**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark one)**
| x          | **Annual Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                            |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | **For the Fiscal Year Ended  December 31, 2004**                                                                                                                                                                                                                                    |
| ** ** | **Or**                                                                                                                                                                                                                                                                                   |
| **o**      | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                             |
| ** ** | **For the transition period from                        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 telephonenumber, including area code)

Securities registered pursuant to Section 12(b) ofthe 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 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 filesuch reports), and (2) has been subject to such filing requirements forthe past 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 an accelerated filer (as defined in Rule 12b-2of the Act). Yes x*  *No o

The aggregate market valueof voting stock held by non-affiliates of the Registrant, as of July 2,2004, was approximately $328,318,000 (based upon theclosing price for shares of the Registrant’s Common Stock as reported by theNasdaq National Market on that date, the last trading date of the Registrant’smost recently completed second quarter). Shares of Common Stock held by eachofficer, director and holder of 5% or more of the outstanding Common Stock havebeen excluded in that such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

As of March 1, 2005,the Registrant had 23,888,253 shares of Common Stockoutstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the Registrant’sProxy Statement for the 2005 Annual Meeting of Stockholders are incorporated byreference 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-Kmay contain, in addition to historical information, certain forward-lookingstatements that involve significant risks and uncertainties. Our actual resultscould differ materially from the information set forth in any suchforward-looking statements. Factors that could cause or contribute to suchdifferences include those discussed below, as well as those discussed under “AdditionalRisk Factors” and elsewhere in this Annual Report on Form 10-K.

**The Company**

Ultratech, Inc. (“Ultratech” or “we”) develops,manufactures and markets photolithography and laser processing equipmentdesigned to reduce the cost of ownership for manufacturers of integratedcircuits, including advanced packaging processes and various nanotechnologycomponents, including thin film head magnetic recording devices (“thin filmheads” or “TFHs”), optical networking devices, laser diodes and LED’s (lightemitting diodes). We supply step-and-repeat systems based on one-to-one(“1X”) technology to customers located throughout North America, Europe, Japanand the rest of Asia. We believe that our 1X steppers utilizing the Wynne Dysonoptical design offer cost and performance advantages, as compared withcompetitors’ contact aligners or reduction steppers, to semiconductor devicemanufacturers for applications involving line geometries of 0.75 micronsor greater (“non-critical feature sizes”) and to nanotechnology manufacturers.Advanced packaging for integrated circuits, specifically bump or wafer levelchip scale packaging (“CSP”) techniques, require lithography steps in thedevice fabrication process. We continue to enhance our product offerings forbump, wafer level CSP processing and post passivation lithography (“PPL”). Our1X steppers are also used as replacements for scanners in existing fabricationfacilities to enable semiconductor manufacturers to extend the useful life andincrease the capabilities of their facilities. In addition, our steppers areused to manufacture 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 g-linewavelengths, depth of focus and special size substrates, may offer advantagesover certain competing tools. Ultratech has developed the model NanoTech 160stepper, with specific design modifications to address the unique requirementsof the nanotechnology market, including dual-side wafer processing capability.

Our products and marketsare more fully described below.

**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. According to the SemiconductorIndustry Association, a significant portion of the cost of processing siliconwafers in the fabrication of ICs is related to photolithography.Photolithography exposure equipment is 

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used to create devicefeatures by selectively exposing a light-sensitive polymer coating on the wafersurface, through a photomask containing the master image of a particular devicelayer. Typically, each exposure results in the patterning of a differentdeposited layer and therefore, requires a different pattern on the device. Eachnew device layer must be properly aligned to previously defined layers beforeimaging takes place, so that structures formed on the wafers are correctlyplaced, one on top of the other, in order to ensure a 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 late 1970s, photolithography tools known as step-and-repeatprojection steppers, were introduced. Prior tools included contact printers andproximity aligners, which required the photomask to physically contact ornearly contact the wafer in order to transfer the entire pattern during asingle exposure. There were also projection scanners, which transferred thedevice image through reflective optics having a very narrow annular field that spannedthe width of the wafer. Exposure was achieved by scanning the entire photomaskand wafer in a single, continuous motion across the annular field. Scannerswere followed by steppers, which expose a square or rectangular portion of thewafer in a single exposure, then move or “step” the wafer to an adjacent siteto repeat the exposure. This stepping process is repeated as often as necessaryuntil the entire wafer has been exposed. By imaging a small area, steppers areable to achieve finer resolution, improved image size control and betteralignment between the multiple device layers resulting in higher yield andproductivity in certain devices than 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 single exposure,step-and-scan systems scan the mask and wafer through a narrow illuminatedregion to produce one field and repeat this operation over multiple fields toexpose the entire wafer.

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, arebased on a different technology which incorporates both reflective andrefractive elements in its optical lens imaging system. This design is muchsimpler than a reduction stepper’s lens imaging system, which incorporates onlyrefractive elements. As a result, 1X steppers for non-critical features aregenerally less expensive than the reduction steppers required for criticalfeature sizes. Because of their optical design, 1X steppers typically are alsoable to deliver greater exposure energy to the wafer surface, which may resultin higher throughput than is achievable with certain reduction steppers inparticular applications. However, 1X steppers are currently limited to use inmanufacturing steps involving non-critical, larger feature sizes. Accordingly,we believe that sales of these systems are highly dependent upon capacityexpansions by our current 1X customers, or by customers making the transitionto advanced bump typed chips, which employ a different means of electricallyconnecting the chip to other components.

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 bumped packaging now focus on reducing theirtotal cost of ownership. A major component of this cost is the cost ofownership of 

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the equipment used for aparticular application in a fabrication facility. Cost of ownership is measuredin terms of the costs associated with the acquisition of equipment, as well asfactors such as throughput, yield, up-time, service, labor overhead,maintenance, and various other costs of owning and using the equipment. Withincreasing importance being placed upon a system’s overall cost of ownership,in many cases the system with the most technologically advanced capabilitieswill not necessarily be the manufacturing system of choice. As part of thefocus on cost reduction, we believe that device manufacturers are attempting toextend the useful life and enhance the production capabilities of fabricationfacilities by selecting equipment that can replace existing tools whileoffering better performance in a cost-effective manner.

In addition to enhancingour current lithography solutions, we have been developing new tools for ourexisting markets. We have developed a new laser annealing technology for volumeproduction of advanced state of the art devices and are now offering a LaserProcessing (“LP”) product. Our first commercial product based on the new LPtechnology platform employs a process called laser spike annealing (“LSA”),which enables the activating of ultra-shallow junctions. This technology is expectedto be useful for multiple IC generations. It is anticipated that eventuallythis technology will be superseded by an even faster laser processingtechnology that will take the processing time below one microsecond, therebyachieving even higher performance characteristics while using almost “zero”thermal budget. As a result, these new LP technologies—for which we have beenawarded 39 patents and have 55 patent applications pending—are expected toremove several critical barriers to future device scaling.

**Products**

We currently offer four different series of 1Xsystems, representing primarily all of our systems revenue in 2004, for use inthe semiconductor fabrication process: the 1000 Family, which addresses themarkets for scanner replacement, high volume/low cost semiconductor fabricationand R&D packaging activities; the Saturn Wafer Stepper® Family,which addresses the market for mix-and-match in advanced semiconductorfabrication; the Saturn Spectrum Wafer Family used in bump processing for flipchips; and the Titan Wafer Stepper®, which addresses the markets forscanner replacement and high volume/low cost semiconductor fabrication. Thesesteppers currently offer feature size capabilities ranging from 2.0 micronsto 0.75 microns and typically range in price from $1.0 million to $4.0 millionper system. The 1000 family and the Titan Wafer Stepper offer g- and h-lineillumination specifications. The Saturn Wafer Stepper Family features an i-lineillumination specification that is designed to make it compatible with advancedi-line reduction steppers. The Saturn and Titan wide-field systems have aunique D-shaped field that permits the size and shape of the exposure field tobe matched with step-and-scan systems, or to encompass reduction stepper fields.The D-shaped field is sized to allow the semiconductor manufacturer to optimizethroughput for the non-critical, mix-and-match layers. In bump processing, weoffer our Saturn Spectrum Family. The Saturn Spectrum Family was developed forhigh volume bump and wafer level CSP manufacturing and post passivationlithography applications. The Saturn Spectrum Family provides broadband (g, hand i-line) exposure or selective exposure (gh or i-line), and is used inconjunction with electroplating to produce a pattern of bumps, or metalconnections, on the bond pads of the die for flip chip devices. This patterncan be placed in a tight array across the entire die, as opposed to theconventional method of wire bonding which is generally limited to the peripheryof the die. This allows manufacturers to shrink the die size. The flip chipdevice can then be placed in a small outline package or directly on a printedcircuit board.

In addition to the above products, in mid-2004 weintroduced our Unity PlatformTM, which we plan to use as a universalfoundation for our future-generation tools. The Unity Platform features acustomer-configurable design that supports flexible manufacturing requirementsas well as tool extendibility for multiple device generations. The recent productintroductions utilizing the Unity Platform include the AP200 & AP300lithography systems, and the LSA100 annealing system.

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Designed to optimize productivity, the AP300 &AP200 systems integrate the processing advantages associated with our advancedpackaging lithography equipment with the productivity benefits of our new UnityPlatformTM. We believe that these new lithography systems support alower cost-of-ownership strategy due to significant throughput enhancements,higher reliability, and superior alignment and illumination systems.

We also offer photolithography equipment for use invarious nanotechnology markets. Nanotechnology manufacturing combineselectronics with mechanics in small devices. Examples include LED’s as apotential for more efficient incandescent light source replacement,accelerometers used to activate air bags in automobiles, and membrane pressuresensors used in industrial control systems. These micro-machined devices aremanufactured on silicon substrates using photolithography techniques similar tothose used for manufacturing semiconductors and thin film head devices. In2002, We introduced the NanoTech product family that consists of the NanoTech100, NanoTech 160, NanoTech 190, NanoTech 200 and NanoTech 200i. The NanoTech160 system 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 other NanoTech steppers offer resolution and depth of focusadvantages over alternative technologies to the manufacturers of nanotechnologycomponents.

We have introduced the NanoTech 190 steppers, withenhanced capabilities directed at TFH backend, or rowbar processingapplications. These steppers are used to expose the Air Bearing Surface (ABS)patterns on rowbars and pole trimming.

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 laser-based thermal annealing tools.Thermal annealing is used by the semiconductor industry for a variety ofprocess steps, including activation of implanted impurities, growth of oxides,formation of silicides and stabilization of copper grain structure. Annealingtools currently in use by manufacturers of semiconductor devices are furnacesand rapid thermal annealing, or Rapid Thermal Processing (“RTP”), systems. Webelieve there is a need for tools that anneal at higher temperatures forshorter periods of time and that our laser annealing tools may ultimatelyprovide this capability to the industry. The near-term application of ourlaser-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.

Currently, we offer two laser-annealing tools. Thefirst tool is designed for use in research and development applications, withthe objective of process optimization. We shipped and recorded revenue on twoof these systems in 2002. The second tool is targeted for pilot production. Weexpect to ship production units of this second tool in 2005.

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Ourcurrent systems are set forth below:
| **Product Line**                    | ** ** | ** ** | ** ** | **Wavelength** | ** ** | **Minimum  Feature Size  (microns)** | ** ** |
|------------------------------------------|------------|------------|------------|----------------|------------|-------------------------------------------|------------|
| **1X Steppers:**                         |       |       |       |           |       |                                      |       |
| Model 1500  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                                |       |
| NanoTech 200                             |       |       | gh-line    |           |       | 1.0 -  1.4                                |       |
| NanoTech 200i                            |       |       | i-line     |           |       | 0.75  - 1.0                               |       |
| Saturn Spectrum 3e                       |       |       | ghi-line   |           |       | 2.0                                       |       |
| Saturn Spectrum  300e2                   |       |       | ghi-line   |           |       | 2.0                                       |       |
| Prisma-ghi                               |       |       | ghi-line   |           |       | 4.0                                       |       |
| Saturn 200 Wafer  Stepper                |       |       | i-line     |           |       | 0.75  - 1.0                               |       |
| Saturn 300 Wafer  Stepper                |       |       | i-line     |           |       | 0.75  - 1.0                               |       |
| Titan 200 Wafer  Stepper                 |       |       | gh-line    |           |       | 1.0 -  1.4                                |       |
| Titan 300 Wafer  Stepper                 |       |       | gh-line    |           |       | 1.0 -  1.4                                |       |
| AP200                                    |       |       | ghi-line   |           |       | 2.0                                       |       |
| AP300                                    |       |       | ghi-line   |           |       | 2.0                                       |       |
| **Laser Processing:**                    |       |       |       |           |       |                                      |       |
| Series 1                            |       |       | NA         |           |       | NA                                        |       |
| LSA100                                   |       |       | NA         |           |       | NA                                        |       |
| **Backside Metrology:**                  |       |       |       |           |       |                                      |       |
| UltraMet 100                             |       |       | NA         |           |       | NA                                        |       |

 

**Research,Development and Engineering**

The semiconductor and nanotechnology (which includesthin film heads) industries are subject to rapid technological change and newproduct introductions and enhancements. We believe that continued and timelydevelopment and introduction of new and enhanced systems to serve these marketsis essential for us to maintain our competitive position. We have made andcontinue to make substantial investments in the research and development of ourcore optical technology, which we believe is critical to our financial results.We intend to continue to develop our technology and to develop innovativeproducts and product features to meet customer demands. Current engineeringprojects include: the continued research and development and process insertionfor our laser processing technologies and continued development of our 1Xstepper products. Other research and development efforts are currently focusedon performance enhancement and development of new features for existingsystems, both for inclusion in our systems and to meet customer order requirements;reliability improvement; and manufacturing cost reductions. These research anddevelopment efforts are undertaken, principally, by our research, developmentand engineering organizations and costs are generally expensed as incurred.Other operating groups within our Company support our research, development andengineering efforts, and the associated costs are charged to theseorganizations and expensed as incurred.

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, 2004, we hadapproximately 70 full-time employees engaged in research, 

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development,and engineering. For 2004, 2003 and 2002, total research, development, andengineering expenses were approximately $25.9 million, $21.3 million and $23.5million, respectively, and represented 24%, 21% and 34% 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 inaddition to product reliability, performance, yield, cost, uptime and mean timebetween failures are increasingly important factors by which customers evaluatepotential suppliers of photolithography equipment. We believe that the strengthof our worldwide 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 the 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 availablethrough 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 preventivemaintenance, scheduled one-on-one training, daily on-sitesupport, and monthly system and performance analysis.

**Manufacturing**

We perform all of our manufacturing activities (finalassembly, system testing and certain subassembly) in clean room environmentstotaling approximately 26,000 square feet located in San Jose, California.Performing manufacturing operations in California exposes us to a higher riskof natural disasters, including earthquakes. In addition, in the pastCalifornia has experienced power shortages, which have interrupted ouroperations. Such shortages could occur in the future and could again interruptour operations resulting in product shipment delays, increased costs and otherproblems, any of which could have a material adverse effect on our business,customer relationships and results of operations. We are not insured againstnatural disasters and power shortages and the occurrence of such an event couldhave a material adverse impact 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 

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components of ourtechnology, the glass for our 1X lenses, from external suppliers. We design the1X lenses and provide the lens specifications and the glass to other suppliers,who then machine the lens elements. We then assemble and test the optical 1Xlenses. We have recorded the critical parameters of each of our optical lensessold since 1982, and believe that such information enables us to supply lenses toour customers that match the 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 1X operation 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, semiconductorpackaging or nanotechnology device production line. We believe that once adevice manufacturer or packaging subcontractor has selected a particular vendor’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 vendor’scapital 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 their current products and to introduce new productswith improved price and performance characteristics. This could cause a declinein sales or loss of market acceptance of our steppers in our served markets,and thereby materially adversely affect our business, financial condition andresults of operations. Enhancements to, or future generations of, competingproducts may be developed that offer superior cost of ownership and technicalperformance features. We believe that to be competitive will requiresignificant financial resources in order to continue to invest in new productdevelopment, to invest in new features and enhancements to existing products,to introduce new generation stepper systems in our served markets on a timelybasis, and to maintain customer service and support centers worldwide. Inmarketing our 

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products, we may also facecompetition from vendors 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 a leadershipposition in the advanced packaging market. Our primary competition in thismarket place comes from contact aligners offered by companies such as SussMicrotec, a German supplier. Although contact and proximity aligners generallyhave lower purchase prices than 1X steppers, 1X steppers offer lower operatingcosts and total cost of ownership in most applications. We believe that mostdevice manufacturers and wafer bump foundries choose 1X steppers due to theyield improvement offered by the use of non-contact lithography. Ushio, aJapanese semiconductor equipment company has also introduced a 1X refractivestepper for the advanced packaging market. However, we believe 1X refractivesteppers do not offer the same productivity and cost saving advantages as our1X stepper based on the Wynne Dyson optical design. Tamarack has introduced a1X scanner for wafer bumping applications. We believe that Tamarack’s 1Xscanners have higher operating costs as compared to our 1X steppers. Inaddition to contact and proximity aligners, Ultratech also faces competitionfrom the used reduction stepper market. While the use of reduction steppersoffers significantly lower throughput and is not easily adapted for thickresist (>35 micron) processing, some device manufacturers may consider thistechnology option.

**LASER PROCESSING**

With respect to our laser annealing technologies,marketed under the LSA100 product name, the primary competition comes fromcompanies such as Applied Materials, Inc., Mattson Technology, Inc.,and Axcelis Technologies, Inc. that offer products utilizing rapid thermalprocessing (RTP), which is the current manufacturing technology. RTP does notprevent semiconductor device manufacturers from scaling the lateral dimensionsof their transistors to obtain improved performance, but diffusion resultingfrom the time scales associated with RTP seriously limits the verticaldimension of the junctions. Faster annealing times result in shallower and moreabrupt junctions and faster transistors. We believe our annealing technologyresults in faster transistors for a given size. We believe that RTPmanufacturers recognize the need to reduce thermal cycle times and are workingtoward this goal. In July 2000, we licensed certain rights to our thenexisting 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 (FLA). Several companies have published paperson annealing tools that incorporate flash lamp technology in order to reduceannealing times and increase anneal temperatures. Developers of flash lampannealing (FLA) technology claim to have overcome annealing difficulties at the65nm node. This technique, which employs xenon flash lamps, has shownimprovements over RTP in junction depth and sheet resistance, but we believeFLA will suffer from pattern-related non-uniformities. Our proprietary laserprocessing solution has been specifically developed to provide junctionannealing on near-instantaneous timescales, while maintaining low sheetresistance. LSA, the first implementation of laser processing, activatesdopants in the microsecond-to-millisecond time frame without melting. 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, competitionto our laser processing products may come from other laser annealing tools,including those presently being used by the flat panel display industry tore-crystallize silicon. Manufacturers of these tools may try to extend the useof their technologies to semiconductor device applications.

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**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 92 UnitedStates and foreign patents, which expire on dates ranging from June 2006to April 2023 and have 83 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 less revenue for us.

On February 29, 2000, we filed lawsuits assertingpatent infringement and related claims against Nikon, Canon, and ASML in theU.S. District Court for the Eastern District of Virginia. In April 2000,we reached a settlement with Nikon, and in September 2001, we reached asettlement with Canon. The patent litigation against ASML is ongoing afterhaving been transferred to the Northern District of California. After theDistrict Court made a preliminary determination that ASML did not infringe thepatent, we appealed the decision to the Court of Appeals for the FederalCircuit in Washington, D.C. The Court of Appeals reversed the preliminarydetermination of the District Court, ruling in our favor, and remanded the caseback to the District Court in Northern California for further proceedings.

On October 12, 2001, we were sued in the DistrictCourt of Massachusetts by SVG Lithography Systems (“SVGL”), alleginginfringement of several patents. SVGL is a division of Silicon Valley Group, Inc.,which is a wholly owned subsidiary of ASML. As of March 2004, all claimsmade by SVGL had been dismissed.

We are involved in other lawsuits and legal actionsregarding infringement claims, and we have from time to time been notified ofclaims that we may be infringing intellectual property rights possessed bythird parties. We believe that these matters are not material to our businessor financial condition. Some ofthe Company’s customers have received notices of infringement from TechnivisionCorporation and the Lemelson Medical, Education and Research Foundation,Limited Partnership (“Lemelson”) alleging that the manufacture of certainsemiconductor products and/or the equipment used to manufacture thosesemiconductor products infringes certain issued patents regarding machinevision technology. The Company has been notified by certain of these customersthat the Company may be obligated to defend or settle claims that the Company’sproducts infringe any of such patents and, in the event it is subsequentlydetermined that the customer infringes any of such patents, they intend to seekreimbursement from the Company for damages and other expenses resulting fromthis matter. The Company believes that its machine vision technology does notinfringe the patent rights of other parties.

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Infringement claims bythird parties or claims for indemnification resulting from infringement claimsmay be asserted in the future and such assertions, if proven to be true, couldmaterially adversely affect our business, financial 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.

**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 and various other nanotechnology manufacturerslocated throughout North America, Europe, Japan, Taiwan and the rest of Asia.Semiconductor manufacturers have purchased the 100 and 1000 Series steppers,the Saturn Wafer Stepper, the Saturn Spectrum Wafer Stepper, and the TitanWafer Stepper for the fabrication and/or packaging of microprocessors,microcontrollers, DRAMs, ASICs and other devices. Such systems are used in mix-and-matchapplications with other lithography tools, as replacements for scanners and contactprinters, in start-up fabrication facilities, in packaging for ultrathinand flip chip applications and for high volume, low cost non-critical featuresize semiconductor production. We believe that thin film head manufacturershave purchased the NanoTech 190 stepper due to its technical capabilities,throughput and overall cost of ownership. We believe that manufacturers ofnanotechnology devices have purchased NanoTech products because of their highthroughput and flexible field size advantages along with their cost-effective,sub-micron imaging capabilities.

Historically, we have sold a substantial portion ofour systems to a limited number of customers. In 2004, Intel Corporationaccounted for 10% of our net sales. In 2003, Intel Corporation accounted for26% of our net sales. In 2002, Intel Corporation accounted for 19% and SumitomoChemical Company, Ltd. accounted for 10% of our net sales. We expect that salesto a relatively few customers will continue to account for a high percentage ofour net sales in the foreseeable future and believe that our financial resultsdepend in significant part upon the success of these major customers and ourability to meet their future capital equipment needs. Although the compositionof the group comprising our largest customers may vary from period to period,the loss of a significant customer or any reduction in orders by a significantcustomer, including reductions due to market, economic or competitiveconditions in the semiconductor, semiconductor packaging or nanotechnologyindustries or in the industries that manufacture products utilizing integratedcircuits, thin film heads or other nanotechnology components, would likely havea material adverse effect on our business, financial condition and results ofoperations. Our ability to maintain or increase our sales in the futuredepends, in part, on our ability to obtain orders from new customers as well asthe financial condition and success of our existing customers, thesemiconductor and nanotechnology industries and the economy in general.

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In addition to the business risks associated withdependence on major customers, these significant customer concentrations havein 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 75% of system revenue for the year ended December 31,2004, as compared to 75% and 83% for the years ended December 31, 2003 and2002, respectively. During 2004, 2003 and 2002, approximately 25%, 25% and 17%,respectively, of our systems revenue was derived from sales to nanotechnologymanufacturers, including micro systems, thin film head and optical networkingdevice manufacturers. Our future results of operations and financial positionwould be materially adversely impacted by a downturn in any of these marketsegments, or by loss of market share in any of these segments.

International sales accounted for approximately 65%,61% and 48% of total net sales for the years 2004, 2003 and 2002, respectively,with Japan representing 32%, 28% and 24% of sales for those same years.

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 following initialqualification of our systems as a result of delays in a customer’s approvalprocess. Additionally, we are presently receiving orders for systems that havelengthy delivery schedules, which may be due to longer production lead times ora result of customers’ capacity scheduling requirements. For these and otherreasons, our systems typically have a lengthy sales cycle during which we mayexpend substantial funds and management effort in securing a sale. Lengthysales cycles 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.

**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 to cancellationor rescheduling by the customer with limited or no penalties. Because ofchanges 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 31,2004 and 2003, our backlog was approximately $82.5 million and $63.0 million,respectively, including $1.0 million and $0.4 million, respectively, ofproducts shipped but not yet installed and accepted. At December 31, 2004,two potential customers accounted for 12% and 11%, respectively, of our systembacklog. Cancellation, deferrals or rescheduling of orders by these customerswould have a material adverse impact on our future results of operations.

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**Employees**

At December 31, 2004,we had approximately 338 full-time employees, including 70 engaged inresearch, development, and engineering, 38 in sales and marketing, 105 incustomer service and support, 75 in manufacturing and 50 in general administrationand finance. We believe our future success depends, in large part, on ourability to attract and retain highly skilled employees. None of our employeesare covered by a collective bargaining agreement. We have, however, enteredinto employment agreements with a limited number of our employees, includingour executive officers. We consider our relationships with our employees to begood.

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

**Developmentof New Product Lines; Expansion of Operations  **Currently,we are devoting significant resources to the development, introduction andcommercialization of our laser processing systems and to enhancements of ourSaturn Spectrum 3e and Saturn Spectrum 300e2 wafersteppers and next generation related platforms. We intend to continue todevelop these products and technologies during 2005, and will continue to incursignificant operating expenses in the areas of research, development andengineering, manufacturing and general and administrative costs in order tofurther develop, produce and support these new products. Additionally, grossprofit margins and inventory levels may be further adversely impacted in thefuture by costs associated with the initial production of our laser processingsystems and by future generations of our 1X lithography systems. Introductionof new products generally 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.

**Cyclicalityof Semiconductor, Semiconductor Packaging and Nanotechnology Industries  **Ultratech’sbusiness depends in significant part upon capital expenditures by******manufacturers of semiconductors,bumped semiconductors and nanotechnology components, including thin film headmagnetic 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 

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slowdowns in thesemiconductor packaging market or by loss of market share. Accordingly, we maynot be able to achieve or maintain our current or prior level of sales.

We attempt to mitigate the risk of cyclicality byparticipating in multiple markets including semiconductor, semiconductorpackaging, thin film head and other nanotechnology sectors, as well asdiversifying into new markets such as photolithography for optical networking(a nanotechnology application) and laser-based annealing for implant activationand other applications. Despite such efforts, when one or more of such marketsexperiences a downturn or a situation of excess capacity, our net sales andoperating results are materially adversely affected.

**RapidTechnological Change; Importance of Timely Product Introduction  **Thesemiconductor and nanotechnology manufacturing industries are subject to rapidtechnological change and new product introductions and enhancements. Ourability to be competitive in these and other markets will depend, in part, uponour ability to develop new and enhanced systems and related software tools, andto introduce these systems and related software tools at competitive prices andon a 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 supply 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 thecommencement by Ultratech of volume production of such systems. We haveexperienced delays from time to time in the introduction of, and technical andmanufacturing difficulties with, certain of our systems and enhancements andrelated software features and options, and may experience delays and technicaland manufacturing difficulties in future introductions or volume production ofnew systems or enhancements 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 and reliabilityof our products early in the products’ life cycles. If new products havereliability or quality problems, reduced orders or higher manufacturing costs,delays in customer acceptance, revenue recognition and collecting accountsreceivable and additional service and warranty expenses may result. Any of suchevents may materially adversely affect our business, financial condition andresults of operations.

**InternationalSales  **International net sales accounted forapproximately 65%, 61% and 48% of total net sales for the years 2004, 2003 and2002, 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 

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unexpected changes inregulatory requirements; difficulty in satisfying existing regulatoryrequirements; exchange rate fluctuations; tariffs and other barriers; politicaland economic instability; difficulties in accounts receivable collections;natural disasters; difficulties in staffing and managing foreign subsidiary andbranch 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 internationalcustomers. However, in Japan, we have direct sales operations and orders areoften denominated in Japanese yen. This may subject us to a higher degree ofrisk from currency fluctuations. We attempt to mitigate this exposure throughthe use of foreign currency forward exchange contracts. We are also subject tothe risks associated with the imposition of legislation and regulationsrelating to the import or export of semiconductors and nanotechnology products.We cannot predict whether the United States or any other country will implementchanges to quotas, duties, taxes or other charges or restrictions upon theimportation or exportation of our products. These factors, or the adoption ofrestrictive policies, may have a material adverse effect on our business,financial condition and results of operations.

**Dependenceon Key Personnel  **Ultratech’s future operatingresults depend, in significant part, upon the continued contributions of keypersonnel, many of whom would be difficult to replace. We have entered intoemployment agreements with only a limited number of our employees, includingour Chief Executive Officer, President and Chief Financial Officer, and ouremployees are employed “at will.” Some of these agreements contain vestingacceleration and severance payment provisions that could result in significantcosts or charges to us should the employee be terminated without cause, die orhave a disability. We do not maintain any life insurance on any of our keypeople. The loss of key personnel could have a material adverse effect on thebusiness, financial condition and results of operations of Ultratech. Inaddition, our future operating results depend in significant part upon ourability to attract and retain other qualified management, manufacturing,technical, sales and support personnel for our operations. There are only a limitednumber of persons with the requisite skills to serve in these positions and itmay become increasingly difficult for us to hire such personnel over time. Attimes, competition for such personnel has been intense, particularly in the SanFrancisco Bay Area where we maintain our headquarters and principal operations,and there can be no assurance that we will be successful in attracting orretaining such personnel. The failure to attract or retain such persons wouldmaterially adversely affect our business, financial condition and results ofoperations.

**Changesto Financial Accounting Standards May ****Affect Our Reported Results of Operations  **We prepareour financial statements in conformity with accounting principles generallyaccepted in the United States, or U.S. GAAP. These principles are subject tointerpretation by the Financial Accounting Standards Board (FASB), the AmericanInstitute of Certified Public Accountants (AICPA), the Securities and ExchangeCommission (SEC) and various bodies formed to interpret and create appropriateaccounting policies. A change in those policies can have a significant effecton our reported results and may affect our reporting of transactions completedbefore a change is announced.

Accounting policies affecting many other aspects ofour business, including rules relating to revenue recognition, off-balancesheet transactions, employee stock options, restructurings, asset disposals,intangible assets, derivative and other financial instruments, and in-processresearch and development charges, have recently been revised or are underreview. Changes to those rules or the questioning of how we interpret orimplement those rules may have a material adverse effect on our reportedfinancial results or on the way we conduct business. In addition, ourpreparation of financial statements in accordance with U.S. GAAP requires thatwe make estimates and assumptions that affect the recorded amounts of assetsand liabilities, disclosure of those assets and liabilities at the date of thefinancial statements and the recorded amounts of expenses during the reportingperiod. A change in the facts and circumstances 

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surrounding thoseestimates could result in a change to our estimates and could impact our futureoperating results.

**Changes in securities laws and regulations haveincreased our costs.  **The Sarbanes-Oxley Act of 2002required changes in our corporate governance, public disclosure and compliancepractices. The number of rules and regulations applicable to us haveincreased and will continue to increase our legal and financial compliance costs,and have made some activities more difficult, such as by requiring stockholderapproval of new option plans. In addition, we have incurred and expect tocontinue to incur significant costs in connection with compliance with Section 404of the Sarbanes-Oxley Act regarding internal controls over financial reporting.We estimate that we have incurred costs approaching three milliondollars to achieve initialcompliance with Section 404, and we expect ongoing costs tomaintain compliance to be between one and two million dollars annually. We alsoexpect these developments to make it more difficult and more expensive toobtain 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 overfinancial reporting could have a negative impact on our reputation, businessand stock price.

**Effectsof Certain Anti-Takeover Provisions  **Certainprovisions of Ultratech’s Certificate of Incorporation, equity incentive plans,Shareholder Rights Plan, licensing agreements, Bylaws and Delaware law maydiscourage certain transactions involving a change in control of our company.In addition to the foregoing, our classified board of directors, theshareholdings of Ultratech’s officers, directors and persons or entities thatmay be deemed affiliates and the ability of the Board of Directors to issue “blankcheck” preferred stock without further stockholder approval could have theeffect of delaying, deferring or preventing a change in control of Ultratechand may adversely affect the voting and other rights of holders of CommonStock.

**Volatilityof Stock Price and Dilutive Impact of Employee Stock Options  **Webelieve that factors such as announcements of developments related to ourbusiness, fluctuations in our operating results, a shortfall in revenue orearnings, changes in analysts’ expectations, general conditions in thesemiconductor and nanotechnology industries or the worldwide or regionaleconomies, sales of our securities into the marketplace, an outbreak orescalation of hostilities, announcements of technological innovations or newproducts or enhancements by us or our competitors, developments in patents orother intellectual property rights and developments in our relationships withour customers and suppliers could cause the price of our Common Stock tofluctuate, perhaps substantially. The market price of our Common Stock hasfluctuated significantly in the past and we expect it to continue to experiencesignificant fluctuations in the future, including fluctuations that may beunrelated to our performance.

As of March 1, 2005, we had approximately 6.5million stock options outstanding. Among other determinants, the market priceof our stock has a major bearing on the number of stock options outstandingthat are included in the weighted-average shares used in determining our netincome (loss) per share. During periods of extreme volatility, the impact ofhigher stock prices can have a materially dilutive effect on our net income(loss) per share.****Additionally, options areexcluded from the calculation of net income (loss) per share when we have a netloss or when the exercise price of the stock option is greater than the averagemarket price of our Common Stock, as the impact of the stock options would beanti-dilutive.

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**Terrorist Attacks andThreats, and Government Responses Thereto, May ****Negatively Impact All Aspects of Our Operations, Revenues, Costs andStock Price**   Terroristattacks in the United States and elsewhere, government responses thereto, andmilitary actions in Iraq, Afghanistan and elsewhere, may disrupt our operationsor those of our customers and suppliers and may affect the availability ofmaterials needed to manufacture our products or the means to transport thosematerials to manufacturing facilities and finished products to customers. Inaddition, any of these events could increase volatility in the United Statesand world financial markets which may depress the price of our Common Stock andmay limit the capital resources available to us or our customers or suppliers,which could result in decreased orders from customers, less favorable financingterms from suppliers, and scarcity or increased costs of materials andcomponents of our products. Additionally, terrorist attacks on Ultratech itselfmay significantly 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.

**InformationAvailable on Company Web-site**

Ultratech’s web-site islocated 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 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 Woburn, Massachusetts and Dallas, Texas under leases expiring in 2005. Wemaintain offices outside the United States in Taiwan, the Philippines, Japan,Korea, France, China and the United Kingdom, with terms expiring between fivemonths and eleven years from December 31, 2004. 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 filed lawsuits assertingpatent infringement and related claims against Nikon, Canon, and ASML in theU.S. District Court for the Eastern District of Virginia. In April 2000,we reached a settlement with Nikon, and in September 2001, we reached asettlement with Canon. The patent litigation against ASML is ongoing afterhaving been transferred to the Northern District of California. After theDistrict Court made a preliminary determination that ASML did not infringe thepatent, we appealed the decision to the Court of Appeals for the FederalCircuit in Washington, D.C. The Court of Appeals reversed the preliminarydetermination of the District Court, ruling in our favor, and remanded the caseback to the District Court in Northern California for further proceedings.

On October 12, 2001, we were sued in the DistrictCourt of Massachusetts by SVG Lithography Systems (“SVGL”), alleging infringementof several patents. SVGL is a division of Silicon Valley Group, Inc.,which is a wholly owned subsidiary of ASML. As of March 2004, all claimsmade by SVGL had been dismissed.

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We are involved in otherlawsuits and legal actions that we believe not to be material to our business,results of operations or financial condition.

**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 31,2004.

**ExecutiveOfficers of the Registrant**

As of December 31,2004, 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 |       | 65         |       | Chairman  of the Board of Directors and Chief Executive Officer        |       |
| John E. Denzel         |       | 45         |       | President and Chief Operating Officer                                  |       |
| Bruce R. Wright        |       | 56         |       | Senior Vice President, Finance, Chief Financial  Officer and Secretary |       |
| Rick P. Friedman       |       | 48         |       | Senior Vice President  of World-wide Sales and Marketing               |       |

 

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 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. Denzelwas the Director of Technology at the J-I-T Institute of Technology. Prior tothat, 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 KLA 

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Instruments Corporation in1997, which formed KLA-Tencor Corporation, and from December 1991 through October 1994,Mr. Wright was Vice President and Chief Financial Officer of Tencor Instruments.Mr. Wright serves on the Board of Directors of Credence SystemsCorporation, a provider of products and equipment used for the testing ofsemiconductor integrated circuits.

Mr. Friedman has served as Senior Vice Presidentof World-wide Sales and Marketing since June 2004. Prior to joiningUltratech, Mr. Friedman served two years as Vice President, World-wideSales and Field Operations for Asyst Technologies, Inc., a leadingprovider of integrated automation solutions for the semiconductor manufacturingindustry. Mr. Friedman has over eighteen years experience in thesemiconductor capital equipment industry and has held executive positions atmajor semiconductor equipment manufacturers, including eight years at LamResearch Corporation, where he held a number of leadership positions withregional and global responsibility for sales and field operations. He joinedLam Research Corporation as a result of its 1993 acquisition of Drytek, Inc.,where he served in key sales leadership and account management roles.

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**PART II**

**ITEM 5.**                *MARKET FOR THE REGISTRANT’S COMMON EQUITY, AND RELATED STOCKHOLDERMATTERS AND 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 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 |   |   |
|                                                                 |            |            |            |                   |            |                  |            |                       |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |

 
| **Fiscal 2003 - Fiscal Quarter Ended** | ** ** | ** ** | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
| Market Price:                                                   | High       |       |       | $                 | 12.99      |             |       | $                     | 19.75      |                 |       | $ | 32.23 |   |   |   | $ | 35.00 |   |   |
|                                                            | Low        |       |       | $                 | 9.71       |             |       | $                     | 10.75      |                 |       | $ | 18.06 |   |   |   | $ | 24.25 |   |   |
|                                                                 |            |            |            |                   |            |                  |            |                       |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

As of March 1, 2005, we had approximately 368stockholders of record.

Ultratech’s fiscal quarters in 2004 ended on April 3,2004, July 3, 2004, October 2, 2004 and December 31, 2004, andour fiscal quarters in 2003 ended on March 29, 2003, June 28, 2003, September 27, 2003and December 31, 2003. For convenience of presentation, our fiscalquarters in each year have been shown as ending on March 31, June 30,September 30, and December 31.

We have not paid cash dividends on our Common Stocksince inception, and our Board of Directors presently plans to reinvest ourearnings in our business. Accordingly, it is anticipated that no cash dividendswill be paid to holders of Common Stock in the foreseeable future.

In August 2004, we issued 1,250 shares of our CommonStock in an unregistered, private placement under Section 4(2) of theSecurities Act of 1933 to Semiconductor Equipment and Materials International(SEMI), a non-profit global trade organization, to support their efforts toeducate youth 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 SemiconductorEquipment and Materials International (SEMI), a non-profit global tradeorganization, to support their efforts to educate youth interested in scienceand math about career opportunities in the semiconductor equipment industry.

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**ITEM 6.**                *SELECTED FINANCIAL DATA*
| **In thousands, except per share data and percentage information**                        | ** ** | **2004** | ** ** | **2003(d)** | ** ** | **2002(c)** | ** ** | **2001(b)** | ** ** | **2000(a)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ***Operations:***                                                                                                                 |       |     |       |        |       |        |       |        |       |        |       |
| Net sales                                                                                                                         |       | $        | 109,892    |        | $          | 100,121     |       | $           | 68,506     |        | $          | 130,680 |   | $ | 146,655 |   |
| Gross profit                                                                                                                      |       | 52,693   |       | 46,611      |       | 14,850      |       | 44,781      |       | 57,667      |       |
| Gross profit as a  percentage of net sales                                                                                        |       | 48       | %          | 47          | %          | 22          | %          | 34          | %          | 39          | %          |
| Operating income (loss)                                                                                                           |       | $        | (2,429     | )           | $          | 2,972       |       | $           | (36,506    | )           | $          | (24,465 | ) | $ | (11,171 | ) |
| Income (loss) before  income taxes (benefit) and cumulative effect of a change in accounting  principle                      |       | 1,069    |       | 6,996       |       | (30,248     | )          | (16,806     | )          | 12,159      |       |
| Pre-tax income (loss) as  a percentage of net sales                                                                          |       | 1        | %          | 7           | %          | (44         | )%         | (13         | )%         | 8           | %          |
| Income taxes (benefit)                                                                                                            |       | $        | 445        |        | $          | (570        | )          | $           | (4,866     | )           | $          | 1,038 |   | $ | 2,433 |   |
| Income (loss) before  cumulative effect of a change in accounting principle                                                  |       | 624      |       | 7,566       |       | (25,382     | )          | (17,844     | )          | 9,726       |       |
| Cumulative effect on  prior years of SAB 101 “Revenue Recognition in Financial Statements”                    |       | —   |       | —      |       | —      |       | —      |       | (18,883     | )          |
| Net income (loss)                                                                                                                 |       | 624      |       | 7,566       |       | (25,382     | )          | (17,844     | )          | (9,157      | )          |
| Income (loss) before  cumulative effect of a change in accounting principle per share—basic                             |       | $        | 0.03       |        | $          | 0.33        |       | $           | (1.12      | )           | $          | (0.81 | ) | $ | 0.46 |   |
| Cumulative effect on  prior years of SAB 101 “Revenue Recognition in Financial Statements” per  share—basic   |       | —   |       | —      |       | —      |       | —      |       | $           | (0.89      | ) |
| Net income (loss) per  share—basic                                                                                           |       | $        | 0.03       |        | $          | 0.33        |       | $           | (1.12      | )           | $          | (0.81 | ) | $ | (0.43 | ) |
| Number of shares used in  per share computation—basic                                                                        |       | 23,733   |       | 23,017      |       | 22,586      |       | 22,143      |       | 21,236      |       |
| Income (loss) before  cumulative effect of a change in accounting principle per share—diluted                           |       | $        | 0.03       |        | $          | 0.31        |       | $           | (1.12      | )           | $          | (0.81 | ) | $ | 0.46 |   |
| Cumulative effect on  prior years of SAB 101 “Revenue Recognition in Financial Statements” per  share—diluted |       | —   |       | —      |       | —      |       | —      |       | $           | (0.89      | ) |
| Net income (loss) per  share—diluted                                                                                         |       | $        | 0.03       |        | $          | 0.31        |       | $           | (1.12      | )           | $          | (0.81 | ) | $ | (0.43 | ) |
| Number of shares used in  per share computation—diluted                                                                      |       | 24,734   |       | 24,476      |       | 22,586      |       | 22,143      |       | 21,236      |       |
| ***Balance  sheet:***                                                                                                             |       |     |       |        |       |        |       |        |       |        |       |
| Cash, cash equivalents  and short-term investments                                                                                |       | $        | 151,627    |        | $          | 165,902     |       | $           | 157,529    |        | $          | 169,154 |   | $ | 163,681 |   |
| Working capital                                                                                                                   |       | 169,621  |       | 170,501     |       | 152,160     |       | 162,826     |       | 151,434     |       |
| Total assets                                                                                                                      |       | 230,546  |       | 220,748     |       | 222,366     |       | 243,419     |       | 264,069     |       |
| Long-term obligations,  less current portion                                                                                      |       | —   |       | —      |       | —      |       | —      |       | —      |       |
| Stockholders’ equity                                                                                                         |       | 193,290  |       | 190,739     |       | 171,754     |       | 195,281     |       | 194,257     |       |
| ***Other  data:***                                                                                                                |       |     |       |        |       |        |       |        |       |        |       |
| Return on average equity                                                                                                          |       | 0        | %          | 4           | %          | (14         | )%         | (9          | )%         | (5          | )%         |
| Book value per common  share outstanding                                                                                          |       | $        | 8.10       |        | $          | 8.09        |       | $           | 7.59       |        | $          | 8.70 |   | $ | 9.13 |   |
| Current ratio                                                                                                                     |       | 6.31     |       | 7.49        |       | 4.29        |       | 4.39        |       | 3.18        |       |
| Long term debt to equity  ratio                                                                                                   |       | 0.00     |       | 0.00        |       | 0.00        |       | 0.00        |       | 0.00        |       |
| Capital expenditures                                                                                                              |       | $        | 9,868      |        | $          | 6,073       |       | $           | 4,800      |        | $          | 5,389 |   | $ | 18,439 |   |
| Income tax (benefit) as percentage of pre-tax  income (loss)                                                                 |       | 42       | %          | (8          | )%         | 16          | %          | (6          | )%         | N/C         |       |

 

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***Quarterly Data***
| **Unaudited,  in thousands, except per share data**          | ** ** | ** ** | *** *** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
|--------------------------------------------------------------|------------|------------|--------------|---------|------------|---------|------------|---------|------------|---------|------------|
| **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  |       |
| **2003(d)**                                                  | * *   |       |         |    |       |    |       |    |       |
| Net sales                                                    | * *   | $          | 22,000       |    | $          | 24,764  |       | $       | 26,544     |    | $          | 26,813 |   |
| Gross profit                                                 | * *   | 8,134      |         | 11,824  |       | 13,713  |       | 12,940  |       |
| Operating income  (loss)                                     | * *   | (1,658     | )            | 1,100   |       | 1,711   |       | 1,819   |       |
| Net income (loss)                                            | * *   | (983       | )            | 2,029   |       | 3,240   |       | 3,280   |       |
| Net income (loss)  per share—basic                      | * *   | $          | (0.04        | )       | $          | 0.09    |       | $       | 0.14       |    | $          | 0.14 |   |
| Number of shares  used in per share computation—basic   | * *   | 22,680     |         | 22,783  |       | 23,010  |       | 23,449  |       |
| Net income (loss)  per share—diluted                    | * *   | $          | (0.04        | )       | $          | 0.09    |       | $       | 0.13       |    | $          | 0.13 |   |
| Number of shares used in  per share computation—diluted | * *   | 22,680     |         | 23,381  |       | 25,144  |       | 25,900  |       |

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(a)           Operating loss in 2000includes a special charge of $9,670,000 relating to the shutdown of our UltraBeamunit. Net loss in 2000 includes a non-operating gain of $15,983,000 relating tothe sale of land and income taxes of $2,433,000 relating to the sale of landand other special items. Additionally, net loss in 2000 includes a charge of$18,883,000 related to the cumulative effect on prior years of the applicationof SAB 101 “Revenue Recognition in Financial Statements.”

(b)          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.

(c)           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.

(d)          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’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*

Certain of the statementscontained herein, which are not a historical fact 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 lengthy sales cycles,including the timing of system installations and acceptances; dependence on newproduct introductions and commercial success of any new products; integration,development and associated expenses of the laser processing operation; delays,deferrals and cancellations of orders by customers; cyclicality in thesemiconductor and nanotechnology industries; pricing pressures and productdiscounts; lengthy and costly development cycles for lithography and laser-processingtechnologies and applications; 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; market acceptance of new products and enhanced versionsof our existing products; 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 stock optiongrants on net income per share, which is largely dependent upon us achievingand maintaining profitability and the market price of our stock; mix ofproducts sold; rapid technological change and the importance of timely productintroductions; outcome of litigation; manufacturing variances and productionlevels; timing and degree of success of technologies licensed to outsideparties; product concentration and lack of product revenue diversification;inventory obsolescence; asset impairment; effects of certain anti-takeoverprovisions; future acquisitions; volatility of stock price; businessinterruptions due to natural disasters or utility failures; environmentalregulations; and any adverse effects of terrorist attacks in the United Statesor elsewhere, or government responses thereto, or military actions in Iraq,Afghanistan and elsewhere, on the economy, in general, or on our business inparticular. Due to these and additional factors, the statements, historicalresults and percentage relationships set forth below are not necessarilyindicative of the results of operations for any future period. Theseforward-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. (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 thesemiconductor 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 which formthe 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 andlicense fees.

Provided all other criteria are met, we recognizerevenues on system sales when we have received customer acceptance of thesystem and have completedthe 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 isrecorded only if the product has met product specifications prior to shipmentand management deems that no significant uncertainties as to productperformance exist.

Our transactions frequently include the sale ofsystems andservices under multiple element arrangements. In situations with multipledeliverables, revenue is recognized upon the delivery of the separate elementsand when we receive customer acceptance or are otherwise released from ourcustomer 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 impact thevalue of our inventory and our reported operating results. In the future, if wefind that our estimates are too optimistic and we determine that our inventoryneeds to be written down, we will be required to recognize such costs in ourcost of sales at the time of such determination. For example, if the demandassumption used in our assessment at December 31, 2004 was reduced by 10%,assuming all other assumptions such as product mix are kept the same and thatmitigation efforts were not possible, we would have had to write down ourinventory and open purchase commitments by $555,000. Conversely, if we find ourestimates are too pessimistic and we subsequently sell product that haspreviously been written down, our gross margin in that period will be favorablyimpacted. During the three year period ended December 31, 2004, werecorded a write down of inventory of $6.7 million in 2002 and subsequentlyrealized favorable gross margin impacts of $1.7 million and $1.0 million,respectively, in 2003 and 2004 due to the sales of inventory previously writtendown.

**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, 2004, our estimates and assumptionshave not changed significantly and our estimates have approximated actual costsincurred.

**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 $1.5 million. Accordingly, a single customerdefault could have a material adverse effect on our results of operations.During the three years ended December 31, 2004, we did not experiencesignificant write-offs of accounts receivable. As a result, we have reduced ourbad debt reserve as a percentage of gross accounts receivable from 2.4% at December 31,2002 to 1.2% at December 31, 2004.

**Deferred Income Taxes**

We record a valuationallowance to reduce our deferred tax assets to the amount that is more likelythan not to be realized. At December 31, 2004, the valuation allowance was$72.9 million. Based on the uncertainty of future pre-tax income for U.S. taxpurposes, we have presently fully reserved our domestic net deferred taxassets. At December 31, 2004, we had recorded approximately $0.3 millionof foreign 

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deferredtax assets related to our Japanese operations. In the event we were todetermine that we would be able to realize the domestic deferred tax assets inthe future, an adjustment to the deferred tax asset valuation reserve wouldincrease income through an increase in the Company’s income tax benefit in theperiod such determination was made.

**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 $1.0 million to $4.0 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 suppliers dueto their long production lead times or otherwise, have caused and may continueto cause net sales in a particular period to fall significantly below ourexpectations, materially adversely affecting our operating results for thatperiod. In particular, the long manufacturing and acceptance cycles of ourSaturn Spectrum family of wafer steppers and laser thermal processing systemsand the long lead time for lenses and other materials, could cause shipmentsand acceptances of such products to be delayed from one quarter to the next,which could materially adversely affect our financial condition and results ofoperations 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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**Netsales**

**2004 vs. 2003**
| **(in 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 | % |   |

 

Net sales consist of revenues from system sales, spareparts sales, services and licensing of technologies. System sales increased11%, to $82.0 million, on a unit volume increase of 14%. The weighted-averageselling prices of systems sold declined 2% from the prior year due to anincrease in the percentage of refurbished systems sold as compared to the prioryear. In 2004, refurbished systems accounted for approximately 30% of unitssold as compared to 22% of units sold in 2003. This percentage can fluctuatefrom year to year and, as refurbished units generally have lower averageselling 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, 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 selling price.The decrease in the weighted average selling price resulted from an increase inthe percentage of refurbished systems sold in 2004 as compared to 2003. In2004, refurbished systems accounted for approximately 42% of units sold ascompared 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, as compared with $3.7 million in 2003, as a resultof a payment we received from a company under a licensing agreement. We do notexpect a similar payment in the future. Except as noted above, we expectlicense revenue to continue at its current level until April 2005 at whichtime our deferred license revenue will be fully amortized.

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 incomerelated to our products is recognized upon satisfying the contractualobligations for installation and/or customer acceptance.

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For the year ended December 31,2004, international net sales were $71.7 million, or 65% of total net sales, ascompared with $61.4 million, or 61% of total net sales for 2003. We expectsales to international customers to continue to represent a significantmajority of our revenues during 2005. 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, 2004, we recorded system sales inJapan of $31.1 million of which 49% were denominated in Japanese yen. Thissubjects us to the risk of currency fluctuations. We attempt to mitigate thisrisk by entering into foreign currency forward exchange contracts for theperiod between when an order is received and when it is recorded as revenue.After recording revenue, we use various mechanisms, such as foreign currencyforward exchange contracts and natural hedges, to offset substantial portionsof the gains or losses associated with our Japanese yen denominated receivablesdue to exchange rate fluctuations. We had approximately $6.6 million ofJapanese yen denominated receivables at December 31, 2004. Internationalsales expose us to a number of additional risks, including fluctuations in thevalue of local currencies relative to the U.S. dollar, which impact therelative cost of ownership of our products and, thus, the customer’swillingness to purchase our product. (See “Additional Risk Factors:International Sales”).

**2003 vs. 2002**
| **(in millions)** | ** ** | ** ** | ** ** | **2003** | ** ** | **2002** | ** ** | **Amount of  Change** | ** ** | **Percentage  change** | ** ** |
|------------------------|------------|------------|------------|----------|------------|----------|------------|----------------------------|------------|------------------------|------------|
| Sales  of:             |       |       |       |     |       |     |       |                       |       |                   |       |   |   |
| Systems                |       | $          | 73.6       |     | $          | 44.2     |       |                       | $          | 29.4                   |       |   |   | 66 | % |   |
| Spare parts            |       | 12.3       |       | 8.2      |       |     | 4.1        |                       |       |                   | 50         | % |   |
| Services               |       | 10.6       |       | 10.9     |       |     | (0.3       | )                          |       |                   | (3         | )% |   |
| Licenses               |       | 3.7        |       | 5.2      |       |     | (1.5       | )                          |       |                   | (29        | )% |   |
| Total Net Sales        |       | $          | 100.1      |     | $          | 68.5     |       |                       | $          | 31.6                   |       |   |   | 46 | % |   |

 

System sales increased 66%, to $73.6 million, on aunit volume increase of 76%. Excluding reduction lithography systems, which wehave discontinued, system sales increased 93% to $72.1 million, on a unitvolume increase of 71%. We discontinued the XLS reduction stepper platform in September 2001.However, we were able to sell three systems that had been previously writtendown during the year ended December 31, 2003. The weighted-average sellingprices of systems sold, exclusive of reduction systems, increased 13% dueprimarily to a lower proportion of lower-priced refurbished systems sold in 2003.In 2003, refurbished systems accounted for approximately 22% of units sold ascompared to 45% of units sold in 2002.

On a product market application basis, system sales tothe semiconductor industry, primarily for advanced packaging applications, were$55.5 million for the year ended December 31, 2003, an increase of 50% ascompared with system sales of $36.8 million in 2002. System sales to thesemiconductor industry included $1.0 million and $6.8 million of reductionstepper systems, which have been discontinued, for the years ended December 31,2003 and 2002, respectively. This increase is due to increased purchases by thesemiconductor industry as demand for products with advanced packagingcapabilities has increased, particularly in the bump technology area, during2003. System sales to the nanotechnology market were $18.1 million for the yearended December 31, 2003, an increase of 145% as compared with sales of$7.4 million in 2002, primarily as a result of growth in the laser diode andLED markets and improvements in the disk drive industry.

Sales of spare parts for 2003 increased 50%, to $12.3million, as compared to 2002. This increase is due to increased levels ofmanufacturing within the semiconductor industry, resulting in greaterutilization of the equipment, and an increase in upgrades of customer systems.Revenues from services declined 3%, 

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to $10.6 million,primarily as a result of fewer units coming out of warranty during the yearpartially offset by increased revenue from training courses that we offered of$0.4 million.

Revenues from licensing and licensing supportarrangements declined to $3.7 million, as compared with $5.2 million in 2002,as a result of a large technology support agreement that expired in February 2002.At December 31, 2003, we had approximately $1.1 million of deferredproduct and services income resulting from products shipped but not yetinstalled and accepted and deferred service revenue, as compared with $11.3million at December 31, 2002. The decrease in deferred product andservices income resulted from lower shipments of systems not yet installed andaccepted as compared to systems recognized for revenue in the fourth fiscalquarter of 2003. During 2003, deferred license income decreased by $3.7million, to $4.8 million, as a result of amortization of proceeds received inprior periods.

For the year ended December 31,2003, international net sales were $61.4 million, or 61% of total net sales, ascompared with $33.2 million, or 48% of total net sales for 2002.

**Gross profit**

**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 efficiencies associated withincreased production and services activity (2.1 points) and increased licenserevenue which has little, if any, cost of sales associated with it (.5 points)offset partially by the favorable impact in 2003 from the sale of 3 XLSreduction lithography systems which had been previously written down (0.7percentage points) and the favorable impact in 2003 due primarily to the saleof inventory previously written down (0.6 percentage points).

Exclusive of licensing revenues, gross margin was45.9% for 2004 as compared with 44.5% for 2003. 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. We expect license revenue to continue at the current leveluntil April 2005, when it will cease. Gross margins will be negativelyimpacted by the discontinuance of license revenue at that time.

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 costsuntil manufacturing efficiencies are realized and which are typicallydiscounted more than existing products until the products gain marketacceptance; the rate of capacity utilization; writedowns of inventory and openpurchase commitments; technology support and licensing revenues, which have no associatedcost of sales; product discounts, pricing and competition in our targetedmarkets; non-linearity of shipments during the quarter which can result inmanufacturing inefficiencies; the percentage of international sales, whichtypically have lower gross margins than domestic sales principally due tohigher field service and support costs; and start-up costs and inefficienciesassociated with the implementation of subcontracting arrangements.

**2003 vs. 2002**

On a comparative basis, gross margins were 46.6% and21.7% for the years ended December 31, 2003 and 2002, respectively. Theimprovement in gross margin in 2003 was due primarily to inventory write-downsin 2002 plus the favorable impact of selling inventory in 2003 previouslywritten down (11.5 points), improved service and warranty costs resulting fromimproved product quality and better utilization of our personnel (9.1 points),increased production levels resulting in better utilization of ourmanufacturing infrastructure (4.4 points), and lower manufacturing costs ofwhich $0.9 million was due to the recording of 

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an expense in 2002 relatedto prior periods due to rent-averaging requirements under certain of ourfacility leases (2.0 points). These improvements were offset partially by theimpact of lower licensing revenue (1.5 points), which has no associated cost ofsales, and a change in product mix.

Exclusive of licensing andlicensing support revenues, gross margin was 44.5% for the year ended December 31,2003, as compared with 15.2% for the year ended December 31, 2002. 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**

**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. We continue to invest significantresources in the development and enhancement of our laser processing systemsand technologies and our 1X products and related technologies. Given that thereis an inherent delay between the time product development activities and expendituresoccur and when resultant product revenue is ultimately realized, current yearresearch, development and engineering investments contributed very little tothe current year’s revenue. However, we expect that product development effortsduring 2004 will contribute to revenue in future years. Approximately 94% ofour system revenue in 2004 represented products or features developed by usduring the three years ended December 31, 2004.

**2003 vs. 2002**
| **(in  millions)**                              | ** ** | ** ** | ** ** | **2003** | ** ** | **2002** | ** ** | **Amount of  Change** | ** ** | **Percentage  change** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------------------------|------------|------------------------|------------|
| Research,  development and engineering expenses |       | $          | 21.3       |     | $          | 23.5     |       |                       | $          | (2.2                   | )          |   |   | (9 | )% |   |
|                                                 |            |            |            |          |            |          |            |                            |            |                        |            |  |  |  |  |  |  |  |

 

The $2.2 millionyear-over-year decline in research, development and engineering spending wasprimarily attributable to the restructuring of the applications engineeringfunction in September 2002 ($2.0 million), the discontinuance of ouradvanced reduction stepper platforms in the second half of 2002 ($1.5 million)and the impact of recording a $0.5 million non-cash expense in 2002 related toprior periods, pursuant to rent-averaging requirements under certain of ourfacility leases. These favorable impacts were offset partially by increasedspending on our laser processing technologies and our next generation 1Xstepper products.

**Amortization of intangible assets**

Amortization of intangibleassets was $0.4 million for the years ended December 31, 2004, 2003 and2002. We expect this expense to be $0.1 million in the first quarter of 2005and to end in March 2005.

 

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**Selling,general and administrative expenses**

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

 

Selling, general andadministrative expense increased by $6.1 million in 2004 as compared to 2003. 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.

**2003 vs. 2002**
| **(in millions)**                        | ** ** | ** ** | ** ** | **2003** | ** ** | **2002** | ** ** | **Amount of  Change** | ** ** | **Percentage  change** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------------------------|------------|------------------------|------------|
| Selling,  general and administrative expenses |       | $          | 22.7       |     | $          | 23.4     |       |                       | $          | (0.7                   | )          |   |   | (3 | )% |   |
|                                               |            |            |            |          |            |          |            |                            |            |                        |            |  |  |  |  |  |  |  |

 

The year-over-year declinein selling, general and administrative expense was $0.7 million. This decreasewas primarily attributable to cost containment measures implemented in thesecond half of 2002 ($1.1 million) and reduced legal costs ($0.8 million),partially offset by higher selling expenses associated with a 46% increase inour revenue ($0.6 million) and increased corporate governance costs primarilyassociated with our compliance with the Sarbanes-Oxley Act of 2002 and relatedSEC and Nasdaq rules ($0.6 million).

**Restructure of operations**

In September 2002, in response to suddenlyworsening conditions in the semiconductor industry in particular, and thegeneral economy as a whole, we decided to reduce our workforce by approximately15% and to cease or suspend activities related to certain engineering andadministrative initiatives. As a result of this decision, we recognized arestructuring charge of $4.3 million for the three-month period ended September 28,2002. We reduced this charge by $0.2 million during the three-month periodended December 31, 2002, primarily as a result of canceling our plans toexit a certain building and an adjustment of our international severance costs.Of the total net charge for the year ended December 31, 2002 of $4.1million, the cash component included employee severance costs of $0.9 million,contract termination fees of $0.2 million and facility closure costs of $0.1million. The non-cash component of this charge included $2.5 million ofimpairment to the carrying value of equipment and leasehold improvements and$0.3 million of impairment to prepaid expenses and other current assets. Wefurther reduced this charge by $0.1 million during the three-month periodending June 30, 2003, as a result of a gain recorded from the sale of certainfixed assets previously written down. As of December 31, 2003, allrestructuring costs had been paid.

In September 2001, wereached a decision to consolidate our manufacturing operations and eliminateapproximately 20% of our workforce. As a result of this decision, we recognizeda restructuring charge of $12.0 million in the quarter ended September 30,2001. Additionally, we recognized restructuring charges of $0.3 million, or$0.01 per share (diluted) in the quarter ended December 31, 2001, primarilyrelated to employee severance costs of $0.6 million (from additional personnelactions) and higher fixed asset disposal costs of $0.4 million, partiallyoffset by revised facility closure and other cost estimates of $0.7 million. Ofthe full-year charge of $12.3 million, non-cash components included a $4.1million impairment 

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chargefor intangible assets related to our XLS reduction product platform acquired in1998 and a $1.5 million impairment charge for fixed assets disposed of inconjunction with the consolidation of manufacturing facilities. The cashcomponents of this charge included $4.0 million for estimated expendituresrelated to the closure of facilities, $2.5 million for employee severance costsand $0.1 million of other restructuring costs. In October 2003, we reachedan agreement to terminate our lease for a facility in Wilmington,Massachusetts. As a result of this agreement we recorded a recovery ofrestructuring charges of $0.6 million during the period ending December 31,2003. As of December 31, 2003, all restructuring costs had been paid. (SeeNote 11 in “Notes to Consolidated Financial Statements.”)

**Interest and otherincome, net**
| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|
| **In thousands**           | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Interest  income                |       | $                                           | 3,624      |   | $ | 4,338 |   | $ | 6,441 |   |
| Other income  (expense), net    |       | (12                                         | )          | (61 | ) | (48 | ) |
| Interest and other  income, net |       | $                                           | 3,612      |   | $ | 4,277 |   | $ | 6,393 |   |
|                                 |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

Interest income was $3.6million for the year ended December 31, 2004, as compared with $4.3million for 2003 and $6.4 million for 2002. Included in the amounts reportedfor 2003 and 2002 were $0.3 and $0.2 million, respectively, relating tointerest on tax settlements or refunds. The decreases in 2004 and 2003 from theprior year, excluding the interest income on tax settlements or refunds, wereprimarily due to lower interest rates on our investments. We presently maintainan investment portfolio with a weighted-average maturity of less than one year.Consequently, changes in short-term interest rates have a significant impact onour interest income. Future changes are expected to have a similar impact.

**Income tax expense (benefit)**

For the year ended December 31, 2004, we recordedan income tax expense of $0.4 million which included a $0.1 million benefitrelated to the settlement of tax audit issues in the United Kingdom. The actualexpense recorded, excluding the benefit related to the settlement of tax auditissues in the United Kingdom, represents 51% of pre-tax income. This rate ishigher than the United States (“US”) federal rate of 35% because the taxbenefit of US losses was not recognized as domestic deferred tax assets arefully reserved.

For the year ended December 31, 2003, we recordedan income tax benefit of $0.6 million, inclusive of a special tax benefit of$0.4 million related to the settlement of a research and development tax creditclaim with the California Franchise Tax Board and $0.4 million related to theresolution of certain tax audit issues in the United Kingdom. Additionally, werecorded a $0.5 million benefit from the reversal of reserves associated withdeferred tax assets carried on the balance sheet of our Japan subsidiary,reflecting improved operating trends in that region. Offsetting these taxbenefits was a tax expense of approximately $0.7 million related, primarily, totaxable income in our foreign entities, for which there is no corresponding netoperating loss carry-forward benefit.

For the year ended December 31, 2002, we recordedan income tax benefit of $4.9 million. The benefit relates to resolution of ourIRS audit for the years 1993 through 1996 and a carry back of losses to recoverprior years’ federal alternative minimum taxes of $1.2 million.

In October 2004, the United States enacted TheAmerican Jobs Creation Act of 2004 (“the Act”). The Act provides for a threeyear phase-out of current extraterritorial income tax (“ETI”) benefits andreplaces ETI with a phased-in nine percent domestic production activitydeduction that will not be fully effective until 2010. We do not currentlyrealize ETI tax benefits. This provision of the Act is not expected to have amaterial effect on our results of operations of financial position in the nearfuture. The Act also includes a 

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deduction of 85% forcertain foreign earnings that are repatriated, as defined in the Act. We do notintend to repatriate any of our foreign earnings during the effective period ofthis deduction under the Act.

We presently anticipate that we will recognize incometax expense in 2005 of approximately 10% of pre-tax income, primarily as aresult of foreign income taxes and federal alternative minimum tax. We believethat the tax rate in 2005 will be substantially less than the rate in 2004 andthe statutory rate because of available federal net operating losscarry-forwards. We expect to recognize the benefit of the use of thesecarry-forwards by reversing the valuation allowance associated with thesedomestic deferred tax assets.

Incometaxes can be affected by estimates of whether, and within which jurisdictions,future earnings will occur and how and when cash is repatriated to the UnitedStates, combined with other aspects of an overall income tax strategy.Additionally, taxing jurisdictions could retroactively disagree with our taxtreatment of certain items, and some historical transactions have income taxeffects going forward. Accounting rules require these future effects to beevaluated using current laws, rules and regulations, each of which canchange at any time and in an unpredictable manner. We believe we haveadequately provided for any reasonably foreseeable outcome related to thesematters, and we do not anticipate any material earnings impact from theirultimate resolutions.

**Outlook**

Although we believe that our served markets havegenerally strengthened during the last twelve months, the anticipated timing oforders, shipments and customer acceptances usually requires us to fill a numberof production slots in any given quarter in order to meet our sales targets. Ifwe are unsuccessful in our efforts to secure those production orders, or ifexisting production orders are delayed or cancelled, our results of operationswill be materially adversely impacted. Accordingly, we may not be able toachieve or maintain our current or prior level of sales. We presently expectthat net sales for 2005 will increase 20% to 25% from the level of net salesreported in 2004 of $109.9 million.

Because our net sales are subject to a number ofrisks, including risks associated with the introduction of our new laserprocessing product line including 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 SaturnSpectrum 3e, our 300mm offerings, our laser processing systems, our newgeneration of 1X steppers and our 1000 series family of wafer steppers, are ofcritical importance to our future financial results. At December 31, 2004,these critical systems represented 90% of our backlog. To the extent that theseproducts 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, customer acceptances, orany other reason, our business, financial condition and results of operationswould be materially adversely affected.

We believe that gross margin for 2005 will be between48% and 49%, as compared to gross margin of 48% for 2004. Should our sales notreach the level expected, we may incur a higher risk of inventory obsolescenceand excess purchase commitments and lower utilization of our manufacturinginfrastructure, which would materially adversely impact our results ofoperations. New products generally have lower gross margins until there iswidespread market acceptance and until production and after-sales efficienciescan be achieved. Should significant market demand fail to develop for our laserprocessing systems, our business, financial condition and results of operationswould be materially adversely affected. In addition, higher costs associatedwith extended customer acceptance periods on early shipments of our new laserprocessing products will negatively affect our gross margins.

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We continue to investsignificant resources in the development and enhancement of our laserprocessing systems and technologies and our 1X products and relatedtechnologies. Further, we expect that selling, general and administrativeexpenses will continue to be impacted by the factors noted above in theexplanation of current period variances. As a result, we believe operatingmargin for 2005 will be between 5% and 7% and net income per share will be between $0.35 and $0.45.

**LIQUIDITY AND CAPITAL RESOURCES**

Net cash used in operating activities was $10.5million for the year ended December 31, 2004, as compared with net cashgenerated by operations of $11.7 million for the comparable period in 2003. Netcash used in operating activities during the year ended December 31, 2004was attributable to the net change in operating assets and liabilities of $20.2million offset partially by non-cash charges to income of $9.2 million and netincome of $0.6 million. The $20.2 million use of cash from the net change inoperating assets and liabilities was primarily a result of an increase inaccounts receivable of $10.5 million, reflecting a 73% increase in shipmentsduring the fourth quarter of 2004 as compared to shipments during the fourthquarter of 2003; an increase in inventories of $8.8 million, due to the rollout of our laser processing product; a decrease in deferred license revenue of$3.7 million; an increase in long-term demonstration inventories of $2.1million and a use of cash of $1.0 million due to changes in all other assetsand liabilities. These uses were offset partially by an increase in accountspayable of $5.9 million due to investments in our facilities and inventoryrelated to our laser processing product during the fourth quarter of 2004.

We believe that because of the relatively longmanufacturing cycle of certain of our systems, particularly newer products, ourinventories will continue to represent a significant portion of workingcapital. Currently, we are devoting significant resources to the development,introduction and commercialization of our laser processing system and to thedevelopment of our next generation 1X lithography technologies. We currentlyintend to continue to incur significant operating expenses in the areas ofresearch, development and engineering, manufacturing and selling, general andadministrative costs in order to further develop, produce and support these newproducts. Additionally, gross profit margins, inventory and capital equipmentlevels may be adversely impacted in the future by costs associated with theinitial production of the laser processing system and by future generations ofour 1X wafer steppers. These costs include, but are not limited to, additionalmanufacturing overhead, costs of demonstration systems and facilities and theestablishment of additional after-sales support organizations. Additionally,there can be no assurance that operating expenses will not increase, relativeto sales, as a result of adding technical, marketing and administrativepersonnel, among other costs, to support our new products. If we are unable toachieve significantly increased net sales or if our sales fall belowexpectations, our cash flow and operating results will be materially adverselyaffected until, among other factors, costs and expenses can be reduced. Ourfailure to achieve our sales targets for these new products could result inadditional inventory write-offs and asset impairment charges, either of whichcould materially adversely impact our results of operations.

During the year ended December 31, 2004, net cashprovided by investing activities was $24.8 million due to a net decrease inavailable-for-sale securities of $34.7 million partially offset by capitalexpenditures of $9.9 million. We are planning to incur capital expenditures in2005 of approximately $5 million for equipment and facility improvements drivenprimarily by our new product introductions.

Net cash provided by financing activities was $8.5million during the year ended December 31, 2004, attributable to increasedborrowings of $5.3 million and $3.1 million in proceeds received from theissuance of Common Stock under our employee stock option and stock purchaseplans.

At December 31, 2004, we had working capital of$169.6 million. Our principal source of liquidity at December 31, 2004consisted of $143.7 million in cash, cash equivalents and short-terminvestments net of our borrowings under our line of credit.

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We have approximately $11.3 million of retainedearnings in our foreign subsidiaries. Although it is not our intent torepatriate these earnings, possible adverse tax consequences associated withrepatriating these funds may effectively restrict their use to cashrequirements in those specific jurisdictions.

During 2002, we received proceeds of $3.2 million inconjunction with a sale/leaseback transaction. To provide additional securityto the lessor, we granted a security interest in certain of our otherequipment. We recorded a deferred rent credit equal to the excess of the saleproceeds over the adjusted basis in the equipment sold. In September 2003,we paid $1.8 million to close this transaction and to purchase the relatedcapital asset. The impact from this transaction on our results of operationsfor the year ended December 31, 2003 was immaterial.

In December 2004, we entered into a line ofcredit agreement with a brokerage firm replacing a similar arrangement that wehad with a different firm. Under the terms of this agreement, we may borrowfunds at a cost equal to the current Federal funds rate plus 100 basis points(2.25% as of December 31, 2004). Certain of our cash, cash equivalents andshort-term investments secure borrowings outstanding under this facility. Fundsare advanced to us under this facility based on pre-determined advance rates onthe cash and securities held by us in this brokerage account. This agreementhas no set expiration date and there are no loan covenants. As of December 31,2004, $7.9 million was outstanding under this facility, with a relatedcollateral requirement of approximately $10.5 million of our cash, cashequivalents and short-term investments. As of December 31, 2003, $2.5million was outstanding under a similar facility, with a related collateralrequirement of approximately $3.6 million of our cash, cash equivalents andshort-term investments.

In January 2003, our Board of Directorsauthorized the purchase of up to 5.0 million shares of our Common Stock atprevailing market prices. This authorization expired on December 31, 2003.We did not elect to repurchase any shares under this arrangement. Should wedecide to acquire our own shares in the open market, potentially large amountsof our cash, cash equivalents and short-term investments would be required.

Thefollowing summarizes our contractual obligations at December 31, 2004, andthe effect such obligations are expected to have on our liquidity and cashflows in future periods:
| **(in millions)**                                     | ** ** | ** ** | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After  5 years** | ** ** |
|------------------------------------------------------------|------------|------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------|------------|
| Notes  payable obligations                                 |       | $          | 7.9        |      |       | $                               | 7.9        |               |       |               | $          | —                  |       |   |   | $ | — |   |   |   | $ | — |   |   |
| Non-cancelable  operating lease obligations—equipment |       | 0.2        |       |      | 0.1        |                            |       |               | 0.1        |               |       |                    | —     |   |   |   | — |   |   |
| Non-cancelable  operating lease obligations—buildings |       | 26.0       |       |      | 4.3        |                            |       |               | 9.1        |               |       |                    | 9.3        |   |   |   | 3.3 |   |   |
| Long-term  payables                                        |       | 0.5        |       |      | —     |                            |       |               | —     |               |       |                    | —     |   |   |   | 0.5 |   |   |
| Open purchase order  commitments                           |       | 36.8       |       |      | 24.4       |                            |       |               | 12.4       |               |       |                    | —     |   |   |   | — |   |   |
| Total contractual cash  obligations                        |       | $          | 71.4       |      |       | $                               | 36.7       |               |       |               | $          | 21.6                    |       |   |   | $ | 9.3 |   |   |   | $ | 3.8 |   |   |

 

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 and manufacture of new lithographysystems and enhancements are highly capital-intensive. In order to becompetitive, we believe we must continue to make significant expenditures forcapital equipment; sales, service, training and support capabilities; systems,procedures and controls; and expansion of operations and research anddevelopment, among many other items. We expect that cash generated fromoperations and our cash, cash equivalents and short-term investments will besufficient to 

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meet our cash requirementsfor at least the next twelve months. However, in the near-term, we may continueto utilize existing and future lines of credit, and other sources of financing,in order to maintain our present levels of cash, cash equivalents andshort-term investments. Beyond the next twelve months, we may requireadditional equity or debt financing to address our working capital or capitalequipment needs. In addition, we may seek to raise equity or debt capital atany time that we deem market conditions to be favorable. Additional financing,if needed, may not be available on reasonable terms, or at all.

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 andamortization expenses and impairment charges related to goodwill and otherintangible assets, which could materially adversely affect our financialcondition and results of operations. In addition, acquisitions involve numerousrisks, including difficulties in the assimilation of the operations,technologies, personnel and products of the acquired companies; the diversionof management’s attention from other business concerns; risks of entering marketsin which we have limited or no direct experience; and the potential loss of keyemployees of the acquired company. In the event we acquire product lines,technologies or businesses which do not complement our business, or whichotherwise do not enhance our sales or operating results, we may incursubstantial write-offs and higher recurring operating costs, which could have amaterial adverse effect on our business, financial condition and results ofoperations. In the event that any such acquisition does occur, there can be noassurance as to the effect thereof on our business or operating results.

**Off-Balance Sheet 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, 2004, 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 yen denominatedforeign currency exposures. We use foreign currency forward contracts to hedgethe risk that unremitted Japanese yen denominated receipts from customers foractual or forecasted sales of equipment after receipt of customer orders may beadversely affected by changes in foreign currency exchange rates. Afterrecording revenue, we use various mechanisms, such as foreign currency forwardexchange contracts and natural hedges, to offset substantial portions of thepotential gains or losses associated with our Japanese yen denominated assetsand liabilities due to exchange rate fluctuations. At December 31, 2004,we had taken action to hedge approximately 100% of these Japanese yendenominated exposures. In addition to natural hedges resulting from having bothassets and liabilities denominated in Japanese yen, we enter into foreigncurrency forward contracts that generally have maturities of nine months orless. We often close foreign currency forward contracts by entering into anoffsetting contract. At December 31, 2004, we had contracts for the saleof $13.9 million of foreign currencies at fixed rates of exchange.

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***ITEM 7A.******   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

**Interest rate risk**

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

Certain of ourcash, cash equivalents and short-term investments serve as collateral for aline of credit we maintain with a brokerage firm. The line of credit is usedfor liquidity purposes, mitigating the need to liquidate investments in orderto meet our current operating cash requirements.

Thefollowing table presents the hypothetical changes in fair values in thefinancial instruments held by us at December 31, 2004, that are sensitiveto changes in interest rates. These instruments are comprised of cash, cashequivalents and short-term investments. These instruments are held for purposesother than trading. The modeling techniques used measure the change in fairvalues arising from selected hypothetical changes in interest rates. Assumedmarket value changes to our portfolio reflects immediate hypothetical parallelshifts in the yield curve of plus or minus 50 basis points (BPS), 100 BPS, and150 BPS:
| ** **                                                            | ** ** | **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** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| **Short-term investments, 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 |       | $                                                                                                                            | 52,885     |                                           | $          | 52,755                                                                                                                       |       | $ | 52,627 |   |   | $ | 52,501 |   |   | $ | 52,376 |   | $ | 52,252 |   | $ | 52,130 |   |
| Obligations of states and political subdivisions                      |       | 4,008                                                                                                                        |       | 4,008                                          |       | 4,008                                                                                                                        |       |   | 4,007 |   |   | 4,007 |   | 4,007 |   | 4,007 |   |
| U.S. corporate debt securities                                        |       | 91,569                                                                                                                       |       | 91,344                                         |       | 91,121                                                                                                                       |       |   | 90,901 |   |   | 90,683 |   | 90,469 |   | 90,256 |   |
| Total short-term  investments                                         |       | $                                                                                                                            | 148,462    |                                           | $          | 148,107                                                                                                                      |       | $ | 147,756 |   |   | $ | 147,409 |   |   | $ | 147,066 |   | $ | 146,728 |   | $ | 146,393 |   |
|                                                                       |            |                                                                                                                              |            |                                                |            |                                                                                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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, 2004, excluding theUnited States government and its agencies, was $5.5 million.

**Foreign exchange risk**

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 bychanges in currency exchange rates we have established transaction and balancesheet hedging programs. We use foreign currency forward contracts to hedge therisk that unremitted Japanese yen denominated receipts from customers foractual or forecasted sales of equipment after receipt of customer orders may beadversely affected by changes in foreign currency exchange rates. Afterrecording revenue, we use various mechanisms, such as foreign currency forwardexchange contracts and natural hedges, to offset substantial portions of the 

37

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potential gains or lossesassociated with our Japanese yen denominated assets and liabilities due toexchange rate fluctuations. At December 31, 2004, 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 31,2004, we had contracts for the sale of $13.9 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.)

 

38

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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, 2004 and 2003                                             |       | 40                   |
| Consolidated Statements of  Operations—Years ended December 31, 2004, 2003, and 2002      |       | 41                   |
| Consolidated Statements of  Cash Flows—Years ended December 31, 2004, 2003, and 2002      |       | 42                   |
| Consolidated Statements of  Stockholders’ Equity—Years ended December 31, 2004, 2003, and 2002 |       | 43                   |
| Notes  to Consolidated Financial Statements                                                                   |       | 44 - 61              |
| Reports  of Ernst & Young LLP, Independent Registered Public Accounting Firm                         |       | 62  - 63             |

 

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**CONSOLIDATEDBALANCE SHEETS**
| **In thousands, except share and per share amounts**                                                                                | ** ** | ** ** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-----------------------------|------------|
| ***Assets***                                                                                                                                                           |       |       |       |                        |       |                        |       |   |   |
| Current assets:                                                                                                                                                        |       |       |       |                        |       |                        |       |   |   |
| Cash and cash  equivalents                                                                                                                                             |       |       | $          | 47,985                      |       |                        |       | $ | 25,149 |   |   |
| Short-term investments                                                                                                                                                 |       |       | 103,642    |                        |       |                        | 140,753    |   |   |
| Accounts receivable,  less allowance for doubtful accounts of $237 in 2004 and $146 in 2003                                                                            |       |       | 19,907     |                        |       |                        | 9,398      |   |   |
| Inventories                                                                                                                                                            |       |       | 27,842     |                        |       |                        | 19,037     |   |   |
| Taxes receivable                                                                                                                                                       |       |       | 509        |                        |       |                        | 349        |   |   |
| Prepaid expenses and  other current assets                                                                                                                             |       |       | 1,654      |                        |       |                        | 2,099      |   |   |
| Total current assets                                                                                                                                                   |       |       | 201,539    |                        |       |                        | 196,785    |   |   |
| Equipment and leasehold  improvements, net                                                                                                                             |       |       | 21,992     |                        |       |                        | 18,481     |   |   |
| Intangible assets, net                                                                                                                                                 |       |       | 95         |                        |       |                        | 476        |   |   |
| Demonstration inventory,  net                                                                                                                                          |       |       | 4,223      |                        |       |                        | 3,071      |   |   |
| Other assets                                                                                                                                                           |       |       | 2,697      |                        |       |                        | 1,935      |   |   |
| Total assets                                                                                                                                                           |       |       | $          | 230,546                     |       |                        |       | $ | 220,748 |   |   |
| ***Liabilities and Stockholders’  Equity***                                                                                                                       |       |       |       |                        |       |                        |       |   |   |
| Current liabilities:                                                                                                                                                   |       |       |       |                        |       |                        |       |   |   |
| Notes payable                                                                                                                                                          |       |       | $          | 7,900                       |       |                        |       | $ | 2,564 |   |   |
| Accounts payable                                                                                                                                                       |       |       | 13,587     |                        |       |                        | 7,729      |   |   |
| Accrued expenses                                                                                                                                                       |       |       | 7,700      |                        |       |                        | 7,883      |   |   |
| Deferred license revenue                                                                                                                                               |       |       | 1,041      |                        |       |                        | 4,752      |   |   |
| Deferred product and  services income                                                                                                                                  |       |       | 1,244      |                        |       |                        | 1,088      |   |   |
| Advance billings                                                                                                                                                       |       |       | 415        |                        |       |                        | 1,523      |   |   |
| Income taxes payable                                                                                                                                                   |       |       | 31         |                        |       |                        | 745        |   |   |
| Total current  liabilities                                                                                                                                             |       |       | 31,918     |                        |       |                        | 26,284     |   |   |
| Accrued rent                                                                                                                                                           |       |       | 3,294      |                        |       |                        | 2,784      |   |   |
| Other liabilities                                                                                                                                                      |       |       | 2,044      |                        |       |                        | 941        |   |   |
| 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: 23,853,538 at December 31,  2004 and 23,582,125 at  December 31, 2003 |       |       | 24         |                        |       |                        | 24         |   |   |
| Additional paid-in  capital                                                                                                                                            |       |       | 213,660    |                        |       |                        | 210,323    |   |   |
| Treasury stock; 464,721  shares at December 31, 2004 and 465,971 shares at December 31,  2003                                                           |       |       | (6,738     | )                           |       |                        | (6,756     | ) |   |
| Accumulated other comprehensive  income (loss), net                                                                                                                    |       |       | (489       | )                           |       |                        | 937        |   |   |
| Accumulated deficit                                                                                                                                                    |       |       | (13,167    | )                           |       |                        | (13,789    | ) |   |
| Total stockholders’  equity                                                                                                                                       |       |       | 193,290    |                        |       |                        | 190,739    |   |   |
| Total liabilities and stockholders’ equity                                                                                                                        |       |       | $          | 230,546                     |       |                        |       | $ | 220,748 |   |   |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS**
| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands, except per share amounts** | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net  sales                                                          |       |                                        |       |   |   |   |   |
| Products                                                            |       | $                                           | 93,392     |   | $ | 85,799 |   | $ | 52,400 |   |
| Services                                                            |       | 12,289                                      |       | 10,611 |   | 10,862 |   |
| Licenses                                                            |       | 4,211                                       |       | 3,711 |   | 5,244 |   |
| Total net sales                                                     |       | 109,892                                     |       | 100,121 |   | 68,506 |   |
| Cost of sales                                                       |       |                                        |       |   |   |   |   |
| Cost of products sold                                               |       | 48,466                                      |       | 46,999 |   | 45,770 |   |
| Cost of services                                                    |       | 8,733                                       |       | 6,511 |   | 7,886 |   |
| Gross profit                                                        |       | 52,693                                      |       | 46,611 |   | 14,850 |   |
| Research, development, and engineering                              |       | 25,936                                      |       | 21,309 |   | 23,522 |   |
| Amortization of  intangible assets                                  |       | 381                                         |       | 381 |   | 381 |   |
| Selling, general,  and administrative                               |       | 28,805                                      |       | 22,677 |   | 23,363 |   |
| Restructure of  operations                                          |       | —                                      |       | (728 | ) | 4,090 |   |
| Operating income (loss)                                             |       | (2,429                                      | )          | 2,972 |   | (36,506 | ) |
| Interest expense                                                    |       | (114                                        | )          | (253 | ) | (135 | ) |
| Interest and  other income, net                                     |       | 3,612                                       |       | 4,277 |   | 6,393 |   |
| Income (loss) before income taxes                                   |       | 1,069                                       |       | 6,996 |   | (30,248 | ) |
| Income taxes  (benefit)                                             |       | 445                                         |       | (570 | ) | (4,866 | ) |
| Net income (loss)                                                   |       | $                                           | 624        |   | $ | 7,566 |   | $ | (25,382 | ) |
| *Net  income (loss) per share—basic*                           |       |                                        |       |   |   |   |   |
| Net income (loss)                                                   |       | $                                           | 0.03       |   | $ | 0.33 |   | $ | (1.12 | ) |
| Number of shares used in per share computations—basic          |       | 23,733                                      |       | 23,017 |   | 22,586 |   |
| *Net  income (loss) per share—diluted*                         |       |                                        |       |   |   |   |   |
| Net income (loss)                                                   |       | $                                           | 0.03       |   | $ | 0.31 |   | $ | (1.12 | ) |
| Number of shares  used in per share computations—diluted       |       | 24,734                                      |       | 24,476 |   | 22,586 |   |
|                                                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**
| ** **                                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands**                                                                               | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| *Cash flows from operating  activities:*                                                            |       |                                        |       |   |   |   |   |
| Net income (loss)                                                                                   |       | $                                           | 624        |   | $ | 7,566 |   | $ | (25,382 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities: |       |                                        |       |   |   |   |   |
| Depreciation                                                                                        |       | 6,235                                       |       | 6,621 |   | 7,678 |   |
| Amortization                                                                                        |       | 2,306                                       |       | 2,492 |   | 1,769 |   |
| Non-cash  restructuring and asset impairment charges (recoveries):                                  |       |                                        |       |   |   |   |   |
| Equipment and  leasehold improvements, net                                                          |       | —                                      |       | (128 | ) | 2,492 |   |
| Inventories                                                                                         |       | —                                      |       | (393 | ) | 5,598 |   |
| Prepaid expenses  and other current assets                                                          |       | —                                      |       | — |   | 337 |   |
| Other, net                                                                                          |       | —                                      |       | — |   | 678 |   |
| Loss on disposal  of equipment                                                                      |       | 122                                         |       | 189 |   | 159 |   |
| Stock compensation                                                                                  |       | 235                                         |       | 311 |   | 85 |   |
| Deferred income  taxes                                                                              |       | 269                                         |       | (559 | ) | — |   |
| Changes in operating  assets and liabilities:                                                       |       |                                        |       |   |   |   |   |
| Accounts  receivable                                                                                |       | (10,509                                     | )          | 3,472 |   | 932 |   |
| Inventories                                                                                         |       | (8,805                                      | )          | 6,420 |   | (4,733 | ) |
| Taxes receivable                                                                                    |       | (160                                        | )          | 830 |   | (1,154 | ) |
| Prepaid expenses  and other current assets                                                          |       | 185                                         |       | (212 | ) | (203 | ) |
| Leases receivable—long  term                                                                   |       | —                                      |       | — |   | 121 |   |
| Demonstration  Inventory                                                                            |       | (2,099                                      | )          | (1,785 | ) | 701 |   |
| Other assets                                                                                        |       | (740                                        | )          | 187 |   | 466 |   |
| Accounts payable                                                                                    |       | 5,858                                       |       | 1,010 |   | (2,374 | ) |
| Accrued expenses                                                                                    |       | (183                                        | )          | (3,078 | ) | 1,018 |   |
| Advance billings                                                                                    |       | (1,108                                      | )          | 499 |   | (1,986 | ) |
| Income taxes  payable                                                                               |       | (745                                        | )          | 305 |   | (3,864 | ) |
| Deferred product  and services income, net                                                          |       | 156                                         |       | (5,205 | ) | 2,725 |   |
| Deferred license  revenue                                                                           |       | (3,711                                      | )          | (3,711 | ) | (5,244 | ) |
| Accrued  restructuring expenses                                                                     |       | —                                      |       | (2,558 | ) | (1,780 | ) |
| Accrued rent                                                                                        |       | 510                                         |       | (522 | ) | 3,131 |   |
| Other liabilities                                                                                   |       | 1,101                                       |       | (74 | ) | 1,015 |   |
| Net cash provided by  (used in) operating activities                                                |       | (10,459                                     | )          | 11,677 |   | (17,815 | ) |
| *Cash  flows from investing activities:*                                                            |       |                                        |       |   |   |   |   |
| Capital expenditures                                                                                |       | (9,868                                      | )          | (6,073 | ) | (4,800 | ) |
| Investments in securities                                                                           |       | (102,513                                    | )          | (165,056 | ) | (95,661 | ) |
| Proceeds from sales and  maturities of investments                                                  |       | 137,195                                     |       | 161,938 |   | 61,604 |   |
| Net cash provided by  (used in) investing activities                                                |       | 24,814                                      |       | (9,191 | ) | (38,857 | ) |
| *Cash  flows from financing activities:*                                                            |       |                                        |       |   |   |   |   |
| Proceeds from notes  payable                                                                        |       | 37,900                                      |       | 15,315 |   | 17,199 |   |
| Repayment of notes  payable                                                                         |       | (32,564                                     | )          | (22,584 | ) | (7,366 | ) |
| Proceeds from issuance of  Common Stock                                                             |       | 3,120                                       |       | 12,055 |   | 2,372 |   |
| Net cash provided by  financing activities                                                          |       | 8,456                                       |       | 4,786 |   | 12,205 |   |
| **Net  effect of exchange rate changes on cash**                                                    |       | 25                                          |       | (301 | ) | (84 | ) |
| **Net  increase (decrease) in cash and cash equivalents**                                           |       | 22,836                                      |       | 6,971 |   | (44,551 | ) |
| **Cash and  cash equivalents at beginning of period**                                               |       | 25,149                                      |       | 18,178 |   | 62,729 |   |
| **Cash and  cash equivalents at end of period**                                                     |       | $                                           | 47,985     |   | $ | 25,149 |   | $ | 18,178 |   |
| Supplemental disclosures  of cash flow information:                                                 |       |                                        |       |   |   |   |   |
| Cash paid during  the period for:                                                                   |       |                                        |       |   |   |   |   |
| Interest                                                                                            |       | $                                           | 94         |   | $ | 264 |   | $ | 111 |   |
| Income taxes                                                                                        |       | 668                                         |       | (1,086 | ) | 132 |   |
| Other non-cash  changes:                                                                            |       |                                        |       |   |   |   |   |
| Systems  transferred from (to) inventory to (from) equipment and demonstration  inventory           |       | $                                           | 3,522      |   | $ | 1,232 |   | $ | (1,965 | ) |
| Systems  transferred from (to) equipment to (from) demonstration inventory                          |       | 1,097                                       |       | — |   | — |   |
|                                                                                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**
| ** **                                                                                     | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Accumulated Other** | ** ** | **Accumulated**        | ** ** | **Total**    | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------------------|------------|------------------------|------------|--------------|------------|
| ** **                                                                                     | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Treasury**   | ** ** | **Comprehensive** | ** ** | **(Deficit)**              | ** ** | **Stockholders’** | ** ** |
| **In thousands**                                                                          | ** ** | ** **            | ** ** | **Shares**  | ** ** | **Amount**     | ** ** | **Capital**       | ** ** | **Stock**                  | ** ** | **Income (Loss)** | ** ** | **Earnings** | ** ** | **Equity** | ** ** |
| Balance at December 31, 2001                                                              |       | 22,451                |       |        | $          | 23             |       |              |       | $                          | 195,612    |                   |       |         | $          | (6,867 | ) |   |   | $ | 2,486 |   |   |   | $ | 4,027 |   |   |   | $ | 195,281 |   |   |
| Net issuance of  Common Stock under stock option plans and  employee stock purchase plan  |       | 176                   |       |        | —     |           |       |              | 2,372      |                       |       |                   | —     |         |       |   | — |   |   |   | — |   |   |   | 2,372 |   |   |
| Compensation                                                                                   |       | —                |       |        | —     |           |       |              | 85         |                       |       |                   | —     |         |       |   | — |   |   |   | — |   |   |   | 85 |   |   |
| Components of comprehensive loss:                                                              |       |                  |       |        |       |           |       |              |       |                       |       |                   |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Change in net unrealized  gains on:                                                            |       |                  |       |        |       |           |       |              |       |                       |       |                   |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale   investments                                                          |       | —                |       |        | —     |           |       |              | —     |                       |       |                   | —     |         |       |   | (518 | ) |   |   | — |   |   |   | (518 | ) |   |
| Foreign exchange  contracts                                                                    |       | —                |       |        | —     |           |       |              | —     |                       |       |                   | —     |         |       |   | (84 | ) |   |   | — |   |   |   | (84 | ) |   |
| Net loss                                                                                       |       | —                |       |        | —     |           |       |              | —     |                       |       |                   | —     |         |       |   | — |   |   |   | (25,382 | ) |   |   | (25,382 | ) |   |
| Total  comprehensive loss                                                                      |       |                  |       |        |       |           |       |              |       |                       |       |                   |       |         |       |   |   |   |   |   |   |   |   |   | (25,984 | ) |   |
| 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 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 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 |   |   |
|                                                                                                |            |                       |            |             |            |                |            |                   |            |                            |            |                        |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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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 thesemiconductor 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***

In 2004, Intel Corporationaccounted for 10% of our net sales and at December 31, 2004, theyaccounted for 10% of our accounts receivable. In 2003, Intel accounted for 26%of our net sales and at December 31, 2003, they accounted for less than10% of our accounts receivable. In 2002, Intel accounted for 19% and SumitomoChemical Company, Ltd. accounted for 10% of our net sales. At December 31,2002, Intel and Sumitomo accounted for 28% and less than 10%, respectively, ofour accounts receivable. Other than noted, no other customers accounted formore than 10% of our net sales in any year during the three-year period ended December 31,2004.

***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, primarily, on consolidatedfinancial information. Accordingly, we have determined that we operate in onebusiness segment, which is the manufacture and distribution of capital equipmentto manufacturers of integrated circuits and nanotechnology components.

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***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 operations and independent sales organizations. The following tablepresents enterprise-wide sales to external customers and long-lived assets bygeographic region:
| **In thousands**    | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Net  sales:              |       |       |       |     |       |     |       |
| United States of America |       | $          | 38,152     |     | $          | 38,732   |       | $        | 35,307     |   |
| Japan                    |       | 35,631     |       | 27,987   |       | 16,689   |       |
| Europe                   |       | 4,346      |       | 11,602   |       | 5,137    |       |
| Taiwan                   |       | 13,912     |       | 10,563   |       | 5,179    |       |
| Rest of world            |       | 17,851     |       | 11,237   |       | 6,194    |       |
| Total                    |       | $          | 109,892    |     | $          | 100,121  |       | $        | 68,506     |   |
| Long-lived  assets:      |       |       |       |     |       |     |       |
| United States of America |       | $          | 27,211     |     | $          | 23,017   |       | $        | 23,350     |   |
| Rest of world            |       | 1,796      |       | 948      |       | 629      |       |
| Total                    |       | $          | 29,007     |     | $          | 23,965   |       | $        | 23,979     |   |

 

Europe and the rest of the world are comprised ofsales to customers in countries that are individually insignificant.

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 ourproduct 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 subject Ultratechto concentrations of credit risk consist principally of cash equivalents,short-term investments and trade receivables. These credit risks include thepotential inability of an issuer or customer to honor their obligations underthe terms of the instrument. We place our cash equivalents and short-terminvestments with high credit-quality financial institutions. We invest ourexcess cash in commercial paper, readily marketable debt instruments andcollateralized funds of U.S. and state government entities. We have establishedguidelines relative to credit ratings, diversification and maturities that seekto 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 semiconductor,semiconductor packaging and nanotechnology industries. We perform ongoingcredit evaluations of our customers’ financial condition and requirecollateral, whenever deemed necessary. We maintain an allowance foruncollectible accounts receivable based upon expected collectibility andestimated returns and allowances. This reserve is established based uponhistorical trends, current economic conditions, delinquency status based oncontractual terms and an analysis of specific exposures. From time to time wemay grant longer payment terms or may lease our systems to customers. Long-termreceivables and the granting of longer customer payment terms expose us toadditional risks, including potentially higher customer concentration andhigher potential operating expenses relating to customer defaults. As of December 31,2004 and 2003, the recorded value of our accounts receivable approximates fairvalue due to the short-term nature of our accounts receivable.

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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 OF PRESENTATION**

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,bad debts, estimated useful lives of fixed assets, asset impairment, incometaxes, intangible assets, restructuring and contingencies and litigation.Management bases its estimates on historical experience and on various otheranalyses and assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

**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, 2004 and 2003, 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.

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***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.

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

Intangible assets are carried at cost less accumulatedamortization, which is being recognized on a straight-line basis over theeconomic lives of the respective assets, generally five to seven years.Intangible assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of the related asset may not berecoverable. The gross value of intangible assets as of December 31, 2004and 2003 was $2.0 million. Intangible assets are presented in the statement offinancial position net of accumulated amortization of $1,905,000 and $1,524,000as of December 31, 2004 and 2003, respectively. The $0.1 million of netbook value as of December 31, 2004 will be amortized in the quarter endingApril 2, 2005.

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. Otherthan as noted on Footnote 11, “Restructure of Operations”, no impairmentcharges have been recorded during the three years ended December 31, 2004.

***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 bychanges in currency exchange rates over the ensuing twelve-month period, wehave established transaction and balance sheet hedging programs. Currencyforward contracts are utilized in these programs. These hedging programsreduce, but do not 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, 2004, we had taken action to hedge100%, or approximately $3.9 million, of these Japanese yen denominated exposures.We often close currency forward contracts by entering into an offsettingcontract.

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 

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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 balance sheetsas 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, 2004and 2003, we had currency forward contracts at fixed rates of exchange for thesale of Japanese yen of $13.9 million and $11.8 million, respectively, and forthe purchase of Japanese yen of $0.0 million and $0.8 million, respectively. Wehad recorded $0.3 million of accumulated losses as a component of othercomprehensive income (loss) at December 31, 2004 and 2003. The fair valueof derivatives classified as cash-flow hedges at December 31, 2004 and2003 was a liability of $0.3 million. The fair value of other derivatives at December 31,2004 and 2003 was a liability of $0.2 million and $0.1 million, respectively.

***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 andlicense fees.

Provided all other criteria are met, we recognizerevenues on system sales when we have received customer acceptance of thesystem  and have completed the systeminstallation 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 isrecorded only if the product has met product specifications prior to shipmentand management deems that no significant uncertainties as to productperformance exist.

Our transactions frequently include the sale ofsystems andservices under multiple element arrangements. In situations with multipledeliverables, revenue is recognized upon the delivery of the separate elementsand when we receive customer acceptance or are otherwise released from ourcustomer 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 

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purchased quantity ofhours under which revenue is recognized as service hours are delivered. Werecognize revenue from licensing and technology support agreements ratably overthe contract period, or the estimated 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. Deferredproduct revenue and costs are netted on our balance sheet, under the caption “deferredproduct 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 areconducted within engineering departments and elsewhere. Research, developmentand engineering 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 morelikely than not to be realized. Based on the uncertainty of future taxableincome, we have presently fully reserved our domestic deferred tax assets.

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

In June 2004, the Financial Accounting StandardsBoard (FASB) ratified Emerging Issues Task Force Issue No. 03-1 (EITF03-1), “The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments.” EITF 03-1 includes new guidance for evaluating andrecording impairment losses on debt and equity investments, as well as newdisclosure requirements for investments that are deemed to be temporarilyimpaired. Adoption of the recognition and measurement guidance of EITF 03-1 hasbeen temporarily deferred by the FASB, but the disclosure requirements of EITF 03-1are effective for our 2004 annual consolidated financial statements. Accordingly,additional disclosures as required by EITF 03-1 are included in Note 8of the Notes to the Consolidated Financial Statements.

In November 2004, the FASB issued FinancialAccounting Standard No. 151, “Inventory Costs—an Amendment of ARB No. 43,Chapter 4” (FAS 151). FAS 151 amends ARB 43, Chapter 4, to clarify thatabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterials (spoilage) should be recognized as current-period charges. Inaddition, this Statement requires that allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacilities. The provisions of this Statement are effective for inventory costsincurred during fiscal years beginning after June 15, 2005. The adoptionof the provisions of FAS 151 is not expected to have a material impact on ourfinancial position or results of operations.

On December 16, 2004, theFinancial Accounting Standards 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 

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Issuedto Employees, and amends FASB Statement No. 95, Statement of Cash Flows.Generally, the approach in Statement 123(R) is similar to the approachdescribed in Statement 123. However, Statement 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values. Pro formadisclosure is no longer an alternative. Statement 123(R) must be adoptedin the first interim period beginning after June 15, 2005. We expect toadopt it on July 3, 2005, the beginning of our third quarter.

Aspermitted by Statement 123, we currently account for share-based payments toemployees using the intrinsic value method and, as such, generally recognize nocompensation cost for employee stock options. Accordingly, the adoption ofStatement 123(R)’s fair value method will have a significant impact on ourresults of operations, although it will have no impact on our overall financialposition. The impact of adoption of Statement 123(R) cannot be predictedat this time because it will depend on levels of share-based payments grantedin the future, the valuation model used to value the options and othervariables. However, had we adoptedStatement 123(R) in prior periods, the impact of that standard would haveapproximated the impact of Statement 123 as described in the disclosure of proforma net income (loss) and earnings (loss) per share in Note 5 to ourconsolidated financial statements.

**5.   STOCK-BASED COMPENSATION**

At December 31, 2004, 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 option valuationmodels that were not developed for use in valuing employee stock options. Underthe intrinsic value method no stock-based employee compensation cost isreflected in net income, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.

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**                                                                    | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net  income (loss) as reported                                                                                                         |       | $                                           | 624        |   | $ | 7,566 |   | $ | (25,382 | ) |
| Total stock-based  employee compensation expense, determined under fair value based method for  all awards, net of related tax effects |       | $                                           | 25,294     |   | $ | 9,570 |   | $ | 10,210 |   |
| Pro forma net  loss                                                                                                                    |       | $                                           | (24,670    | ) | $ | (2,004 | ) | $ | (35,592 | ) |
| Net income (loss)  per share—basic, as reported                                                                                   |       | $                                           | 0.03       |   | $ | 0.33 |   | $ | (1.12 | ) |
| Pro forma net  loss per share—basic                                                                                               |       | $                                           | (1.06      | ) | $ | (0.09 | ) | $ | (1.62 | ) |
| Net income (loss)  per share—diluted, as reported                                                                                 |       | $                                           | 0.03       |   | $ | 0.31 |   | $ | (1.12 | ) |
| Pro forma net loss per  share—diluted                                                                                             |       | $                                           | (1.06      | ) | $ | (0.09 | ) | $ | (1.62 | ) |
|                                                                                                                                        |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

 

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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, July 19, 2004 and June 25, 2004. We have never repricedstock options, thus, the exercise prices for the stock options accelerated wereunchanged. These unvested “underwater”options, in our opinion, represented negligible value in retaining ormotivating our employees. We believe, however, thatfully vesting these options favorably motivates our employeesto continue with our company and to work to increasestockholder value. As the exercise price of all the stockoptions affected was greater than their fair market price on the date ofvesting acceleration, there was no impact, under the intrinsic value method, onour 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.
| ** **                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected life (in  years): stock options                |       | 2.2      |       | 3.5      |       | 3.5      |       |
| Expected life (in  years): Employee Stock Purchase Plan |       | 0.50     |       | 1.25     |       | 1.00     |       |
| Risk-free  interest rate                                |       | 2.54     | %          | 2.48     | %          | 2.22     | %          |
| Volatility factor                                       |       | 0.60     |       | 0.71     |       | 0.73     |       |
| Dividend yield                                          |       | 0        | %          | 0        | %          | 0        | %          |

 

The 2004 information in the table above reflects thetermination of our Employee Stock Purchase Plan in July 2004 and theimpact of the acceleration of vesting of underwater stock options discussedpreviously. The weighted-average expected life of stock options is computedassuming a multiple-point approach with annual vesting periods. Theweighted-average fair value per share of stock options granted during 2004,2003 and 2002 were $5.90, $8.82 and $6.98, respectively.

The weighted average fair value of purchase rightsgranted under our Employee Stock Purchase Plan during 2004, 2003 and 2002 were$8.21, $5.00 and $5.24, 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. Stock option grants are divided into annualvesting periods, resulting in the recognition of approximately 50% of the totalcompensation expense of the grant in the first year. 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** | ** ** | ** **                                  | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** | **       2002       ** | ** ** |
| Numerator:                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                   |       |                                        | $          | 624 |   |   |   | $ | 7,566 |   |   |   | $ | (25,382 | ) |   |
| Denominator:                                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Denominator for net income (loss) per share—basic              |       |                                        | 23,733     |   |   |   | 23,017 |   |   |   | 22,586 |   |   |
| Effect of dilutive Employee Stock Options                           |       |                                        | 1,001      |   |   |   | 1,459 |   |   |   | — |   |   |
| Denominator for net income (loss) per share—diluted            |       |                                        | 24,734     |   |   |   | 24,476 |   |   |   | 22,586 |   |   |
| Net income (loss)  per share—basic                             |       |                                        | $          | 0.03 |   |   |   | $ | 0.33 |   |   |   | $ | (1.12 | ) |   |
| Net income (loss) per  share—diluted                           |       |                                        | $          | 0.03 |   |   |   | $ | 0.31 |   |   |   | $ | (1.12 | ) |   |
|                                                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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For the year ended December 31,2004, options to purchase 2,245,000 shares of Common Stock at an averageexercise price of $25.25 were excluded from the computation of diluted net lossper share as the effect would have been anti-dilutive. This compares to theexclusion of 1,127,000 options at an average exercise price of $25.26 for theyear ended December 31, 2003 and 4,505,000 options at an average exerciseprice of $16.40 for the year ended December 31, 2002. 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.

**7.   COMPREHENSIVE INCOME (LOSS)**

Comprehensiveincome (loss), as presented on the statements of stockholder’s equity, includesnet income (loss) and accumulated other comprehensive income(loss). Accumulated other comprehensive income (loss) is comprised of thefollowing items, net of tax:
| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                                         | ** ** | ** **            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Unrealized  gains (losses) on:                                |       |                  |       |   |   |
| Available-for-sale investments                                |       | $                     | (194       | ) | $ | 1,257 |   |
| Foreign exchange contracts                                    |       | (295                  | )          | (320 | ) |
| Accumulated other comprehensive  income (loss) at end of year |       | $                     | (489       | ) | $ | 937 |   |
|                                                               |            |                       |            |  |  |  |  |  |  |

 

The amount of gain (loss)on foreign exchange contracts reclassified to earnings was ($655,000),($248,000) and $49,000 in 2004, 2003 and 2002, respectively.  The amount of gain (loss) on available-for-saleinvestments reclassified to earnings was immaterial in each year of thethree-year period ended December 31, 2004.

**8.**   INVESTMENTS

We classified all of our investments as “available forsale” as of December 31, 2004 and 2003. Accordingly, we state ourinvestments at estimated fair value. Fair values are determined based on quotedmarket prices or pricing models using current market rates. We deem allinvestments to be available to meet current working capital requirements.

The following is a summaryof our investments:
| ** **                                                            | ** ** | **December 31, 2004** | ** ** | **December 31, 2003**       | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|
| **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 |       |                            | $          | 52,613                                |       |   |   | $ | 28 |   |   |   | $ | 140 |   |   |   | $ | 52,501 |   |   |   | $ | 27,156 |   |   | $ | 109 |   |   | $ | 14 |   |   |   | $ | 27,251 |   |   |
| Obligations of states and political  subdivisions                     |       |                            | 4,007      |                                  |       |   | — |   |   |   | — |   |   |   | 4,007 |   |   |   | 11,954 |   |   | — |   |   | — |   |   |   | 11,954 |   |   |
| U.S. corporate debt securities                                        |       |                            | 90,982     |                                  |       |   | 111 |   |   |   | 192 |   |   |   | 90,901 |   |   |   | 118,395 |   |   | 1,177 |   |   | 15 |   |   |   | 119,557 |   |   |
|                                                                  |       |                            | $          | 147,602                               |       |   |   | $ | 139 |   |   |   | $ | 332 |   |   |   | $ | 147,409 |   |   |   | $ | 157,505 |   |   | $ | 1,286 |   |   | $ | 29 |   |   |   | $ | 158,762 |   |   |
|                                                                       |            |                                 |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing is a reconciliation of our investments to the balance sheetclassifications at December 31:
| **In thousands**                 | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Cash equivalents                      |       | $          | 43,767     |     | $          | 18,009   |       |
| Short-term  investments               |       | 103,642    |       | 140,753  |       |
| Investments, at  estimated fair value |       | $          | 147,409    |     | $          | 158,762  |       |

 

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Gross realized gains and losses on sales ofinvestments were not material in each year of the three-year period ended December 31,2004.

Thegross amortized cost and estimated fair value of our investments at December 31,2004, 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                |       | $             | 99,901     |       | $          | 99,862 |   |
| Due after one  year through five years |       | 47,702        |       | 47,547     |       |
|                                   |       | $             | 147,603    |       | $          | 147,409 |   |
|                                        |            |               |            |            |            |  |  |  |  |

 

Thefollowing table provides the breakdown of the cash equivalents and short-terminvestments with unrealized losses at December 31, 2004:
| ** **                                                            | ** ** | **In Loss Postion for  Less Than 12 Months** | ** ** | **In Loss Postion 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 |       | $                                                                          | 22,894     |                                                                       |       | $          | 140        |   |   | $ | — |   |   | $ | — |   |   | $ | 22,894 |   |   | $ | 140 |   |   |
| Obligations of  states and political subdivisions                     |       | —                                                                     |       |                                                                       | —     |       |       | — |   |   | — |   |   | — |   |   | — |   |   |
| U.S. corporate  debt securities                                       |       | 45,220                                                                     |       |                                                                       | 168        |       |       | 1,081 |   |   | 24 |   |   | 46,301 |   |   | 192 |   |   |
|                                                                  |       | $                                                                          | 68,114     |                                                                       |       | $          | 308        |   |   | $ | 1,081 |   |   | $ | 24 |   |   | $ | 69,195 |   |   | $ | 332 |   |   |
|                                                                       |            |                                                                            |            |                                                                            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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 2004. We have determined that the gross unrealized losseson our cash equivalents and short-term investments at December 31, 2004are temporary in nature because each investment meets the credit qualityrequirements of our investment policy and because we have the ability and theintent to hold these investments until they recover their unrealized losses,which may be until maturity.

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**9.   BALANCESHEET DETAILS**
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                            | ** ** | ** **            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Inventories:                                     |       |                  |       |   |   |
| Raw materials                                    |       | $                     | 11,362     |   | $ | 8,647 |   |
| Work-in-process                                  |       | 13,347                |       | 9,286 |   |
| Finished products                                |       | 3,133                 |       | 1,104 |   |
| Total                                            |       | $                     | 27,842     |   | $ | 19,037 |   |
| Equipment and  leasehold improvements, net:      |       |                  |       |   |   |
| Machinery and equipment                          |       | $                     | 39,502     |   | $ | 35,458 |   |
| Leasehold Improvements                           |       | 7,046                 |       | 5,022 |   |
| Office equipment and furniture                   |       | 14,279                |       | 17,103 |   |
|                                             |       | 60,827                |       | 57,583 |   |
| Accumulated depreciation and amortization        |       | (38,835               | )          | (39,102 | ) |
| Total                                            |       | $                     | 21,992     |   | $ | 18,481 |   |
| Accrued expenses:                                |       |                  |       |   |   |
| Salaries and benefits                            |       | $                     | 2,360      |   | $ | 2,929 |   |
| Warranty accrual                                 |       | 2,013                 |       | 1,257 |   |
| Reserve for losses on purchase order commitments |       | 1,090                 |       | 841 |   |
| Other                                            |       | 2,237                 |       | 2,856 |   |
| Total                                            |       | $                     | 7,700      |   | $ | 7,883 |   |
|                                                  |            |                       |            |  |  |  |  |  |  |

 

***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**                                                                       | ** ** | ** **            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Balance, beginning of the period                                                            |       | $                     | 1,257      |   | $ | 1,462 |   |
| Warranties issued  during the period                                                        |       | 3,979                 |       | 3,323 |   |
| Settlements  during the period                                                              |       | (3,298                | )          | (3,555 | ) |
| Changes in  liability for pre-existing warranties during the period, including  expirations |       | 75                    |       | 27 |   |
| Balance, end of the  period                                                                 |       | $                     | 2,013      |   | $ | 1,257 |   |
|                                                                                             |            |                       |            |  |  |  |  |  |  |

 

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***Deferred Service Income***

Wesell service contracts for which revenue is deferred and recognized ratablyover the contract period, for time based service contracts, or as service hoursare delivered, for contracts based on a purchased quantity of hours. Changes inour deferred service revenue are as follows:
| ** **                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                                  | ** ** | ** **            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Balance, beginning of the period                       |       | $                     | 821        |   | $ | 815 |   |
| Service contracts  sold during the period              |       | 8,672                 |       | 7,123 |   |
| Service contract  revenue recognized during the period |       | (8,161                | )          | (7,117 | ) |
| Balance, end of the  period                            |       | $                     | 1,332      |   | $ | 821 |   |
|                                                        |            |                       |            |  |  |  |  |  |  |

 

**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 (2.25% as of December 31, 2004). 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 31,2004, $7.9 million was outstanding under this facility, with a relatedcollateral requirement of approximately $10.5 million of our cash, cashequivalents and short-term investments. As of December 31, 2003, $2.5million was outstanding under a similar facility, with a related collateralrequirement of approximately $3.6 million of our cash, cash equivalents andshort-term investments. The cost of borrowing funds at December 31, 2003was 2.00%. The recorded value of our notes payable approximates fair value dueto the short-term nature of the debt.

**11.   RESTRUCTURE OF OPERATIONS**

In September 2002, in response to worseningconditions in the semiconductor industry in particular, and the general economyas a whole, we decided to reduce our workforce by approximately 15% and tocease or suspend activities related to certain engineering and administrativeinitiatives. As a result of this decision, we recognized a restructuring chargeof $4.3 million, or $0.19 per share for the three-month period ended September 28,2002. We reduced this charge by $0.2 million during the three-month periodended December 31, 2002, primarily as a result of canceling our plans toexit a certain building and an adjustment of our international severance costs.Of the total net charge for the year ended December 31, 2002 of $4.1 million,the cash component included employee severance costs of $0.9 million, contracttermination fees of $0.2 million and facility closure costs of $0.1 million.The non-cash component of this charge included $2.5 million of impairment tothe carrying value of equipment and leasehold improvements and $0.3 million ofimpairment to prepaid expenses and other current assets.

We further reduced this charge by $0.1 million duringthe three-month period ended June 28, 2003, as a result of the excess ofproceeds received from the sale of certain fixed assets over the adjusted netbook value of those assets.

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As of December 31,2003, all amounts of these restructuring costs had been paid. Cash componentsof accrued restructuring costs, and amounts charged against the plan, relativeto the September 2002 restructure of operations, were as follows:
| **in millions**      | ** ** | ** ** | ** ** | **Beginning  Accrual  Balance** | ** ** | **Expenditures** | ** **  | **Adjustments** | ** ** | **December 31,  2002** | ** **  | **Expenditures** | ** ** | **December 31,  2003** | ** ** |
|---------------------------|------------|------------|------------|---------------------------------|------------|------------------|-------------|-----------------|------------|-----------------------------|-------------|------------------|------------|-----------------------------|------------|
| Employee  severance costs |       |       | $ 1.0 |                            |       |             | $ (0.8 | )               |       |                        | $ (0.1 | )                |       |                        | $ 0.1 |   |   |   | $ (0.1 | ) |   |   | $ — |   |   |
| Facility closure  costs   |       |       | 0.2        |                            |       |             | —      |            |       |                        | (0.1        | )                |       |                        | 0.1        |   |   |   | (0.1 | ) |   |   | — |   |   |
| Other costs               |       |       | 0.2        |                            |       |             | —      |            |       |                        | —      |             |       |                        | 0.2        |   |   |   | (0.2 | ) |   |   | — |   |   |
| Total                     |       |       | $ 1.4 |                            |       |             | $ (0.8 | )               |       |                        | $ (0.2 | )                |       |                        | $ 0.4 |   |   |   | $ (0.4 | ) |   |   | $ — |   |   |

 

In September 2001, Ultratech reached a decisionto consolidate our manufacturing operations and eliminate approximately 20% ofour workforce. As a result of this decision, we recognized a restructuringcharge of $12.0 million, or $0.54 per share (diluted) in the quarter ended September 29,2001. Additionally, we recognized restructuring charges of $0.3 million, or$0.01 per share (diluted) in the quarter ended December 31, 2001,primarily related to employee severance costs of $0.6 million (from additionalpersonnel actions) and higher fixed asset disposal costs of $0.4 million,partially offset by revised facility closure and other cost estimates of $0.7million. Of the full-year charge of $12.3 million, non-cash components includeda $4.1 million impairment charge for intangible assets related to our XLSreduction product platform acquired in 1998 and a $1.5 million impairment chargefor fixed assets disposed of in conjunction with the consolidation ofmanufacturing facilities. The cash components of this charge included $4.0million for estimated expenditures related to the closure of facilities, $2.5million for employee severance costs and $0.1 million of other restructuringcosts.

In October 2003, we reached a settlement with thelandlord of our Wilmington, Massachusetts facility. As a result of thissettlement, we recognized a credit to operations of $0.6 million.

As of December 31,2003, all amounts of these restructuring costs had been paid. Cash componentsof accrued restructuring costs, and amounts charged against the plan for thetwelve-month period then ended, relative to the September 2001 restructureof operations, were as follows:
| **in millions**      | ** ** | ** ** | ** ** | **Beginning  Accrual  Balance** | ** ** | **Expend-  itures** | ** **  | **Adjust-  ments** | ** ** | **Dec. 31,  2001** | ** **  | **Expend-  itures** | ** ** | **Dec. 31,  2002** | ** ** | **Expend-  itures** | ** ** | **Adjust-  ments** | ** **  | **Dec. 31,  2003** | ** ** |
|---------------------------|------------|------------|------------|---------------------------------|------------|---------------------|-------------|--------------------|------------|-------------------------|-------------|---------------------|------------|-------------------------|------------|---------------------|------------|--------------------|-------------|-------------------------|------------|
| Facility  closure costs   |       |       | $ 4.3 |                            |       |                | $ (0.8 | )                  |       |                    | $ (0.3 | )                   |       |                    | $ 3.2 |                |       |               | $ (1.0 | )                       |       |   | $ 2.2 |   |   |   | $ (1.6 | ) |   |   | $ (0.6 | ) |   |   | $ — |   |   |
| Employee severance  costs |       |       | 1.9        |                            |       |                | (1.4        | )                  |       |                    | 0.6         |                |       |                    | 1.1        |                |       |               | (1.1        | )                       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Other costs               |       |       | 0.5        |                            |       |                | (0.1        | )                  |       |                    | (0.4        | )                   |       |                    | —     |                |       |               | —      |                    |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total                     |       |       | $ 6.7 |                            |       |                | $ (2.3 | )                  |       |                    | $ (0.1 | )                   |       |                    | $ 4.3 |                |       |               | $ (2.1 | )                       |       |   | $ 2.2 |   |   |   | $ (1.6 | ) |   |   | $ (0.6 | ) |   |   | $ — |   |   |

 

**12.**   STOCKHOLDERS’EQUITY

***1993 Stock Option Plan***

Under Ultratech’s 1993Stock Option Plan, as amended, qualified employees, non-employee Board membersand consultants may receive options to purchase shares of Common Stock at noless than 85% of fair value at the grant date. These options historically havevested in equal monthly installments over a period of approximately four years,with a minimum vesting period of twelve months from the grant date, andgenerally expire ten years from the date of grant. In 2002 and 2003, certainoptions were granted with non-standard vesting periods that provided for fullvesting as early as twelve months from date of grant if certain performancetargets were met, and deferred any vesting until fifty months from the date ofgrant if performance targets were not met. In 2004, certain options weregranted with no vesting requirement and others were granted with non-standardvesting periods that provided for full vesting as of December 31, 2004. Someof these option grants contained sales restrictions and some of theseprovisions were linked to 

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performancetargets. In 2003, we granted options to certain executives that call foracceleration of vesting and extension of the early termination provisionsshould certain events occur. The plan terminates on the earlier of February 28,2011 or the date on which all shares available for issuance under the plan havebeen issued. The plan contains an automatic share increase feature pursuant towhich the share reserve will automatically increase on the first trading day inJanuary of each calendar year, beginning with the 2002 calendar year andcontinuing through and including calendar year 2006, by an amount equal to fourpercent (4%) of the total number of shares of Common Stock outstanding on thelast trading day in December of the immediately preceding calendar year,but in no event would such annual increase exceed 1.7 million shares, subjectto adjustment in the event of certain changes to our capital structure. Underthe plan, approximately 56,000, 171,000, and 676,000 options were available forissuance at December 31, 2004, 2003 and 2002, 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 monthsfrom grant date, and generally expire ten years from date of grant. In 2002,certain options were granted with non-standard vesting periods that providedfor full vesting as early as twelve months from date of grant if certainperformance targets were met, and deferred any vesting until fifty months fromthe date of grant if performance targets were not met. The plan will terminateon the earlier of October 19, 2008, or the date on which all sharesavailable for issuance under the plan have been issued. Under the plan,approximately 16,000, 18,000 options and 130,000 options were available forissuance at December 31, 2004, 2003 and 2002, respectively.

Asummary of our stock option activity, and related information follows:
| ** **                       | ** ** | **2004**    | ** ** | **2003**                                    | ** **   | **2002**    | ** ** |
|----------------------------------|------------|-------------|------------|---------------------------------------------|--------------|-------------|------------|
| ** **                       | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** **   | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
| Outstanding at  January 1   |       | 5,200,824   |       |                                        | $ 17.11 |        |       | 4,505,397 |   |   | $ 16.40 |   |   | 3,346,280 |   |   | $ 17.84 |   |   |
| Granted                          |       | 1,213,500   |       |                                        | 22.32        |        |       | 1,656,500 |   |   | 17.19 |   |   | 1,850,050 |   |   | 14.00 |   |   |
| Exercised                        |       | (120,390    | )          |                                        | 13.62        |        |       | (827,026 | ) |   | 13.08 |   |   | (84,495 | ) |   | 14.26 |   |   |
| Forfeited                        |       | (143,642    | )          |                                        | 16.84        |        |       | (134,047 | ) |   | 18.94 |   |   | (605,938 | ) |   | 17.33 |   |   |
| Expired                          |       | (22,150     | )          |                                        | 17.85        |        |       | — |   |   | — |   |   | (500 | ) |   | 26.00 |   |   |
| Outstanding at  December 31 |       | 6,128,142   |       |                                        | $ 18.22 |        |       | 5,200,824 |   |   | $ 17.11 |   |   | 4,505,397 |   |   | $ 16.40 |   |   |

 

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At December 31,2004, 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  - $11.8750             |       | 969,315                      |       |                                                                  | 7.42       |   |   |   | $ 11.41 |   |   | 590,957 |   |   | $ 11.48 |   |   |
| $12.9375 -  $13.6700                        |       | 424,147                      |       |                                                                  | 6.33       |   |   |   | 13.52 |   |   | 424,147 |   |   | 13.52 |   |   |
| $13.7500 -  $14.8750                        |       | 1,429,565                    |       |                                                                  | 6.81       |   |   |   | 14.15 |   |   | 1,381,565 |   |   | 14.14 |   |   |
| $14.9375 -  $19.0000                        |       | 1,023,358                    |       |                                                                  | 6.93       |   |   |   | 16.42 |   |   | 1,023,358 |   |   | 16.42 |   |   |
| $19.1875 -  $22.3750                        |       | 934,261                      |       |                                                                  | 8.24       |   |   |   | 21.44 |   |   | 867,761 |   |   | 21.54 |   |   |
| $23.2100 -  $33.6250                        |       | 1,347,496                    |       |                                                                  | 7.11       |   |   |   | 28.03 |   |   | 1,347,496 |   |   | 28.03 |   |   |
| $  8.4100 -  $33.6250             |       | 6,128,142                    |       |                                                                  | 7.18       |   |   |   | $ 18.22 |   |   | 5,635,284 |   |   | $ 18.69 |   |   |

 

***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. Prior to February 2001,the offering period was twelve months, with one annual purchase date. In February 2001,we commenced a plan that allows twenty-four month offering periods withsemi-annual purchase dates. Under the Plan, approximately 198,000 shares ofCommon Stock were reserved and available for issuance at December 31, 2003.In July 2004, we terminated the Employee Stock Purchase Plan.

***Treasury Stock***

In April 2000, Ultratech initiated a program tore-purchase up to 2.0 million shares of our Common Stock at prevailing marketprices. This program was terminated in January 2003. In conjunction withthis initiative, we re-purchased 475,000 shares of Common Stock at a cost of$6.9 million.

In January 2003, weinitiated a new program to re-purchase up to 5 million shares of our CommonStock at prevailing market prices. This program expired at December 31,2003 with us electing not to re-purchase any shares of our Common Stock.

***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 of Directorsapproves a transaction. The Rights will not prevent a takeover of Ultratech,but are designed to encourage anyone seeking to acquire us to negotiate withour Board of Directors.

Shares reserved forissuance under the plan were 350,000 at December 31, 2004.

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**13.   EMPLOYEE BENEFIT PLANS**

***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 2004, 2003 and2002.

***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, 2004, no company contributions were made to this plan. Wealso sponsor an executive non-qualified deferred compensation plan (the “Plan”)that allows qualifying executives to defer current cash compensation. At December 31,2004, Plan assets, representing the cash surrender value of life insurancepolicies held by us, and liabilities were approximately $1.4 million and $1.6million, respectively, and are included in our consolidated balance sheetsunder the captions “other assets” and “other liabilities.” In conjunction withthis plan, we recognized $0.1, $0.0 and $0.1 million of expense for the yearsended December 31, 2004, 2003 and 2002, respectively.

**14.   INCOME TAXES (BENEFIT)**

Thedomestic and foreign components of income (loss) before income taxes andcumulative adjustments are as follows:
| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| **In thousands**              | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Domestic                           |       | $ (1,055                               | )          | $ 4,506 |   | $ (30,950 | ) |
| Foreign                            |       | 2,124                                       |       | 2,490 |   | 702 |   |
| Income (loss) before  income taxes |       | $ 1,069                                |       | $ 6,996 |   | $ (30,248 | ) |
|                                    |            |                                             |            |  |  |  |  |  |  |

 

Incometax provision (benefit) included the following:
| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| **In thousands**       | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Federal:                    |       |                                        |       |   |   |   |   |
| Current                     |       | $ —                               |       | $   — |   | $ (4,985 | ) |
| Deferred                    |       | —                                      |       | — |   | — |   |
|                        |       | —                                      |       | — |   | (4,985 | ) |
| State:                      |       |                                        |       |   |   |   |   |
| Current                     |       | 13                                          |       | (300 | ) | (45 | ) |
| Deferred                    |       | —                                      |       | — |   | — |   |
|                        |       | 13                                          |       | (300 | ) | (45 | ) |
| Foreign:                    |       |                                        |       |   |   |   |   |
| Current                     |       | 162                                         |       | 289 |   | 164 |   |
| Deferred                    |       | 270                                         |       | (559 | ) | — |   |
|                        |       | 432                                         |       | (270 | ) | 164 |   |
| Total income tax  provision |       | $ 445                                  |       | $ (570 | ) | $ (4,866 | ) |
|                             |            |                                             |            |  |  |  |  |  |  |

 

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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**                       | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Tax  computed at statutory rate             |       | $ 374                                  |       | $ 2,449 |   | $ (10,587 | ) |
| State income  taxes, net of federal benefit |       | 8                                           |       | (300 | ) | (29 | ) |
| Foreign taxes                               |       | (311                                        | )          | (1,142 | ) | (82 | ) |
| Tax settlements                             |       | —                                      |       | — |   | (3,811 | ) |
| U.S. losses not  benefited                  |       | 374                                         |       | (1,577 | ) | 9,659 |   |
| Other, net                                  |       | —                                      |       | — |   | (16 | ) |
| Income tax provision                        |       | $ 445                                  |       | $  (570 | ) | $ (4,866 | ) |
|                                             |            |                                             |            |  |  |  |  |  |  |

 

Significantcomponents of deferred income tax assets and liabilities are as follows:
| **In thousands**                       | ** ** | ** **                               | ** ** | **2004**                                 | ** ** | **2003**                                                      | ** ** | **2002** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|---------------------------------------------------------------|------------|----------|------------|
| Deferred  tax assets:                       |       |                                     |       |                                     |       |                                                          |       |
| Net operating loss carryforwards            |       | $ 39,119                            |       | $ 36,278                            |       | $ 25,266                                                 |       |
| Inventory valuation                         |       | 3,022                                    |       | 3,796                                    |       | 6,073                                                         |       |
| Bad debt reserve                            |       | 92                                       |       | 56                                       |       | 123                                                           |       |
| Basis difference in assets                  |       | 5,186                                    |       | 5,662                                    |       | 8,839                                                         |       |
| Tax credit carryforwards                    |       | 24,328                                   |       | 15,161                                   |       | 12,334                                                        |       |
| Warranty reserves                           |       | 781                                      |       | 484                                      |       | 539                                                           |       |
| Deferred license income                     |       | 404                                      |       | 1,837                                    |       | 3,305                                                         |       |
| Deferred product and services income        |       | 361                                      |       | 390                                      |       | 2,223                                                         |       |
| Other non-deductible accruals and reserves  |       | 4,316                                    |       | 4,377                                    |       | 5,311                                                         |       |
| Total deferred  tax assets                  |       | 77,609                                   |       | 68,041                                   |       | 64,013                                                        |       |
| Valuation allowance                         |       | (72,944                                  | )          | (67,482                                  | )          | (64,013                                                       | )          |
| Net deferred tax  assets                    |       | 4,665                                    |       | 559                                      |       | —                                                        |       |
| Deferred tax  liabilities:                  |       |                                     |       |                                     |       |                                                          |       |
| Unremitted earnings of foreign subsidiaries |       | (4,376                                   | )          | —                                   |       | —                                                        |       |
| Total deferred  tax liabilities             |       | (4,376                                   | )          | —                                   |       | —                                                        |       |
| Net deferred tax assets                     |       | $      289 |       | $      559 |       | $         — |       |

 

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 $5.5, $3.5and $20.6 million during the years ended December 31, 2004, 2003 and 2002,respectively. Approximately $12.4 million of the valuation allowance as of December 31,2004 is attributable to stock options, the benefit of which will be credited topaid-in capital when realized.

As of December 31, 2004, we had net operatingloss carryforwards for federal and state tax purposes of $105.9 million and$39.5 million, respectively. We also had federal research and development taxcredit carryforwards of approximately $9.7 million. The federal and state netoperating loss carryforwards will expire at various dates beginning in year2005 through 2024, if not utilized. The tax credit carryforwards will expire atvarious dates beginning in 2011 through 2024, 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 

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stateprovisions. Such an annual limitation could result in the expiration of the netoperating losses and credits before utilization.

**15.   COMMITMENTS AND CONTINGENCIES**

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, 2004, the minimum annual rentalcommitments are as follows:
| ** ** | ** ** | **in thousands** | ** **    |
|------------|------------|-----------------------|---------------|
| 2005       |       |                  | $ 4,296  |   |   |
| 2006       |       |                  | 4,507         |   |   |
| 2007       |       |                  | 4,630         |   |   |
| 2008       |       |                  | 4,757         |   |   |
| 2009       |       |                  | 4,533         |   |   |
| Thereafter |       |                  | 3,347         |   |   |
|       |       |                  | $ 26,070 |   |   |

 

Rent expense was approximately $4.2 million, $4.8million and $7.0 million for the years ended December 31, 2004, 2003 and2002, 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. InJune 2003, we replaced a credit facility requiring $2.0 million ofrestricted cash with a credit facility requiring $4.0 million in compensatingbalances, consisting of our cash, cash equivalents and short-term investments.

On February 29, 2000, we filed lawsuits assertingpatent infringement and related claims against Nikon, Canon, and ASML in theU.S. District Court for the Eastern District of Virginia. In April 2000,we reached a settlement with Nikon, and in September 2001, we reached asettlement with Canon. The patent litigation against ASML is ongoing afterhaving been transferred to the Northern District of California. After theDistrict Court made a preliminary determination that ASML did not infringe thepatent, we appealed the decision to the Court of Appeals for the FederalCircuit in Washington, D.C. The Court of Appeals reversed the preliminarydetermination of the District Court, ruling in our favor, and remanded the caseback to the District Court in Northern California for further proceedings.

On October 12, 2001,we were sued in the District Court of Massachusetts by SVG Lithography Systems(“SVGL”), alleging infringement of several patents. SVGL is a division ofSilicon Valley Group, Inc., which is a wholly owned subsidiary of ASML. Asof March 2004, all claims made by SVGL had been dismissed.

**16.   FINANCIAL GUARANTEES**

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 31,2004, 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, 2004 and 2003, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2004.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, 2004 and 2003, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2004, in conformity with accountingprinciples generally accepted in the United States. Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Ultratech, Inc.’s internal controlover financial reporting as of December 31, 2004, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 2,2005 expressed an unqualified opinion thereon.
|                       | /s/ ERNST &  YOUNG LLP |
|-----------------------|---------------------------------|
| Palo Alto, California |
| March 2, 2005    |

 

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**Report of Ernst & Young LLP, IndependentRegistered Public Accounting Firm**

The Board of Directors and Shareholders 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, 2004, 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 31,2004, is fairly stated, in all material respects, based on the COSO criteria. Also,in our opinion, Ultratech, Inc. maintained, in all material respects,effective internal control over financial reporting as of December 31,2004, 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, 2004 and 2003, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2004 of Ultratech, Inc.and our report dated March 2, 2005 expressed an unqualified opinionthereon.
|                  |   | /s/ ERNST &  YOUNG LLP |
|-----------------------|--------|--------------------------------------|
| Palo Alto, California |   |                                 |
| March 2, 2005    |   |                                 |

 

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***ITEM 9.******  *CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

Not applicable.

***ITEM 9A.******  *CONTROLS ANDPROCEDURES**

**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, 2004. 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, 2004,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 31,2004, 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 31,2004 that have materially affected, or are reasonably likely to materiallyaffect our internal controls over financial reporting.

**ITEM 9B.*****  ****OTHERINFORMATION*

**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 2005 Annual Meeting of Stockholders to beheld July 19, 2005 and the informationincluded therein is incorporated herein by reference as set forth below.

***ITEM 10.******  *DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT**

The information concerningour directors required by this Item is incorporated by reference from the Itemcaptioned “Election of Directors” in our Proxy Statement for the 2005 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 Itemcaptioned “Section 16(a) BeneficialOwnership Reporting Compliance”in the Proxy Statement.

***ITEM 11.******  *EXECUTIVECOMPENSATION**

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

**ITEM 12.****  ***SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS*

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.******  *CERTAINRELATIONSHIPS 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.******  *PRINCIPALACCOUNTANT 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 2004” in the Proxy Statement.

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**PART IV**

**ITEM15.   *EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K***

(a)           Thefollowing documents are filed as part of this Report on Form 10-K

(1)         Financial Statements

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(5)   |   | 1995 Employee Stock  Purchase Plan (Amended and Restated as of October 17, 2000).                                                                                                                           |
| 10.7(6)   |   | 1998 Supplemental Stock  Option/ Stock Issuance Plan (Amended and Restated effective January 29,  2002).                                                                                                    |
| 10.8      |   | Brokerage Line of Credit  Agreement with Morgan Stanley, dated December 16, 2004.                                                                                                                           |
| 10.9(5)   |   | Lease Agreement between  Montague LLC, As Landlord, and Registrant, As Tenant dated November 22,  1999.                                                                                                     |
| 10.10(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. |
| 10.11(14) |   | Employment agreement  between Registrant and Mr. Arthur Zafiropoulo, chief Executive Officer.                                                                                                               |
| 10.12(14) |   | Employment agreement  between Registrant and Mr. John Denzel, President and Chief Operating  Officer                                                                                                        |
| 10.13(14) |   | Employment agreement  between Registrant and Mr. Bruce Wright, Senior Vice President and Chief  Financial Officer.                                                                                          |
| 10.14(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.                     |

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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 FileNo. 0-22248).

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(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 FileNo. 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)   Previouslyfiled with our Annual Report on Form 10-K for the year ended December 31,2003 (Commission FileNo. 0-22248).

(b)          Exhibits.See list of exhibits under (a)(3) above.

(c)           FinancialStatement Schedules. See list of schedules under (a)(2) above.

68

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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 9,  2005 |                 | 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.

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below (and the above Powers of Attorney granted) by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.
|                             | **Signature** | ** **                                                          | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-----------------------------|---------------|---------------------------------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ ARTHUR ZAFIROPOULO |          | Chairman of the Board of  Directors and Chief                       |       | March 9,  2005 |
| Arthur  Zafiropoulo         |          | Executive Officer (Principal Executive Officer)                     |       |                |
| /s/  BRUCE WRIGHT           |          | Senior Vice President,  Finance, Chief Financial                    |       | March 9,  2005 |
| Bruce Wright                |          | Officer and Secretary (Principal Financial and  Accounting Officer) |       |                |
| /s/ DENNIS RANEY       |          | Director                                                            |       | March 9,  2005 |
| Dennis Raney                |          |                                                                |       |                |
| /s/ RICK TIMMINS       |          | Director                                                            |       | March 9,  2005 |
| Rick Timmins                |          |                                                                |       |                |
| /s/ THOMAS D. GEORGE   |          | Director                                                            |       | March 9,  2005 |
| Thomas D. George            |          |                                                                |       |                |

69

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| /s/ JOEL  GEMUNDER      |   | Director |   | March 9, 2005  |
|------------------------------|--------|----------|--------|---------------------|
| Joel  Gemunder               |   |     |   |                |
| /s/ NICHOLAS KONIDARIS  |   | Director |   | March 9,  2005 |
| Nicholas  Konidaris          |   |     |   |                |
| /s/ VINCENT F. SOLLITTO |   | Director |   | March 9,  2005 |
| Vincent F.  Sollitto         |   |     |   |                |

 

70

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**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(5)                    |       | 1995 Employee Stock  Purchase Plan (Amended and Restated as of October 17, 2000).                                                                                                                                                                                     |
|     10.7(6)                    |       | 1998 Supplemental Stock  Option/ Stock Issuance Plan (Amended and Restated effective January 29,  2002).                                                                                                                                                              |
|     10.8                       |       | Brokerage Line of Credit  Agreement with Morgan Stanley, dated December 16, 2004.                                                                                                                                                                                     |
|     10.9(5)                    |       | Lease Agreement between  Montague LLC, As Landlord, and Registrant, As Tenant dated November 22,  1999.                                                                                                                                                               |
|     10.10(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.                                                           |
|     10.11(14)                  |       | Employment agreement  between Registrant and Mr. Arthur Zafiropoulo, chief Executive Officer.                                                                                                                                                                         |
|     10.12(14)                  |       | Employment agreement  between Registrant and Mr. John Denzel, President and Chief Operating  Officer                                                                                                                                                                  |
|     10.13(14)                  |       | Employment agreement  between Registrant and Mr. Bruce Wright, Senior Vice President and Chief  Financial Officer.                                                                                                                                                    |
|     10.14(12)                  |       | Description of 2005 Cash  Bonus Plan.                                                                                                                                                                                                                                      |
|     21                         |       | Subsidiaries of  Registrant.                                                                                                                                                                                                                                               |

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|     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. |

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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 our AnnualReport on Form 10-K for the year ended December 31, 2003 (CommissionFile No. 0-22248).

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**SCHEDULE II**

**ULTRATECH, INC.VALUATION AND 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, 2002 |       |       |       |                                           |       |                                      |       |                                 |       |              |       |                                           |       |   |   |   |   |   |   |   |   |
| Trade accounts receivable          |       |       | $          | 540                                            |       |                                      |       | $                                    | (213       | )                 |       |                                           | $          | — |   |   |   | $ | (13 | ) |   |   | $ | 314 |   |   |
|                               |       |       | $          | 540                                            |       |                                      |       | $                                    | (213       | )                 |       |                                           | $          | — |   |   |   | $ | (13 | ) |   |   | $ | 314 |   |   |
| 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 |   |   |

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

S-1

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