 2,490 |   |
| Income (loss) before  income taxes |       | $                                           | (522       | ) | $ | 1,069 |   | $ | 6,996 |   |
|                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

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Thecomponents of the provision (benefit) for income taxes were as follows:

| ** **                            | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| **In thousands**                 | ** ** | ** **                                  | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **    2003    ** | ** ** |
| Federal:                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Current                               |       |                                        | $          | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Deferred                              |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |
|                                  |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |
| State:                                |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Current                               |       |                                        | 51         |   |   |   | 13 |   |   |   | (300 | ) |   |
| Deferred                              |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |
|                                  |       |                                        | 51         |   |   |   | 13 |   |   |   | (300 | ) |   |
| Foreign:                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Current                               |       |                                        | 691        |   |   |   | 162 |   |   |   | 289 |   |   |
| Deferred                              |       |                                        | (43        | ) |   |   | 270 |   |   |   | (559 | ) |   |
|                                  |       |                                        | 648        |   |   |   | 432 |   |   |   | (270 | ) |   |
| Total income tax  provision (benefit) |       |                                        | $          | 699 |   |   |   | $ | 445 |   |   |   | $ | (570 | ) |   |
|                                       |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thedifference between the provision (benefit) for income taxes and the amountcomputed by applying the U.S. federal statutory rate (35 percent) to income(loss) before income taxes is explained below:

| ** **                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands**                       | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Tax computed at  statutory rate             |       | $                                           | (183       | ) | $ | 374 |   | $ | 2,449 |   |
| State income  taxes, net of federal benefit |       | 33                                          |       | 8 |   | (300 | ) |
| Foreign taxes                               |       | 663                                         |       | (311 | ) | (1,142 | ) |
| U.S. losses not  benefited                  |       | 186                                         |       | 374 |   | (1,577 | ) |
| Income tax provision  (benefit)             |       | $                                           | 699        |   | $ | 445 |   | $ | (570 | ) |
|                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

Significantcomponents of deferred income tax assets and liabilities are as follows:

| **In thousands**                       | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                       |       |       |       |     |       |     |       |
| Net operating loss carryforwards            |       | $          | 39,941     |     | $          | 39,119   |       | $        | 36,278     |   |
| Inventory valuation                         |       | 3,123      |       | 3,022    |       | 3,796    |       |
| Bad debt reserve                            |       | 223        |       | 92       |       | 56       |       |
| Basis difference in assets                  |       | 4,334      |       | 5,186    |       | 5,662    |       |
| Tax credit carryforwards                    |       | 25,428     |       | 24,328   |       | 15,161   |       |
| Warranty reserves                           |       | 926        |       | 781      |       | 484      |       |
| Deferred license income                     |       | —     |       | 404      |       | 1,837    |       |
| Deferred product and services income        |       | 753        |       | 361      |       | 390      |       |
| Other non-deductible accruals and reserves  |       | 5,916      |       | 4,316    |       | 4,377    |       |
| Total deferred  tax assets                  |       | 80,644     |       | 77,609   |       | 68,041   |       |
| Valuation  allowance                        |       | (74,034    | )          | (72,944  | )          | (67,482  | )          |
| Net deferred tax  assets                    |       | 6,610      |       | 4,665    |       | 559      |       |
| Deferred tax  liabilities:                  |       |       |       |     |       |     |       |
| Unremitted earnings of foreign subsidiaries |       | $          | (6,170     | )        | $          | (4,376   | )          | $        | —     |   |
| Other                                       |       | (109       | )          | —   |       | —   |       |
| Total deferred  tax liabilities             |       | (6,279     | )          | (4,376   | )          | —   |       |
| Net deferred tax assets                     |       | $          | 331        |     | $          | 289      |       | $        | 559        |   |

 

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Based upon the weight of available evidence, whichincludes our historical operating performance and carry back potential, we havedetermined that a valuation allowance continues to be necessary for all taxjurisdictions, except Japan.

The net valuation allowance increased by $1.1, $5.5and $3.5 million during the years ended December 31, 2005, 2004 and 2003,respectively. Approximately $13.3 million of the valuation allowance as of December 31,2005 is attributable to stock options, the benefit of which will be credited topaid-in capital when realized.

As of December 31, 2005, we had net operatingloss carryforwards for federal and state tax purposes of $107 million and $45million, respectively. We also had federal research and development tax creditcarryforwards of approximately $9.2 million. The federal and state netoperating loss carryforwards will expire at various dates beginning in 2006through 2025, if not utilized. The federal tax credit carryforwards will expireat various dates beginning in 2011 through 2025, if not utilized.

Utilization of our netoperating loss and tax credits carryforwards may be subject to substantialannual limitation due to the ownership change limitations provided by theInternal Revenue Code and similar state provisions. Such an annual limitationcould result in the expiration of the net operating losses and credits beforeutilization.

**15.**   COMMITMENTS ANDCONTINGENCIES

Welease our facilities, and certain equipment under operating leases expiringthrough December 2015. Certain of our leasing arrangements subject us toletter of credit requirements. The leases for our headquarters and manufacturingoperations contain a five-year renewal option subject to a fair market valuepricing adjustment. As of December 31, 2005, the minimum annual rentalcommitments are as follows:

| ** ** | ** ** | **in thousands** | ** ** |
|------------|------------|-----------------------|------------|
| 2006       |       |                  | $          | 4,787 |   |   |
| 2007       |       |                  | 4,639      |   |   |
| 2008       |       |                  | 4,759      |   |   |
| 2009       |       |                  | 4,528      |   |   |
| 2010       |       |                  | 2,891      |   |   |
| Thereafter |       |                  | 423        |   |   |
|       |       |                  | $          | 22,027 |   |   |

 

Rent expense was approximately $4.2 million, $4.2million and $4.8 million for the years ended December 31, 2005, 2004 and2003, respectively.

Under terms of certain of our leases, we are obligatedto provide a $2.0 million bank letter of credit as security to the landlord.

On February 29, 2000, we filedlawsuits asserting patent infringement and related claims against Nikon, Canon,and ASML in the U.S. District Court for the Eastern District of Virginia. InApril 2000, we reached a settlement with Nikon, and in September 2001, wereached a settlement with Canon. In the patent litigation against ASML, a jurytrial was conducted during the three-month period ended July 2, 2005. The jury reacheda verdict that the patent was infringed, but that the asserted claims of thepatent were invalid. We filed a post-trial motion for a new trial and forjudgment as a matter of law in our favor. ASML also filed a motion for judgmentas a matter of law seeking to invalidate three of the asserted claims for lackof enablement and requested that the court awards costs. On February 13th, 2006,the Court denied our post-trial motions, including the motion for a new trial,and entered judgment in favor of 

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ASMLinvalidating three claims of the patent for lack of enablement. The Court also awardedASML approximately $330,000 in costs. Ultratech intends to appeal the finaljudgment.

On July 11, 2003, wefiled a lawsuit against a Southern California company asserting infringement ofcertain claims related to U.S. patent No. 5,621,813 in the U.S. DistrictCourt in and for the Northern District of California. On May 17, 2005, thecourt found the subject patent to be invalid. We have appealed this decisionand that appeal is pending. The defendant subsequently brought a motion forreimbursement of its attorneys’ fees and costs in a total asserted amount ofapproximately $2 million. We opposed this motion, and on October 12, 2005,the District Court denied the defendant’s request for attorneys’ fees in itsentirety. On November 3, 2005, the defendant filed a notice of appeal withrespect to the court’s ruling on its motion for attorneys’ fees.

**16.**   FINANCIALGUARANTEES

Our off-balance sheet transactions consist of certainfinancial guarantees, both express and implied, related to indemnification forproduct liability, patent infringement and latent product defects. Other thanliabilities recorded pursuant to known product defects, at December 31,2005, we did not record a liability associated with these guarantees, as wehave little or no history of costs associated with such indemnificationrequirements. Contingent liabilities associated with product liability may bemitigated by insurance coverage we maintain.

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**REPORT OF ERNST & YOUNG LLP, INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

To The Board Of Directors and Stockholders OfUltratech, Inc.

We have audited the accompanying consolidated balancesheets of Ultratech, Inc. as of December 31, 2005 and 2004, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2005.Our audits also included the financial statement schedule listed in the indexat Item 15(a). These financial statements and schedule are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements and schedule based on our audits.

We conducted our audits in accordance with standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Ultratech, Inc. at December 31, 2005 and 2004, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2005, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

As discussed in Note 4 to the consolidated financialstatements, during 2005, the Company changed its method of accounting for assetretirement obligations.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Ultratech, Inc.’sinternal control over financial reporting as of December 31, 2005, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated March 3, 2006 expressed an unqualified opinion thereon.
|                        | /s/ ERNST &  YOUNG LLP |
|------------------------|---------------------------------|
| Palo Alto,  California |                            |
| March 3,  2006    |                            |

 

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**REPORT OF ERNST & YOUNG LLP, INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Stockholders of Ultratech, Inc.

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Ultratech, Inc. maintained effective internal control overfinancial reporting as of December 31, 2005, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Ultratech, Inc.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the company’sinternal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Ultratech, Inc.maintained effective internal control over financial reporting as of December 31,2005, is fairly stated, in all material respects, based on the COSO criteria.Also, in our opinion, Ultratech, Inc. maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2005, based on****the COSO criteria**.**

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofUltratech, Inc. as of December 31, 2005 and 2004, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2005 of Ultratech, Inc.and our report dated March 3, 2006 expressed an unqualified opinionthereon.

|  | /s/ ERNST &  YOUNG LLP |
|--|--------------------------------------|

Palo Alto, CaliforniaMarch 3, 2006

 

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***ITEM 9.******  *CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

Not applicable.

***ITEM 9A.******  *CONTROLS AND PROCEDURES**

**Controls and Procedures**

We conducted an evaluation of the effectiveness of thedesign and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”), as of the end of the period covered by this report (the “EvaluationDate”). Based upon the evaluation, our principal executive officer andprincipal financial officer concluded as of the Evaluation Date that ourdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by us in reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms.

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms. Disclosure controlsand procedures include, without limitation, controls and procedures designed toensure that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is accumulated and communicated to managementto allow timely decisions regarding required disclosure. In designing andevaluating the disclosure controls and procedures, our management recognizesthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives.Management is further required to apply judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

**Management’sReport on Internal Control Over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in rules 13a-15(f) underthe Securities Exchange Act of 1934. Our internal control over financialreporting is designed to provide reasonable assurance to our management andboard of directors regarding the preparation and fair presentation of publishedfinancial statements. Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and presentation.

Management, including our principal executive officerand principal financial officer, assessed the effectiveness of our internalcontrol over financial reporting as of December 31, 2005. In making thisassessment, management used the criteria set forth by the committee ofSponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework*. Based on thisassessment, our management has concluded that, as of December 31, 2005,our internal control over financial reporting is effective based on thosecriteria.

Management’s assessment ofthe effectiveness of internal control over financial reporting as of December 31,2005, has been audited by Ernst & Young, LLP, the independentregistered public accounting firm who also audited our consolidated financialstatements. Ernst & Young’s attestation report on management’sassessment of our internal control over financial reporting appears elsewhereherein.

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**Changesin Internal Control Over Financial Reporting**

There were no changes inour internal controls over financial reporting during the quarter ended December 31,2005 that have materially affected, or are reasonably likely to materiallyaffect our internal controls over financial reporting.

**ITEM 9B.*****  ****OTHER INFORMATION*

**None.**

**PART III**

Certain informationrequired by Part III is omitted from this Report in that the we will filea definitive proxy statement within 120 days after the end of its fiscal yearpursuant to Regulation 14A for its 2006 Annual Meeting of Stockholders to beheld  July 18, 2006 and the information included therein isincorporated herein by reference as set forth below.

***ITEM 10.******  *DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

The information concerningour directors required by this Item is incorporated by reference from the Itemcaptioned “Election of Directors” in our Proxy Statement for the 2006 AnnualMeeting of Stockholders (the “Proxy Statement”). The information required bythis Item relating to our executive officers is included under the caption “ExecutiveOfficers of the Registrant” in Part I of this Annual Report on Form 10-K.Other information required by this Item is incorporated herein by reference fromthe Item captioned “Section 16(a) Beneficial Ownership ReportingCompliance” in the Proxy Statement.

***ITEM 11.******  *EXECUTIVE COMPENSATION**

The information requiredby this Item is incorporated by reference from the Item captioned “ExecutiveCompensation” in the Proxy Statement.

**ITEM 12.****  ***SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS*

The information requiredby this Item is incorporated by reference from the Items captioned “Election ofDirectors,” “Ownership of Securities” and “Equity Compensation Information forPlans or Individual Arrangements with Employees and Non-Employees” in the ProxyStatement.

***ITEM 13.******  *CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

The information requiredby this Item is incorporated by reference from the item captioned “CertainRelationships and Related Transactions” in the Proxy Statement.

***ITEM 14.******  *PRINCIPAL ACCOUNTANT FEES AND SERVICES**

The information required by this Item is incorporatedby reference from the item captioned “Fees billed to Ultratech by Ernst &Young LLP during fiscal year 2005” in the Proxy Statement.

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**PART IV**

**ITEM 15.**   *EXHIBITS AND FINANCIAL STATEMENT SCHEDULES*

(a)           The following documentsare filed as part of this Report on Form 10-K

(1)         FinancialStatements

The financial statements (including the notes thereto)listed in the Index to Consolidated Financial Statement Schedule (set forth inItem 8 of Part II of this Form 10-K) are filed within this AnnualReport on Form 10-K.

(2)         FinancialStatement Schedules

Thefollowing consolidated financial statement schedule is included herein:

|                                                     | ** ** | **Page Number** |
|-----------------------------------------------------|------------|----------------------|
| Schedule  II Valuation and Qualifying Accounts |       | S-1                  |

 

Schedules other than those listed above have beenomitted since they are either not required, are not applicable, or the requiredinformation is shown in the financial statements or related notes.

(3)         Exhibits

The following exhibits arereferenced or included in this report:

| Exhibit   | ** ** | ** **                                                                                                                                                                                                                                                                 | ** ** | **Description** |
|-----------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1(10)   |       | Amended and Restated Certificate of Incorporation of  the Registrant, filed October 6, 1993.                                                                                                                                                                          |
| 3.1.1(10) |       | Certificate of Amendment  of the Amended and Restated Certificate of Incorporation of the Company,  dated May 17, 1995.                                                                                                                                               |
| 3.1.2(10) |       | Certificate of Amendment  of the Amended and Restated Certificate of Incorporation of the Registrant,  filed June 17, 1998.                                                                                                                                           |
| 3.1.3(10) |       | Certificate of Amendment  of the Amended and Restated Certificate of Incorporation of the Registrant,  filed June 20, 2003.                                                                                                                                           |
| 3.2(10)   |       | Bylaws of Registrant, as  amended.                                                                                                                                                                                                                                         |
| 4.5(1)    |       | Specimen Common Stock  Certificate of Registrant.                                                                                                                                                                                                                          |
| 4.6(3)    |       | Shareholder Rights  Agreement between Registrant and the First National Bank of Boston, filed on  February 11, 1997, as amended on March 18, 1998.                                                                                                               |
| 4.6.1(4)  |       | Second Amendment to  Shareholder Rights Agreement dated February 11, 1997 between Registrant  and BankBoston, N.A. (formerly known as the First National Bank of Boston) as  of October 12, 1998, and Certification of Compliance with  Section 27 thereof. |
| 10.1(13)  |       | 1993 Stock Option/Stock  Issuance Plan (Amended and Restated as of March 2, 2004).                                                                                                                                                                                    |
| 10.2(1)   |       | Form of  Indemnification Agreement entered into between the Registrant and each of its  officers and directors.                                                                                                                                                       |
| 10.3(8)   |       | Form of  Indemnification Agreement entered into between the Registrant and certain  officers.                                                                                                                                                                         |
| 10.4(1)   |       | Standard Industrial  Lease—Single Tenant, Full Net between The Equitable Life Assurance Society of  the United States, as Landlord, and Registrant, as Tenant, dated  August 27, 1993.                                                                           |
| 10.4.1(8) |       | First Amendment to Lease  between The Equitable Life Assurance Society of the United States, as  Landlord, and Registrant, as Tenant, dated November 1999.                                                                                                            |

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| 10.5(2)   |   | Profit Sharing Plan.                                                                                                                                                                                              |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6(6)   |   | 1998 Supplemental Stock  Option/ Stock Issuance Plan (Amended and Restated effective January 29,  2002).                                                                                                     |
| 10.7(15)  |   | Brokerage Line of Credit  Agreement with Morgan Stanley, dated December 16, 2004.                                                                                                                            |
| 10.8(5)   |   | Lease Agreement between  Montague LLC, As Landlord, and Registrant, As Tenant dated November 22,  1999.                                                                                                      |
| 10.9(5)   |   | Lease Agreement between  Judith Ann Spinelli, as lessor, and Registrant, as lessee dated  December 28th,  1999, regarding the leased building premises known as 16 Jonspin Road,  Wilmington, Massachusetts. |
| 10.10(14) |   | Employment agreement  between Registrant and Mr. Arthur Zafiropoulo, chief Executive Officer.                                                                                                                |
| 10.11(14) |   | Employment agreement  between Registrant and Mr. John Denzel, President and Chief Operating  Officer                                                                                                         |
| 10.12(14) |   | Employment agreement  between Registrant and Mr. Bruce Wright, Senior Vice President and Chief  Financial Officer.                                                                                           |
| 10.13(12) |   | Description of 2005 Cash  Bonus Plan.                                                                                                                                                                             |
| 21        |   | Subsidiaries of  Registrant.                                                                                                                                                                                      |
| 23        |   | Consent of  Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                                                            |
| 24        |   | Power of Attorney  (contained in Signature page hereto).                                                                                                                                                     |
| 31.1      |   | Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                         |
| 31.2      |   | Certification of  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                         |
| 32.1      |   | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                      |

----

(1)          Previously filed withour Registration Statement on Form S-1 declared effective with theSecurities and Exchange Commission on September 28, 1993. File No. 33-66522.

(2)          Previously filed withour 1993 Annual Report on Form 10-K (Commission File No. 0-22248).

(3)          Previously filed withour 1997 Annual Report on Form 10-K (Commission File No. 0-22248).

(4)          Previously filed withour Quarterly Report on Form 10-Q for the quarter ended September 30,1998 (Commission File No. 0-22248).

(5)          Previously filed withour 2000 Annual Report on Form 10-K (Commission File No. 0-22248).

(6)          Previously filed withour Quarterly Report on Form 10-Q for the quarter ended March 31,2002 (Commission File No. 0-22248).

(7)          Previously filed withour Quarterly Report on Form 10-Q for the quarter ended September 28,2002 (Commission File No. 0-22248).

(8)          Previously filed withour Annual Report on Form 10-K for the year ended December 31,2002 (Commission File No. 0-22248).

(9)          Previously filed withour Registration Statement on Form S-8, dated February 14,2003.

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(10)   Previously filed with ourQuarterly Report on Form 10-Q for the quarter ended June 28,2003 (Commission File No. 0-22248).

(11)   Previously filed with ourQuarterly Report on Form 10-Q for the quarter ended March 29,2003 (Commission File No. 0-22248).

(12)   Incorporated by reference toItem 1.01 of our Current Report on Form 8-K filed on January 27,2005 (Commission File No. 0-22248).

(13)   Previously filed with ourQuarterly Report on Form 10-Q for the quarter ended April 3,2004 (Commission File No. 0-22248).

(14)   Previously filed with ourAnnual Report on Form 10-K for the year ended December 31, 2003(Commission File No. 0-22248).

(15)   Previously filed with ourAnnual Report on Form 10-K for the year ended December 31, 2004(Commission File No. 0-22248).

(b)          Exhibits. See list ofexhibits under (a)(3) above.

(c)           Financial StatementSchedules. See list of schedules under (a)(2) above.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunder duly authorized.
|        | ULTRATECH, INC. |
|--------|----------------------|
| Date:  | March 6, 2006   |   | By: | /s/ ARTHUR ZAFIROPOULO |   |
|   |                 | Arthur Zafiropoulo |
|   |                 | *Chairman of the Board of Directors and* |
|   |                 | *Chief Executive Officer* |
|        |                      |  |  |  |  |

 

The undersigned directors and officers of Ultratech, Inc.(the “Company”), a Delaware corporation, hereby constitute and appointArthur W. Zafiropoulo and Bruce R. Wright, and each of them with fullpower to act without the other, the undersigned’s true and lawfulattorney-in-fact, with full power of substitution and resubstitution, for theundersigned and in the undersigned’s name, place and stead in the undersigned’scapacity as an officer and/or director of the Company, to execute in the nameand on behalf of the undersigned this Report and to file such Report, withexhibits thereto and other documents in connection therewith and any and allamendments thereto, with the Securities and Exchange Commission, granting untosaid attorneys-in-fact, and each of them, full power and authority to do andperform each and every act and thing necessary or desirable to be done and totake any other action of any type whatsoever in connection with the foregoingwhich, in the opinion of such attorney-in-fact, may be of benefit to, in thebest interest of, or legally required of, the undersigned, it being understoodthat the documents executed by such attorney-in-fact on behalf of theundersigned pursuant to this Power of Attorney shall be in such form and shallcontain such terms and conditions as such attorney-in-fact may approve in suchattorney-in-fact’s discretion.

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report has been signed below (and the above Powersof Attorney granted) by the following persons on behalf of the Registrant andin the capacities and on the dates indicated.

|                             | **Signature** | ** **                                                          | ** ** |                     | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|-----------------------------|---------------|---------------------------------------------------------------------|------------|---------------------|-----------|------------|------------|--|----------|------------|
| /s/ ARTHUR ZAFIROPOULO |          | Chairman of the Board of  Directors and Chief                       |       | March 6,  2006 |
| Arthur  Zafiropoulo         |          | Executive Officer (Principal Executive Officer)                     |       |                |
| /s/  BRUCE WRIGHT           |          | Senior Vice President,  Finance, Chief Financial                    |       | March 6,  2006 |
| Bruce Wright                |          | Officer and Secretary (Principal Financial and  Accounting Officer) |       |                |
| /s/ DENNIS RANEY       |          | Director                                                            |       | March 6,  2006 |
| Dennis Raney                |          |                                                                |       |                |
| /s/ RICK TIMMINS       |          | Director                                                            |       | March 6,  2006 |
| Rick Timmins                |          |                                                                |       |                |
|                        |          | Director                                                            |       |                |
| Thomas D. George            |          |                                                                |       |                |

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| /s/ JOEL  GEMUNDER      |   | Director |   | March 6, 2006  |
|------------------------------|--------|----------|--------|---------------------|
| Joel Gemunder                |   |     |   |                |
| /s/ NICHOLAS KONIDARIS  |   | Director |   | March 6, 2006  |
| Nicholas  Konidaris          |   |     |   |                |
| /s/ VINCENT F. SOLLITTO |   | Director |   | March 6,  2006 |
| Vincent F.  Sollitto         |   |     |   |                |

 

 

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**SCHEDULE II**

**ULTRATECH, INC.**

**VALUATIONAND QUALIFYING ACCOUNTS**

**(in thousands)**

| **Description**                    | ** ** | ** ** | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged  to Costs  and  Expenses** | ** ** | **Charged  to Other  Accounts** | ** ** | **Deductions(1)** | ** ** | **Balance at  End of  Period** | ** ** |
|------------------------------------|------------|------------|------------|------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|------------------------------------------|------------|
| Allowance for doubtful  accounts   |       |       |       |                                           |       |                                      |       |                                 |       |              |       |                                     |       |   |   |   |   |   |   |   |   |
| Year ended  December 31, 2003 |       |       |       |                                           |       |                                      |       |                                 |       |              |       |                                     |       |   |   |   |   |   |   |   |   |
| Trade accounts receivable          |       |       | $          | 314                                            |       |                                      |       | $                                    | (164       | )                 |       |                                     | $          | — |   |   |   | $ | (4 | ) |   |   | $ | 146 |   |   |
|                               |       |       | $          | 314                                            |       |                                      |       | $                                    | (164       | )                 |       |                                     | $          | — |   |   |   | $ | (4 | ) |   |   | $ | 146 |   |   |
| Year ended  December 31, 2004 |       |       |       |                                           |       |                                      |       |                                 |       |              |       |                                     |       |   |   |   |   |   |   |   |   |
| Trade accounts receivable          |       |       | $          | 146                                            |       |                                      |       | $                                    | 93         |              |       |                                     | $          | — |   |   |   | $ | (2 | ) |   |   | $ | 237 |   |   |
|                               |       |       | $          | 146                                            |       |                                      |       | $                                    | 93         |              |       |                                     | $          | — |   |   |   | $ | (2 | ) |   |   | $ | 237 |   |   |
| Year ended  December 31, 2005 |       |       |       |                                           |       |                                      |       |                                 |       |              |       |                                     |       |   |   |   |   |   |   |   |   |
| Trade accounts receivable          |       |       | $          | 237                                            |       |                                      |       | $                                    | 339        |              |       |                                     | $          | — |   |   |   | $ | 1 |   |   |   | $ | 577 |   |   |
|                               |       |       | $          | 237                                            |       |                                      |       | $                                    | 339        |              |       |                                     | $          | — |   |   |   | $ | 1 |   |   |   | $ | 577 |   |   |

----

(1)          Deductions representwrite-offs against reserve account balances.

S-1

----

**EXHIBIT INDEX**

| Exhibit   | ** ** | ** **                                                                                                                                                                                                                                                                 | ** ** | **Description** |
|-----------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1(10)   |       | Amended and Restated  Certificate of Incorporation of the Registrant, filed October 6, 1993.                                                                                                                                                                          |
| 3.1.1(10) |       | Certificate of  Amendment of the Amended and Restated Certificate of Incorporation of the  Company, dated May 17, 1995.                                                                                                                                               |
| 3.1.2(10) |       | Certificate of  Amendment of the Amended and Restated Certificate of Incorporation of the  Registrant, filed June 17, 1998.                                                                                                                                           |
| 3.1.3(10) |       | Certificate of  Amendment of the Amended and Restated Certificate of Incorporation of the  Registrant, filed June 20, 2003.                                                                                                                                           |
| 3.2(10)   |       | Bylaws of  Registrant, as amended.                                                                                                                                                                                                                                         |
| 4.5(1)    |       | Specimen Common  Stock Certificate of Registrant.                                                                                                                                                                                                                          |
| 4.6(3)    |       | Shareholder  Rights Agreement between Registrant and the First National Bank of Boston,  filed on February 11, 1997, as amended on March 18, 1998.                                                                                                               |
| 4.6.1(4)  |       | Second Amendment  to Shareholder Rights Agreement dated February 11, 1997 between  Registrant and BankBoston, N.A. (formerly known as the First National Bank of  Boston) as of October 12, 1998, and Certification of Compliance with  Section 27 thereof. |
| 10.1(13)  |       | 1993 Stock  Option/Stock Issuance Plan (Amended and Restated as of March 2, 2004).                                                                                                                                                                                    |
| 10.2(1)   |       | Form of  Indemnification Agreement entered into between the Registrant and each of its  officers and directors.                                                                                                                                                       |
| 10.3(8)   |       | Form of  Indemnification Agreement entered into between the Registrant and certain  officers.                                                                                                                                                                         |
| 10.4(1)   |       | Standard  Industrial Lease—Single Tenant, Full Net between The Equitable Life Assurance  Society of the United States, as Landlord, and Registrant, as Tenant, dated  August 27, 1993.                                                                           |
| 10.4.1(8) |       | First Amendment  to Lease between The Equitable Life Assurance Society of the United States,  as Landlord, and Registrant, as Tenant, dated November 1999.                                                                                                            |
| 10.5(2)   |       | Profit Sharing  Plan.                                                                                                                                                                                                                                                      |
| 10.6(6)   |       | 1998 Supplemental  Stock Option/ Stock Issuance Plan (Amended and Restated effective  January 29, 2002).                                                                                                                                                              |
| 10.7(15)  |       | Brokerage Line of  Credit Agreement with Morgan Stanley, dated December 16, 2004.                                                                                                                                                                                     |
| 10.8(5)   |       | Lease Agreement  between Montague LLC, As Landlord, and Registrant, As Tenant dated  November 22, 1999.                                                                                                                                                               |
| 10.9(5)   |       | Lease Agreement  between Judith Ann Spinelli, as lessor, and Registrant, as lessee dated  December 28th,  1999, regarding the leased building premises known as 16 Jonspin Road,  Wilmington, Massachusetts.                                                          |
| 10.10(14) |       | Employment  agreement between Registrant and Mr. Arthur Zafiropoulo, chief Executive  Officer.                                                                                                                                                                        |
| 10.11(14) |       | Employment  agreement between Registrant and Mr. John Denzel, President and Chief  Operating Officer                                                                                                                                                                  |
| 10.12(14) |       | Employment  agreement between Registrant and Mr. Bruce Wright, Senior Vice President  and Chief Financial Officer.                                                                                                                                                    |
| 10.13(12) |       | Description of  2005 Cash Bonus Plan.                                                                                                                                                                                                                                      |
| 21        |       | Subsidiaries of  Registrant.                                                                                                                                                                                                                                               |
| 23        |       | Consent of  Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                     |
| 24        |       | Power of Attorney  (contained in Signature page hereto).                                                                                                                                                                                                              |

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| 31.1 |   | Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                                    |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                               |
| 32.1 |   | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

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(1)          Previously filed withour Registration Statement on Form S-1 declared effective with theSecurities and Exchange Commission on September 28, 1993. File No. 33-66522.

(2)          Previously filed withour 1993 Annual Report on Form 10-K (Commission File No. 0-22248).

(3)          Previously filed withour 1997 Annual Report on Form 10-K (Commission File No. 0-22248).

(4)          Previously filed withour Quarterly Report on Form 10-Q for the quarter ended September 30,1998 (Commission File No. 0-22248).

(5)          Previously filed withour 2000 Annual Report on Form 10-K (Commission File No. 0-22248).

(6)          Previously filed withour Quarterly Report on Form 10-Q for the quarter ended March 31,2002 (Commission File No. 0-22248).

(7)          Previously filed withour Quarterly Report on Form 10-Q for the quarter ended September 28,2002 (Commission File No. 0-22248).

(8)          Previously filed withour Annual Report on Form 10-K for the year ended December 31,2002 (Commission File No. 0-22248).

(9)          Previously filed withour Registration Statement on Form S-8, dated February 14,2003.

(10)   Previously filed with ourQuarterly Report on Form 10-Q for the quarter ended June 28,2003 (Commission File No. 0-22248).

(11)   Previously filed with ourQuarterly Report on Form 10-Q for the quarter ended March 29,2003 (Commission File No. 0-22248).

(12)   Incorporated by reference toItem 1.01 of our Current Report on Form 8-K filed on January 27,2005 (Commission File No. 0-22248).

(13)   Previously filed with ourQuarterly Report on Form 10-Q for the quarter ended April 3,2004 (Commission File No. 0-22248).

(14)   Previously filed with ourAnnual Report on Form 10-K for the year ended December 31, 2003(Commission File No. 0-22248).

(15)   Previously filed with ourAnnual Report on Form 10-K for the year ended December 31, 2004(Commission File No. 0-22248).

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