**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Markone)**
| **x**      | ** ** | **Annual  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**                                                                                                                                                                                        |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **For the Fiscal Year Ended December 31, 2003**                                                                                                                                                                                                                                        |
| ** ** | ** ** | **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 mark whetherthe 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 June 28,2003, was approximately $364,577,000 (based upon the closing price for sharesof the Registrant’s Common Stock as reported by the Nasdaq National Market onthat date, the last trading date of the Registrant’s most recently completedsecond quarter). Shares of Common Stock held by each officer, director andholder of 5% or more of the outstanding Common Stock have been excluded in thatsuch persons may be deemed to be affiliates. This determination of affiliatestatus is not necessarily a conclusive determination for other purposes.

As of March 1, 2004, the Registrant had23,690,333 shares of Common Stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the Registrant’s Proxy Statement for the Annual Meeting of Stockholders tobe held on June 3, 2004 are incorporated by reference into Part IIIof 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. The Company’sactual results could differ materially from the information set forth in anysuch forward-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 the “Company”)develops, manufactures and markets photolithography and laser processingequipment designed to reduce the cost of ownership for manufacturers ofintegrated circuits, including advanced packaging processes and variousnanotechnology components, including thin film head magnetic recording devices(“thin film heads” or “TFHs”), optical networking devices, laser diodes and LED’s(light emitting diodes). The Company supplies step-and-repeatsystems based on one-to-one (“1X”) technology to customers locatedthroughout North America, Europe, Japan and the rest of Asia. Ultratechbelieves that its 1X steppers utilizing the Wynne Dyson optical design offercertain cost and performance advantages, as compared with competitors’ contactaligners or reduction steppers, to semiconductor device manufacturers forapplications involving line geometries of 0.75 microns or greater (“non-criticalfeature sizes”) and to nanotechnology manufacturers. Advanced packaging forintegrated circuits, specifically bump or wafer level chip scale packaging (“CSP”)techniques, require lithography steps in the device fabrication process.Ultratech continues to enhance its product offerings for bump, wafer level CSPprocessing and post passivation lithography (PPL). The Company’s 1X steppersare also used as replacements for scanners in existing fabrication facilitiesto enable semiconductor manufacturers to extend the useful life and increasethe capabilities of their facilities. In addition, the Company’s steppers areused to manufacture high volume, low cost semiconductors used in a variety ofapplications such as telecommunications, automotive control systems, powersystems and consumer electronics. Ultratech also supplies 1X photolithographysystems to thin film head manufacturers and believes that its steppers offeradvantages over certain competitive reduction lithography tools with respect tofield size, throughput, specialized substrate handling and cost. Additionally,the Company supplies 1X photolithography equipment to various othernanotechnology markets, where certain technical features, such as highresolution at g-line wavelengths, depth of focus and special size substrates,may offer advantages over certain competing tools. Ultratech has developed themodel NanoTech 160 stepper, with specific design modifications to address theunique requirements of the nanotechnology market, including dual-side waferprocessing capability.

The Company’s products andmarkets are 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 silicon 

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

Since the introduction of the earliest commercialphotolithography tools for IC manufacturing in the early 1960s, a number oftools have been introduced to enable manufacturers to produce increasinglycomplex devices with virtually zero defects that incorporate progressivelyfiner line widths. In the 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 thatspanned the width of the wafer. Exposure was achieved by scanning the entirephotomask and wafer in a single, continuous motion across the annular field.Scanners were followed by steppers, which expose a square or rectangularportion of the wafer in a single exposure, then move or “step” the wafer to anadjacent site to repeat the exposure. This stepping process is repeated asoften as necessary until the entire wafer has been exposed. By imaging a smallarea, steppers are able to achieve finer resolution, improved image sizecontrol and better alignment between the multiple device layers resulting inhigher yield and productivity in certain devices than possible with earliertools.

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 as astep-and-scan system 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.The Company’s 1X, Wynne Dyson optics steppers, unlike most reduction steppers,are based 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,the Company believes that sales of these systems are highly dependent uponcapacity expansions by its current 1X customers, or by customers making thetransition to advanced bump typed chips, which employ a different means ofelectrically connecting 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 and maintainadvanced fabrication facilities, relatively short product cycles andmanufacturers’ increasing concern for overall fabrication costs, the Companybelieves that manufacturers of ICs with bumped 

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packaging will continue tofocus on reducing their total manufacturing cost for the entire device. A majorcomponent of this cost is the cost of ownership of 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, inmany cases the system with the most technologically advanced capabilities willnot necessarily be the manufacturing system of choice. As part of the focus oncost reduction, the Company believes that device manufacturers are attemptingto extend the useful life and enhance the production capabilities offabrication facilities by selecting equipment that can replace existing toolswhile offering better performance in a cost-effective manner.

In addition to enhancingits current lithography solutions, the Company has been developing new toolsfor its existing markets. Ultratech has developed a new laser annealingtechnology for volume production of advanced state of the art devices and isnow offering a Laser Processing (LP) product. The Company’s first commercialproduct based on the new LP technology platform employs a process called laserspike annealing (LSA), which enables the activating of ultra-shallow junctions.This technology is expected to be useful for multiple IC generations. It isanticipated that eventually this technology will be superseded by an evenfaster laser processing technology that will take the processing time below onemicrosecond, thereby achieving even higher performance characteristics whileusing almost “zero” thermal budget. As a result, these new LP technologies—forwhich Ultratech has been awarded more than 36 patents and has 28 more patentapplications pending—are expected to remove several critical barriers to futuredevice scaling.

**Products**

The Company currently offers four different series of1X systems, representing primarily all of the Company’s systems revenue in2003, for use in the semiconductor fabrication process: the 1000 Family, whichaddresses the markets for scanner replacement, high volume/low costsemiconductor fabrication and R&D packaging activities; the Saturn WaferStepperâ 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 Stepperâ,which addresses the markets for scanner replacement and high volume/low costsemiconductor fabrication. These steppers currently offer feature sizecapabilities ranging from 2.0 microns to 0.75 microns and typically range inprice from $1.0 million to $3.0 million per system. The 1000 family and theTitan Wafer Stepper offer g- and h-line illuminationspecifications. The Saturn Wafer Stepper Family features an i-lineillumination specification that is designed to make them compatible withadvanced i-line reduction steppers. The Saturn and Titan wide-fieldsystems have a unique D-shaped field that permits the size and shape of theexposure field to be matched with step-and-scan systems, or to encompassreduction stepper fields. The D-shaped field is sized to allow thesemiconductor manufacturer to optimize throughput for the non-critical,mix-and-match layers. In bump processing, the Company offers its SaturnSpectrum Family. The Saturn Spectrum Family was developed for high volume bumpand wafer level CSP manufacturing and post passivation lithographyapplications. The Saturn Spectrum Family provides broadband (g, h and i-line)exposure or selective exposure (gh or i-line), and is used in conjunction withelectroplating to produce a pattern of bumps, or metal connections, on the bondpads of the die for flip chip devices. This pattern can be placed in a tightarray across the entire die, as opposed to the conventional method of wirebonding which is generally limited to the periphery of the die. This allowsmanufacturers to shrink the die size. The flip chip device can then be placedin a small outline package or directly on a printed circuit board.

The Company also offers photolithography equipment foruse in various 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 

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activate air bags inautomobiles, and membrane pressure sensors used in industrial control systems.These micro-machined devices are manufactured on silicon substrates usingphotolithography techniques similar to those used for manufacturingsemiconductors and thin film head devices. In 2002, the Company introduced theNanoTech product family which consists of the NanoTech 100, NanoTech 160,NanoTech 190, NanoTech 200 and NanoTech 200i. The NanoTech 160 system utilizesa platform based on the previous 1000 Series steppers, incorporating DualSide Alignment (“DSA”) capability for applications requiring lithography onboth sides of a wafer. The NanoTech 160 is an extension of the model 1600DSAstepper, and enhances the capabilities of the 1000 Series steppers byoffering the first stepper with Dual Side Alignment capability, providingcustomers with a 1X stepper solution to this special processing requirement.Additionally, the Company believes that its other NanoTech steppers offerresolution and depth of focus advantages over alternative technologies to themanufacturers of nanotechnology components.

The Company has introduced the NanoTech 190 steppers,with enhanced 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.

The Company also sells upgrades to systems in itsinstalled base and refurbished systems. These refurbished systems typicallyhave a purchase price that is lower than the purchase price for the Company’snew systems.

The Company also offers laser-based thermal annealingtools. 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. TheCompany believes there is a need for tools that anneal at higher temperaturesfor shorter periods of time and that its laser annealing tools may ultimatelyprovide this capability to the industry. The near-term application of theCompany’s laser-based thermal annealing tools is anticipated to be in the areaof source/drain dopant activation. However, the Company is also researching theuse of these tools for other applications.

Currently, the Company offers two laser-annealingtools. The first tool is designed for use in research and developmentapplications, with the objective of process optimization. The Company shippedand recorded revenue on two of these systems in 2002. The second tool istargeted for pilot production. The Company expects to ship production units ofthis second tool in 2004.

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TheCompany’s current 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                            |       |
| **Laser  Processing:**                  |       |       |       |           |       |                                      |       |
| Series 1                           |       |       | NA         |           |       | NA                                        |       |
| V100                                    |       |       | 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. The Company believes that continued andtimely development and introduction of new and enhanced systems to serve thesemarkets is essential for the Company to maintain its competitive position. TheCompany has made and continues to make substantial investments in the researchand development of its core optical technology, which the Company believes iscritical to its financial results. The Company intends to continue to developits technology and to develop innovative products and product features to meetcustomer demands. Current engineering projects include: the continued researchand development and process insertion for the Company’s laser processingtechnologies and continued development of the Company’s 1X stepper products.Other research and development efforts are currently focused on performanceenhancement and development of new features for existing systems, both forinclusion in the Company’s systems and to meet customer order requirement;reliability improvement; and manufacturing cost reduction s. These research anddevelopment efforts are undertaken, principally, by the Company’s research,development and engineering organizations and costs are generally expensed asincurred. Other operating groups within the Company support the Company’sresearch, development and engineering efforts, and the associated costs arecharged to these organizations and expensed as incurred.

The Company works with many customers to jointlydevelop technology required to manufacture advanced devices or to lower thecustomer’s cost of ownership. The Company also has a worldwide engineeringsupport organization including reticle engineering and photo processingcapability and applications.

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The Company hashistorically devoted a significant portion of its financial resources toresearch and development programs and expects to continue to allocatesignificant resources to these efforts in the future. As of December 31, 2003,the Company had approximately 66 full-time employees engaged in research,development, and engineering. For 2003, 2002 and 2001, total research,development, and engineering expenses were approximately $21.3 million, $23.5million and $25.8 million, respectively, and represented 21.3%, 34.3% and 19.7%of the Company’s net sales, respectively.

**Sales and Service**

The Company markets and sells its products in NorthAmerica, Europe, Japan, Taiwan and southeast Asia principally through itsdirect sales organization. The Company also sells its products in theAsia/Pacific region, excluding Japan and Taiwan, through independent salesorganizations. Ultratech also has service personnel based throughout the UnitedStates, Europe, Japan and the rest of Asia.

The Company 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. The Company believes thatthe strength of its worldwide service and support organization is an importantfactor in its ability to sell its systems, maintain customer loyalty and reducethe maintenance costs of its systems. In addition, the Company believes thatworking with its suppliers and customers is necessary to ensure that theCompany’s systems are cost effective, technically advanced and designed tosatisfy customer requirements.

The Company supports its customers with field service,applications, technical service engineers and training programs. The Companyprovides its customers with comprehensive support and service before, duringand after delivery of its systems. To support the sales process and to enhancecustomer relationships, the Company works closely with prospective customers todevelop hardware, software and applications test specifications and benchmarks,and often designs customized applications to enable prospective customers toevaluate the Company’s equipment for their specific needs. Prior to shipment,Ultratech’s support personnel typically assist the customer in site preparationand inspection, and provide customers with training at the Company’s facilitiesor at the customer’s location. The Company currently offers its customersvarious courses of instruction on the Company’s systems, including instructionsin system hardware, software and applications tools for optimizing the Company’ssystems to the customer’s particular needs. The Company’s customer trainingprogram also includes instructions in the maintenance of the Company’s systems.The Company’s field support personnel work with the customer’s employees toinstall the system and demonstrate system readiness. Technical support is alsoavailable through on-site Company personnel.

In general, the Companywarrants its new systems against defects in design, materials and workmanshipfor one year. The Company offers its customers additional support after thewarranty period in the form of applications and service contracts for specifiedtime periods. Service contracts include various options such as priorityresponse, planned preventive maintenance, scheduled one-on-onetraining, daily on-site support, and monthly system and performanceanalysis.

**Manufacturing**

The Company performs all of its manufacturingactivities (final assembly, system testing and certain subassembly) in cleanroom environments totaling approximately 26,000 square feet located in SanJose, California. Performing manufacturing operations in California exposes theCompany to a higher risk of natural disasters, including earthquakes. TheCompany is not insured against natural disasters and power 

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shortages and theoccurrence of such an event could materially adversely impact the Company’sresults of operations.

The Company’s manufacturing activities consist ofassembling and testing components and subassemblies, which are then integratedinto finished systems. The Company relies on a limited number of outsidesuppliers and subcontractors to manufacture certain components andsubassemblies. The Company orders one of the most critical components of itstechnology, the glass for its 1X lenses, from external suppliers. The Companydesigns the 1X lenses and provides the lens specifications and the glass toother suppliers, who then machine the lens elements. The Company then assemblesand tests the optical 1X lenses. The Company has recorded the criticalparameters of each of its optical lenses sold since 1982, and believes thatsuch information enables it to supply lenses to its customers that match thecharacteristics of its customers’ existing lenses.

The Company procures some of its other criticalsystems’ components, subassemblies and services from single outside suppliersor a limited 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, the Company has been able to obtainadequate services and supplies of components and subassemblies for its systems ina timely manner. However, disruption or termination of certain of these sourcescould result in a significant adverse impact on the Company’s ability tomanufacture its systems. This, in turn, would have a material adverse effect onthe Company’s business, financial condition and results of operations. TheCompany’s reliance on a sole or a limited group of suppliers and the Company’sreliance on subcontractors involve several risks, including a potentialinability to obtain an adequate supply of required components due to thesuppliers’ failure or inability to provide such components in a timely manner,or at all, and reduced control over pricing and timely delivery of components.Although the timeliness, yield and quality of deliveries to date from the Company’ssubcontractors have been acceptable, manufacture of certain of these componentsand subassemblies is an extremely complex process, and long lead-times arerequired. Any inability to obtain adequate deliveries or any other circumstancethat would require the Company to seek alternative sources of supply or tomanufacture such components internally could delay the Company’s ability toship its products, which could damage relationships with current andprospective customers and have a material adverse effect on the Company’sbusiness, financial condition and results of operations.

The Company maintains acompany-wide quality program. The Company’s 1X operation achieved ISO9001:1994 certification in 1996 and ISO 14001:1996 certification in March 2001.The Company’s ISO 9001 certification was upgraded to the ISO 9001:2000 standardin January 2002. All certifications have been maintained uninterruptedthrough the date of this report.

**Competition**

The capital equipmentindustry in which the Company operates is intensely competitive. A substantialinvestment is required to install and integrate capital equipment into asemiconductor, semiconductor packaging or nanotechnology device productionline. The Company believes that once a device manufacturer or packagingsubcontractor has selected a particular vendor’s capital equipment, themanufacturer generally relies upon that equipment for the specific productionline application and, to the extent possible, subsequent generations of similarproducts. Accordingly, it is difficult to achieve significant sales to aparticular customer once another vendor’s capital equipment has been selected.

**ADVANCED PACKAGING**

The Company experiences competition in advancedpackaging from various proximity aligner companies such as Suss Microtec AG(Suss Microtec) and projection companies such as Ushio, Inc. (Ushio) andTamarack Scientific Co., Inc. (Tamarack). The Company expects itscompetitors to continue 

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to improve the performanceof their current products and to introduce new products with improved price andperformance characteristics that can compete directly with the Company’sproducts. This could cause a decline in sales or loss of market acceptance ofthe Company’s steppers in its served markets, and thereby materially adverselyaffect the Company’s business, financial condition and results of operations.Enhancements to, or future generations of, competing products may be developedthat offer superior cost of ownership and technical performance features. TheCompany believes that to be competitive, it will require significant financialresources in order to continue to invest in new product development, in newfeatures and enhancements to existing products, to introduce new generationstepper systems in our served markets on a timely basis, and to maintaincustomer service and support centers worldwide. In marketing its products, theCompany may also face competition from vendors employing other technologies. Inaddition, increased competitive pressure has led to intensified price-basedcompetition in certain of the Company’s markets, resulting in lower prices andmargins. Should these competitive trends continue, the Company’s business,financial condition and operating results may be materially adversely affected.

Ultratech has obtained a leadership position in theadvanced packaging market. The Company’s primary competition in this marketplace comes from contact aligners offered by companies such as Suss Microtec, aGerman supplier. Although contact and proximity aligners generally have lowerpurchase prices than 1X steppers, 1X steppers offer lower operating costs andtotal cost of ownership in most applications. The Company believes 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, the Company believes 1Xrefractive steppers do not offer the same productivity and cost savingadvantages as the Ultratech 1X stepper based on the Wynne Dyson optical design.Tamarack has introduced a 1X scanner for wafer bumping applications. TheCompany believes that Tamarack’s 1X scanners have higher operating costs ascompared to Ultratech 1X steppers. In addition to contact and proximityaligners, Ultratech also faces competition from the used reduction steppermarket. While the use of reduction steppers offers significantly lowerthroughput and is not easily adapted for thick resist (>35 micron)processing, some device manufacturers may consider this technology option.

**LASER PROCESSING**

With respect to the Company’s laser annealingtechnologies, marketed under the V100 product name, the primary competition comesfrom companies 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 long time scales associated with RTP seriously limits the verticaldimension of the junctions. Faster annealing times result in shallower and moreabrupt junctions and faster transistors. The Company believes its annealingtechnology results in faster transistors for a given size. The Company believesthat RTP manufacturers recognize the need to reduce thermal cycle times and areworking toward this goal. In July 2000, the Company licensed certainrights to its then existing laser processing technology, with reservations, toa competing manufacturer of semiconductor equipment. The Company presentlyanticipates this company will offer laser annealing tools to the semiconductorindustry that will compete with the Company’s 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 the Companybelieves FLA will suffer from severe pattern-related non-uniformities.Ultratech’s 

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proprietary laser processing solution has beenspecifically developed to provide junction annealing on near-instantaneoustimescales, while maintaining low sheet resistance. Laser spike annealing(LSA), the first implementation of laser processing, activates dopants in themicrosecond-to-millisecond time frame without melting. Research indicates that,at temperatures just below the melting point of silicon, time durations in themicrosecond to millisecond range, are required to achieve full activation, and dopantdiffusion is minimal.

Additionally, competitionto the Company’s laser processing products may come from other laser annealingtools, including those presently being used by the flat panel display industryto re-crystallize silicon. Manufacturers of these tools may try to extend theuse of their technologies to semiconductor device applications.

**IntellectualProperty Rights**

Although the Company attempts to protect itsintellectual property rights through patents, copyrights, trade secrets andother measures, it believes that its success will depend more upon theinnovation, technological expertise and marketing abilities of its employees.Nevertheless, the Company has a policy of seeking patents when appropriate oninventions resulting from its ongoing research and development andmanufacturing activities. The Company owns 89 United States and foreignpatents, which expire on dates ranging from May 2004 to August 2021and has 54 United States and foreign patent applications pending. The Companyalso has various registered trademarks and copyright registrations coveringmainly software programs used in the operation of its systems. The Company alsorelies upon trade secret protection for its confidential and proprietaryinformation. The Company may not be able to protect its technology adequatelyand competitors may be able to develop similar technology independently. TheCompany’s pending patent applications may not be issued or that U.S. or foreignintellectual property laws will protect the Company’s intellectual propertyrights. In addition, litigation may be necessary to enforce the Company’spatents, copyrights or other intellectual property rights, to protect theCompany’s trade secrets, to determine the validity and scope of the proprietaryrights of others or to defend against claims of infringement. Such litigationcould result in substantial costs and diversion of resources and could have amaterial adverse effect on the Company’s business, financial condition andresults of operations, regardless of the outcome of the litigation. Patentsissued to the Company may be challenged, invalidated or circumvented and therights granted thereunder may not provide competitive advantages to theCompany. Furthermore, others may independently develop similar technology orproducts, or, if patents are issued to the Company, design around the patentsissued to the Company. Challenges to, or invalidation of, patents related tothose technologies would expose the Company to the risk of forfeiture ofrevenues and further risk of damage claims.

On February 29, 2000, the Company filed lawsuitsasserting patent infringement and related claims against Nikon, Canon, and ASMLin the U.S. District Court for the Eastern District of Virginia. In April 2000,the Company reached a settlement with Nikon, and in September 2001, theCompany reached a settlement with Canon. The patent litigation against ASML isongoing after having been transferred to the Northern District of California. Afterthe District Court made a preliminary determination that ASML did not infringethe patent, the Company appealed the decision to the Court of Appeal for theFederal Circuit in Washington, D.C., and oral arguments were heard in February 2004.On October 12, 2001, the Company was sued in the District Court ofMassachusetts by SVG Lithography Systems (“SVGL”), alleging infringement ofseveral patents. SVGL is a division of Silicon Valley Group, Inc., whichis a wholly owned subsidiary of ASML. The claims for all but one of the patentshave since been dismissed, and the Company is currently defending against theremaining claim, which it believes to be without merit.

The Company is involved in other lawsuits and legalactions regarding infringement claims that it believes not to be material toits business or financial condition. Additionally, the Company has from time totime been notified of claims that it may be infringing intellectual propertyrights possessed by third 

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parties. Some of theCompany’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. In a recent case not involving the Company, the U.S. DistrictCourt in Las Vegas, Nevada held that certain patents held by Lemelson thatpurportedly cover machine vision are invalid and unenforceable. The Companybelieves that its machine vision technology does not infringe the patent rightsof other parties.

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, maymaterially adversely affect the Company’s business, financial condition andresults of operations, regardless of the outcome of any litigation. Withrespect to any such future claims, the Company may seek to obtain a licenseunder the third party’s intellectual property rights. However, a license maynot be available on reasonable terms or at all. The Company could decide, inthe alternative, to resort to litigation to challenge such claims. Suchchallenges could be expensive and time consuming and could materially adverselyaffect the Company’s business, financial condition and results of operations,regardless of the outcome of any litigation.

**EnvironmentalRegulations**

The Company is subject toa variety of governmental regulations relating to the use, storage, discharge,handling, emission, generation, manufacture and disposal of toxic or other hazardoussubstances used to manufacture the Company’s systems. The Company believes thatit is currently in compliance in all material respects with such regulationsand that it has obtained all necessary environmental permits to conduct itsbusiness. Nevertheless, the failure to comply with current or futureregulations could result in substantial fines being imposed on the Company,suspension of production, alteration of the manufacturing process or cessationof operations. Such regulations could require the Company to acquire expensiveremediation equipment or to incur substantial expenses to comply withenvironmental regulations. Any failure by the Company to control the use,disposal or storage of, or adequately restrict the discharge of, hazardous or toxicsubstances could subject the Company to significant liabilities.

**Customers,Applications and Markets**

The Company sells its systems to semiconductor,advanced packaging, thin film head and various other nanotechnologymanufacturers located throughout North America, Europe, Japan, Taiwan and therest 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 andcontact printers, in start-up fabrication facilities, in packaging forultrathin and flip chip applications and for high volume, low cost non-criticalfeature size semiconductor production. The Company believes that thin film headmanufacturers have purchased the NanoTech 190 stepper due to its technicalcapabilities, throughput and overall cost of ownership. The Company believesthat manufacturers of nanotechnology devices have purchased NanoTech productsbecause of their high throughput and flexible field size advantages along withtheir cost-effective, submicron imaging capabilities.

Historically, the Company has sold a substantialportion of its systems to a limited number of customers. In 2003, IntelCorporation accounted for 26% of the Company’s net sales. In 2002, Intel 

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Corporation accounted for19% and Sumitomo Chemical Company, Ltd. accounted for 10% of the Company’s netsales. In 2001, no single customer accounted for 10% or more of the Company’snet sales.

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 31,2003, as compared to 83% and 63% for the years ended December 31, 2002 and2001, respectively. During 2003, 2002 and 2001, approximately 25%, 17% and 37%,respectively, of the Company’s systems revenue was derived from sales tonanotechnology manufacturers, including micro systems, TFH and opticalnetworking device manufacturers. The Company’s future results of operations andfinancial position would be materially adversely impacted by a downturn in anyof these market segments, or by loss of market share in any of these segments.

International sales accounted for approximately 61%,48% and 51% of total net sales for the years 2003, 2002 and 2001, respectively,with Japan representing 28%, 24% and 17% of sales for those same years.

The Company expects that sales to a relatively fewcustomers will continue to account for a high percentage of its net sales inthe foreseeable future and believes that the Company’s financial results dependin significant part upon the success of these major customers and the Company’sability to meet their future capital equipment needs. Although the compositionof the group comprising the Company’s largest customers may vary from period toperiod, the loss of a significant customer or any reduction in orders by asignificant customer, including reductions due to market, economic orcompetitive conditions in the semiconductor, semiconductor packaging ornanotechnology industries or in the industries that manufacture productsutilizing integrated circuits, thin film heads or other nanotechnologycomponents, would likely have a material adverse effect on the Company’sbusiness, financial condition and results of operations. The Company’s abilityto maintain or increase its sales in the future depends, in part, on itsability to obtain orders from new customers as well as the financial conditionand success of its existing customers, the semiconductor and nanotechnologyindustries and the economy in general.

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 the Company to additionalrisks, including the risk of default by one or more customers representing asignificant portion of the Company’s total receivables. If the Company wererequired to take additional accounts receivable reserves, its business,financial condition and results of operations would be materially adverselyaffected.

Sales of the Company’ssystems depend, in significant part, upon the decision of a prospectivecustomer to increase manufacturing capacity or to restructure current manufacturingfacilities, either of which typically involves a significant commitment ofcapital. Many of the Company’s customers in the past have cancelled thedevelopment of new manufacturing facilities and have substantially reducedtheir capital equipment budgets. In view of the significant investment involvedin a system purchase, the Company has experienced and may continue toexperience delays following initial qualification of the Company’s systems as aresult of delays in a customer’s approval process. Additionally, the Company ispresently receiving orders for systems that have lengthy delivery schedules,which may be due to longer production lead times or a result of customers’capacity scheduling requirements. In order to maintain or exceed the Company’spresent level of net sales, the Company is dependent upon obtaining orders forsystems that will ship and be accepted in the current period. The Company maynot be able to obtain those orders. For these and other reasons, the Company’ssystems typically have a lengthy sales cycle during which the Company mayexpend substantial funds and management effort in securing a sale. Lengthysales cycles subject the Company to a number of significant risks, includinginventory obsolescence and fluctuations in operating results, over which theCompany has little or no control.

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**Backlog**

The Company schedulesproduction of its systems based upon order backlog, informal customercommitments and general economic forecasts for its targeted markets. TheCompany includes in its backlog all accepted customer orders for its systemswith assigned shipment dates within one year, as well as all orders forservice, spare parts and upgrades, in each case, that management believes to befirm. However, all orders are subject to cancellation or rescheduling by thecustomer with limited or no penalties. Because of changes in system deliveryschedules, cancellations of orders and potential delays in system shipments,the Company’s backlog at any particular date may not necessarily berepresentative of actual sales for any succeeding period. As of December 31,2003 and 2002, the Company’s backlog was approximately $63.0 million and $50.4million, respectively, including $0.4 million and $10.5 million, respectively,of products shipped but not yet installed and accepted. At December 31,2003, three potential customers accounted for 12%, 11% and 10%, respectively,of the Company’s system backlog. Cancellation, deferrals or rescheduling oforders by these customers would have a material adverse impact on the Company’sfuture results of operations.

**Employees**

At December 31, 2003,the Company had approximately 315 full-time employees, including 66engaged in research, development, and engineering, 35 in sales and marketing,97 in customer service and support, 67 in manufacturing and 50 in generaladministration and finance. The Company believes its future success depends, inlarge part, on its ability to attract and retain highly skilled employees. Noneof the employees of the Company is covered by a collective bargainingagreement. The Company has, however, entered into employment agreements with alimited number of its employees, including its executive officers. The Companyconsiders its relationships with its employees to be good.

**Additional RiskFactors**

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 the Company and its business:

**Developmentof New Product Lines; Expansion of Operations****  **Currently, the Company is devoting significantresources to the development, introduction and commercialization of its laserprocessing systems and to enhancements of its Saturn Spectrum 3e andSaturn Spectrum 300e2 wafer steppers and next generation relatedplatforms. The Company intends to continue to develop these products andtechnologies during 2004, and will continue to incur significant operatingexpenses in the areas of research, development and engineering, manufacturingand general and administrative costs in order to further develop, produce andsupport these new products. Additionally, gross profit margins and inventorylevels may be further adversely impacted in the future by costs associated withthe initial production of the Company’s laser processing systems and by futuregenerations of its 1X lithography systems. These costs include, but are notlimited to, additional manufacturing overhead, additional inventory write-offs,costs of demonstration systems and facilities, costs associated with theestablishment of additional after-sales support organizations. Additionally,operating expenses may increase, relative to sales, as a result of addingadditional marketing and administrative personnel, among other costs, tosupport the Company’s new products. If the Company is unable to achievesignificantly increased net sales or if its sales fall below expectations, theCompany’s operating results will be materially adversely affected.

The Company’s ability to commercialize its laserprocessing technologies depends on its ability to demonstrate amanufacturing-worthy tool. The Company does not presently have in-housecapability to 

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fabricate devices. As aresult, the Company must rely on partnering with semiconductor companies todevelop the anneal process. The development of new process technologies islargely dependent upon the Company’s ability to interest potential customers inworking on joint process development. The Company’s ability to deliver timelysolutions is also limited by wafer turnaround at the potential customer’sfabrication facility.

**Cyclicalityof Semiconductor, Semiconductor Packaging and Nanotechnology Industries****  **The Company’s business depends in significant partupon capital expenditures bymanufacturersof semiconductors, bumped semiconductors and nanotechnology components,including thin film head magnetic recording devices, which in turn depend uponthe current and anticipated market demand for such devices and productsutilizing such devices. The semiconductor industry historically has been highlycyclical and has experienced recurring periods of oversupply. This has, fromtime to time, resulted in significantly reduced demand for capital equipmentincluding the systems manufactured and marketed by the Company. Thesemiconductor industry, which includes the semiconductor-packaging sector, hasrecently experienced a severe downturn. The Company believes that markets fornew generations of semiconductors and semiconductor packaging will also besubject to similar fluctuations. The Company’s business and operating resultswould be materially adversely affected by continued downturns or slowdowns inthe semiconductor packaging market or by loss of market share. Accordingly, theCompany may not be able to achieve or maintain its current or prior level ofsales.

The Company attempts to mitigate the risk ofcyclicality by participating in multiple markets including semiconductor,semiconductor packaging, thin film head and other nanotechnology sectors, aswell as diversifying into new markets such as photolithography for opticalnetworking (a nanotechnology application) and laser-based annealing for implantactivation and other applications. Despite such efforts, when one or more ofsuch markets experiences a downturn or a situation of excess capacity, theCompany’s net sales and operating results are materially adversely affected.

**RapidTechnological Change; Importance of Timely Product Introduction****  **The semiconductor and nanotechnology manufacturingindustries are subject to rapid technological change and new productintroductions and enhancements. The Company’s ability to be competitive inthese and other markets will depend, in part, upon its ability to develop newand enhanced systems and related software tools, and to introduce these systemsand related software tools at competitive prices and on a timely andcost-effective basis to enable customers to integrate them into theiroperations either prior to or as they begin volume product manufacturing. TheCompany will also be required to enhance the performance of its existingsystems and related software tools. Any success of the Company in developingnew and enhanced systems and related software tools depends upon a variety offactors, including product selection, timely and efficient completion ofproduct design, timely and efficient implementation of manufacturing andassembly processes, product performance in the field and effective sales andmarketing. Because new product development commitments must be made well inadvance of sales, new product decisions must anticipate both future demand andthe technology that will be available to supply that demand. There can be noassurance that the Company will be successful in selecting, developing,manufacturing or marketing new products and related software tools or enhancingits existing products and related software tools. Any such failure wouldmaterially adversely affect the Company’s business, financial condition andresults of operations.

Because of the large number of components in theCompany’s systems, significant delays can occur between a system’s introductionand the commencement by the Company of volume production of such systems. TheCompany has experienced delays from time to time in the introduction of, andtechnical and manufacturing difficulties with, certain of its systems andenhancements and related software features and options, and may experiencedelays and technical and manufacturing difficulties in future introductions orvolume production of new systems or enhancements and related software featuresand options.

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The Company may encounter additional technical,manufacturing or other difficulties that could further delay futureintroductions or volume production of systems or enhancements. The Company’sinability to complete the development or meet the technical specifications ofany of its systems or enhancements and related software tools, or its inabilityto manufacture and ship these systems or enhancements and related softwaretools in volume and in time to meet the requirements for manufacturing thefuture generation of semiconductor or nanotechnology devices would materiallyadversely affect the Company’s business, financial condition and results ofoperations. In addition, the Company may incur substantial unanticipated coststo ensure the functionality and reliability of its products early in theproducts’ life cycles. If new products have reliability or quality problems,reduced orders or higher manufacturing costs, delays in collecting accountsreceivable and additional service and warranty expenses may result. Any of suchevents may materially adversely affect the Company’s business, financialcondition and results of operations.

**InternationalSales****  **Internationalnet sales accounted for approximately 61%, 48% and 51% of total net sales forthe years 2003, 2002 and 2001, respectively. The Company anticipates thatinternational sales, which typically have lower gross margins than domesticsales, principally due to increased competition and higher field service andsupport costs, will continue to account for a significant portion of total netsales. As a result, a significant portion of the Company’s net sales willcontinue to be subject to certain risks, including 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; some dependence on outside sales representativeorganizations; difficulties in staffing and managing foreign subsidiary andbranch operations; and potentially adverse tax consequences.

Although the Company generally transacts itsinternational sales in U.S. dollars, international sales expose the Company toa number of additional risk factors, including fluctuations in the value oflocal currencies relative to the U.S. dollar, which, in turn, impact therelative cost of ownership of the Company’s products and may further impact thepurchasing ability of its international customers. However, in Japan, theCompany has direct sales operations and orders are often denominated inJapanese yen. This may subject the Company to a higher degree of risk fromcurrency fluctuations. The Company attempts to mitigate this exposure throughthe use of foreign exchange contracts. The Company is also subject to the risksassociated with the imposition of legislation and regulations relating to theimport or export of semiconductors and nanotechnology products. The Companycannot predict whether the United States, Japan or any other country willimplement changes to quotas, duties, taxes or other charges or restrictionsupon the importation or exportation of the Company’s products. These factors,or the adoption of restrictive policies, may have a material adverse effect onthe Company’s business, financial condition and results of operations.

**Dependenceon Key Personnel****  **TheCompany’s future operating results depend, in significant part, upon thecontinued contributions of key personnel, many of whom would be difficult toreplace. The Company has entered into employment agreements with only a limitednumber of its employees, including its Chief Executive Officer, President andChief Financial Officer, and its employees are employed “at will.” Some of theseagreements contain vesting acceleration and severance payment provisions thatcould result in significant costs or charges to the Company should the employeebe terminated without cause, die or have a disability. The Company does notmaintain any life insurance on any of its key persons. The loss of keypersonnel could have a material adverse effect on the business, financialcondition and results of operations of the Company. In addition, the Company’sfuture operating results depend in significant part upon its ability to attractand retain other qualified management, manufacturing, technical, sales andsupport personnel for its operations. There are only a limited number ofpersons with the requisite skills to serve in these positions and it may becomeincreasingly difficult for the Company to hire such personnel over time. Attimes, competition for such personnel has been intense, particularly in the SanFrancisco Bay 

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Area where the Companymaintains its headquarters and principal operations, and there can be noassurance that the Company will be successful in attracting or retaining suchpersonnel. The failure to attract or retain such persons would materiallyadversely affect the Company’s business, financial condition and results ofoperations.

**Changesto Financial Accounting Standards May****Affect the Company’s Reported Results of Operations**   TheCompany prepares its financial statements in conformity with accountingprinciples generally accepted in the United States, or U.S. GAAP. Theseprinciples are subject to interpretation by the American Institute of CertifiedPublic Accountants, the SEC and various bodies formed to interpret and createappropriate accounting policies. A change in those policies can have asignificant effect on the Company’s reported results and may affect itsreporting of transactions completed before a change is announced.

Accounting policies affecting many other aspects ofthe Company’s business, including rules relating to revenue recognition,off-balance sheet transactions, employee stock options, restructurings, assetdisposals, intangible assets, derivative and other financial instruments, andin-process research and development charges, have recently been revised or areunder review. Changes to those rules or the questioning of currentpractices may have a material adverse effect on the Company’s reportedfinancial results or on the way it conducts business. In addition, the Company’spreparation of financial statements in accordance with U.S. GAAP requires thatit 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 surrounding those estimatescould result in a change to the Company’s estimates and could impact its futureoperating results.

**Effectsof Certain Anti-Takeover Provisions****  **Certain provisions of the Company’s Certificate ofIncorporation, equity incentive plans, Shareholder Rights Plan, licensingagreements, Bylaws and Delaware law may discourage certain transactionsinvolving a change in control of the Company. In addition to the foregoing, theCompany’s classified board of directors, the shareholdings of the Company’sofficers, directors and persons or entities that may be deemed affiliates andthe ability of the Board of Directors to issue “blank check” preferred stockwithout further stockholder approval could have the effect of delaying,deferring or preventing a change in control of the Company and may adverselyaffect the voting and other rights of holders of Common Stock.

**Volatilityof Stock Price and Dilutive Impact of Employee Stock Options****  **The Company believes that factors such asannouncements of developments related to the Company’s business, fluctuationsin the Company’s operating results, a shortfall in revenue or earnings, changesin analysts’ expectations, general conditions in the semiconductor andnanotechnology industries or the worldwide or regional economies, sales ofsecurities of the Company into the marketplace, an outbreak or escalation ofhostilities, announcements of technological innovations or new products orenhancements by the Company or its competitors, developments in patents orother intellectual property rights and developments in the Company’srelationships with its customers and suppliers could cause the price of theCompany’s Common Stock to fluctuate, perhaps substantially. The market price ofthe Company’s Common Stock may continue to experience significant fluctuationsin the future, including fluctuations that may be unrelated to the Company’sperformance.

As of March 1, 2004, the Company hadapproximately 5.7 million stock options outstanding. Among other determinants,the market price of the Company’s stock has a major bearing on the number ofstock options outstanding that are included in the weighted-average shares usedin determining the Company’s net income (loss) per share. During periods ofextreme volatility, the impact of higher stock prices can have a materiallydilutive effect on the Company’s net income (loss) per share (diluted).Additionally, options are excluded from the calculation ofnet income (loss) per share when the Company has a net loss 

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or when the exercise priceof the stock option is greater than the average market price of the Company’sCommon Stock, as the impact of the stock options would be anti-dilutive.

**Terrorist Attacks andThreats, and Government Responses Thereto, May****Negatively Impact All Aspects of The Company’s Operations, Revenues,Costs and Stock Price.**   Terrorist attacks in the United Statesand elsewhere, government responses thereto, and military actions in Iraq,Afghanistan and elsewhere, may disrupt the Company’s operations or those of itscustomers and suppliers and may affect the availability of materials needed tomanufacture its products or the means to transport those materials tomanufacturing facilities and finished products to customers. In addition, anyof these events could increase volatility in the United States and worldfinancial markets which may depress the price of the Company’s Common Stock andmay limit the capital resources available to the Company or its customers orsuppliers, which could result in decreased orders from customers, lessfavorable financing terms from suppliers, and scarcity or increased costs ofmaterials and components of its products. Additionally, terrorist attacks onthe Company itself may significantly disrupt the Company’s ability to conductits business. Any of these occurrences could have a significant impact on theCompany’s operating results, revenues and costs and may result in increasedvolatility of the market price of its Common Stock.

**InformationAvailable on Company Web-site**

The Company’s web-site is located at *www.ultratech.com*. The Company makes available, free ofcharge, through its web-site, its 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. The Company has adopted a Codeof Ethics for its principal executive officer, principal financial officer,principal accounting officer or controller, or persons performing similarfunctions. The Company has posted this Code of Ethics on its website.

**ITEM 2.**   *PROPERTIES*

The Company 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 2010toJanuary 2011. The Company also leases a sales and support office in theUnited States in Woburn, Massachusetts under a lease expiring December 31,2005. The Company maintains offices outside the United States in Taiwan, thePhilippines, Japan, Korea, France, Germany and the United Kingdom, with termsexpiring between one month and twelve years from December 31, 2003. TheCompany believes that its existing facilities will be adequate to meet itscurrently anticipated requirements and that suitable additional or substitutespace will be available as needed.

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

On February 29, 2000, the Company filed lawsuitsasserting patent infringement and related claims against Nikon, Canon, and ASMLin the U.S. District Court for the Eastern District of Virginia. In April 2000,the Company reached a settlement with Nikon, and in September 2001, theCompany reached a settlement with Canon. The patent litigation against ASML isongoing after having been transferred to the Northern District of California. Afterthe District Court made a preliminary determination that ASML did not infringethe patent, the Company appealed the decision to the Court of Appeal for theFederal Circuit in Washington, D.C., and oral arguments were heard in February 2004.On October 12, 2001, the Company was sued in the District Court ofMassachusetts by SVG Lithography Systems (“SVGL”), alleging infringement ofseveral patents. SVGL is a division of Silicon Valley Group, Inc., whichis a wholly owned subsidiary of ASML. The claims for all but one of the patentshave since been dismissed, and the Company is currently defending against theremaining claim, which it believes to be without merit.

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The Company is involved inother lawsuits and legal actions that it believes not to be material to itsbusiness or financial condition.

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

No matters were submittedto a vote of security holders during the fourth quarter ended December 31,2003.

**Executive Officersof the Registrant**

As of December 31,2003, the executive officers of the Company, 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 |       | 64         |       | Chairman of the Board of Directors and Chief  Executive Officer        |       |
| John E. Denzel        |       | 44         |       | President and Chief Operating Officer                                  |       |
| Bruce R. Wright       |       | 55         |       | Senior Vice President, Finance, Chief Financial  Officer and Secretary |       |
| Erik C. Smith         |       | 39         |       | Senior Vice  President of World-wide Sales                             |       |

 

Mr. Zafiropoulo founded the Company 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 of theCompany 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. Zafiropoulohas served as Chairman of SEMI; and Mr. Zafiropoulo has been on the Boardof Directors 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 the Company, 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 Jc-I-T Institute ofTechnology. Prior to that, Mr. Denzel worked in various positions atWatkins-Johnson Company, a semiconductor equipment, electronics andenvironmental services company.

Mr. Wright has served as Senior Vice President,Finance, Chief Financial Officer and Secretary since joining the Company 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 

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Administration, and ChiefFinancial Officer of Tencor Instruments until its acquisition by KLAInstruments Corporation in 1997, which formed KLA-Tencor Corporation, and from December 1991through October 1994, Mr. Wright was Vice President and ChiefFinancial Officer of Tencor Instruments. Mr. Wright serves on the Board ofDirectors of Credence Systems Corporation, a provider of products and equipmentused for the testing of semiconductor integrated circuits.

Mr. Smith has servedas Senior Vice President, Worldwide Sales since September 2001. From January 2000to September 2001, Mr. Smith served as Vice President of WorldwideSales. From March 1999 to December 1999, Mr. Smith served asDirector of Marketing, and from August 1997 to February 1999, heserved as Director of International Marketing. From June 1997 to July 1997,Mr. Smith was the Director of International Business Development. From July 1992to May 1997, Mr. Smith served as Director of Operations for theCompany’s Japan and Korea offices.

**PART II**

**ITEM 5.*  ******MARKET FOR THE REGISTRANT’SCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS***

TheCompany’s Common Stock is traded on the Nasdaq National Market under the symbolUTEK. The following table sets forth, for the periods indicated, the range ofhigh and low reported sale prices of the Company’s Common Stock on the NasdaqNational Market
| **Fiscal 2003 - Fiscal Quarter Ended** | ** ** | ** ** | ** ** | **March 31** | ** ** | **June 30** | ** ** | **Septemeber 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------------|------------|------------|------------|-------------------|------------|------------------|------------|------------------------|------------|----------------------|------------|
| Market Price:    High                  |       |       | $          | 12.99             |       |             | $          | 19.75                  |       |                 | $          | 32.23 |   |   |   | $ | 35.00 |   |   |
| Low                                                   |       |       | $          | 9.71              |       |             | $          | 10.75                  |       |                 | $          | 18.06 |   |   |   | $ | 24.25 |   |   |

 
| **Fiscal 2002  - Fiscal Quarter Ended** | ** ** | ** ** | ** ** | **March 31** | ** ** | **June 30** | ** ** | **Septemeber 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------------------|------------|------------|------------|-------------------|------------|------------------|------------|------------------------|------------|----------------------|------------|
| Market Price:    High                   |       |       | $          | 20.87             |       |             | $          | 21.39                  |       |                 | $          | 16.23 |   |   |   | $ | 12.01 |   |   |
| Low                                                    |       |       | $          | 13.75             |       |             | $          | 13.39                  |       |                 | $          | 7.83 |   |   |   | $ | 6.32 |   |   |

 

As of March 1, 2004, the Company had approximately312 stockholders of record.

The Company’s fiscal quarters in 2003 ended on March 29,2003, June 28, 2003, September 27, 2003 and December 31, 2003,and the Company’s fiscal quarters in 2002 ended on March 30, 2002, June 29,2002, September 28, 2002 and December 31, 2002. For convenience ofpresentation, the Company’s fiscal quarters in each year have been shown asending on March 31, June 30, September 30, and December 31.

The Company has not paid cash dividends on its CommonStock since inception, and its Board of Directors presently plans to reinvestthe Company’s earnings in its business. Accordingly, it is anticipated that nocash dividends will be paid to holders of Common Stock in the foreseeablefuture.

In November 2003, theCompany issued 1,000 shares of its Common Stock in an unregistered, privateplacement under Section 4(2) of the Securities Act of 1933 toSemiconductor Equipment and Materials International (SEMI). The Company issuedthe shares to support SEMI’s efforts to educate youth about careeropportunities in the semiconductor equipment industry and in return receivedpublic relations benefits.

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**ITEM 6.*  ******SELECTED FINANCIAL DATA***
| **In thousands, except per share data**                                                             | ** ** | ** ** | ** ** | **2003(d)** | ** ** | **2002(c)** | ** ** | **2001(b)** | ** ** | **2000(a)** | ** ** | **1999** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|----------|------------|
| ***Operations:***                                                                                                            |       |       |       |        |       |        |       |        |       |        |       |
| Net sales                                                                                                                    |       | $          | 100,121    |        | $          | 68,506      |       | $           | 130,680    |        | $          | 146,655  |       | $ | 113,123 |   |
| Gross profit                                                                                                                 |       | 46,611     |       | 14,850      |       | 44,781      |       | 57,667      |       | 44,420      |       |
| Gross profit as a  percentage of net sales                                                                                   |       | 47         | %          | 22          | %          | 34          | %          | 39          | %          | 39          | %          |
| Operating income (loss)                                                                                                      |       | $          | 2,972      |        | $          | (36,506     | )          | $           | (24,465    | )           | $          | (11,171  | )          | $ | (11,213 | ) |
| Income (loss) before  income taxes (benefit) and cumulative effect of a change in accounting  principle                      |       | 6,996      |       | (30,248     | )          | (16,806     | )          | 12,159      |       | (4,168      | )          |
| Pre-tax income (loss) as  a percentage of net  sales                                                                         |       | 7          | %          | (44         | )%         | (13         | )%         | 8           | %          | (4          | )%         |
| Income taxes (benefit)                                                                                                       |       | $          | (570       | )           | $          | (4,866      | )          | $           | 1,038      |        | $          | 2,433    |       | $ | — |   |
| Income (loss) before  cumulative effect of a change in accounting principle                                                  |       | 7,566      |       | (25,382     | )          | (17,844     | )          | 9,726       |       | (4,168      | )          |
| Cumulative effect on  prior years of SAB 101 “Revenue Recognition in Financial Statements”                         |       | —     |       | —      |       | —      |       | (18,883     | )          | —      |       |
| Net income (loss)                                                                                                            |       | 7,566      |       | (25,382     | )          | (17,844     | )          | (9,157      | )          | (4,168      | )          |
| Income (loss) before  cumulative effect of a change in accounting principle per share—basic                             |       | $          | 0.33       |        | $          | (1.12       | )          | $           | (0.81      | )           | $          | 0.46     |       | $ | (0.20 | ) |
| Cumulative effect on  prior years of SAB 101 “Revenue Recognition in Financial Statements” per  share—basic   |       | —     |       | —      |       | —      |       | $           | (0.89      | )           | —     |     |
| Net income (loss) per  share—basic                                                                                      |       | $          | 0.33       |        | $          | (1.12       | )          | $           | (0.81      | )           | $          | (0.43    | )          | $ | (0.20 | ) |
| Number of shares used in  per share computation—basic                                                                   |       | 23,017     |       | 22,586      |       | 22,143      |       | 21,236      |       | 21,279      |       |
| Income (loss) before  cumulative effect of a change in accounting principle per share—diluted                           |       | $          | 0.31       |        | $          | (1.12       | )          | $           | (0.81      | )           | $          | 0.46     |       | $ | (0.20 | ) |
| Cumulative effect on  prior years of SAB 101 “Revenue Recognition in Financial Statements” per  share—diluted |       | —     |       | —      |       | —      |       | $           | (0.89      | )           | —     |     |
| Net income (loss) per  share—diluted                                                                                    |       | $          | 0.31       |        | $          | (1.12       | )          | $           | (0.81      | )           | $          | (0.43    | )          | $ | (0.20 | ) |
| Number of shares used in  per share computation—diluted                                                                 |       | 24,476     |       | 22,586      |       | 22,143      |       | 21,236      |       | 21,279      |       |
| ***Balance  sheet:***                                                                                                        |       |       |       |        |       |        |       |        |       |        |       |
| Cash, cash equivalents  and short-term investments                                                                           |       | $          | 165,902    |        | $          | 157,529     |       | $           | 169,154    |        | $          | 163,681  |       | $ | 143,544 |   |
| Working capital                                                                                                              |       | 170,501    |       | 152,160     |       | 162,826     |       | 151,434     |       | 163,601     |       |
| Total assets                                                                                                                 |       | 220,748    |       | 222,366     |       | 243,419     |       | 264,069     |       | 236,808     |       |
| Long-term obligations,  less current portion                                                                                 |       | —     |       | —      |       | —      |       | —      |       | —      |       |
| Stockholders’ equity                                                                                                    |       | 190,739    |       | 171,754     |       | 195,281     |       | 194,257     |       | 204,214     |       |
| ***Other  data:***                                                                                                           |       |       |       |        |       |        |       |        |       |        |       |
| Return on average equity                                                                                                     |       | 4          | %          | (14         | )%         | (9          | )%         | (5          | )%         | (2          | )%         |
| Book value per common  share outstanding                                                                                     |       | $          | 8.09       |        | $          | 7.59        |       | $           | 8.70       |        | $          | 9.13     |       | $ | 9.55 |   |
| Current ratio                                                                                                                |       | 7.49       |       | 4.29        |       | 4.39        |       | 3.18        |       | 6.06        |       |
| Long term debt to equity  ratio                                                                                              |       | 0.00       |       | 0.00        |       | 0.00        |       | 0.00        |       | 0.00        |       |
| Capital expenditures                                                                                                         |       | $          | 6,073      |        | $          | 4,800       |       | $           | 5,389      |        | $          | 18,439   |       | $ | 6,948 |   |
| Income tax (benefit) as percentage of pre-tax income  (loss)                                                                 |       | (8         | )%         | 16          | %          | (6          | )%         | N/C         |       | 0           | %          |

 

20

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***Quarterly Data***
| **Unaudited, in thousands, except per share data** | ** ** | ** ** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|---------|------------|---------|------------|---------|------------|---------|------------|
| **2003(d)**                                                                      |       |       |       |    |       |    |       |    |       |
| Net sales                                                                        |       | $          | 22,000     |    | $          | 24,764  |       | $       | 26,544     |    | $          | 26,813 |   |
| Gross profit  (loss)                                                             |       | 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  |       |
| **2002(c)**                                                                      |       |       |       |    |       |    |       |    |       |
| Net sales                                                                        |       | $          | 19,785     |    | $          | 20,709  |       | $       | 7,290      |    | $          | 20,722 |   |
| Gross profit  (loss)                                                             |       | 7,932      |       | 7,342   |       | (7,734  | )          | 7,310   |       |
| Operating income  (loss)                                                         |       | (4,072     | )          | (4,480  | )          | (23,967 | )          | (3,987  | )          |
| Net income (loss)                                                                |       | (2,422     | )          | (1,659  | )          | (18,867 | )          | (2,434  | )          |
| Net income (loss)  per share—basic                                          |       | $          | (0.11      | )       | $          | (0.07   | )          | $       | (0.83      | )       | $          | (0.11 | ) |
| Number of shares  used in per share computation—basic                       |       | 22,485     |       | 22,574  |       | 22,609  |       | 22,626  |       |
| Net income (loss)  per share—diluted                                        |       | $          | (0.11      | )       | $          | (0.07   | )          | $       | (0.83      | )       | $          | (0.11 | ) |
| Number of shares used in  per share computation—diluted                     |       | 22,485     |       | 22,574  |       | 22,609  |       | 22,626  |       |

----

(a)    Operatingincome (loss) in 2000 includes special charges of $7,984,000 and $1,686,000 inthe second and third quarters, respectively, relating to the shutdown of theCompany’s UltraBeam unit. Net income (loss) in 2000 includes a non-operatinggain of $15,983,000 in the third quarter, relating to the sale of land andincome taxes of $2,433,000 relating to the sale of land and other specialitems. Additionally, net income in 2000 includes a charge of $18,883,000 in thefirst quarter related to the cumulative effect on prior years of theapplication of SAB 101 “Revenue Recognition in Financial Statements.”

(b)   Operatingincome (loss) in 2001 includes third and fourth quarter charges of $10,993,000and $77,000, respectively, or $0.50 per share—basic and diluted, related tocost of discontinued products, and $11,988,000 and $290,000, respectively, or$0.55 per share—basic and diluted, related to restructure of operations.

(c)    Operatingincome (loss) in 2002 includes third and fourth quarter charges of: $5,733,000and ($428,000), respectively, or $0.25 and ($0.02) per share—basic and diluted,respectively, related to cost of inventory writedowns; $2,169,00 and($744,000), respectively, or $0.10 and ($0.03) per share—basic and diluted,respectively, related to cost of discontinued products; and $4,297,000 and($207,000), or $0.19 and ($0.01) per share—basic and diluted, respectively,related to restructure of operations.

(d)   Operatingincome (loss) in 2003, in the second, third and fourth quarters, includes thefavorable impact of selling inventory and discontinued products previouslywritten down of $740,000, $363,000 and $569,000, respectively, or $0.03, $0.02,and $0.02 per share basic and diluted, 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, or $0.01 and $0.03 per sharebasic and diluted, respectively.

 

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***ITEM7.*  *****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS***

**OVERVIEW**

Ultratech, Inc. develops, manufactures andmarkets photolithography and laser processing equipment for manufacturers ofintegrated circuits and nanotechnology components located throughout NorthAmerica, Europe, Japan and the rest of Asia.

The Company supplies step-and-repeatphotolithography systems based on one-to-one imaging technology.Markets for the Company’s photolithography products include advanced packagingand the manufacture of various nanotechnology components, including thin filmhead magnetic recording devices, optical networking devices, laser diodes andLED’s.

Certain of the statementscontained herein may be considered forward-looking statements under Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, that involve risks anduncertainties, such as integration and development of the laser processingoperation; high degree of industry competition; delays, deferrals andcancellations of orders by customers; pricing pressures and product discounts;changes in pricing by the Company, its competitors or suppliers; customerconcentration; market acceptance of new products and enhanced versions of theCompany’s existing products; lengthy sales cycles, including the timing ofsystem acceptances; timing of new product announcements and releases by theCompany or its competitors; ability to volume produce systems and meet customerrequirements; mix of products sold; expiration of licensing arrangements, andthe resulting adverse impact on the Company’s licensing revenues; cyclicalityin the semiconductor and nanotechnology industries; rapid technological changeand the importance of timely product introductions; dependence on new productintroductions and commercial success of any new products; outcome oflitigation; sole or limited sources of supply; international sales; customerconcentration; manufacturing variances and production levels; timing and degreeof success of technologies licensed to outside parties; product concentrationand lack of product revenue diversification; lengthy and costly developmentcycles for advanced lithography and laser-processing technologies and applications;inventory obsolescence; asset impairment; ability and resulting costs toattract or retain sufficient personnel to achieve the Company’s targets for aparticular period; dilutive effect of employee stock option grants on netincome per share, which is largely dependent upon the Company maintainingprofitability and the market price of the Company’s stock; future acquisitions;changes to financial accounting standards; intellectual property matters;environmental regulations; effects of certain anti-takeover provisions;volatility of stock price; business interruptions due to natural disasters orutility failures; and any adverse effects of terrorist attacks in the UnitedStates or elsewhere, or government responses thereto, or military actions in Iraq,Afghanistan and elsewhere, on the economy, in general, or on the Company’sbusiness in particular. Due to these and additional factors, certainstatements, historical results and percentage relationships discussed below arenot necessarily indicative of the results of operations for any future period.

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

The Company’s discussion and analysis of its financialcondition and results of operations are based upon the Company’s consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of theseconsolidated financial statements requires the Company to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities at thedate of the consolidated financial statements. By their nature, these estimatesand judgments are subject to an inherent degree of uncertainty. On an on-goingbasis, the Company evaluates its estimates, including those related toinventories, warranty obligations, purchase order commitments, bad debts,income taxes, intangible assets, restructuring and contingencies andlitigation. Management 

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bases its estimates andjudgments on historical experience and on various other assumptions that arebelieved 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.

The Company believes thefollowing critical accounting policies are affected by its more significantjudgments and estimates used in the preparation of its consolidated financialstatements. The Company has reviewed these policies with its Audit Committee.

**Revenue Recognition**

In November 2002, the FASB’s Emerging Issues TaskForce issued EITF 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables” (“EITF 00-21”). EITF 00-21 addresses how to account forarrangements that may involve delivery or performance of multiple products,services and/or rights to use assets, and, if so, how an arrangement involvingmultiple deliverables should be divided into separate units of accounting. Itdoes not change otherwise applicable revenue recognition criteria. It appliesto arrangements entered into in fiscal periods beginning after June 15,2003, with early adoption permitted.

Under the provisions of EITF 00-21, separate units ofaccounting exist if all of the following criteria are met: the item has valueon a standalone basis; there is objective and reliable evidence of fair value;delivery of the undelivered item is probable and in control of the Company; andconsideration allocable to the delivered item is not contingent on delivery ofadditional items.

In response to EITF 00-21, the Company has reviewedits arrangements involving multiple deliverables. The Company has concludedthat the adoption of EITF 00-21 has no material effect on its current revenuerecognition policy. Although application of EITF 00-21 results in theidentification of separate accounting units, e.g. the system and itsinstallation, the Company believes that all required elements of revenuerecognition under SAB 104 are not met at the time of shipment of its systems.Therefore, revenue recognition for systems must be delayed until all elementsof revenue recognition are met, generally upon acceptance of the system.

Accordingly, the Company recognizes revenues on systemsales when the contractual obligation for installation (if any) has beensatisfied, or installation is substantially complete, and/or customeracceptance provisions have lapsed, or generally if the customer has placed thesystem into production, provided collections of the related receivable areprobable. In the event of a delay in the installation of the Company’s productscaused by the customer, the Company may seek acceptance of the system andwarranty commencement after shipment and transfer of title, but prior tocompletion of installation. Revenue recorded as a result of these customeracceptances is reduced by an amount representing the fair-value of installationservices. In these instances, revenue is recorded only if the product has metproduct specifications prior to shipment and management deems that nosignificant uncertainties as to product performance exist.

The Company generally recognizes revenue from spareparts sales upon shipment. The Company has concluded that the adoption of EITF00-21 has no material effect on its current revenue recognition policy withregards to spare parts, as these revenue arrangements generally do not containmultiple elements.

The Company sells time basedservice contracts for which revenue is deferred and recognized ratably over thecontract period, and service contracts based on a purchased quantity of hoursunder which revenue is recognized as service hours are delivered. The Companyrecognizes revenue from licensing and technology support agreements ratablyover the contract period, or the estimated useful life of the licensedtechnologies, whichever is shorter.

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**Inventories andPurchase Order Commitments**

The semiconductor industryis characterized by rapid technological change, changes in customerrequirements and evolving industry standards. The Company performs a detailedassessment of inventory at each balance sheet date, which includes a review of,among other factors, demand requirements and market conditions. Based on thisanalysis, the Company records adjustments, when appropriate, to reflectinventory at lower of cost or market. In fiscal 2002, demand for the Company’sproducts was adversely affected by the downturn in the global economy and reducedcapital spending. Although the Company makes every effort to ensure theaccuracy of its forecasts of product demand, any significant unanticipatedchanges in demand or technological developments would significantly impact thevalue of its inventory and its reported operating results. In the future, ifthe Company finds that its estimates are too optimistic and it determines thatits inventory needs to be written down, the Company will be required torecognize such costs in its cost of revenue at the time of such determination.Conversely, if the Company finds its estimates are too pessimistic and itsubsequently sells product that has previously been written down, its grossmargin in that period will be favorably impacted.

**WarrantyObligations**

The Company provides forthe estimated cost of its product warranties at the time revenue is recognized.The Company’s warranty obligation is affected by product failure rates,material usage rates and the efficiency by which the product failure iscorrected. Should actual product failure rates, material usage rates and laborefficiencies differ from the Company’s estimates, revisions to the estimatedwarranty liability would be required which could result in future charges orcredits to the Company’s gross margins.

**Bad Debt**

The Company maintains anallowance for estimated losses resulting from the inability of its customers tomake required payments and for returns and allowances. This reserve isestablished based upon historical trends, current economic conditions and ananalysis of specific exposures. If the financial condition of the Company’scustomers were to deteriorate, or even a single customer was otherwise unableto make payments, additional allowances may be required. The average sellingprice of the Company’s systems is in excess of $1.5 million. Accordingly, asingle customer default could have a material adverse effect on the Company’sresults of operations.

**Deferred Taxes**

The Company records avaluation allowance to reduce its deferred tax assets to the amount that ismore likely than not to be realized. At December 31, 2003, the valuationallowance was $67.5 million. Based on the uncertainty of future pre-tax incomefor U.S. tax purposes, the Company has presently fully reserved its domesticdeferred tax assets. At December 31, 2003, the Company has recordedapproximately $0.6 million of foreign deferred tax assets related to itsJapanese operations. In the event the Company was to determine that it would beable to realize the domestic deferred tax assets in the future, an adjustmentto the deferred tax asset valuation reserve would increase income through anincrease in the Company’s income tax benefit in the period such determinationwas made.

**RESULTS OFOPERATIONS**

The Company derives a substantial portion of its totalnet sales from sales of a relatively small number of newly manufacturedsystems, which typically range in price from $1.0 million to $3.0 million. As aresult of these high sale prices, the timing and recognition of revenue from asingle transaction has had and most likely will continue to have a significantimpact on the Company’s net sales and operating results for any particularperiod.

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The Company’s backlog at the beginning of a periodtypically does not include all of the sales needed to achieve the Company’ssales objectives for that period. In addition, orders in backlog are subject tocancellation, shipment or customer acceptance delays, and deferral orrescheduling by a customer with limited or no penalties. Consequently, the Company’snet sales and operating results for a period have been and will continue to bedependent upon the Company obtaining orders for systems to be shipped andaccepted in the same period in which the order is received. The Company’sbusiness and financial results for a particular period could be materiallyadversely affected if an anticipated order for even one system is not receivedin time to permit shipment and customer acceptance during that period.Furthermore, a substantial portion of the Company’s shipments has historicallybeen realized near the end of each quarter. Delays in installation and customeracceptance due, for example, to the inability of the Company to successfullydemonstrate the agreed-upon specifications or criteria at the customer’s facility,or to the failure of the customer to permit installation of the system in theagreed upon time, may cause net sales in a particular period to fallsignificantly below the Company’s expectations, which may materially adverselyaffect the Company’s operating results for that period. Additionally, thefailure to receive anticipated orders or delays in shipments due, for example,to rescheduling, delays, deferrals or cancellations by customers, additionalcustomer configuration requirements, or to unexpected manufacturingdifficulties or delays in deliveries by suppliers due to their long productionlead times or otherwise, have caused and may continue to cause net sales in aparticular period to fall significantly below the Company’s expectations, materiallyadversely affecting the Company’s operating results for that period. Inparticular, the long manufacturing cycles of the Company’s Saturn Spectrumfamily of wafer steppers, laser thermal processing systems and the long leadtime for lenses and other materials, could cause shipments of such products tobe delayed from one quarter to the next, which could materially adverselyaffect the Company’s financial condition and results of operations for aparticular 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 the Company to reduce its operating expenses in aparticular period if the Company fails to achieve its net sales goals for theperiod.

**Net sales**

**2003vs. 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 | % |   |

 

Net sales consist of revenues from system sales, spareparts sales, service and licensing of technologies. System sales increased 66%,to $73.6 million, on a unit volume increase of 76%. Excluding reductionlithography systems, which have been discontinued by the Company, system salesincreased 93% to $72.1 million, on a unit volume increase of 71%. The Companydiscontinued its XLS reduction stepper platform in September 2001 and hassince suspended development of its advanced reduction lithography systems.However, the Company was able to sell three systems which had been previouslywritten down during the year ended December 31, 2003. The weighted-averageselling prices of systems sold, exclusive of reduction systems, increased 13%due primarily to a lower proportion of refurbished systems sold in 2003. In2003, refurbished systems accounted for approximately 22% of units sold ascompared to 45% of units sold in 

25

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2002. This percentagefluctuates from year to year and any such fluctuation would have an impact onthe weighted average selling price of the systems sold.

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. In 2004, the Company believes that the semiconductor industry willcontinue to recover resulting in increased equipment purchases and that the Companyis positioned to grow as the utilization of advanced packaging in thesemiconductor industry increases. System sales to the nanotechnology marketwere $18.1 million for the year ended December 31, 2003, an increase of145% as compared with sales of $7.4 million in 2002, primarily as a result ofgrowth in the laser diode and LED markets and improvements in the disk driveindustry.

Spare part sales 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%, to $10.6 million, primarily as a result offewer units coming out of warranty during the year partially offset byincreased revenue from training courses offered by the Company 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.The Company presently anticipates that revenues from licensing and licensingsupport arrangements will remain at approximately $0.9 million per quarter for2004.

At December 31, 2003, the Company hadapproximately $1.2 million of deferred revenue resulting from products shippedbut not yet installed and accepted and deferred service revenue, as comparedwith $11.3 million at December 31, 2002. The decrease in deferred revenueresulted from lower shipments of systems not yet installed and accepted ascompared to systems recognized for revenue in the fourth fiscal quarter of 2003.During 2003, deferred license income decreased by $3.7 million, to $4.8million, as a result of amortization of proceeds received in prior periods.Amortization of license income results in current period license revenue.Deferred income related to the Company’s products is recognized upon satisfyingthe contractual obligations for installation and/or customer acceptance.

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. The Companyexpects this trend to continue in 2004 as seven of the ten largest forecastedpurchasers of semiconductor equipment are international companies. The Company’srevenues in foreign countries are not generally subject to significant exchangerate fluctuations, principally because sales contracts for the Company’ssystems are generally denominated in U.S. dollars. In Japan, however, ordersare often denominated in Japanese yen. For the year ended December 31,2003, the Company recorded system sales in Japan of $23.7 million of which 19%were denominated in Japanese yen. This subjects the Company to the risk ofcurrency fluctuations. The Company attempts to mitigate this risk by enteringinto foreign currency forward exchange contracts for the period between when anorder is received and when it is recorded as revenue. After recording revenue,the Company uses various mechanisms, such as foreign currency forward exchangecontracts and natural hedges, to offset substantial portions of the gains orlosses associated with its Japanese yen denominated receivables due to exchangerate fluctuations. The Company had approximately $5.0 million of Japanese yendenominated receivables at December 31, 2003. International sales exposethe Company to a number of additional risks, including fluctuations in thevalue of local 

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currencies relative to theU.S. dollar, which, in turn, impact the relative cost of ownership of theCompany’s products. (See “Additional Risk Factors: International Sales”).

The Company believes that its served markets havestrengthened during 2003, and it expects demand for its products to grow in2004. During the year ended December 31, 2003, the Company’s level of neworders exceeded the its revenue resulting in an increase in the Company’sbacklog to $63 million from $50.4 million at December 31, 2002. However,the anticipated timing of shipments and customer acceptances will require theCompany to fill a number of production slots in the current and subsequentquarters in order to meet its near-term sales targets. If the Company isunsuccessful in its efforts to secure those production orders, or if existingproduction orders are delayed or cancelled, its results of operations will bematerially adversely impacted in the near-term. Accordingly, the Company maynot be able to achieve or maintain its current or prior level of sales.

The Company presently expects that net sales for thequarter ending April 3, 2004 will increase approximately 35% from thelevel of net sales reported in the comparable period in 2003 of $22.0 million.The Company expects the percentage derived from international sales in 2004 toremain consistent with the level reported for 2003.

Because the Company’s netsales are subject to a number of risks, including intense competition in thecapital equipment industry, uncertainty relating to the timing and marketacceptance of the Company’s products and the condition of the macro-economy andthe semiconductor industry, the Company may not exceed or maintain its currentor prior level of net sales for any period in the future. Additionally, the Companybelieves that the market acceptance and volume production of its SaturnSpectrum 3e, its 300mm offerings, its laser processing systems andits 100 and 1000 series family of wafer steppers, are of critical importance toits future financial results. At December 31, 2003, these critical systemsrepresented 84% of the Company’s backlog. To the extent that these products donot achieve significant sales due to difficulties involving manufacturing orengineering, the inability to reduce the current long manufacturing cycles forthese products, competition, excess capacity in the semiconductor ornanotechnology device industries, customer acceptances, or any other reason,the Company’s business, financial condition and results of operations would bematerially adversely affected.

**2002vs. 2001**
| **(in millions)** | ** ** | ** ** | ** ** | **2002**   | ** ** | **2001** | ** ** | **Amount of  Change** | ** ** | **Percentage  change** | ** ** |
|------------------------|------------|------------|------------|------------|------------|----------|------------|----------------------------|------------|------------------------|------------|
| Sales of:              | ** ** | ** ** | ** ** | ** ** | ** ** |     | ** ** | ** **                 |       |                   | ** ** | ** ** |   |
| Systems                |       | $          | 44.2       |       | $          | 90.6     |       |                       | $          | (46.4                  | **)**      |   |   | (51 | )% |   |
| Spare parts            |       | $          | 8.2        |       | $          | 13.1     |       |                       | $          | (4.9                   | **)**      |   |   | (37 | )% |   |
| Services               |       | $          | 10.9       |       | $          | 14.3     |       |                       | $          | (3.4                   | **)**      |   |   | (24 | )% |   |
| Licenses               |       | $          | 5.2        |       | $          | 12.7     |       |                       | $          | (7.5                   | **)**      |   |   | (59 | )% |   |
| Total Net Sales        |       | $          | 68.5       |       | $          | 130.7    |       |                       | $          | (62.2                  | **)**      |   |   | (48 | )% |   |

 

System sales decreased 51%, to $44.2 million, on aunit volume decline of 58%. Excluding reduction lithography systems, which havebeen discontinued by the Company, system sales decreased 52% to $37.4 million,on a unit volume decline of 55%. The weighted-average selling prices of systemssold, exclusive of reduction systems, declined 13%, due primarily to a higherproportion of refurbished systems sold in 2002 and generally weaker marketconditions. In 2002, refurbished systems accounted for approximately 45% ofunits sold. Geographically, the decline in unit volumes was attributable to 40%or greater declines in all regions the Company serves, with the steepestdecline (78%) occurring in Europe.

On a product market application basis, system sales tothe semiconductor industry were $36.8 million for the year ended December 31,2002, a decrease of 36% as compared with system sales of $57.2 million 

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in 2001. System sales tothe semiconductor industry included $6.8 million and $12.7 million of reductionstepper systems for the years ended December 31, 2002 and 2001,respectively; including a single system sale of $6.7 million for the quarterended December 31, 2002. This decline was primarily attributable to theseverely depressed economic environment in the semiconductor industry inparticular, and the economy as a whole. The Company discontinued its XLSreduction stepper platform in September 2001 and has since suspendeddevelopment of its advanced reduction lithography systems. System sales to thenanotechnology market were $7.4 million for the year ended December 31,2002, a decrease of 78% as compared with sales of $33.4 million in 2001,primarily as a result of lower demand from microsystems and optical networkingcustomers.

Spare part sales decreased 37%, to $8.2 million,primarily as a result of decreased utilization of plant capacity within thesemiconductor industry and certain system upgrades that occurred in 2001.

Revenues from services declined 24%, to $10.9 million,primarily as a result of decreased utilization of plant capacity within thesemiconductor industry.

Revenues from licensing and licensing supportarrangements declined to $5.2 million, as compared with $12.7 million in 2001,as a result of a large technology support agreement that expired in February 2002.

At December 31, 2002,the Company had approximately $10.5 million of deferred revenue resulting fromproducts shipped but not yet installed and accepted, as compared with $6.0million at December 31, 2001. This resulted in a net increase in deferredproduct and services income of approximately $2.7 million. During 2002,deferred license income decreased by $5.2 million, to $8.5 million, as a resultof amortization of proceeds received in prior periods. For the year ended December 31,2002, international net sales were $33.2 million, or 48% of total net sales, ascompared with $67.0 million, or 51% of total net sales for 2001.

**Gross profit**
| ** **                                                                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Expressed as a % of total net sales** | ** ** | ** **                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Total net sales                                                            |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Cost of products and services sold                                         |       | 55.1                                        | %          | 68.5 | % | 57.3 | % |
| Cost (recovery)  of inventory writedown                                    |       | (1.6                                        | )%         | 7.7 | % | — |   |
| Cost (recovery)  of discontinued products                                  |       | (0.1                                        | )%         | 2.1 | % | 8.5 | % |
| Gross margin                                                               |       | 46.6                                        | %          | 21.7 | % | 34.3 | % |
|                                                                            |            |                                             |            |  |  |  |  |  |  |

 

**2003 vs. 2002**

During 2003, the Company reported the benefit ofselling inventory and discontinued products previously written down of $1.6 millionand $0.1 million, respectively. This contrasts to charges for those items in2002 of $5.3 million and $1.4 million, respectively. The Company presentlyrecords write-downs to reflect the reduction in carrying value for inventoriesand purchase order commitments in excess of 12 months of production demand (18months for certain long lead-time items). Based on the Company’s currentexpectations with respect to market demand for its products, gross margin maybe favorably impacted by similar recoveries in 2004.

On a comparative basis, gross margins, exclusive ofthe aforementioned recoveries and charges were 44.9% and 31.5% for the yearsended December 31, 2003 and 2002, respectively. The Company believesdisclosure of gross margins exclusive of these recoveries and charges providesadditional appropriate disclosure to allow comparison of its gross margins overtime. The 13.4 percentage point improvement in gross margin in 2003 was dueprimarily to improved service and warranty costs (9.1 points), resulting from 

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improved product qualityand better utilization of the Company’s personnel, increased production levels(4.4 points), resulting from better utilization of the Company’s manufacturinginfrastructure, and lower manufacturing costs (2.0 points), of which $0.9million was due to the recording of an expense in 2002 related to prior periodsdue to rent-averaging requirements under certain of the Company’s facilityleases. These improvements were offset partially by the impact of lowerlicensing revenue (1.5 points), which has no associated cost of sales, and achange in product mix.

Exclusive of licensing and licensing support revenues,gross margin was 44.5% for the year ended December 31, 2003, as comparedwith 15.2% for the year ended December 31, 2002, inclusive of theaforementioned recoveries and charges. The Company believes disclosure of grossmargins without reference to licensing and licensing support revenues providesadditional appropriate disclosure to allow comparison of its product grossmargins over time.

The Company’s gross profit as a percentage of saleshas been and most likely will continue to be significantly affected by avariety of factors, including the mix of products sold; writedowns of inventoryand open purchase commitments; the rate of capacity utilization; productdiscounts, pricing and competition in the Company’s targeted markets;technology support and licensing revenues, which have no associated cost ofsales; non-linearity of shipments during the quarter which can result inmanufacturing inefficiencies; the introduction of new products, which typicallyhave higher manufacturing costs until manufacturing efficiencies are realizedand which are typically discounted more than existing products until theproducts gain market acceptance; 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.

The Company believes that gross margin for the quarterending April 3, 2004 will improve significantly to between 46% and 50%, ascompared to the comparable period in 2003 which was 37%, primarily due toincreased revenues. Should erosion of the Company’s business occur, the Companymight incur a higher risk of inventory obsolescence and excess purchasecommitments, which would materially adversely impact results of operations.Additionally, increased price-based competition would contribute to erosion ofgross margin.

New products generallyhave lower gross margins until there is widespread market acceptance and untilproduction and after-sales efficiencies can be achieved. Should significantmarket demand fail to develop for the Company’s laser processing systems, theCompany’s business, financial condition and results of operations may bematerially adversely affected.

**2002 vs. 2001**

The Company’s gross margin, was 21.7% for the yearended December 31, 2002, as compared with 34.3% for the year ended December 31,2001, inclusive of charges for the cost of inventory writedowns of $5.3 millionfor the year ended December 31, 2002, and the cost of discontinuedproducts of $1.4 million and $11.1 million for the years ended December 31,2002 and 2001, respectively. On a comparative basis, gross margins, exclusiveof the aforementioned charges, were adversely affected by the lack of capacityutilization. Lack of capacity utilization results in higher levels ofunabsorbed overhead. This adverse impact on gross margins from these lowerproduction levels was partially offset by cost savings associated with theclosing of the Company’s Wilmington, Massachusetts facility and by other costreduction measures taken in the second half of 2001. Gross margins for thequarter ended December 31, 2002 were adversely impacted by recording $0.9million of non-cash expenses related to prior periods, pursuant torent-averaging requirements under certain of the Company’s facility leases. TheCompany does not believe these amounts are material to the periods in whichthey should have been recorded, nor does it believe the prospective correctionof such amounts during the year ended December 31, 2002 is material to itsconsolidated operating results for such year.

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Exclusive of licensing and licensing support revenues,gross margin was 15.2% for the year ended December 31, 2002, as comparedwith 27.2% for the year ended December 31, 2001, inclusive of theaforementioned charges. The Company believes disclosure of gross marginswithout reference to licensing and licensing support revenues providesadditional appropriate disclosure to allow comparison of its product grossmargins over time.

In September 2002, as a direct result ofworsening conditions in the semiconductor industry in particular, and thegeneral economy as a whole, the Company discontinued or suspended developmentof certain advanced reduction lithography programs, including 157nm, anddiscontinued certain 1X products and platforms. Additionally, the Companysignificantly reduced its revenue outlook for 2003. As a result, the Companyrecognized inventory write-downs of $5.6 million and additional purchase ordercommitment reserves of $1.1 million for the year ended December 31, 2002.

In the three-month periodended September 30, 2001, as a direct result of dramatically worseningconditions in the semiconductor industry, the Company decided to discontinueits XLS reduction stepper production and focus its efforts on developingnext-generation platforms for its reduction technologies, principally 157nm. Asa result of this decision, the Company recognized inventory write-downs of $8.5million and additional purchase order commitment reserves of $2.5 million.

**Research,development and engineering expenses**

**2003vs. 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 million year-over-year decline in research,development and engineering spending was primarily attributable to therestructuring of the applications engineering function in September 2002($2.0 million), the discontinuance of the Company’s advanced reduction stepperplatforms in the second half of 2002 ($1.5 million) and the impact of recordinga $0.5 million non-cash expense related to prior periods, pursuant torent-averaging requirements under certain of the Company’s facility leases. Thesefavorable impacts were offset partially by increased spending on the Company’slaser processing technologies and its next generation 1X stepper products.

The Company continues toinvest significant resources in the development and enhancement of its laserprocessing systems and technologies and its 1X products and relatedtechnologies. The Company presently expects that the absolute dollar amount ofresearch, development and engineering expenses for the quarter ending April 3,2004 will be approximately 25% higher than expenses incurred for the comparableperiod in 2003 of $4.6 million.

**2002vs. 2001**
| **(in millions)**                          | ** ** | ** ** | ** ** | **2002** | ** ** | **2001** | ** ** | **Amount of  Change** | ** ** | **Percentage  change** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------------------------|------------|------------------------|------------|
| Research,  development and engineering expenses |       | $          | 23.5       |     | $          | 25.8     |       |                       | $          | (2.3                   | )          |   |   | (9 | )% |   |
|                                                 |            |            |            |          |            |          |            |                            |            |                        |            |  |  |  |  |  |  |  |

*** ***

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The year-over-year declinein research, development and engineering spending was primarily attributable tothe discontinuance of the Company’s XLS reduction stepper platform and to othercost reduction measures implemented in the second half of 2001 and during 2002.Research, development, and engineering expenses for the quarter ended December 31,2002 were adversely impacted by recording $0.5 million of non-cash expensesrelated to prior periods, pursuant to rent-averaging requirements under certainof the Company’s facility leases. The Company does not believe these amountsare material to the periods in which they should have been recorded, nor doesit believe the prospective correction of such amounts during the year ended December 31,2002 is material to its consolidated operating results for such year.

**Amortization ofintangible assets**

**2003 vs. 2002**

Amortization of intangibleassets was $0.4 million for the year ended December 31, 2003, unchangedfrom the amount reported for the year ended December 31, 2002. The Companyexpects to report approximately the same level of amortization in the quarterending April 3, 2004 as the $0.1 million that was reported in thecomparable period in 2003.

**2002 vs. 2001**

Amortization of intangibleassets was $0.4 million for the year ended December 31, 2002, as comparedwith $1.5 million for the year ended December 31, 2001. The year-over-yearreduction in amortization was a direct result of impairment charges recognizedin the quarter ended September 30, 2001 relating to certain intangibleassets (see “Restructure of operations”).

**Selling, generaland administrative expenses**

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

 

As a percentage of net sales, selling, general, andadministrative expenses decreased to 22.7%, as compared with 34.1% in 2002. Theyear-over-year decline, in absolute dollars, was primarily attributable to costcontainment measures implemented in the second half of 2002 ($1.1 million) andreduced legal costs ($0.8 million), partially offset by higher selling expensesassociated with a 46% increase in the Company’s revenue ($0.6 million) andincreased corporate governance costs primarily associated with the Company’scompliance with the Sarbanes-Oxley Act of 2002 and related SEC and Nasdaq rules ($0.6million).

The Company presentlyanticipates that selling, general and administrative expenses for thethree-month period ending April 3, 2004 will be approximately 35% higherthan the $5.1 million reported in the comparable period in 2003, due primarilyto increased selling costs associated with the expected increase in net sales,costs associated with bringing its laser processing product to market and costsassociated with compliance with the Sarbanes-Oxley Act of 2002 and related SECand Nasdaq rules.

**2002vs. 2001**
| **(in millions)**                       | ** ** | ** ** | ** ** | **2002** | ** ** | **2001** | ** ** | **Amount of  Change** | ** ** | **Percentage  change** | ** ** |
|----------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------------------------|------------|------------------------|------------|
| Selling, general and administrative expenses |       | $          | 23.4       |     | $          | 29.7     |       |                       | $          | (6.3                   | )          |   |   | (21 | )% |   |
|                                              |            |            |            |          |            |          |            |                            |            |                        |            |  |  |  |  |  |  |  |

 

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Selling, general, andadministrative expenses were $23.4 million for the year ended December 31,2002, as compared with $29.7 million for the year ended December 31, 2001.As a percentage of net sales, selling, general, and administrative expensesincreased to 34.1%, as compared with 22.7% in 2001. The year-over-year decline,in absolute dollars, was primarily attributable to cost containment measuresimplemented in the second half of 2001 and during 2002, and lower sales and supportexpenses, including sales commissions, typically associated with a decline insales. Selling, general, and administrative expenses for the quarter ended December 31,2002 were adversely impacted by recording $0.3 million of non-cash expensesrelated to prior periods, pursuant to rent-averaging requirements under certainof the Company’s facility leases. The Company does not believe these amountsare material to the periods in which they should have been recorded, nor doesit believe the prospective correction of such amounts during the year ended December 31,2002 is material to its consolidated operating results for such year.

**Restructure ofoperations**

In September 2002, in response to suddenlyworsening conditions in the semiconductor industry in particular, and thegeneral economy as a whole, the Company decided to reduce its workforce byapproximately 15% and to cease or suspend activities related to certainengineering and administrative initiatives. As a result of this decision, theCompany recognized a restructuring charge of $4.3 million, or $0.19 per sharefor the three-month period ended September 30, 2002. The Company reducedthis charge by $0.2 million during the three-month period ended December 31,2002, primarily as a result of canceling its plans to exit a certain buildingand an adjustment of its international severance costs. Of the total net chargefor the year ended December 31, 2002 of $4.1 million, the cash componentincluded employee severance costs of $0.9 million, contract termination fees of$0.2 million and facility closure costs of $0.1 million. The non-cash componentof this charge included $2.5 million of impairment to the carrying value ofequipment and leasehold improvements and $0.3 million of impairment to prepaidexpenses and other current assets. The Company further reduced this charge by$0.1 million during the three-month period ending June 30, 2003, as aresult of a gain recorded from the sale of certain fixed assets previouslywritten down. As of December 31, 2003, all restructuring costs had beenpaid.

In September 2001,the Company reached a decision to consolidate its manufacturing operations andeliminate approximately 20% of its workforce. As a result of this decision, theCompany recognized a restructuring charge of $12.0 million, or $0.54 per share(diluted) in the quarter ended September 30, 2001. Additionally, theCompany recognized restructuring charges of $0.3 million, or $0.01 per share(diluted) in the quarter ended December 31, 2001, primarily related to employeeseverance costs of $0.6 million (from additional personnel actions) and higherfixed asset disposal costs of $0.4 million, partially offset by revisedfacility closure and other cost estimates of $0.7 million. Of the full-yearcharge of $12.3 million, non-cash components included a $4.1 million impairmentcharge for intangible assets related to the Company’s XLS reduction productplatform acquired in 1998 and a $1.5 million impairment charge for fixed assetsdisposed of in conjunction with the consolidation of manufacturing facilities.The cash components of this charge included $4.0 million for estimatedexpenditures related to the closure of facilities, $2.5 million for employeeseverance costs and $0.1 million of other restructuring costs. In October 2003,the Company reached an agreement to terminate its lease for a facility inWilmington, Massachusetts. As a result of this agreement the Company recorded arecovery of restructuring 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**

Interest and other income, net, which consistsprimarily of interest income, was $4.3 million for the year ended December 31,2003, as compared with $6.4 million for 2002 and $7.9 million for 2001.Included in the amounts reported for 2003 and 2002 were $0.3 and $0.2 million,respectively, relating to interest on 

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tax settlements or refunds.The decrease in 2003 from 2002 was primarily attributable to lower interestrates on the Company’s investments. The decrease in 2002 relative to 2001 wasprimarily attributable to lower interest rates on the Company’s investments andlower average invested balances.

The Company presentlymaintains an investment portfolio with a weighted-average maturity of less thanone year. Consequently, changes in short-term interest rates have a majorimpact on the Company’s interest income. Future changes are expected to have asimilar impact. The Company presently expects that interest and other income,net, for the three-month period ending April 3, 2004, will beapproximately 20% lower than the $1.1 million reported in the comparable periodin 2003, primarily as a result of lower interest rates.

**Income tax expense(benefit)**

For the year ended December 31, 2003, the Companyrecorded an income tax benefit of $0.6 million, inclusive of a special taxbenefit of $0.4 million related to the settlement of a research and developmenttax credit claim with the California Franchise Tax Board and $0.4 millionrelated to the resolution of certain tax audit issues in the United Kingdom.Additionally, the Company recorded a $0.5 million benefit from the reversal ofreserves associated with deferred tax assets carried on the balance sheet ofits Japan subsidiary, reflecting improved operating trends in that region.Offsetting these tax benefits was a tax expense of approximately $0.7 millionrelated, primarily, to taxable income in the Company’s foreign entities, forwhich there is no corresponding net operating loss carry-forward benefit.

For the year ended December 31, 2002, the Companyrecorded an income tax benefit of $4.9 million. The benefit relates toresolution of the Company’s IRS audit for the years 1993 through 1996 and acarry back of losses to recover prior years’ federal alternative minimum taxesof $1.2 million.

The Company presently anticipates that it willrecognize income tax expense in 2004 of approximately 5% of pre-tax income, primarilyas a result of foreign income taxes and federal alternative minimum tax. TheCompany believes that the tax rate in 2004 will be substantially less than thestatutory rate because of available federal net operating loss carry-forwards. TheCompany expects to recognize the benefit of the use of these carryforwards byreversing the valuation allowance associated with the Company’s domesticdeferred 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 theCompany’s tax treatment of certain items, and some historical transactions haveincome tax effects going forward. Accounting rules require these futureeffects to be evaluated using current laws, rules and regulations, each ofwhich can change at any time and in an unpredictable manner. The Companybelieves it has adequately provided for any reasonably foreseeable outcomerelated to these matters, and it does not anticipate any material earningsimpact from their ultimate resolutions.

**LIQUIDITY ANDCAPITAL RESOURCES**

Net cash generated by operating activities was $11.7million for the year ended December 31, 2003, as compared with net cashused in operations of $17.8 million for the comparable period in 2002. Net cashgenerated by operating activities during the year ended December 31, 2003was attributable to net income of $7.6 million and non-cash charges to incomeof $8.5 million, partially offset by the use of cash resulting from a netchange in operating assets and liabilities of $4.4 million. The $4.4 millionuse of cash from the net change in operating assets and liabilities wasprimarily a result of a decrease in deferred product and services income of$5.2 million due to the low level of systems shipped as compared to revenue inthe three-month period ended December 31, 2003, a decrease in deferredlicense income of $3.7 million, liquidation of accruals related torestructurings of $2.6 million, an increase in long-term demonstration 

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inventories of $1.8million and a use of cash of $1.1 million due to changes in all other assetsand liabilities. These uses were offset partially by reductions in inventory of$6.4 million, as a result of improved sales during 2003 and focused efforts toimprove inventory utilization, and accounts receivable of $3.5 million due tolow levels of system shipments in the three-month period ending December 31,2003. The Company expects the decrease in accounts receivable and deferredproduct and services income to be temporary as system unit shipments in theperiod ending April 3, 2004 are expected to increase significantly ascompared to system unit shipments in the quarter ended December 31, 2003,although the increases in deferred product and services income may be moregradual over 2004. Additionally, the Company expects to increase long-termdemonstration inventory to include its new laser processing product offerings.

The Company believes that because of the relativelylong manufacturing cycle of certain of its systems, particularly newerproducts, the Company’s inventories will continue to represent a significantportion of working capital. Currently, the Company is devoting significantresources to the development, introduction and commercialization of its laserprocessing system and to the development of its next generation 1X lithographytechnologies. The Company currently intends to continue to incur significantoperating expenses in the areas of research, development and engineering,manufacturing and selling, general and administrative costs in order to furtherdevelop, produce and support these new products. Additionally, gross profitmargins, inventory and capital equipment levels may be adversely impacted inthe future by costs associated with the initial production of the laserprocessing system and by future generations of the Company’s 1X wafer steppers.These costs include, but are not limited to, additional manufacturing overhead,costs of demonstration systems and facilities and the establishment ofadditional after-sales support organizations. Additionally, there can be noassurance that operating expenses will not increase, relative to sales, as aresult of adding additional marketing and administrative personnel, among othercosts, to support the Company’s new products. If the Company is unable toachieve significantly increased net sales or if its sales fall belowexpectations, the Company’s cash flow and operating results will be materiallyadversely affected until, among other factors, costs and expenses can bereduced. The failure of the Company to achieve its sales targets for these newproducts could result in additional inventory write-offs and asset impairmentcharges, either of which could materially adversely impact the Company’sresults of operations.

During the year ended December 31, 2003, net cashused in investing activities was $9.2 million, attributable to capitalexpenditures of $6.1 million and a net increase in available-for-salesecurities of $3.1 million. The Company is planning to incur capitalexpenditures in 2004 of approximately $10 million for equipment and facilityimprovements driven primarily by the Company’s new product introductions.

Net cash provided by financing activities was $4.8million during the year ended December 31, 2003, attributable to $12.1million in proceeds received from the issuance of Common Stock under theCompany’s employee stock option and stock purchase plans offset partially bynet repayments of notes payable of $7.3 million.

At December 31, 2003, the Company had workingcapital of $170.5 million. The Company’s principal source of liquidity at December 31,2003 consisted of $165.9 million in cash, cash equivalents and short-terminvestments.

The Company has approximately $9.3 million of retainedearnings in its foreign subsidiaries. Possible adverse tax consequencesassociated with repatriating these funds may effectively restrict their use tocash requirements in those specific jurisdictions.

During 2002, the Company received proceeds of $3.2million in conjunction with a sale/leaseback transaction. To provide additionalsecurity to the lessor, the Company granted a security interest in certain ofits other equipment. The Company recorded a deferred rent credit equal to theexcess of the sale proceeds over the adjusted basis in the equipment sold. In September 2003,the Company paid $1.8 million 

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to close this transactionand to purchase the related capital asset. The impact from this transaction onthe Company’s results of operations for the year ended December 31, 2003was immaterial.

In September 2002, the Company entered into aline of credit agreement with a brokerage firm. Under the terms of thisagreement, the Company may borrow funds at a cost equal to the current Federalfunds rate plus 100 basis points (2.00% as of December 31, 2003). Certainof the Company’s cash, cash equivalents and short-term investments secureborrowings outstanding under this facility. Funds are advanced to the Companyunder this facility based on pre-determined advance rates on the cash andsecurities held by the Company in this brokerage account. This agreement has noset expiration date and there are no loan covenants. As of December 31,2003, $2.5 million was outstanding under this facility, with a relatedcollateral requirement of approximately $3.6 million of the Company’s cash,cash equivalents and short-term investments.

In January 2003, the Company’s Board of Directorsauthorized the purchase of up to 5.0 million shares of the Company’s CommonStock at prevailing market prices. This authorization expired on December 31,2003. The Company did not elect to repurchase any shares under thisarrangement. Should the Company decide to acquire its own shares in the openmarket, potentially large amounts of the Company’s cash, cash equivalents andshort-term investments would be required.

Thefollowing summarizes the Company’s contractual obligations at December 31,2003, and the effect such obligations are expected to have on its liquidity andcash flows in future periods:
| **(in millions)**                                     | ** ** | ** ** | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **After  5 years** | ** ** |
|------------------------------------------------------------|------------|------------|------------|-----------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-------------------------|------------|
| Notes payable  obligations                                 |       | $          | 2.5        |      |       | $                               | 2.5        |                           |       |                           | $          | —                  |       |   |   | $ | — |   |   |   | $ | — |   |   |
| Non-cancelable  capital lease obligations                  |       | 0.1        |       |      | 0.1        |                            |       |                           | —     |                           |       |                    | —     |   |   |   | — |   |   |
| Non-cancelable  operating lease obligations—equipment |       | 0.1        |       |      | —     |                            |       |                           | 0.1        |                           |       |                    | —     |   |   |   | — |   |   |
| Non-cancelable  operating lease obligations—buildings |       | 28.7       |       |      | 3.6        |                            |       |                           | 8.5        |                           |       |                    | 8.8        |   |   |   | 7.8 |   |   |
| Long-term vendor  accounts payable                         |       | 0.7        |       |      | 0.5        |                            |       |                           | —     |                           |       |                    | —     |   |   |   | 0.2 |   |   |
| Open purchase  order commitments                           |       | 30.4       |       |      | 23.2       |                            |       |                           | 7.2        |                           |       |                    | —     |   |   |   | — |   |   |
| Total contractual cash  obligations                        |       | $          | 62.5       |      |       | $                               | 29.9       |                           |       |                           | $          | 15.8                    |       |   |   | $ | 8.8 |   |   |   | $ | 8.0 |   |   |

 

The amounts shown in the table above for open purchaseorder commitments are primarily related to the purchase of inventories,equipment and leasehold improvements. The Company records writedowns forpurchase order commitments it deems in excess of normal 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, the Company believes it must continue to make significantexpenditures for capital equipment; sales, service, training and supportcapabilities; systems, procedures and controls; and expansion of operations andresearch and development, among many other items. The Company expects that cashgenerated from operations and its cash, cash equivalents and short-terminvestments will be sufficient to meet the Company’s cash requirements for atleast the next twelve months. However, in the near-term, the Company maycontinue to utilize existing and future lines of credit, and other sources offinancing, in order to maintain its present levels of cash, cash equivalentsand short-term investments. Beyond the next twelve months, the Company mayrequire additional equity or debt financing to address its working capital orcapital equipment needs. In addition, the Company may seek to raise equity ordebt capital at any time that it deems market conditions to be favorable.Additional financing, if needed, may not be available on reasonable terms, orat all.

The Company may in thefuture pursue additional acquisitions of complementary product lines,technologies or businesses. Future acquisitions by the Company may result inpotentially dilutive issuances of equity securities, the incurrence of debt andcontingent liabilities and amortization expenses and 

35

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impairmentcharges related to goodwill and other intangible assets, which could materiallyadversely affect the Company’s financial condition and results of operations.In addition, acquisitions involve numerous risks, including difficulties in theassimilation of the operations, technologies, personnel and products of theacquired companies; the diversion of management’s attention from other businessconcerns; risks of entering markets in which the Company has limited or no directexperience; and the potential loss of key employees of the acquired company. Inthe event the Company acquires product lines, technologies or businesses whichdo not complement the Company’s business, or which otherwise do not enhance theCompany’s sales or operating results, the Company may incur substantialwrite-offs and higher recurring operating costs, which could have a materialadverse effect on the Company’s 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 the Company’s business or operatingresults.

**Off-Balance SheetTransactions**

The Company’s off-balancesheet transactions consist of certain financial guarantees, both expressed and implied,related to product liability, patent infringement and latent product defects.Other than liabilities recorded pursuant to known product defects, at December 31,2003, the Company did not record a liability associated with these guarantees,as the Company has little or no history of costs associated with suchindemnification requirements.

**Foreign currency**

As part of its overallstrategy to manage the level of exposure to the risk of foreign currencyexchange rate fluctuations, the Company attempts to hedge most of its Japaneseyen denominated foreign currency exposures. The Company uses foreign currencyforward contracts to hedge the risk that unremitted Japanese yen denominatedreceipts from customers for actual or forecasted sales of equipment afterreceipt of customer orders may be adversely affected by changes in foreigncurrency exchange rates. At December 31, 2003, the Company had takenaction to hedge approximately 100% of these Japanese yen denominated exposures.To hedge this exposure, the Company enters into foreign currency forwardcontracts that generally have maturities of nine months or less. The Companyoften closes foreign currency forward contracts by entering into an offsettingcontract. At December 31, 2003, the Company had contracts for the sale andpurchase of $11.8 and $0.8 million, respectively, of foreign currencies atfixed rates of exchange.

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

**Interest rate risk**

The Company’s exposure to market risk due to potentialchanges in interest rates, relates primarily to the Company’s investmentportfolio, which consisted primarily of fixed interest rate instruments as of December 31,2003. The Company maintains an investment policy designed to ensure the safetyand preservation of its invested funds by limiting market risk and the risk ofdefault.

Certain of the Company’s cash, cash equivalents andshort-term investments serve as collateral for a line of credit the Companymaintains with a brokerage firm. The line of credit is used for liquiditypurposes, mitigating the need to liquidate investments in order to meet theCompany’s current operating cash requirements.

Thefollowing table presents the hypothetical changes in fair values in thefinancial instruments held by the Company at December 31, 2003, that aresensitive to changes in interest rates. These instruments are comprised ofcash, cash equivalents and short-term investments. These instruments are heldfor purposes other than trading. The modeling techniques used measure thechange in fair values arising from selected hypothetical changes in interestrates. Assumed market value changes to the Company’s portfolio 

36

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reflects immediate hypothetical parallel shifts in theyield curve of plus or minus 50 basis points (BPS), 100 BPS, and 150 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 |       | $                                                                                                                            | 27,859     |                                           | $          | 27,653                                                                                                                       |       | $ | 27,450 |   |   | $ | 27,251 |   |   | $ | 27,055 |   | $ | 26,862 |   | $ | 26,672 |   |
| Obligations of states and political subdivisions                      |       | 11,954                                                                                                                       |       | 11,954                                         |       | 11,954                                                                                                                       |       |   | 11,954 |   |   | 11,954 |   | 11,954 |   | 11,954 |   |
| U.S. corporate debt securities                                        |       | 121,078                                                                                                                      |       | 120,563                                        |       | 120,056                                                                                                                      |       |   | 119,557 |   |   | 119,065 |   | 118,581 |   | 118,103 |   |
| Total short-term  investments                                         |       | $                                                                                                                            | 160,891    |                                           | $          | 160,170                                                                                                                      |       | $ | 159,460 |   |   | $ | 158,762 |   |   | $ | 158,074 |   | $ | 157,397 |   | $ | 156,729 |   |
|                                                                       |            |                                                                                                                              |            |                                                |            |                                                                                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company has notmaterially altered its investment objectives or criteria and believes that,although the composition of the Company’s portfolio has changed from thepreceding year, the portfolio’s sensitivity to changes in interest rates ismaterially the same.

**Credit risk**

The Company mitigatescredit default risk by attempting to invest in high credit quality securitiesand by positioning its portfolio to respond appropriately to a significantreduction in a credit rating of any investment issuer or guarantor. Theportfolio includes only marketable securities with active secondary or resalemarkets to ensure portfolio liquidity and is diversified in accordance with theCompany’s investment policy. To date, the Company has not experiencedsignificant liquidity problems with its portfolio.

**Foreign exchangerisk**

The majority of theCompany’s revenue, expense and capital purchasing activities are transacted inU.S. dollars. However, the Company does enter into these transactions in othercurrencies, primarily Japanese Yen. To protect against reductions in value andthe volatility of future cash flows caused by changes in currency exchangerates the Company has established transaction and balance sheet hedgingprograms. The Company uses foreign currency forward contracts to hedge the riskthat unremitted Japanese yen denominated receipts from customers for actual orforecasted sales of equipment after receipt of customer orders may be adverselyaffected by changes in foreign currency exchange rates. At December 31,2003, the Company had taken action to hedge approximately 100% of theseJapanese yen denominated exposures. To hedge this exposure, the Company entersinto foreign currency forward contracts that generally have maturities of ninemonths or less. The Company often closes foreign currency forward contracts byentering into an offsetting contract. At December 31, 2003, the Companyhad contracts for the sale and purchase of $11.8 and $0.8 million,respectively, of foreign currencies at fixed rates of exchange. The Company’shedging programs reduce, but do not always entirely eliminate, the impact ofcurrency movements.

***ITEM8.***   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.

37

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

ConsolidatedFinancial Statements included in Item 8:
| ** **                                                                                                     | **Page Number** |
|----------------------------------------------------------------------------------------------------------------|-----------------|
| Consolidated  Balance Sheets—December 31, 2003 and 2002.                                             | 39              |
| Consolidated  Statements of Operations —Years ended December 31, 2003, 2002, and 2001.               | 40              |
| Consolidated  Statements of Cash Flows—Years ended December 31, 2003, 2002, and 2001.                | 41              |
| Consolidated  Statements of Stockholders’ Equity—Years ended December 31 2003, 2002,  and 2001. | 42              |
| Notes  to Consolidated Financial Statements                                                                    | 43 - 59         |
| Report of Ernst &  Young LLP, Independent Auditors                                                    | 60              |

 

 

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**CONSOLIDATED BALANCE SHEETS**
| **In thousands, except share and per share amounts**                                                                               | ** ** | ** ** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-----------------------------|------------|
| ***Assets***                                                                                                                                                          |       |       |       |                        |       |                        |       |   |   |
| Current assets:                                                                                                                                                       |       |       |       |                        |       |                        |       |   |   |
| Cash and cash  equivalents                                                                                                                                            |       |       | $          | 25,149                      |       |                        |       | $ | 18,178 |   |   |
| Short-term investments                                                                                                                                                |       |       | 140,753    |                        |       |                        | 139,351    |   |   |
| Accounts receivable,  less allowance for doubtful accounts of $146 in 2003 and $314 in 2002                                                                           |       |       | 9,398      |                        |       |                        | 12,870     |   |   |
| Inventories                                                                                                                                                           |       |       | 19,037     |                        |       |                        | 25,182     |   |   |
| Taxes receivable                                                                                                                                                      |       |       | 349        |                        |       |                        | 1,179      |   |   |
| Prepaid expenses and  other current assets                                                                                                                            |       |       | 2,099      |                        |       |                        | 1,627      |   |   |
| Total current assets                                                                                                                                                  |       |       | 196,785    |                        |       |                        | 198,387    |   |   |
| Equipment and leasehold  improvements, net                                                                                                                            |       |       | 18,481     |                        |       |                        | 19,090     |   |   |
| Intangible assets, net                                                                                                                                                |       |       | 476        |                        |       |                        | 858        |   |   |
| Demonstration inventory,  net                                                                                                                                         |       |       | 3,071      |                        |       |                        | 2,208      |   |   |
| Other assets                                                                                                                                                          |       |       | 1,935      |                        |       |                        | 1,823      |   |   |
| Total assets                                                                                                                                                          |       |       | $          | 220,748                     |       |                        |       | $ | 222,366 |   |   |
| ***Liabilities and Stockholders’  Equity***                                                                                                                      |       |       |       |                        |       |                        |       |   |   |
| Current liabilities:                                                                                                                                                  |       |       |       |                        |       |                        |       |   |   |
| Notes payable                                                                                                                                                         |       |       | $          | 2,564                       |       |                        |       | $ | 9,769 |   |   |
| Accounts payable                                                                                                                                                      |       |       | 7,729      |                        |       |                        | 6,719      |   |   |
| Accrued expenses                                                                                                                                                      |       |       | 7,883      |                        |       |                        | 10,961     |   |   |
| Deferred license income                                                                                                                                               |       |       | 4,752      |                        |       |                        | 8,463      |   |   |
| Deferred product and  services income                                                                                                                                 |       |       | 1,088      |                        |       |                        | 6,293      |   |   |
| Advance billings                                                                                                                                                      |       |       | 1,523      |                        |       |                        | 1,024      |   |   |
| Accrued restructuring  expenses                                                                                                                                       |       |       | —     |                        |       |                        | 2,558      |   |   |
| Income taxes payable                                                                                                                                                  |       |       | 745        |                        |       |                        | 440        |   |   |
| Total current  liabilities                                                                                                                                            |       |       | 26,284     |                        |       |                        | 46,227     |   |   |
| Deferred rent                                                                                                                                                         |       |       | 2,784      |                        |       |                        | 3,306      |   |   |
| Other liabilities                                                                                                                                                     |       |       | 941        |                        |       |                        | 1,079      |   |   |
| 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: 23,582,125 at  December 31, 2003 and 22,627,201 at December 31, 2002 |       |       | 24         |                        |       |                        | 23         |   |   |
| Additional paid-in  capital                                                                                                                                           |       |       | 210,323    |                        |       |                        | 198,069    |   |   |
| Treasury stock; 465,971  shares at December 31, 2003 and 475,000 shares at December 31, 2002                                                                |       |       | (6,756     | )                           |       |                        | (6,867     | ) |   |
| Accumulated other  comprehensive income, net                                                                                                                          |       |       | 937        |                        |       |                        | 1,884      |   |   |
| Accumulated deficit                                                                                                                                                   |       |       | (13,789    | )                           |       |                        | (21,355    | ) |   |
| Total stockholders’  equity                                                                                                                                      |       |       | 190,739    |                        |       |                        | 171,754    |   |   |
| Total liabilities and stockholders’ equity                                                                                                                       |       |       | $          | 220,748                     |       |                        |       | $ | 222,366 |   |   |

 

See accompanying notes to consolidated financial statements.

 

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**CONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands, except per share amounts** | ** ** | ** **                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Net sales                                                           |       |                                        |       |   |   |   |   |
| Products                                                            |       | $                                           | 85,799     |   | $ | 52,400 |   | $ | 103,714 |   |
| Services                                                            |       | 10,611                                      |       | 10,862 |   | 14,305 |   |
| Licenses                                                            |       | 3,711                                       |       | 5,244 |   | 12,661 |   |
| Total net sales                                                     |       | 100,121                                     |       | 68,506 |   | 130,680 |   |
| Cost of sales                                                       |       |                                        |       |   |   |   |   |
| Cost of products sold                                               |       | 48,671                                      |       | 39,040 |   | 64,694 |   |
| Cost of services                                                    |       | 6,511                                       |       | 7,886 |   | 10,135 |   |
| Cost (recovery) of inventory writedown                              |       | (1,551                                      | )          | 5,305 |   | — |   |
| Cost (recovery) of discontinued products                            |       | (121                                        | )          | 1,425 |   | 11,070 |   |
| Gross profit                                                        |       | 46,611                                      |       | 14,850 |   | 44,781 |   |
| Research, development, and engineering                              |       | 21,309                                      |       | 23,522 |   | 25,759 |   |
| Amortization of  intangible assets                                  |       | 381                                         |       | 381 |   | 1,508 |   |
| Selling, general,  and administrative                               |       | 22,677                                      |       | 23,363 |   | 29,701 |   |
| Restructure of  operations                                          |       | (728                                        | )          | 4,090 |   | 12,278 |   |
| Operating income (loss)                                             |       | 2,972                                       |       | (36,506 | ) | (24,465 | ) |
| Interest expense                                                    |       | (253                                        | )          | (135 | ) | (198 | ) |
| Interest and  other income, net                                     |       | 4,277                                       |       | 6,393 |   | 7,857 |   |
| Income (loss) before income taxes                                   |       | 6,996                                       |       | (30,248 | ) | (16,806 | ) |
| Income taxes  (benefit)                                             |       | (570                                        | )          | (4,866 | ) | 1,038 |   |
| Net income (loss)                                                   |       | $                                           | 7,566      |   | $ | (25,382 | ) | $ | (17,844 | ) |
| *Net  income (loss) per share—basic*                           |       |                                        |       |   |   |   |   |
| Net income (loss)                                                   |       | $                                           | 0.33       |   | $ | (1.12 | ) | $ | (0.81 | ) |
| Number of shares used in per share computations—basic          |       | 23,017                                      |       | 22,586 |   | 22,143 |   |
| *Net  income (loss) per share—diluted*                         |       |                                        |       |   |   |   |   |
| Net income (loss)                                                   |       | $                                           | 0.31       |   | $ | (1.12 | ) | $ | (0.81 | ) |
| Number of shares  used in per share computations—diluted       |       | 24,476                                      |       | 22,586 |   | 22,143 |   |
|                                                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands**                                                                               | ** ** | ** **                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| *Cash flows from operating activities:*                                                             |       |                                        |       |   |   |   |   |
| Net income (loss)                                                                                   |       | $                                           | 7,566      |   | $ | (25,382 | ) | $ | (17,844 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                        |       |   |   |   |   |
| Depreciation                                                                                        |       | 6,621                                       |       | 7,678 |   | 7,657 |   |
| Amortization                                                                                        |       | 2,492                                       |       | 1,769 |   | 2,610 |   |
| Non-cash  restructuring and asset impairment charges (recoveries):                                  |       |                                        |       |   |   |   |   |
| Intangible assets,  net                                                                             |       | —                                      |       | — |   | 4,135 |   |
| Equipment and leasehold  improvements, net                                                          |       | (128                                        | )          | 2,492 |   | 1,540 |   |
| Inventories                                                                                         |       | (393                                        | )          | 5,598 |   | 11,070 |   |
| Prepaid expenses  and other current assets                                                          |       | —                                      |       | 337 |   | — |   |
| Other, net                                                                                          |       | —                                      |       | 678 |   | — |   |
| Loss on disposal  of equipment                                                                      |       | 189                                         |       | 159 |   | 58 |   |
| Deferred  compensation                                                                              |       | 311                                         |       | 85 |   | (41 | ) |
| Deferred income  taxes                                                                              |       | (559                                        | )          | — |   | — |   |
| Changes  in operating assets and liabilities:                                                       |       |                                        |       |   |   |   |   |
| Accounts  receivable                                                                                |       | 3,472                                       |       | 932 |   | 10,140 |   |
| Inventories                                                                                         |       | 6,420                                       |       | (4,733 | ) | (6,855 | ) |
| Taxes receivable                                                                                    |       | 830                                         |       | (1,154 | ) | (25 | ) |
| Prepaid expenses  and other current assets                                                          |       | (212                                        | )          | (203 | ) | 1,368 |   |
| Leases receivable—long  term                                                                   |       | —                                      |       | 121 |   | — |   |
| Demonstration  Inventory                                                                            |       | (1,785                                      | )          | 701 |   | 2,009 |   |
| Other assets                                                                                        |       | 187                                         |       | 466 |   | (2,288 | ) |
| Accounts payable                                                                                    |       | 1,010                                       |       | (2,374 | ) | (3,135 | ) |
| Accrued expenses                                                                                    |       | (3,078                                      | )          | 1,018 |   | (4,500 | ) |
| Advance billings                                                                                    |       | 499                                         |       | (1,986 | ) | (4,460 | ) |
| Income taxes  payable                                                                               |       | 305                                         |       | (3,864 | ) | (886 | ) |
| Deferred product  and services income, net                                                          |       | (5,205                                      | )          | 2,725 |   | (3,160 | ) |
| Deferred license  income                                                                            |       | (3,711                                      | )          | (5,244 | ) | (8,662 | ) |
| Accrued  restructuring expenses                                                                     |       | (2,558                                      | )          | (1,780 | ) | 4,338 |   |
| Deferred rent                                                                                       |       | (522                                        | )          | 3,131 |   | (53 | ) |
| Other liabilities                                                                                   |       | (74                                         | )          | 1,015 |   | — |   |
| Net cash provided  by (used in) operating activities                                                |       | 11,677                                      |       | (17,815 | ) | (6,984 | ) |
| *Cash flows from investing activities:*                                                             |       |                                        |       |   |   |   |   |
| Capital  expenditures                                                                               |       | (6,073                                      | )          | (4,800 | ) | (5,389 | ) |
| Investments in  securities                                                                          |       | (165,056                                    | )          | (95,661 | ) | (313,130 | ) |
| Proceeds from  sales and maturities of investments                                                  |       | 161,938                                     |       | 61,604 |   | 317,952 |   |
| Net cash used in  investing activities                                                              |       | (9,191                                      | )          | (38,857 | ) | (567 | ) |
| *Cash flows from financing activities:*                                                             |       |                                        |       |   |   |   |   |
| Proceeds from  notes payable                                                                        |       | 15,315                                      |       | 17,199 |   | 1,175 |   |
| Repayment of notes  payable                                                                         |       | (22,584                                     | )          | (7,366 | ) | (2,327 | ) |
| Proceeds from  issuance of Common Stock                                                             |       | 12,055                                      |       | 2,372 |   | 16,021 |   |
| Net cash provided  by financing activities                                                          |       | 4,786                                       |       | 12,205 |   | 14,869 |   |
| **Net  effect of exchange rate changes on cash**                                                    |       | (301                                        | )          | (84 | ) | 65 |   |
| **Net  increase (decrease) in cash and cash equivalents**                                           |       | 6,971                                       |       | (44,551 | ) | 7,383 |   |
| **Cash and  cash equivalents at beginning of period**                                               |       | 18,178                                      |       | 62,729 |   | 55,346 |   |
| **Cash and  cash equivalents at end of period**                                                     |       | $                                           | 25,149     |   | $ | 18,178 |   | $ | 62,729 |   |
| Supplemental  disclosures of cash flow information:                                                 |       |                                        |       |   |   |   |   |
| Cash  paid during the period for:                                                                   |       |                                        |       |   |   |   |   |
| Interest                                                                                            |       | $                                           | 264        |   | $ | 111 |   | $ | 198 |   |
| Income taxes, net                                                                                   |       | (1,086                                      | )          | 132 |   | 2,032 |   |
| Other non-cash  changes:                                                                            |       |                                        |       |   |   |   |   |
| Systems  transferred from (to) inventory to (from) equipment and other assets                       |       | $                                           | 1,232      |   | $ | (1,965 | ) | $ | 2,031 |   |
|                                                                                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**
| ** **                                                                              | ** ** | **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, 2000                                                      |       | 21,285                        |       |   | $ | 22 |   |   |   | $ | 179,530 |   |   |   | $ | (6,867 | ) |   |   | $ | (299 | ) |   |   | $ | 21,871 |   |   |   | $ | 194,257 |   |   |
| Net issuance of  Common Stock under stock option plans and employee stock purchase plan |       | 1,166                         |       |   | 1 |   |   |   | 16,021 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 16,022 |   |   |
| Buyback of Common  Stock                                                                |       | —                        |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Income tax benefit  from stock option and stock purchase plan transactions              |       | —                        |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Deferred  compensation                                                                  |       | —                        |       |   | — |   |   |   | 61 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 61 |   |   |
| Components of comprehensive loss:                                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change in net unrealized  gains on:                                                     |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale  investments                                                         |       | —                        |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,720 |   |   |   | — |   |   |   | 2,720 |   |   |
| Foreign exchange  contracts                                                             |       | —                        |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 65 |   |   |   | — |   |   |   | 65 |   |   |
| Net loss                                                                                |       | —                        |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (17,844 | ) |   |   | (17,844 | ) |   |
| Total  comprehensive loss                                                               |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (15,059 | ) |   |
| 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 |   |   |
| Deferred  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 |   |   |
| Deferred  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 |   |   |
|                                                                                         |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

42

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1. COMPANY AND INDUSTRYINFORMATION**

***Nature of operations***

Ultratech, Inc. develops, manufactures andmarkets photolithography and laser processing equipment for manufacturers ofintegrated circuits and nanotechnology components located throughout NorthAmerica, Europe, Japan and the rest of Asia.

The Company supplies step-and-repeatphotolithography systems based on one-to-one imaging technology.Markets for the Company’s photolithography products include advanced packagingand the manufacture of various nanotechnology components, including thin filmhead magnetic recording devices, optical networking devices, laser diodes andLED’s.

***Major customers***

In 2003, Intel Corporationaccounted for 26% of the Company’s net sales. In 2002, Intel Corporationaccounted for 19% and Sumitomo Chemical Company, Ltd. accounted for 10% of theCompany’s net sales. In 2001, no single customer accounted for 10% or more ofthe Company’s net sales.

***Business segments***

In evaluating its businesssegments, the Company gave consideration to the Chief Executive Officer’sreview of financial information and the organizational structure of the Company’smanagement. Based on this review, the Company concluded that, at the presenttime, resources are allocated and other financial decisions are made based,primarily, on consolidated financial information. Accordingly, the Company hasdetermined that it operates in one business segment, which is the manufactureand distribution of capital equipment to manufacturers of integrated circuitsand nanotechnology components.

***Enterprise-wide disclosures***

TheCompany’s products are manufactured in the United States and are soldworldwide. The Company markets its products internationally through domesticand foreign-based sales and service operations and independent salesorganizations. The following table presents enterprise-wide sales to externalcustomers and long-lived assets by geographic region:
| **(In thousands)**  | ** ** | ** ** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales:               |       |       |       |     |       |     |       |
| United States of America |       | $          | 38,732     |     | $          | 35,307   |       | $        | 63,653     |   |
| Japan                    |       | 27,987     |       | 16,689   |       | 22,534   |       |
| Rest of world            |       | 33,402     |       | 16,510   |       | 44,493   |       |
| Total                    |       | $          | 100,121    |     | $          | 68,506   |       | $        | 130,680    |   |
| Long-lived assets:       |       |       |       |     |       |     |       |
| United States of America |       | $          | 23,017     |     | $          | 23,350   |       | $        | 31,687     |   |
| Rest of world            |       | 948        |       | 629      |       | 943      |       |
| Total                    |       | $          | 23,965     |     | $          | 23,979   |       | $        | 32,630     |   |

 

With the exception ofJapan, the Company’s operations in foreign countries are not currently subjectto significant exchange rate fluctuations, principally because sales contractsfor the Company’s systems are generally denominated in U.S. dollars.. In Japan,the Company sells its product in both U.S. dollars and 

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Japaneseyen. However, the Company attempts to mitigate its currency exposure throughthe use of currency forward contracts.

**2. CONCENTRATIONS OF RISKS**

Sales of the Company’s systems depend, in significantpart, upon the decision of a prospective customer to increase manufacturingcapacity or to restructure current manufacturing facilities, either of whichtypically involves a significant commitment of capital. For this and otherreasons, the Company’s systems typically have a lengthy sales cycle duringwhich the Company may expend substantial funds and management effort insecuring a sale. Additionally, the markets for the Company’s products aresubject to rapid technological change, which requires the Company to respondwith new products and enhanced versions of existing products. Lengthy salescycles and rapid technological change subject the Company to a number ofsignificant risks, including inventory obsolescence, significant after-salessupport and fluctuations in operating results, which are difficult to estimateand over which the Company has little or no control. Sole-source and single-sourcesuppliers provide critical components and services for the manufacture of theCompany’s products. The reliance on sole or limited groups of suppliers maysubject the Company from time to time to quality, allocation and pricingconstraints.

Financial instruments that potentially subject theCompany to concentrations of credit risk consist principally of cashequivalents, short-term investments and trade receivables. These credit risksinclude the potential inability of an issuer or customer to honor theirobligations under the terms of the instrument. The Company places its cashequivalents and short-term investments with high credit-quality financialinstitutions. The Company invests its excess cash in commercial paper, readilymarketable debt instruments and collateralized funds of U.S. and stategovernment entities. The Company has established guidelines relative to creditratings, diversification and maturities that seek to maintain safety andliquidity.

A majority of the Company’strade receivables are derived from sales in various geographic areas,principally the U.S., Europe, Japan and the rest of Asia, to large companieswithin the semiconductor, semiconductor packaging and nanotechnologyindustries. The Company performs ongoing credit evaluations of its customers’financial condition and requires collateral, whenever deemed necessary. TheCompany maintains an allowance for uncollectible accounts receivable based uponexpected collectibility and estimated returns and allowances. This reserve isestablished based upon historical trends, current economic conditions and ananalysis of specific exposures. From time to time the Company may grant longerpayment terms or may lease its systems to customers. Long-term receivables andthe granting of longer customer payment terms expose the Company to additionalrisks, including potentially higher customer concentration and higher potentialoperating expenses relating to customer defaults.

**3. SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

***Basis of presentation***

The accompanying consolidated financial statementsinclude the accounts of the Company and its subsidiaries, all of which arewholly owned. 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 

44

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thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities at the date of theconsolidated financial statements. By their nature, these estimates andjudgments are subject to an inherent degree of uncertainty. On an ongoingbasis, management evaluates its estimates, including those related toinventories, warranty obligations, purchase order commitments, bad debts,income taxes, intangible assets, restructuring and contingencies andlitigation. Management bases its estimates on historical experience and onvarious other 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.

***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, 2003 and 2002, all investmentsin the Company’s portfolio were classified as “available for sale” and arestated 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***

The Company maintains anallowance for uncollectible accounts receivable based upon expectedcollectibility and a reserve for estimated returns and allowances. This reserveis established based upon historical trends, current economic conditions and ananalysis of specific exposures.

***Inventories***

Inventories are stated atthe lower of cost or market. Cost is determined using the first-in, first-out(FIFO) method. The semiconductor industry is characterized by rapidtechnological change, changes in customer requirements and evolving industrystandards. The Company performs a detailed assessment of inventory at eachbalance sheet date, which includes a review of, among other factors, demandrequirements and market conditions. Based on this analysis, it recordsadjustments, when appropriate, 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 seven 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 over theestimated useful life of the systems, generally four years.

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Intangible assets are carried at cost less accumulatedamortization, which is being provided 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. Intangible assets are presented net of accumulated amortization of$1,524,000 and $1,144,000 as of December 31, 2003 and 2002, respectively. Amortizationexpense for intangible assets included in the Company’s Statement of FinancialPosition at December 31, 2003 for the years ending December 31, 2004and 2005 will be $0.4 million and $0.1 million, respectively.

The Company reviewslong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of these assets may not be recoverable. TheCompany assesses these assets for impairment based on estimated future cashflows from these assets.

***Derivative instruments and hedging***

The majority of the Company’s revenue, expense andcapital purchasing activities are transacted in U.S. dollars. However, theCompany does enter into these transactions in other currencies, primarilyJapanese Yen. To protect against reductions in value and the volatility offuture cash flows caused by changes in currency exchange rates over the ensuingtwelve-month period, the Company has established transaction and balance sheethedging programs. Currency forward contracts are utilized in these programs. Thesehedging programs reduce, but do not always entirely eliminate, the impact ofcurrency movements.

Currency forward contracts that are used by theCompany to hedge the risk that unremitted Japanese Yen denominated receiptsfrom customers for forecasted sales of equipment after receipt of customerpurchase orders may be adversely affected by changes in foreign currencyexchange rates are designated as cash flow hedges. The maturity of theseinstruments is generally nine months or less. At December 31, 2003, theCompany had taken action to hedge approximately 100%, or approximately $8.9million , of these Japanese Yen denominated exposures. The Company often closescurrency forward contracts by entering into an offsetting contract.

The Company records these currency forward contractsat fair value in its consolidated balance sheet and the related gains or losseson these contracts are recorded in stockholders’ equity (as a component ofother comprehensive income). These deferred gains and losses are recognized inincome, as a component of revenue, in the period in which the forecasted salesbeing hedged are recognized in income. However, to the extent that any of thesecontracts are not considered to be perfectly effective in offsetting the changein the value of the forecasted sales being hedged, any changes in fair valuerelating to the ineffective portion of these contracts are immediatelyrecognized in income as a component of interest and other income, net. Theeffectiveness of the hedge is measured using the forward rates to value theforward contract and the underlying hedged transaction. The ineffectiveportions of the hedges were not material to the periods presented.

Currency forward contracts are also used to offset thecurrency risk of Japanese Yen denominated assets and liabilities. The Companyrecords these currency forward contracts at fair value in its consolidatedbalance sheet and the related gains or losses on these contracts are recognizedas a component of interest and other income, net.

At December 31, 2003,the Company had currency forward contracts for the sale and purchase ofJapanese Yen at fixed rates of exchange of $11.8 and $0.8 million, respectively.The Company had recorded $0.3 million of accumulated losses as a component ofother comprehensive income at December 31, 2003.

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***Revenue recognition***

In November 2002, the Emerging Task Force issuedEITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”.EITF 00-21 addresses how to account for arrangements that may involve deliveryor performance of multiple products, services and/or rights to use assets, andwhen and, if so, how an arrangement involving multiple deliverables should bedivided into separate units of accounting. It does not change otherwiseapplicable revenue recognition criteria. It applies to arrangements enteredinto in fiscal periods beginning after June 15, 2003, with early adoptionpermitted.

The Company has concluded that the adoption of EITF00-21 has no effect on its current revenue recognition policy. Althoughapplication of EITF 00-21 results in the identification of separate accountingunits, e.g. the system and its installation, the Company believes that all requiredelements of revenue recognition are not met at the time of shipment of itssystems. Therefore, revenue recognition for systems must be delayed until allelements of revenue recognition are met, generally upon acceptance of thesystem.

Accordingly, the Company recognizes revenues on systemsales when the contractual obligation for installation (if any) has beensatisfied, or installation is substantially complete, and/or customeracceptance provisions have lapsed, provided collections of the relatedreceivable are probable. In the event of a delay in the installation of itsproducts caused by the customer, the Company may seek acceptance of the systemand warranty commencement after shipment and transfer of title, but prior tocompletion of installation. Revenue recorded as a result of these customeracceptances is reduced by an amount representing the fair-value of installationservices. In these instances, revenue is recorded only if the product has metproduct specifications prior to shipment and management deems that nosignificant uncertainties as to product performance exist.

The Company generallyrecognizes revenue from spare parts sales upon shipment. The Company sells timebased service contracts for which revenue is deferred and recognized ratablyover the contract period, and service contracts based on a purchased quantityof hours under which revenue is recognized as service hours are delivered. TheCompany recognizes revenue from licensing and technology support agreementsratably over the contract period, or the estimated useful life of the licensedtechnologies, whichever is shorter.

***Warranty***

The Company generallywarrants its products for a period of 12 months for new products, or 3 monthsfor refurbished products, from the date of customer acceptance for material andlabor to repair the product; accordingly, a provision for the estimated cost ofthe warranty is recorded at the time revenue is recognized.

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

The Company is activelyengaged in basic technology and applied research programs designed to developnew products and product applications. In addition, substantial ongoing productand process improvement engineering and support programs relating to existingproducts are conducted within engineering departments and elsewhere. Research,development and engineering costs are charged to operations as incurred.

***Deferred Income Taxes***

The Company records avaluation allowance to reduce its deferred tax assets to the amount that ismore likely than not to be realized. Based on the uncertainty of future pre-taxincome for U.S. tax purposes, the Company has presently fully reserved itsdomestic deferred tax assets.

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

In January 2003, theFASB issued FASB Interpretation No. 46, *Consolidationof Variable Interest Entities* (“FIN 46”). FIN 46 requires that if anentity has a controlling financial interest in a variable interest entity, theassets, liabilities and results of activities of the variable interest entity (“VIE”)should be included in the consolidated financial statements of the entity. Forarrangements entered into after January 31, 2003, FIN 46 is effectiveimmediately. For arrangements entered into prior to February 1, 2003, FIN46 was scheduled to be effective at the end of the period ending after December 15,2003. In December 2003, FIN 46 was revised (“Interpretation 46R”) torequire application in financial statements of public entities that haveinterests in special-purpose entities for periods ending after December 15,2003. For all other types of variable interest entities, application isrequired for periods ending after March 15, 2004. The initial adoption ofFIN 46 did not, nor does the Company believe the adoption of the remainingprovisions of FIN 46 will have a material impact on its results of operationsor financial condition.

***Stock-based compensation***

At December 31,2003, the Company had several stock-based employee compensation plans, whichare described more fully in Note 12. The Company accounts for these plans 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. The following table illustrates the effect on net income andearnings per share if the Company had applied the fair value recognitionmethod.
| ** **                                                                                                                             | ** ** | **Years Ended December 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **In thousands, except per share amounts**                                                                    | ** ** | ** **                                 | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Net income (loss) as reported                                                                                                          |       | $                                          | 7,566      |   | $ | (25,382 | ) | $ | (17,844 | ) |
| Total stock-based  employee compensation expense, determined under fair value based method for  all awards, net of related tax effects |       | $                                          | 9,570      |   | $ | 10,210 |   | $ | 7,598 |   |
| Pro forma net  loss                                                                                                                    |       | $                                          | (2,004     | ) | $ | (35,592 | ) | $ | (25,442 | ) |
| Net income (loss)  per share—basic, as reported                                                                                   |       | $                                          | 0.33       |   | $ | (1.12 | ) | $ | (0.81 | ) |
| Pro forma net  loss per share—basic                                                                                               |       | $                                          | (0.09      | ) | $ | (1.62 | ) | $ | (1.17 | ) |
| Net income (loss)  per share—diluted, as reported                                                                                 |       | $                                          | 0.31       |   | $ | (1.12 | ) | $ | (0.81 | ) |
| Pro forma net loss per  share—diluted                                                                                             |       | $                                          | (0.08      | ) | $ | (1.62 | ) | $ | (1.17 | ) |
|                                                                                                                                        |            |                                            |            |  |  |  |  |  |  |  |  |  |

 

**4. BASIC AND DILUTED NETINCOME (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** | ** ** | ** **                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Numerator:                                                          |       |                                        |       |   |   |   |   |
| Net income (loss)                                                   |       | $                                           | 7,566      |   | $ | (25,382 | ) | $ | (17,844 | ) |
| Denominator:                                                        |       |                                        |       |   |   |   |   |
| Denominator for net income (loss) per share—basic              |       | 23,017                                      |       | 22,586 |   | 22,143 |   |
| Effect of dilutive Employee Stock Options                           |       | 1,459                                       |       | — |   | — |   |
| Denominator for net income (loss) per share—diluted            |       | 24,476                                      |       | 22,586 |   | 22,143 |   |
| Net income (loss) per share—basic                              |       | $                                           | 0.33       |   | $ | (1.12 | ) | $ | (0.81 | ) |
| Net income (loss)  per share—diluted                           |       | $                                           | 0.31       |   | $ | (1.12 | ) | $ | (0.81 | ) |
|                                                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

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For the year ended December 31,2003, options to purchase 1,127,000 shares of Common Stock at an averageexercise price of $25.26 were excluded from the computation of diluted net lossper share as the effect would have been anti-dilutive. This compares to theexclusion of 4,505,000 options at an average exercise price of $16.40 for theyear ended December 31, 2002 and 3,346,000 options at an average exerciseprice of $17.84 for the year ended December 31, 2001. Options areanti-dilutive when the Company has a net loss or when the exercise price of thestock option is greater than the average market price of the Company’s CommonStock.

**5.COMPREHENSIVE INCOME (LOSS)**

Comprehensiveincome (loss), as presented on the accompanying statement of stockholder’sequity, includes net income (loss) plus components of other comprehensiveincome (loss). Other comprehensive income (loss) for the Company is comprisedprimarily of changes in unrealized gains or losses on available-for-salesecurities, net of tax. Accumulated other comprehensive income consists of:
| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| **In thousands:**                                        | ** ** | ** **            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Unrealized gains  (losses) on:                                |       |                  |       |   |   |
| Available-for-sale investments                                |       | $                     | 1,257      |   | $ | 1,903 |   |
| Foreign exchange contracts                                    |       | (320                  | )          | (19 | ) |
| Accumulated other  comprehensive income (loss) at end of year |       | $                     | 937        |   | $ | 1,884 |   |
|                                                               |            |                       |            |  |  |  |  |  |  |

 

**6.INVESTMENTS**

The Company classified allof its investments as “available for sale” as of December 31, 2003 and2002. Accordingly, the Company states its investments at estimated fair value.Fair values are determined based on quoted market prices or pricing modelsusing current market rates. The Company deems all investments to be availableto meet current working capital requirements.

Thefollowing is a summary of the Company’s investments: 
| ** **                                                            | ** ** | **December 31, 2003** | ** ** | **December 31, 2002** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | ** **                      | ** ** | **Accumulated  Other**          | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated  Other** | ** ** | ** ** | ** ** |
| **Available-for-sale**                                                | ** ** | **Amortized**                   | ** ** | **Comprehensive**               | ** ** | **Estimated** | ** ** | **Amortized** | ** ** | **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 |       | $                               | 27,156     |                            | $          | 109 |   |   | $ | 14 |   |   | $ | 27,251 |   | $ | 25,405 |   | $ | 225 |   |   | $ | — |   |   | $ | 25,630 |   |
| Obligations of  states and political subdivisions                     |       | 11,954                          |       | —                          |       |   | — |   |   | 11,954 |   | 16,170 |   | 3 |   |   | — |   |   | 16,173 |   |
| U.S. corporate  debt securities                                       |       | 118,395                         |       | 1,177                           |       |   | 15 |   |   | 119,557 |   | 110,942 |   | 1,675 |   |   | — |   |   | 112,617 |   |
| Corporate equity  securities                                          |       | —                          |       | —                          |       |   | — |   |   | — |   | 35 |   | — |   |   | — |   |   | 35 |   |
|                                                                  |       | $                               | 157,505    |                            | $          | 1,286 |   |   | $ | 29 |   |   | $ | 158,762 |   | $ | 152,552 |   | $ | 1,903 |   |   | $ | — |   |   | $ | 154,455 |   |
|                                                                       |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing is a reconciliation of the Company’s investments to the balance sheetclassifications at December 31:
| **In thousands**                 | ** ** | ** ** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Cash equivalents                      |       | $          | 18,009     |     | $          | 15,104   |       |
| Short-term  investments               |       | 140,753    |       | 139,351  |       |
| Investments, at  estimated fair value |       | $          | 158,762    |     | $          | 154,455  |       |

 

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Gross realized gains and losses were not material forthe years ended December 31, 2003, 2002 and 2001.

Thegross amortized cost and estimated fair value of the Company’s investments at December 31,2003, 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.
| **In thousands**                  | ** ** | ** ** | ** ** | **Gross  Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------|------------|-----------------|------------|
| Due in one year  or less               |       | $          | 89,586     |                       | $          | 89,763          |       |
| Due after one  year through five years |       | 67,919     |       | 68,999                     |       |
|                                   |       | $          | 157,505    |                       | $          | 158,762         |       |

 

**7.BALANCE SHEET DETAILS**
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                            | ** ** | ** **            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Inventories:                                     |       |                  |       |   |   |
| Raw materials                                    |       | $                     | 8,647      |   | $ | 12,094 |   |
| Work-in-process                                  |       | 9,286                 |       | 10,289 |   |
| Finished products                                |       | 1,104                 |       | 2,799 |   |
| Total                                            |       | $                     | 19,037     |   | $ | 25,182 |   |
| Equipment and  leasehold improvements, net:      |       |                  |       |   |   |
| Machinery and equipment                          |       | $                     | 35,458     |   | $ | 32,772 |   |
| Leasehold Improvements                           |       | 5,022                 |       | 5,287 |   |
| Office equipment and furniture                   |       | 17,103                |       | 19,045 |   |
|                                             |       | $                     | 57,583     |   | $ | 57,104 |   |
| Accumulated depreciation and amortization        |       | (39,102               | )          | (38,014 | ) |
| Total                                            |       | $                     | 18,481     |   | $ | 19,090 |   |
| Accrued expenses:                                |       |                  |       |   |   |
| Salaries and benefits                            |       | $                     | 2,854      |   | $ | 3,247 |   |
| Warranty reserves                                |       | 1,257                 |       | 1,462 |   |
| Reserve for losses on purchase order commitments |       | 841                   |       | 2,120 |   |
| Other                                            |       | 2,931                 |       | 4,132 |   |
| Total                                            |       | $                     | 7,883      |   | $ | 10,961 |   |
|                                                  |            |                       |            |  |  |  |  |  |  |

 

***Warranty reserves***

The Company generally warrants its products for aperiod of 12 months for new products, or 3 months for refurbished products,from the date of customer acceptance for material and labor to repair theproduct; accordingly, a provision for the estimated cost of the warranty isrecorded at the time revenue is recognized. Extended warranty terms, ifgranted, result in deferral of revenue equating to the Company’s standardpricing for similar service contracts. Recognition of the related warranty costis deferred until product revenue is recognized. Factors that affect theCompany’s warranty liability include the number of installed units, historicaland anticipated rates of warranty claims, and cost per claim. The Companyperiodically assesses the adequacy of its recorded warranty liabilities andadjusts the amounts as necessary.

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Changesin the Company’s product liability are as follows:
| ** **                                                                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                                                                       | ** ** | ** **            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Balance,  beginning of the period                                                           |       | $                     | 1,462      |   | $ | 1,895 |   |
| Warranties issued  during the period                                                        |       | 3,323                 |       | 2,268 |   |
| Settlements made  during the period                                                         |       | (3,555                | )          | (2,931 | ) |
| Changes in  liability for pre-existing warranties during the period, including  expirations |       | 27                    |       | 230 |   |
| Balance, end of the  period                                                                 |       | $                     | 1,257      |   | $ | 1,462 |   |
|                                                                                             |            |                       |            |  |  |  |  |  |  |

 

***Deferred Service Income***

TheCompany sells service contracts for which revenue is deferred and recognizedratably over the contract period, for time based service contracts, or asservice hours are delivered, for contracts based on a purchased quantity ofhours. Changes in the Company’s deferred service contract revenue are asfollows:
| ** **                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                                  | ** ** | ** **            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Balance,  beginning of the period                      |       | $                     | 715        |   | $ | 756 |   |
| Service contracts  sold during the period              |       | 6,846                 |       | 7,466 |   |
| Service contract  revenue recognized during the period |       | (6,864                | )          | (7,507 | ) |
| Balance, end of the  period                            |       | $                     | 697        |   | $ | 715 |   |
|                                                        |            |                       |            |  |  |  |  |  |  |

 

**8. NOTES PAYABLE**

In September 2002,the Company entered into a line of credit agreement with a brokerage firm.Under the terms of this agreement, the Company may borrow funds at a cost equalto the current Federal funds rate plus 100 basis points (2.0% as of December 31,2003). Certain of the Company’s cash, cash equivalents and short-terminvestments secure borrowings outstanding under this facility. Funds areadvanced to the Company under this facility based on pre-determined advancerates on the cash and securities held by the Company in this brokerage account.This agreement has no set expiration date and there are no loan covenants,other than the aforementioned collateral requirement. As of December 31,2003, $2.5 million was outstanding under this facility, with a relatedcollateral requirement of approximately $3.6 million of the Company’s cash, cashequivalents and short-term investments. As of December 31, 2002, $9.0million was outstanding under this facility, with a related collateralrequirement of approximately $12.9 million of the Company’s cash, cashequivalents and short-term investments. Additionally, the Company had acapitalized lease obligation of $0.1 million and $0.2 million outstanding as ofDecember 31, 2003 and 2002, respectively. This lease has monthly paymentsthrough May 2003 and an annual interest rate of 7.5%.

**9. DEFERRED RENT**

In 2002, in conjunction with a $3.2 millionsale/leaseback transaction, the Company recorded a deferred rent credit equalto the excess of the sale proceeds over the adjusted basis in the equipmentsold. The deferred rent credit was to be amortized as an offset to rentalexpense during the three year term of the agreement. At December 31, 2002,credits of $0.7 million and $1.1 million representing the short-term andlong-term portions of deferred rent, respectively, were carried as liabilitieson the Company’s consolidated balance sheet. As part of this transaction, theCompany granted a security interest in certain of its other equipment having anet book value of approximately $1.2 million at December 31, 2002. In September 2003,the Company determined that it was in its best economic interest to reacquirethe equipment and terminate the lease. Accordingly, the Company paid $1.8million to close this transaction 

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and to purchase therelated capital asset and terminate the security interest. The impact from thistransaction on the Company’s results of operations for the year ended December 31,2003 was immaterial.

As part of the Company’sreview of its lease commitments for the year ended December 31, 2002,certain matters were identified related to prior financial reporting periodsthat necessitated the recording of additional expenses. Such matters wererelated to (i) the extension of the Company’s lease of its headquartersbuilding in November 1999 and (ii) the lease of an additionalbuilding in March 2000. Accordingly, for the three months ended December 31,2002, the Company recorded additional rent expense, net of related depreciationof (i) $1.2 million and (ii) $0.5 million. The Company does notbelieve these amounts are material to the periods in which they should havebeen recorded, nor does it believe the prospective correction of such amountsduring the year ended December 31, 2002 is material to its consolidatedoperating results for such year. The impact on prior financial reportingperiods would be as follows: net loss for the three month periods ended September 30,2002, June 30, 2002 and March 31, 2002 would be increased by $0.1million ($0.01 per share); net loss for the year ended December 31, 2001would be increased by $0.6 million ($0.03 per share); net loss for the yearended December 31, 2000 would be increased by $0.6 million ($0.03 pershare): and net loss for the year ended December 31, 1999 would beincreased by $0.1 million ($0.00 per share).

**10. COST OF DISCONTINUEDPRODUCTS AND INVENTORY WRITEDOWN**

As a result of dramatically worsening conditions inthe semiconductor industry, heightened by the events of the terrorist attack onSeptember 11, 2001, which further weakened the U.S. and world economies,the Company decided to discontinue its XLS reduction stepper production andfocus its efforts on developing next-generation platforms for its reductiontechnologies, principally 157nm. As a result of this decision, the Companyrecognized inventory write-downs of $11.1 million for the year ended December 31,2001.

In 2002, as a direct result of worsening conditions inthe semiconductor industry in particular, and the general economy as a whole,the Company discontinued or suspended development of certain advanced reductionlithography programs, including 157nm, and discontinued certain 1X products andplatforms. Additionally, the Company significantly reduced its revenue outlookfor 2003. As a result, the Company recognized inventory write-downs of $5.6million and additional purchase order commitment reserves of $1.1 million forthe year ended December 31, 2002.

In 2003, the Company soldinventory and discontinued products previously written down and reported arecovery of previously reported special charges of $1.6 million and $0.1million, respectively.

**11. RESTRUCTURE OFOPERATIONS**

In September 2002, in response to worseningconditions in the semiconductor industry in particular, and the general economyas a whole, the Company decided to reduce its workforce by approximately 15%and to cease or suspend activities related to certain engineering andadministrative initiatives. As a result of this decision, the Companyrecognized a restructuring charge of $4.3 million, or $0.19 per share for thethree-month period ended September 28, 2002. The Company reduced thischarge by $0.2 million during the three-month period ended December 31,2002, primarily as a result of canceling its plans to exit a certain buildingand an adjustment of its international severance costs. Of the total net chargefor the year ended December 31, 2002 of $4.1 million, the cash componentincluded employee severance costs of $0.9 million, contract termination fees of$0.2 million and facility closure costs of $0.1 million. The non-cash componentof this charge included $2.5 million of impairment to the carrying value ofequipment and leasehold improvements and $0.3 million of impairment to prepaidexpenses and other current assets.

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The Company further reduced this charge by $0.1million during the three-month period ended June 28, 2003, as a result ofthe excess of proceeds received from the sale of certain fixed assets over theadjusted net book value of those assets.

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, the Company reached a decisionto consolidate its manufacturing operations and eliminate approximately 20% ofits workforce. As a result of this decision, the Company recognized arestructuring charge of $12.0 million, or $0.54 per share (diluted) in thequarter ended September 29, 2001. Additionally, the Company recognizedrestructuring charges of $0.3 million, or $0.01 per share (diluted) in thequarter ended December 31, 2001, primarily related to employee severancecosts of $0.6 million (from additional personnel actions) and higher fixedasset disposal costs of $0.4 million, partially offset by revised facilityclosure and other cost estimates of $0.7 million. Of the full-year charge of$12.3 million, non-cash components included a $4.1 million impairment chargefor intangible assets related to the Company’s XLS reduction product platformacquired in 1998 and a $1.5 million impairment charge for fixed assets disposedof in conjunction 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, the Company reached a settlementwith the landlord of its Wilmington, Massachusetts facility. As a result ofthis settlement, the Company 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 2001restructure of 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. STOCK BASEDCOMPENSATION**

***1993 Stock Option Plan***

Under the Company’s 1993Stock Option Plan, as amended, qualified employees, non-employee Board membersand consultants may receive options to purchase shares of Common Stock at 85%to 

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100% offair value at certain specified dates. These options generally vest in equalmonthly installments over a period of approximately four years, with a minimumvesting period of twelve months from grant date, and generally expire ten yearsfrom date of grant. In 2002 and 2003, the Company granted options with non-standardvesting periods that allow vesting as early as twelve months from date of grantif certain performance targets are met, and defer any vesting until fiftymonths from date of grant if performance targets are not met. In addition, in2003 the Company 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 the Company’s capitalstructure. Under the plan, approximately 171,000 options, 676,000 options, and184,000 options were available for issuance at December 31, 2003, 2002 and2001, respectively.

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

Under the Company’s 1998 Supplemental StockOption/Stock Issuance Plan, as amended, qualified employees may receive optionsto purchase shares of Common Stock at 100% or above of fair value at certainspecified dates. These options generally vest in equal monthly installmentsover a period of approximately four years, with a minimum vesting period oftwelve months from grant date, and generally expire ten years from date ofgrant. In 2002, the Company granted options with non-standard vesting periodsthat allow vesting as early as twelve months from date of grant if certainperformance targets are met, and defer any vesting until fifty months from dateof grant if performance targets are not met. The plan will terminate on theearlier of October 19, 2008, or the date on which all shares available forissuance under the plan have been issued. Under the plan, approximately 18,000options, 130,000 options, and 218,000 options were available for issuance at December 31,2003, 2002 and 2001, respectively.

Asummary of the Company’s stock option activity, and related informationfollows:
| ** **                       | ** ** | **2003**    | ** ** | **2002**                                  | ** ** | **2001**    | ** ** |
|----------------------------------|------------|-------------|------------|-------------------------------------------|------------|-------------|------------|
| ** **                       | ** ** | **Options** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| Outstanding at January 1    |       | 4,505,397   |       |                                      | $          | 16.40       |       |   | 3,346,280 |   |   | $ | 17.84 |   |   | 3,863,819 |   |   | $ | 15.23 |   |   |
| Granted                          |       | 1,656,500   |       |                                      | $          | 17.19       |       |   | 1,850,050 |   |   | $ | 14.00 |   |   | 835,819 |   |   | $ | 25.70 |   |   |
| Exercised                        |       | (827,026    | )          |                                      | $          | 13.08       |       |   | (84,495 | ) |   | $ | 14.26 |   |   | (1,073,116 | ) |   | $ | 13.67 |   |   |
| Forfeited                        |       | (134,047    | )          |                                      | $          | 18.94       |       |   | (606,438 | ) |   | $ | 17.33 |   |   | (280,242 | ) |   | $ | 21.24 |   |   |
| Outstanding at  December 31 |       | 5,200,824   |       |                                      | $          | 17.11       |       |   | 4,505,397 |   |   | $ | 16.40 |   |   | 3,346,280 |   |   | $ | 17.84 |   |   |

 

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At December 31,2003, 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             |       | 1,034,090                    |       |                                                            | 8.41       |   |   |   | $ | 11.40 |   |   | 215,190 |   |   | $ | 11.60 |   |   |
| $12.0000 - $13.6700                         |       | 437,111                      |       |                                                            | 7.25       |   |   |   | $ | 13.50 |   |   | 272,194 |   |   | $ | 13.40 |   |   |
| $13.7500 - $13.9600                         |       | 1,176,292                    |       |                                                            | 8.07       |   |   |   | $ | 13.96 |   |   | 465,423 |   |   | $ | 13.96 |   |   |
| $14.2500 - $18.8900                         |       | 866,937                      |       |                                                            | 5.66       |   |   |   | $ | 16.32 |   |   | 716,894 |   |   | $ | 16.33 |   |   |
| $19.0000 - $22.3750                         |       | 869,040                      |       |                                                            | 8.96       |   |   |   | $ | 21.53 |   |   | 119,992 |   |   | $ | 20.16 |   |   |
| $23.0625 - $33.6250                         |       | 817,354                      |       |                                                            | 6.76       |   |   |   | $ | 26.95 |   |   | 579,079 |   |   | $ | 27.63 |   |   |
| $  8.4100 -  $33.6250             |       | 5,200,824                    |       |                                                            | 7.61       |   |   |   | $ | 17.11 |   |   | 2,368,772 |   |   | $ | 18.05 |   |   |

 

***Employee Stock Purchase Plan***

Under the provisions ofthe Company’s Employee Stock Purchase Plan, virtually all employees maypurchase Common Stock through payroll deductions at 85% of the lower of thefair market value of the Common Stock on the first or last day of the offeringperiod. Prior to February 2001, the offering period was twelve months,with one annual purchase date. In February 2001, the Company commenced aplan that allows twenty-four month offering periods with semi-annual purchasedates. Under the Plan, approximately 198,000 shares and 317,000 shares ofCommon Stock were reserved and available for issuance at December 31, 2003and 2002, respectively.

***Accounting for stock-based compensation***

The Company uses the intrinsic value method inaccounting for employee stock-based compensation because, as discussed below,the fair value accounting method requires use of option valuation models thatwere not developed for use in valuing employee stock options. Under theintrinsic value method no compensation expense is recognized because theexercise price of the Company’s employee stock options equals the market priceof the underlying stock on the date of grant.

Proforma information regarding net income (loss) and net income (loss) per shareis required as if the Company had accounted for its employee stock options(including purchase rights issued under the Employee Stock Purchase Plan) underthe fair value method. The Black-Scholes option valuation model was developedfor use in estimating the fair value of traded options that have no vestingrestrictions and are fully transferable. In addition, option valuation modelsrequire the input of highly subjective assumptions including the expected stockprice volatility. Because the Company’s 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 its employeestock options. The fair value for these options was estimated at the date ofgrant using a Black-Scholes option-pricing model with the followingweighted-average assumptions:
| ** **                                              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected life (in  years): stock options                |       | 3.5      |       | 3.5      |       | 3.5      |       |
| Expected life (in years): Employee Stock Purchase  Plan |       | 1.25     |       | 1.0      |       | 1.0      |       |
| Risk-free interest rate                                 |       | 2.48     | %          | 2.22     | %          | 3.5      | %          |
| Volatility factor                                       |       | 0.71     |       | 0.73     |       | 0.61     |       |
| Dividend yield                                          |       | 0        | %          | 0        | %          | 0        | %          |

 

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The weighted-average expected life of stock options iscomputed assuming a multiple-point approach with annual vesting periods. Theweighted-average fair value per share of stock options granted during 2003,2002 and 2001 were $8.82, $6.98 and $12.09, respectively.

The weighted average fair value of purchase rightsgranted under the Company’s Employee Stock Purchase Plan during 2003, 2002 and2001 were $5.00, $5.24 and $6.43, 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. The Company’s pro forma information is disclosed in Note 3 to theconsolidated financial statements.

**13. STOCKHOLDERS’EQUITY**

***Treasury Stock***

In April 2000, the Company initiated a program tore-purchase up to 2.0 million shares of the Company’s Common Stock atprevailing market prices. This program was terminated in January 2003. Inconjunction with this initiative, the Company re-purchased 475,000 shares ofCommon Stock at a cost of $6.9 million.

In January 2003, theCompany initiated a new program to re-purchase up to 5 million shares of theCompany’s Common Stock at prevailing market prices. This program expired at December 31,2003 with the Company electing not to re-purchase any shares of its CommonStock.

***Shareholder Rights Plan***

The Company’s Shareholder Rights Plan provides that PreferredShare Purchase Rights (“Rights”) are attached at the rate of one Right on eachoutstanding share of the Company’s Common Stock held by stockholders. Theserights expire on February 9, 2007.

The Rights will be exercisable only if a person orgroup acquires 15% or more of the Company’s Common Stock or announces a tenderoffer the consummation of which would result in ownership by a person or groupof 15% or more of the Company’s Common Stock. Each Right will entitlestockholders to buy one one-hundredth of a share of a new series of JuniorParticipating Preferred Stock at an exercise price of $145.00 upon certainevents.

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 within 10days of the date they become exercisable and in certain other circumstances andwill not become exercisable in certain instances where the Company’s Board ofDirectors approves a transaction. The Rights will not prevent a takeover of theCompany, but are designed to encourage anyone seeking to acquire the Company tonegotiate with the Company’s Board of Directors.

Shares reserved forissuance under the plan were 350,000 at December 31, 2003.

**14. EMPLOYEEBENEFIT PLANS**

***Employee bonus plans***

The Company currentlysponsors a profit sharing plan and an executive incentive bonus plan thatdistribute employee awards based on the achievement of predetermined targets.The Company has not recognized expense under these various employee bonus plansfor 2003, 2002 and 2001.

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***Employee savings and retirement plans***

The Company sponsors a 401(k) employee salary deferralplan that allows voluntary contributions by all full-time employees of from 1%to 20% of their pretax earnings. In 2001, the Company’s Board of Directorselected to provide Company matching of employee contributions up to a maximumof $2,000 per employee. In conjunction with this benefit plan, the Companyrecognized $0.7 million of expense for the year ended December 31, 2001. Nocontributions were made in fiscal years 2003 and 2002.

The Company sponsors anexecutive non-qualified deferred compensation plan (the “Plan”) that allowsqualifying executives to defer current cash compensation. At December 31,2003, Plan assets, representing the cash surrender value of life insurancepolicies held by the Company, and liabilities were approximately $0.6 millionand $0.8 million, respectively, and are included in the Company’s consolidatedbalance sheets under the captions “other assets” and “other liabilities.” Inconjunction with this plan, the Company recognized $0.0 million, $0.1 millionand $0.0 million of expense for the years ended December 31, 2003, 2002and 2001, respectively.

**15. INCOME TAXES**

Thedomestic and foreign components of income (loss) before income taxes andcumulative adjustments are as follows:
| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| **In thousands**              | ** ** | ** **                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Domestic                           |       | $                                           | 4,506      |   | $ | (30,950 | ) | $ | (18,074 | ) |
| Foreign                            |       | 2,490                                       |       | 702 |   | 1,268 |   |
| Income (loss)  before income taxes |       | $                                           | 6,996      |   | $ | (30,248 | ) | $ | (16,806 | ) |
|                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

Incometax provision (benefit) included the following:
| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| **In thousands**       | ** ** | ** **                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Federal:                    |       |                                        |       |   |   |   |   |
| Current                     |       | $                                           | —     |   | $ | (4,985 | ) | $ | (644 | ) |
| Deferred                    |       | —                                      |       | — |   | 859 |   |
|                        |       | —                                      |       | (4,985 | ) | 215 |   |
| State:                      |       |                                        |       |   |   |   |   |
| Current                     |       | (300                                        | )          | (45 | ) | 187 |   |
| Deferred                    |       | —                                      |       | — |   | — |   |
|                        |       | (300                                        | )          | (45 | ) | 187 |   |
| Foreign:                    |       |                                        |       |   |   |   |   |
| Current                     |       | 289                                         |       | 164 |   | 636 |   |
| Deferred                    |       | (559                                        | )          | — |   | — |   |
|                        |       | (270                                        | )          | 164 |   | 636 |   |
| Total income tax  provision |       | $                                           | (570       | ) | $ | (4,866 | ) | $ | 1,038 |   |
|                             |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

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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**                       | ** ** | ** **                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Tax computed at  statutory rate             |       | $                                           | 2,449      |   | $ | (10,587 | ) | $ | (5,882 | ) |
| State income  taxes, net of federal benefit |       | (300                                        | )          | (29 | ) | 122 |   |
| Foreign taxes                               |       | (1,142                                      | )          | (82 | ) | 192 |   |
| Tax settlements                             |       | —                                      |       | (3,811 | ) | — |   |
| U.S. losses not  benefited                  |       | (1,577                                      | )          | 9,659 |   | 6,325 |   |
| Other, net                                  |       | —                                      |       | (16 | ) | 281 |   |
| Income tax  provision                       |       | $                                           | (570       | ) | $ | (4,866 | ) | $ | 1,038 |   |
|                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

Significantcomponents of deferred income tax assets and liabilities are as follows:
| **In thousands**                      | ** ** | ** ** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                       |       |       |       |     |       |
| Net operating loss carryforwards           |       | $          | 36,278     |     | $          | 25,266   |       |
| Inventory valuation                        |       | 3,796      |       | 6,073    |       |
| Bad debt reserve                           |       | 56         |       | 123      |       |
| Basis difference in assets                 |       | 5,662      |       | 8,839    |       |
| Tax credit carryforwards                   |       | 15,161     |       | 12,334   |       |
| Warranty reserves                          |       | 484        |       | 539      |       |
| Deferred license income                    |       | 1,837      |       | 3,305    |       |
| Deferred product and services income       |       | 390        |       | 2,223    |       |
| Other non-deductible accruals and reserves |       | 4,377      |       | 5,311    |       |
| Total deferred tax assets                  |       | 68,041     |       | 64,013   |       |
| Valuation  allowance                       |       | (67,482    | )          | (64,013  | )          |
| Net deferred tax assets                    |       | $          | 559        |     | $          | —   |       |
| Total deferred tax liabilities             |       | $          | —     |     | $          | —   |       |
| Net deferred tax  assets                   |       | $          | 559        |     | $          | —   |       |

 

Based upon the weight of available evidence, whichincludes the Company’s historical operating performance and carry backpotential, the Company has determined that a valuation allowance continues tobe necessary for all tax jurisdictions, except Japan.

The net valuation allowance increased by $3.5 million,$20.6 million and $17.6 million during the years ended December 31, 2003,2002 and 2001, respectively. Approximately $12.1 million of the valuationallowance as of December 31, 2003 is attributable to stock options, thebenefit of which will be credited to paid-in capital when realized.

As of December 31, 2003, the Company had netoperating loss carryforwards for federal and state tax purposes of $98.2million and $37.6 million, respectively. The Company also had federal researchand development tax credit carryforwards of approximately $5.7 million. Thefederal and state net operating loss carryforwards will expire at various datesbeginning in year 2004 through 2023, if not utilized. The tax credit carryforwardswill expire at various dates beginning in 2011 through 2023, if not utilized.

58

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

**16. COMMITMENTS ANDCONTINGENCIES**

TheCompany leases its facilities, and certain equipment under operating leasesexpiring through December 2015. Under certain of its leasing arrangements,the Company is subject to letter of credit requirements, escalation charges andalso retains certain renewal options. As of December 31, 2003, the minimumannual rental commitments are as follows:
| ** ** | ** ** | **(in thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2004       |       |                    | $          | 3,685 |   |   |
| 2005       |       |                    | 4,254      |   |   |
| 2006       |       |                    | 4,202      |   |   |
| 2007       |       |                    | 4,325      |   |   |
| 2008       |       |                    | 4,451      |   |   |
| Thereafter |       |                    | 7,852      |   |   |
|       |       |                    | $          | 28,769 |   |   |

 

Rent expense was approximately $4.8 million, $7.0million and $5.4 million for the years ended December 31, 2003, 2002 and2001, respectively.

Under terms of certain of the Company’s leases, theCompany is obligated to provide a $2.0 million bank letter of credit assecurity to the landlord. In June 2003, the Company replaced a creditfacility requiring $2.0 million of restricted cash with a credit facilityrequiring $4.0 million in compensating balances, consisting of the company’scash, cash equivalents and short-term investments.

On February 29, 2000,the Company filed lawsuits asserting patent infringement and related claimsagainst Nikon, Canon, and ASML in the U.S. District Court for the EasternDistrict of Virginia. In April 2000, the Company reached a settlement withNikon, and in September 2001, the Company reached a settlement with Canon.The patent litigation against ASML is ongoing after having been transferred tothe Northern District of California. After the District Court made apreliminary determination that ASML did not infringe the patent, the Companyappealed the decision to the Court of Appeal for the Federal Circuit inWashington, D.C., and oral arguments were heard in February 2004. On October 12,2001, the Company was sued in the District Court of Massachusetts by SVGLithography Systems (“SVGL”), alleging infringement of several patents. SVGL isa division of Silicon Valley Group, Inc., which is a wholly ownedsubsidiary of ASML. The claims for all but one of the patents have since beendismissed, and the Company is currently defending against the remaining claim,which it believes to be wholly without merit.

**17. FINANCIALGUARANTEES**

The Company’s off-balance sheet transactions consistof certain financial guarantees, both express and implied, related to productliability, patent infringement and latent product defects. Other thanliabilities recorded pursuant to known product defects, at December 31,2003, the Company did not record a liability associated with these guarantees,as the Company has little or no history of costs associated with suchindemnification requirements. Contingent liabilities associated with productliability may be mitigated by insurance coverage the Company maintains.

 

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**REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS**

To The Board Of Directors and Stockholders OfUltratech, Inc.

We have audited the accompanying consolidated balancesheets of Ultratech, Inc. as of December 31, 2003 and 2002, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2003.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 auditingstandards generally accepted in the United States. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Ultratech, Inc. at December 31,2003 and 2002, and the consolidated results of its operations and its cashflows for each of the three years in the period ended December 31, 2003,in conformity with accounting principles generally accepted in the UnitedStates. Also, in our opinion, the related financial statement schedule, whenconsidered in relation to the basic financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

/s/ Ernst & YoungLLP

San Jose, CaliforniaJanuary 16, 2004

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***ITEM 9.*  *****CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE***

Not applicable.

***ITEM 9A.******   CONTROLSAND PROCEDURES***

Based on their evaluation, as of December 31,2003, the Company’s Chief Executive Officer and Chief Financial Officer haveconcluded the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) underthe Securities Exchange Act of 1934) are effective. There have been nosignificant changes in internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in the Company’s reports filed orsubmitted under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed in the Company’s reports filed or submitted under theSecurities Exchange Act of 1934, as amended, is accumulated and communicated tomanagement to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, its managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives. Management is further required to apply judgment inevaluating the cost-benefit relationship of possible controls and procedures.

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**PART III**

Certain information requiredby Part III is omitted from this Report in that the Registrant will file adefinitive proxy statement within 120 days after the end of its fiscal yearpursuant to Regulation 14A for its 2004 Annual Meeting of Stockholders to beheld June 4, 2004 and the information included therein is incorporatedherein by reference as set forth below.

***ITEM 10.******   DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT***

The information concerningthe Company’s directors required by this Item is incorporated by reference fromthe Item captioned “Election of Directors” in the Company’s Proxy Statement forthe 2004 Annual Meeting of Stockholders (the “Proxy Statement”). Theinformation required by this Item relating to the Company’s executive officersis included under the caption “Executive Officers of the Registrant” in Part Iof this Annual Report on Form 10-K.

***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*

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 requiredby this Item is incorporated by reference from the item captioned “Fees billedto the Company by Ernst & Young LLP during fiscal year 2003” in theProxy Statement.

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**PART IV**

**ITEM 15.**   *EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K*

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

(1)         Financial Statements

Thefinancial statements (including the notes thereto) listed in the Index toConsolidated Financial Statement Schedule (set forth in Item 8 of Part IIof this Form 10-K) are filed within this Annual Report on Form 10-K.

(2)         Financial StatementSchedules

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

Thefollowing exhibits are referenced 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(9)    |        | 1993 Stock Option/Stock  Issuance Plan (Amended and Restated as of January 2, 2003).                                                                                                                                                                                  |
| 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.                                                                           |

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| 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(7)   |   | Brokerage Line of Credit  Agreement with Donaldson, Lufkin & Jenrette, dated  September 20, 2002.                                                                                                  |
| 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     |   | Employment agreement  between Registrant and Mr. Arthur Zafiropoulo, chief Executive Officer.                                                                                                               |
| 10.12     |   | Employment agreement between  Registrant and Mr. John Denzel, President and Chief Operating Officer                                                                                                         |
| 10.13     |   | Employment agreement  between Registrant and Mr. Bruce Wright, Senior Vice President and Chief  Financial Officer.                                                                                          |
| 10.14(11) |   | Termination Agreement  and General Release of All Claims, dated as of September 30, 2002, by  and between Ellery Buchanan and the Registrant.                                                               |
| 10.15(11) |   | Consulting Agreement,  dated as of October 1, 2002, by and between Ellery Buchanan and the  Registrant.                                                                                                     |
| 10.16(11) |   | Non-disclosure  Agreement, dated October 1, 2002, by and between Ellery Buchanan and the  Registrant.                                                                                                       |
| 21        |   | Subsidiaries of  Registrant.                                                                                                                                                                                     |
| 23        |   | Consent of  Ernst & Young LLP, Independent Auditors.                                                                                                                                                    |
| 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 withthe Company’s Registration Statement on Form S-1 declared effective withthe Securities and Exchange Commission on September 28, 1993. File No. 33-66522.

(2)          Previously filed withthe Company’s 1993 Annual Report on Form 10-K (Commission File No. 0-22248).

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(3)          Previously filed withthe Company’s 1997 Annual Report on Form 10-K (Commission File No. 0-22248).

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

(5)          Previously filed withthe Company’s 2000 Annual Report on Form 10-K (Commission File No. 0-22248).

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

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

(8)          Previously filed withthe Company’s Annual Report of Form 10-K for the year ended December 31,2002.

(9)          Previously filed withthe Company’s Registration Statement on Form S-8, dated February 14,2003.

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

(11)   Previouslyfiled with the Company’s Quarterly Report on Form 10-Q for the quarterended March 29, 2003 (Commission File No. 0-22248).

(b)          Reports on Form 8-K.

ACurrent Report on Form 8-K, dated October 16, 2003, was filed during thequarter ended December 31, 2003, reporting the Company’s results for thequarter ended September 27, 2003. Current Reports on Form 8-K, dated November 20,2003 and December 18, 2003, were filed during the quarter ended December 31,2003, reporting updates to the Company’s quarterly teleconference guidance.

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

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

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunder duly authorized.
|   |   | Ultratech, Inc.                                                   |   |   |
|--------|--------|-------------------------------------------------------------------|--------|--------|
|   | By:    | /s/ Arthur Zafiropoulo                                       |   | Date:  | March 11,  2004 |
|   |   | 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 11, 2004 |
| Arthur  Zafiropoulo         |          | Executive Officer (Principal Executive Officer)                     |       |                |
| /s/  Bruce Wright           |          | Senior Vice President,  Finance, Chief Financial                    |       | March 11, 2004 |
| Bruce Wright                |          | Officer and Secretary (Principal Financial and  Accounting Officer) |       |                |
| /s/ Kenneth Levy       |          | Director                                                            |       | March 11, 2004 |
| Kenneth Levy                |          |                                                                |       |                |
| /s/ Dennis Raney       |          | Director                                                            |       | March 11, 2004 |
| Dennis Raney                |          |                                                                |       |                |
| /s/ Rick Timmins       |          | Director                                                            |       | March 11, 2004 |
| Rick Timmins                |          |                                                                |       |                |

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| /s/ Thomas D. George    |   | Director |   | March 11, 2004 |
|------------------------------|--------|----------|--------|---------------------|
| Thomas D. George             |   |     |   |                |
| /s/ Joel Gemunder       |   | Director |   | March 11, 2004 |
| Joel Gemunder                |   |     |   |                |
| /s/ Nicholas Konidaris  |   | Director |   | March 11, 2004 |
| Nicholas  Konidaris          |   |     |   |                |
| /s/ Vincent F. Sollitto |   | Director |   | March 11, 2004 |
| Vincent F.  Sollitto         |   |     |   |                |

 

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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(9)     |       | 1993 Stock Option/Stock  Issuance Plan (Amended and Restated as of January 2, 2003).                                                                                                                                                                                  |
| 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(7)     |       | Brokerage Line of Credit  Agreement with Donaldson, Lufkin & Jenrette, dated  September 20, 2002.                                                                                                                                                            |
| 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       |       | Employment agreement  between Registrant and Mr. Arthur Zafiropoulo, chief Executive Officer.                                                                                                                                                                         |

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| 10.12     |   | Employment agreement between Registrant and  Mr. John Denzel, President and Chief Operating Officer                                                                                     |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13     |   | Employment agreement between Registrant and  Mr. Bruce Wright, Senior Vice President and Chief Financial Officer.                                                                       |
| 10.14(11) |   | Termination Agreement  and General Release of All Claims, dated as of September 30, 2002, by  and between Ellery Buchanan and the Registrant.                                           |
| 10.15(11) |   | Consulting Agreement,  dated as of October 1, 2002, by and between Ellery Buchanan and the  Registrant.                                                                                 |
| 10.16(11) |   | Non-disclosure  Agreement, dated October 1, 2002, by and between Ellery Buchanan and the  Registrant.                                                                                   |
| 21        |   | Subsidiaries of  Registrant.                                                                                                                                                                 |
| 23        |   | Consent of  Ernst & Young LLP, Independent Auditors.                                                                                                                                |
| 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 withthe Company’s Registration Statement on Form S-1 declared effectivewith the Securities and Exchange Commission on September 28, 1993. File No. 33-66522.

(2)          Previously filed withthe Company’s 1993 Annual Report on Form 10-K (Commission File No. 0-22248).

(3)          Previously filed withthe Company’s 1997 Annual Report on Form 10-K (Commission File No. 0-22248).

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

(5)          Previously filed withthe Company’s 2000 Annual Report on Form 10-K (Commission File No. 0-22248).

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

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

(8)          Previously filed withthe Company’s Annual Report of Form 10-K for the year ended December 31,2002.

(9)          Previously filed withthe Company’s Registration Statement on Form S-8, dated February 14,2003.

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

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

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**SCHEDULE II**

**ULTRATECH STEPPER,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, 2001 |       |       |       |                                           |       |                                      |       |                                 |       |              |       |                                     |       |   |   |   |   |   |   |   |   |
| Trade accounts receivable          |       |       | $          | 327                                            |       |                                      |       | $                                    | 216        |              |       |                                     | $          | — |   |   |   | $ | (3 | ) |   |   | $ | 540 |   |   |
|                               |       |       | $          | 327                                            |       |                                      |       | $                                    | 216        |              |       |                                     | $          | — |   |   |   | $ | (3 | ) |   |   | $ | 540 |   |   |
| 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 |   |   |

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

S-1

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