---

---

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-K

(Mark One)

|ý | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

For the Fiscal Year Ended December 31, 2001

or

|o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

---

Commission File Number: 0-22248

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

Delaware(State or other jurisdiction of
incorporation or organization)

94-3169580(I.R.S. Employer Identification No.)3050 Zanker Road
San Jose, California(Address of principal executive offices)

95134(Zip Code)


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

Securities
registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value Per Share;
Preferred Stock Purchase Rights

---

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

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ý

The
aggregate market value of voting stock held by non-affiliates based on the closing sale price of the Common Stock on March 18, 2002, as reported on the Nasdaq
National Market was approximately $333,000,000. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from
this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As
of March 18, 2002, the Registrant had 22,519,926 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 6, 2002 are incorporated by reference into Part III of this
Annual Report on Form 10-K.

---

---

---



PART I

ITEM 1.BUSINESS

This
Annual Report on Form 10-K may contain, in addition to historical information, certain forward-looking statements that involve significant risks and
uncertainties. The Company's actual results could differ materially from the information set forth in any such forward-looking statements. Factors that could cause or contribute to such differences
include those discussed below under "Additional Risk Factors", as well as those discussed elsewhere in this Annual Report on Form 10-K.

The Company

Ultratech Stepper, Inc. ("Ultratech" or the "Company") develops, manufactures and markets photolithography equipment designed to reduce the cost of
ownership for manufacturers of integrated circuits, including advanced packaging processes and various nanotechnology components, including thin film head magnetic recording devices ("thin film heads"
or "TFHs"). The Company supplies step-and-repeat systems based on one-to-one ("1X") and reduction optical technology to customers located throughout
North America, Europe, Japan and the rest of Asia. Ultratech believes that its 1X steppers offer cost and certain performance advantages, as compared with competitors' reduction steppers, to
semiconductor device manufacturers for applications involving line geometries of 0.65 microns or greater ("noncritical feature sizes") and to nanotechnology manufacturers. The Company's 1X steppers do
not currently address applications involving line geometries of less than 0.65 microns ("critical feature sizes"). Advanced packaging for integrated circuits, specifically "bump or wafer level CSP"
techniques, requires lithography steps in the fabrication process. Ultratech continues to enhance its product offerings for bump and wafer level CSP processing with the introduction of an improved
version of the flagship bump lithography tool, the Saturn Spectrum 3e. Additionally, the Company has developed two new "bump specific lithography tools", the Saturn Spectrum 300 and the
Prisma-ghi in order to broaden its advanced packaging market base into 300mm bumping and R&D packaging activities. The Company's 1X steppers are also used as replacements for scanners in
existing fabrication facilities to enable semiconductor manufacturers to extend the useful life and increase the capabilities of their facilities. In addition, the Company's steppers are used to
manufacture high volume, low cost semiconductors used in a variety of applications such as telecommunications, automotive control
systems, power systems and consumer electronics. Ultratech also supplies 1X photolithography systems to thin film head manufacturers and believes that its steppers offer advantages over certain
competitive reduction lithography tools with respect to field size, throughput, specialized substrate handling and cost. Additionally, the Company supplies 1X photolithography equipment to various
other nanotechnology markets, where certain technical features, such as high resolution at g-line wavelengths and depth of focus, may offer advantages over competing tools. Ultratech has
developed and commenced shipment of the model 1600DSA stepper, with specific design modifications to address the unique requirements of the nanotechnology market, including dual-side wafer
processing capability.

The
Company's products and markets are more fully described, below.

Background

The fabrication of devices such as integrated circuits ("semiconductors" or "ICs") requires a large number of complex processing steps, including deposition,
photolithography and etching. Deposition is a process in which a layer of either electrically insulating or electrically conductive material is deposited on the surface of a wafer. The
photolithographic imaging process imprints device features on a light sensitive polymer photoresist. After development of the photoresist, etching selectively removes material from areas not covered
by the imprinted pattern.

2

---

Photolithography
is one of the most critical and expensive steps in IC device manufacturing. According to the Semiconductor Industry Association, a significant portion of the cost of
processing silicon wafers in the fabrication of ICs is related to photolithography. Photolithography exposure equipment is used to image device features on the surface of thin deposition films by
selectively exposing a light sensitive polymer photoresist coated on the wafer surface, through a photomask containing the master image of a particular device layer. Exposure of each process layer
imprints a different set of features on the device. These device layers must be properly aligned to previously defined layers before imaging takes place, so that structures formed on the wafers are
correctly placed, one on top of the other, in order to ensure a functioning device.

Since
the introduction of the earliest commercial photolithography tools for IC manufacturing in the early 1960s, a number of tools have been introduced to enable manufacturers to
produce increasingly complex devices that incorporate progressively finer line widths. In the late 1970s, photolithography tools known as step-and-repeat projection aligners,
or steppers, were introduced. Unlike prior tools, such as contact printers and proximity aligners, which required the photomask to physically contact the wafer in order to transfer the entire pattern
during a single exposure, and scanners, which transferred the device image by scanning a narrow slit of light across the entire photomask and wafer in a single, continuous motion, steppers expose only
a small square or rectangular portion of the wafer in a single exposure, then move or "step" to an adjacent site to repeat the exposure. This stepping process is repeated as often as necessary until
the entire wafer has been exposed. By imaging a small area,
steppers are able to achieve finer resolution, improved image precision and better alignment between the multiple device layers with higher yield and productivity in certain devices than possible with
earlier tools. Since the late 1980s, 1X steppers have become a critical tool for the fabrication of thin film heads because of their performance characteristics. Thin film heads are devices that form
the small read/write component in advanced disk drives and have enabled disk drives to increase in speed and memory capacity and perform more efficiently. Steppers are currently the predominant
lithography tools used in the manufacture of devices such as ICs and TFHs. The Company believes that manufacturers of leading-edge TFH devices are relying increasingly on reduction
steppers to address the more critical feature sizes for these devices in their front-end applications.

The
two principal types of steppers currently in use by the semiconductor industry are reduction steppers, which are the most widely used steppers, and one-to-one
steppers. Reduction steppers, which typically have reduction ratios of four or five-to-one, are tools in which the photomask pattern containing the design is typically four or
five times larger than the device pattern that is to be exposed on the wafer surface. Additionally, step-and-scan systems address device sizes of .35 micron and below. In
contrast to steppers, which expose the entire field in a single exposure, step-and-scan systems scan across the field until the entire field is exposed.

The
principal advantage of reduction steppers and step-and-scan systems is that they may be used in manufacturing steps requiring critical feature sizes and are
therefore necessary for manufacturing advanced ICs. One-to-one steppers, on the other hand, are tools in which the photomask containing the design is the same size as the
device pattern that is exposed on the wafer surface. Current one-to-one steppers, unlike most current reduction steppers, are based on different technology which incorporates
both reflective and refractive elements in its optical lens imaging system that, although highly sophisticated in design, is much simpler than a current reduction stepper's lens imaging system which
incorporates only refractive elements. As a result, current 1X steppers are generally less expensive than the current reduction steppers required for critical feature sizes. Because of their optical
design, 1X steppers typically are also able to deliver greater energy to the wafer surface, which generally results in higher throughput than is achievable with most reduction steppers.
One-to-one steppers, however, are currently limited to use in manufacturing steps involving noncritical feature sizes. Accordingly, the

3

---

Company believes that sales of these systems are highly dependent upon capacity expansions by its current 1X customers.

In
the past, manufacturers of ICs and similar devices purchased capital equipment based principally on technological capabilities. In view of the significant capital expenditures
required to construct, equip and maintain fabrication facilities, relatively short product cycles and manufacturers' increasing concern for overall fabrication costs, the Company believes that
manufacturers of ICs and thin film heads increasingly are focusing on reducing their total cost to manufacture a device. A major component of this cost is the cost of ownership of the equipment used
for a particular application in a fabrication facility. Cost of ownership is measured in terms of the costs associated with the acquisition of equipment, as well as factors such as throughput, yield,
up-time, service, labor overhead, maintenance, and various other costs of owning and using the equipment. With increasing importance being placed upon a system's overall cost of ownership,
in many cases the system with the most technologically advanced capabilities will not necessarily be the manufacturing system of choice. As part of the focus on cost reduction, the Company believes
that device manufacturers are attempting to extend the useful
life and enhance the production capabilities of fabrication facilities by selecting equipment that can replace existing tools while offering better performance in a cost-effective manner.

Products

The Company currently offers three different series of 1X systems for use in the semiconductor fabrication process: the model 1500 Series, which addresses the
markets for scanner replacement, high volume/low cost semiconductor fabrication and R&D packaging activities; the Saturn Wafer Stepper® Family, which addresses the market for
mix-and-match in advanced semiconductor fabrication and bump processing for flip chips; and the Titan Wafer Stepper®, which addresses the markets for scanner
replacement and high volume/low cost semiconductor fabrication. These steppers currently offer feature size capabilities ranging from 2.0 microns to 0.65 microns and typically range in price from
$900,000 to $3.4 million per system. The model 1500 Series and the Titan Wafer Stepper offer g- and h-line illumination specifications. The Saturn Wafer Stepper Family
features an i-line illumination specification that is designed to make them compatible with advanced i-line reduction steppers. In bump processing, the Company offers its
Saturn Spectrum 3, Saturn Spectrum 3e, Prisma-ghi and the Saturn Spectrum 300. The Saturn Spectrum 3e was developed for high volume bump and wafer level CSP
manufacturing. The Prisma-ghi was developed as a lower cost, low volume/R&D bump stepper. The Saturn Spectrum 300 is the Company's first product offering to support 300mm bump
manufacturing. All of these bump steppers provide broadband (g, h and i-line) exposure, and are used in conjunction with electroplating to produce a pattern of bumps, or metal connections,
on the bond pads of the die for flip chip devices. This pattern can be placed in a tight array across the entire die, as opposed to the conventional method of wire bonding which is limited to the
periphery of the die. This allows manufacturers to shrink the die size. The flip chip device can then be placed in a small outline package or directly on a printed circuit board. The Saturn and Titan
widefield systems have a unique D-shaped field that allows for a one-to-one field match with step-and-scan systems, or a
two-to-one match with reduction steppers. The D-shaped field is designed to allow the semiconductor manufacturer to optimize overlay and throughput for its
non-critical mix-and-match layers.

The
Company has introduced a stepper with enhanced capabilities directed at TFH backend, or rowbar processing applications. The model 1900 Series steppers are used to expose the Air
Bearing Surface (ABS) pattern on these rowbars.

The
Company also offers photolithography equipment for use in various nanotechnology markets. Nanotechnology manufacturing combines electronics with mechanics in small devices for
detection and control of a wide variety of parameters. Examples include accelerometers used to activate air bags in automobiles, and membrane pressure sensors used in industrial control systems. These
micromachined devices are manufactured on silicon substrates using photolithographic techniques similar to those used

4

---

for manufacturing semiconductors and thin film head devices. In 2000, the Company introduced and shipped a new product into the nanotechnology market, based on the 1500 Series steppers, incorporating
Dual Side Alignment ("DSA") capability for applications requiring lithography on both sides of a wafer. The Company believes that its new 1600DSA stepper enhances the capabilities of the 1500 Series
steppers by offering the first stepper with Dual Side Alignment capability, providing
customers with a 1X stepper solution to this special processing requirement. Additionally, the Company believes that its 1500 Series steppers and the Saturn Wafer Stepper Family offer resolution and
depth of focus advantages over alternative technologies, to the manufacturers of nanotechnology components.

The
Company also offers a reduction stepper product line for selected semiconductor markets. The 193nm (small field) and XLS 157nm (small and mid field) systems are deep ultra-violet
("DUV") tools used for advanced research and development semiconductor materials and processes.

The
Company also sells upgrades and refurbishments to certain older product lines in its installed base. These refurbished older systems typically have a purchase price that is
significantly lower than the purchase price for the Company's new systems.

Features
of the Company's current stepper systems are set forth below:

Product Line

Wavelength

Minimum Feature
Size (microns)1X Steppers:Model 1500 Series

gh-line

0.81.0Model 1900 Series

gh-line

1.02.01600DSA

gh-line

1.02.0Prisma-ghi

ghi-line

4.0Saturn Wafer Stepper

i-line

0.651.0Saturn Spectrum 3e

ghi-line

2.0Saturn Spectrum 300

ghi-line

2.0Star 100

gh-line

0.81.0Titan Wafer Stepper

gh-line

0.751.2Titan 300 Wafer Stepper

gh-line

1.01.2Reduction Steppers:193nm

DUV (193 nm)

0.16157nm

DUV (157 nm)

0.10


Research, Development and Engineering

The semiconductor and nanotechnology (which includes thin film heads) industries are subject to rapid technological change and new product introductions and
enhancements. The Company believes that continued and timely development and introduction of new and enhanced systems is essential for the Company to maintain its competitive position. The Company has
made a substantial investment in the research and development of its core optical technology, which the Company believes is critical to its financial results. The Company intends to continue to
develop its technology and to develop innovative products and product features to meet customer demands. Current engineering projects include: the continued research and development and process
insertion for the Company's laser thermal processing technologies; continued development of the Company's 1X and reduction optical products, including the Company's 1X 300mm tool for bump processing
and Company's 157nm reduction stepper; and development of larger and more flexible optical systems. Other research and development efforts are currently focused on reliability improvement;
manufacturing cost reduction; and performance enhancement and development of new features for existing systems, both for inclusion in the Company's systems and to meet specific customer order
requirements. These research and development efforts are undertaken, principally, by the Company's research, development and

5

---

engineering organizations and costs are generally expensed as incurred. Other operating groups within the Company support the Company's research, development and engineering efforts, and the
associated costs are charged to these organizations as incurred. The Company also has programs devoted to the development of new photolithography systems, including new generations of photolithography
systems for existing and new markets, enhancements and extensions of existing photolithography systems for existing and new markets and custom engineering for specific customers.

The
Company works with many customers to develop technology required to manufacture advanced devices or to lower the customer's cost of ownership. The Company maintains an engineering
department that supports customer design of 1X stepper photomasks for both test and production
purposes and an applications engineering group that assist customers in optimizing the use of the Company's systems.

The
Company has historically devoted a significant portion of its financial resources to research and development programs and expects to continue to allocate significant resources to
these efforts in the future. As of December 31, 2001, the Company had approximately 73 full-time employees engaged in research, development, and engineering. For 2001, 2000 and
1999, total research, development, and engineering expenses were approximately $25.8 million, $26.8 million and $27.7 million, respectively, and represented 19.7%, 18.3% and 24.5%
of the Company's net sales, respectively.

Sales and Service

The Company markets and sells its products in North America, Europe and Japan principally through its direct sales organization. The Company sells its products in
the Asia/Pacific region, excluding Japan and Taiwan, primarily through outside sales organizations. In January 2001, the Company terminated its relationship with its Taiwanese distributor and
has established a direct sales force in Taiwan. (See "Additional Risk Factors: International Sales; Japanese Market").

Ultratech's
service personnel are based throughout the United States, Europe, Japan and the rest of Asia. The Company currently has four sales and service offices in the United States
outside of California, five sales and/or service offices in the United Kingdom, Japan, Korea, Taiwan and Philippines, and personnel in Thailand, to service equipment and support customers in such
locations. As part of its customer service, the Company maintains an on-line computerized network of its parts inventory in the United States, Europe and Japan.

The
Company believes that as semiconductor and nanotechnology device manufacturers produce increasingly complex devices, they will require an increased level of support. Reliability,
performance, yield, cost, uptime and mean time between failures are increasingly important factors by which customers evaluate potential suppliers of photolithography equipment. The Company believes
that the strength of its worldwide service and support organization is an important factor in its ability to sell its systems, maintain customer loyalty and reduce the maintenance costs of its
systems. In addition, the Company believes that working with its suppliers and customers is necessary to ensure that the Company's systems are cost effective, technically advanced and designed to
satisfy customer requirements.

The
Company supports its customers with field service, technical service engineers and training programs. The Company provides its customers with comprehensive support and service
before, during and after delivery of its systems. To support the sales process and to enhance customer relationships, the Company works closely with prospective customers to develop hardware and
software test specifications and benchmarks, and often designs customized applications to enable prospective customers to evaluate the Company's equipment for their specific needs. Prior to shipment,
Ultratech's support personnel typically assist the customer in site preparation and inspection, and typically provide
customers with training at the Company's facilities or at the customer's location. The Company currently offers to its customers various courses of instruction on the Company's systems, including

6

---

instructions in system hardware and software tools for optimizing the Company's systems. The Company's customer training program also includes instructions in the maintenance of the Company's
systems. The Company's field support personnel work with the customers' employees to install the system and demonstrate system readiness. Technical support is also available through
on-site Company personnel.

In
general, the Company warrants its new systems against defects in design, materials and workmanship for one year. The Company offers its customers additional support after the warranty
period in the form of maintenance contracts for specified time periods. Such contracts include various options such as priority response, planned preventive maintenance, scheduled
one-on-one training, daily on-site support, and monthly system and performance analysis.

Manufacturing

The Company performs all of its manufacturing activities (final assembly, system testing and certain subassembly) in clean room environments totaling
approximately 26,000 square feet. These facilities are located in San Jose, California. Performing manufacturing operations in California exposes the Company to a higher risk of natural disasters,
including earthquake. The Company is not insured against natural disasters and power shortages and the occurrence of such an event could materially adversely impact the Company's results of
operations.

The
Company's manufacturing activities consist of assembling and testing components and subassemblies, which are then integrated into finished systems. The Company is relying
increasingly on a limited number of outside vendors and subcontractors to manufacture certain components and subassemblies. This strategy has enabled the Company to increase its manufacturing
capacity. The Company orders one of the most critical components of its technology, the glass for its 1X lenses, from suppliers on purchase orders. The Company designs the 1X lenses and provides the
lens specifications to other suppliers that grind the lens elements. The Company then assembles and tests the optical 1X lenses in its metrology laboratory. The Company has recorded the critical
parameters of each of its optical lenses sold since 1982, and believes that such information enables it to supply lenses to its customers that match the characteristics of its customers' existing
lenses. Additionally, the Company orders reduction lenses from suppliers on purchase orders. These lenses are designed to the Company's specifications and tested by the supplier.

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

7

---

Prior
to shipment of the Company's systems, the customer's engineers may perform acceptance tests at Ultratech's facility. After passing the acceptance test, the system is packaged in
the clean room environment and prepared for shipment.

The
Company maintains a company-wide quality program. The intent of the program is to provide continuous improvement in the Company's steppers and services to meet customer
requirements. The Company trains all of its employees in basic quality skills and regularly participates in quality sharing meetings with other equipment manufacturers and customer quality audits of
procedures and personnel. The Company's 1X operation achieved ISO 9001:1994 certification in 1996 and ISO 14001:1996 certification in March 2001. The Company's ISO 9001 certification was
upgraded to the ISO 9001:2000 standard in January 2002. All certifications have been maintained uninterrupted through the date of this report.

Competition

The capital equipment industry in which the Company operates is intensely competitive. A substantial investment is required to install and integrate capital
equipment into a semiconductor, semiconductor packaging or nanotechnology device production line. The Company believes that once a device manufacturer or packaging subcontractor has selected a
particular vendor's capital equipment, the manufacturer generally relies upon that equipment for the specific production line application and, to the extent possible, subsequent generations of similar
products. Accordingly, it is difficult to achieve significant sales to a particular customer once another vendor's capital equipment has been selected. The Company experiences intense competition
worldwide from a number of leading stepper manufacturers, such as Nikon Inc. ("Nikon"), Canon, Inc. ("Canon") and ASM Lithography ("ASML"), all of which have substantially
greater financial, marketing and other resources than the Company. Nikon supplies a 1X stepper for use in the manufacture of liquid crystal displays and Canon, Nikon and ASML offer reduction steppers
for thin film head fabrication. With respect to the semiconductor
packaging and nanotechnology markets, the Company experiences intense competition from various proximity aligner companies such as Suss Microtec AG (Karl Suss).

Current
thin film head front-end production involves manufacturing steps that require critical feature sizes. Although the Company's advanced reduction stepper product
offerings address critical feature sizes, additional development of these product lines is necessary to fully address the unique requirements of thin film head manufacturing. ASML, Canon and Nikon
have each introduced an i-line step-and-scan system as a lower cost alternative to the DUV step-and-scan system for use on the less critical
layers. These systems compete with wide-field steppers, such as the Company's Saturn and Titan steppers, for advanced mix-and-match applications. In addition, the
Company believes that the high cost of developing new lithography tools has increasingly caused its competitors to collaborate with customers and other parties in various areas such as research and
development, manufacturing and marketing, or to acquire other competitors, thereby resulting in a combined competitive threat with significantly enhanced financial, technical and other resources. The
Company expects its competitors to continue to improve the performance of their current products. These competitors have stated that they will introduce new products with improved price and
performance characteristics that will compete directly with the Company's products. This could cause a decline in sales or loss of market acceptance of the Company's steppers, and thereby materially
adversely affect the Company's business, financial condition and results of operations. There can be no assurance that enhancements to, or future generations of, competing products will not be
developed that offer superior cost of ownership and technical performance features. The Company believes that to be competitive, it will require significant financial resources in order to continue to
invest in new product development, features and enhancements, to introduce next generation stepper systems on a timely basis, and to maintain customer service and support centers worldwide. In
marketing its products, the Company may also face competition from vendors employing other technologies. In addition, increased competitive pressure has

8

---

led to intensified price-based competition in certain of the Company's markets, resulting in lower prices and margins. Should these competitive trends continue, the Company's business, financial
condition and operating results would continue to be materially adversely affected. There can be no assurance that the Company will be able to compete successfully in the future.

Foreign
integrated circuit manufacturers have a significant share of the worldwide market for certain types of ICs for which the Company's systems are used. The Japanese stepper
manufacturers are well established in the Japanese stepper market, and it is extremely difficult for non-Japanese lithography equipment companies to penetrate the Japanese stepper market.
Although the Company has experienced recent success in its introduction of its Saturn Spectrum 3 into the Japanese marketplace, to date the Company has not established itself as a major competitor in
the Japanese equipment market and there can be no assurance that the Company will be able to achieve significant sales to Japanese manufacturers in the future. (See "International Sales; Japanese
Market").

Intellectual Property Rights

Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, it believes that any
success will depend more upon the innovation,
technological expertise and marketing abilities of its employees. Nevertheless, the Company has a policy of seeking patents when appropriate on inventions resulting from its ongoing research and
development and manufacturing activities. The Company owns various United States and foreign patents, which expire on dates ranging from May 2002 to December 2018, and has various United
States and foreign patent applications pending. The Company also has various registered trademarks and copyright registrations covering mainly software programs used in the operation of its stepper
systems. The Company also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that the Company will be able to protect its technology
adequately or that competitors will not be able to develop similar technology independently. There can be no assurance that any of the Company's pending patent applications will be issued or that U.S.
or foreign intellectual property laws will protect the Company's intellectual property rights. In particular, the Company is presently reviewing expansion plans in the People's Republic of China,
where the Company has no prior experience in protecting or defending its intellectual property rights. In addition, litigation may be necessary to enforce the Company's patents, copyrights or other
intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such
litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations, regardless of
the outcome of the litigation. Patents issued to the Company may be challenged, invalidated or circumvented and the rights granted thereunder may not provide competitive advantages to the Company.
Furthermore, others may independently develop similar products, duplicate the Company's products or, if patents are issued to the Company, design around the patents issued to the Company.
Additionally, the Company presently has several agreements in force to license certain of its technologies. Challenges to, or invalidation of, patents related to those technologies would expose the
Company to the risk of forfeiture of revenues and further risk of damage claims.

On
February 29, 2000, in the U.S. District Court of Virginia, the Company filed patent infringement lawsuits against Nikon, Canon and ASML. In April 2000, the Company
reached a settlement with Nikon and in September 2001, the Company reached a settlement with Canon. The litigation against ASML is ongoing. On October 12, 2001, the Company was sued in
the District Court in Massachusetts for alleged infringement of certain patents owned by Silicon Valley Group, Inc. ("SVG"), a company recently acquired by ASML. The case is in its early stages
and the Company is evaluating the claim.

9

---

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

Infringement
claims by third parties or claims for indemnification resulting from infringement claims may be asserted in the future and such assertions, if proven to be true, may
materially adversely affect the Company's business, financial condition and results of operations, regardless of the outcome of any litigation. With respect to any such future claims, the Company may
seek to obtain a license under the third party's intellectual property rights. However, a license may not be available on reasonable terms or at all. The Company could decide, in the alternative, to
resort to litigation to challenge such claims. Such challenges could be expensive and time consuming and could materially adversely affect the Company's business, financial condition and results of
operations, regardless of the outcome of any litigation.

Environmental Regulations

The Company is subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture and disposal
of toxic or other hazardous substances used to manufacture the Company's systems. The Company believes that it is currently in compliance in all material respects with such regulations and that it has
obtained all necessary environmental permits to conduct its business. Nevertheless, the failure to comply with current or future regulations could result in substantial fines being imposed on the
Company, suspension of production, alteration of the manufacturing process or cessation of operations. Such regulations could require the Company to acquire expensive remediation equipment or to incur
substantial expenses to comply with environmental regulations. Any failure by the Company to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic
substances 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 nanotechnology manufacturers located throughout North
America, Europe, Japan and the rest of Asia. Semiconductor manufacturers have purchased the model 1500 Series steppers, the Saturn Wafer Stepper, the Saturn Spectrum 3 wafer stepper, the Titan Wafer
Stepper and the reduction product family for the fabrication and packaging of microprocessors, microcontrollers, DRAMs, ASICs and other devices. Such systems are used in
mix-and-match environments with other lithography tools, as replacements for scanners and contact printers, in start-up fabrication facilities, in packaging for
ultrathin and flip chip applications and for high volume, low cost noncritical feature size semiconductor production. The Company's reduction stepper product line will continue to address selected
advanced semiconductor applications. The Company believes that thin film head manufacturers have purchased the model 1900 Series steppers due to their throughput and overall cost of ownership. The
Company believes that manufacturers of nanotechnology devices have purchased the model 1500 Series steppers, the 1600DSA and Saturn/Titan wafer stepper families because of their high throughput and
flexible field size advantages along with their cost-effective, submicron imaging capabilities.

10

---

Historically, the Company has sold a substantial portion of its systems to a limited number of customers. In 2001, no single customer accounted for 10% or more of the Company's net
sales. In 2000, one customer accounted for approximately 10% of total net sales. In 1999, no single customer accounted for 10% or more of the Company's net sales. In 2001, one customer accounted for
$9.2 million of licensing revenue from an agreement that expired February 2002. The Company presently expects that there will be no further licensing revenue from this customer during
the remainder of 2002. The Company expects that sales to a relatively few customers will continue to account for a high percentage of its net sales in the foreseeable future and believes that the
Company's financial results depend in significant part upon the success of these major customers and the Company's ability to meet their future capital equipment needs. Although the composition of the
group comprising the Company's largest customers may vary from period to period, the loss of a significant customer or any reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the semiconductor, semiconductor packaging or nanotechnology industries or in the industries that manufacture products utilizing integrated circuits, thin
film heads or other nanotechnology components, may have a material adverse effect on the Company's business, financial condition and results of operations. The Company's ability to maintain or
increase its sales in the future will depend, in part, upon its ability to obtain orders from new customers as well as the financial condition and success of its existing customers, the semiconductor
and nanotechnology industries and the economy in general, of which there can be no assurance. (See "Additional Risk Factors: Cyclicality of Semiconductor, Semiconductor Packaging and Thin Film Head
Industries").

In
addition to the business risks associated with dependence on major customers, these significant customer concentrations have in the past resulted in significant concentrations of
accounts receivable. These significant and concentrated receivables expose the Company to additional risks, including the risk of default by one or more customers representing a significant portion of
the Company's total receivables. If the Company were required to take additional accounts receivable reserves, its business, financial condition and results of operations would be materially adversely
affected.

Sales
of the Company's systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity or to restructure current manufacturing
facilities, either of which typically involves a significant commitment of capital. Many of the Company's customers have cancelled the development of new manufacturing facilities and have
substantially reduced their capital equipment budgets. In view of the significant investment involved in a system purchase, the Company has experienced and may continue to experience delays following
initial qualification of the Company's systems as a result of delays in a customer's approval process. Additionally, the Company is presently receiving orders for systems that have lengthy delivery
schedules, which may be due to longer production lead times or a result of customers' capacity scheduling requirements. In order to maintain or exceed the Company's present level of net sales, the
Company is dependent upon obtaining orders for systems that will ship and be accepted in the current period. There can be no assurance that the Company will be able to obtain those orders. For these
and other reasons, the Company's systems
typically have a lengthy sales cycle during which the Company may expend substantial funds and management effort in securing a sale. Lengthy sales cycles subject the Company to a number of significant
risks, including inventory obsolescence and fluctuations in operating results, over which the Company has little or no control.

Backlog

The Company schedules production of its systems based upon order backlog, informal customer commitments and general economic forecasts for its targeted markets.
The Company includes in its backlog all customer orders for its systems for which it has accepted purchase orders and assigned shipment dates within one year, as well as all orders for service, spare
parts and upgrades. All orders are subject to cancellation or rescheduling by the customer with limited or no penalties. Because of

11

---

changes in system delivery schedules, cancellations of orders and potential delays in system shipments, the Company's backlog at any particular date may not necessarily be representative of actual
sales for any succeeding period. As of December 31, 2001 and 2000, the Company's backlog was approximately $58.4 million and $106.8 million, respectively, including
$6.0 million and $15.7 million, respectively, of systems shipped but not yet installed and accepted.

The
Company believes that demand for semiconductors and semiconductor equipment is currently experiencing a severe downturn. As a result, the Company may experience lower order booking
rates in the near term, relative to those achieved in 2001, and may experience an increased incidence of order deferrals, rescheduling and cancellations. Fewer net bookings would result in lower net
sales and gross margin, which would materially adversely impact the Company's business and results of operations.

Employees

At December 31, 2001, the Company had approximately 392 full-time employees, including 73 engaged in research, development, and engineering, 44
in sales and marketing, 125 in customer service and support, 85 in manufacturing and 65 in general administration and finance. The Company believes any future success, should it occur, would depend,
in large part, on its ability to attract and retain highly skilled employees. None of the employees of the Company is covered by a collective bargaining agreement. The Company considers its
relationships with its employees to be good.

Additional Risk Factors

Cyclicality of Semiconductor, Semiconductor Packaging and Thin Film Head IndustriesThe Company's
business depends in significant part upon capital expenditures by manufacturers of semiconductors and
nanotechnology components, including thin film head magnetic recording devices, which in turn depend upon the current and anticipated market demand for such devices and products utilizing such
devices. The semiconductor industry historically has been highly cyclical and has experienced recurring periods of oversupply. This has, from time to time, resulted in significantly reduced demand for
capital equipment including the systems manufactured and marketed by the Company. The semiconductor and semiconductor packaging industries are presently experiencing a severe downturn. The Company
also believes that markets for new generations of semiconductors and semiconductor packaging will also be subject to similar fluctuations. Accordingly, the Company can give no assurance that it will
be able to achieve or maintain its current or prior level of sales.

The
Company attempts to mitigate the risk of cyclicality by participating in multiple markets including semiconductor, semiconductor packaging, thin film head and other nanotechnology
sectors, as well as diversifying into new markets such as photolithography for optical networking (a nanotechnology application). Despite such efforts, when one or more of such markets experiences a
downturn or a situation of excess capacity, such as is presently occurring in the semiconductor, semiconductor packaging, optical networking and thin film head markets, the Company's net sales and
operating results are materially adversely affected.

During
2001, 2000 and 1999, approximately 33%, 18% and 30%, respectively, of the Company's net sales were derived from sales to nanotechnology manufacturers, including thin film head and
optical networking device manufacturers. The Company believes the TFH market is currently in a state of over-capacity and expects this situation to last for at least the next several
quarters. This has and will continue to result in lower sales and delays or deferrals of customer orders from this industry, which will continue to materially adversely affect the Company's business,
financial condition and results of operations in the near term. Additionally, the Company is experiencing increased competition in this market from Nikon, Canon and ASML. The Company's business and
operating results would be materially adversely affected by continued downturns or slowdowns in the TFH market or by loss of market share.

12

---

Development of New Product Lines; Expansion of OperationsCurrently, the Company is devoting significant resources to the
development, introduction and commercialization of its Verdant laser thermal processing system, its reduction steppers, and to the volume production of its Saturn Spectrum 3e and 300mm
wafer steppers. During the remainder of 2002, the Company will continue to develop these products and will continue to incur significant operating expenses in the areas of research, development and
engineering, manufacturing and general and administrative costs in order to further develop, produce and support these new products. Additionally, gross profit margins and inventory levels may be
further adversely impacted in the future by costs associated with the initial production of these new product lines. These costs include, but are not limited to, additional manufacturing overhead,
additional inventory write-offs, costs of demonstration systems and facilities, costs associated with managing multiple sites and the establishment of additional after-sales support
organizations. Additionally, there can be no assurance that operating expenses will not increase, relative to sales, as a result of adding additional marketing and administrative personnel, among
other costs, to support the Company's new products. If the Company is unable to achieve significantly increased net sales or its
sales fall below expectations, the Company's operating results will be materially adversely affected until, among other factors, costs and expenses can be reduced.

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

Because
of the large number of components in the Company's systems, significant delays can occur between a system's introduction and the commencement by the Company of volume production
of such systems. The Company has experienced delays from time to time in the introduction of, and technical and manufacturing difficulties with, certain of its systems and enhancements and related
software tools and may experience delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements and related software tools.

The
Company may encounter additional technical, manufacturing or other difficulties that could further delay future introductions or volume production of systems or enhancements. The
Company's inability to complete the development or meet the technical specifications of any of its systems or enhancements and related software tools, or its inability to manufacture and ship these
systems or enhancements and related software tools in volume and in time to meet the requirements for manufacturing the future generation of semiconductor or nanotechnology devices would materially
adversely affect the Company's business, financial condition and results of operations. In addition, the Company may incur substantial unanticipated costs to ensure the functionality and reliability
of its products early in the products' life cycles. If new products have reliability or quality problems, reduced orders or higher manufacturing costs, delays in collecting accounts receivable and
additional service and

13

---

warranty expenses may result. Any of such events may materially adversely affect the Company's business, financial condition and results of operations.

Sole or Limited Sources of SupplyThe Company is relying increasingly on outside vendors and subcontractors to manufacture
certain components and subassemblies. This strategy has enabled the
Company to increase its manufacturing capacity. The Company orders one of the most critical components of its technology, the glass for its 1X lenses, from suppliers on purchase orders. The Company
designs the 1X lenses and provides the lens specifications to other suppliers that grind the lens elements. The Company then assembles and tests the optical 1X lenses in its metrology laboratory. The
Company has recorded the critical parameters of each of its optical lenses sold since 1982, and believes that such information enables it to supply lenses to its customers that match the
characteristics of its customers' existing lenses. Additionally, the Company orders reduction lenses from suppliers on purchase orders. These lenses are designed to the Company's specifications and
tested by the supplier.

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

International Sales; Japanese MarketInternational net sales accounted for approximately 51%, 54% and 55% of total net sales
for the years 2001, 2000 and 1999, respectively. The Company anticipates that international sales, which typically have lower gross margins than domestic sales, principally due to increased
competition and higher field service and support costs, will continue to account for a significant portion of total net sales and may increase as a percentage of total net sales in the
near-term. As a result, a significant and growing portion of the Company's net sales will continue to be subject to certain risks, including dependence on outside sales representative
organizations; transitions to direct sales organizations from outside sales representative organizations, such as the Company recently completed in Taiwan; unexpected changes in regulatory
requirements; difficulty in satisfying existing regulatory requirements; exchange rate fluctuations; tariffs and other barriers; political and economic instability; difficulties in accounts receivable
collections; natural disasters; difficulties in staffing and managing foreign subsidiary and branch operations; and potentially adverse tax consequences. Although the Company generally transacts its
international sales in U.S. dollars, international sales expose the Company to a number of additional risk factors, including fluctuations in the value of local currencies relative to the U.S. dollar,
which, in turn, impact the relative cost of ownership of the Company's products and may further impact the purchasing ability of its international customers. In Japan, however, the Company has direct
sales operations and orders are often denominated in Japanese yen. This may subject the Company to a higher degree of risk from currency

14

---

fluctuations. The Company attempts to mitigate this exposure through the use of foreign exchange contracts. The Company is also subject to the risks associated with the imposition of legislation and
regulations relating to the import or export of semiconductors and nanotechnology products. The Company cannot predict whether changes to quotas, duties, taxes or other charges or restrictions will be
implemented by the United States, Japan or any other country upon the importation or exportation of the Company's products in the future. These factors, or the adoption of restrictive policies, may
have a material adverse effect on the Company's business, financial condition and results of operations.

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

Changes to Financial Accounting Standards May Affect the Company's Reported Results of OperationsThe Company prepares its
financial statements to conform with generally accepted accounting principles, or GAAP. These principles are subject to interpretation by the American Institute of Certified Public Accountants, the
SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on the Company's reported results and may even affect
its reporting of transactions completed before a change is announced.

In
December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), entitled "Revenue Recognition in Financial Statements".
Effective January 1, 2000, the Company changed its method of accounting for product sales to recognize such revenues when the contractual obligation for installation has been satisfied, or when
installation is substantially complete, and customer acceptance provisions have lapsed, provided collection of the related receivable is probable. The cumulative effect of the change in accounting
principle includes system revenue, cost of sales and certain expenses, including warranty and commission expenses, which were recognized when both installation and customer acceptance provisions were
satisfied, subsequent to January 1, 2000. The cumulative effect of this change in accounting principle, $18.9 million (or $0.89 per share, basic and diluted) was reported as a charge to
operations in the quarter ended March 31, 2000.

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

15

---

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

Volatility of Stock Price and Dilutive Impact of Employee Stock OptionsThe Company believes that factors such as
announcements of developments related to the Company's business, fluctuations in the Company's operating results, a shortfall in revenue or earnings, changes in analysts' expectations, general
conditions in the semiconductor, semiconductor packaging and nanotechnology industries or the worldwide or regional economies, sales of securities of the Company into the marketplace, an outbreak of
hostilities, announcements of technological innovations or new products or enhancements by the Company or its competitors, developments in patents or other intellectual property rights and
developments in the Company's relationships with its customers and suppliers could cause the price of the Company's Common Stock to fluctuate, perhaps substantially. The market price of the Company's
Common Stock may continue to experience significant fluctuations in the future, including fluctuations that may be unrelated to the Company's performance.

As
of March 8, 2002, the Company had approximately 4.7 million stock options outstanding. Among other determinants, the market price of the Company's stock has a major
bearing on the number of stock options outstanding that are included in the weighted-average shares used in determining the Company's net income (loss) per share. During periods of extreme volatility,
the impact of higher stock prices can have a materially dilutive effect on the Company's net income (loss) per share (diluted). Additionally, options are excluded from the calculation of net income
(loss) per share when the Company has a net loss or when the exercise price of the stock option is greater than the average market price of the Company's Common Stock, as the impact of the stock
options would be anti-dilutive.

Terrorist Attacks and Threats, and Government Responses Thereto, May Negatively Impact All Aspects of Our Operations, Revenues, Costs and Stock PriceThe recent terrorist attacks in the
United States, and the resulting United States retaliation, and any similar future events may disrupt our operations or those
of our customers and suppliers and may affect the availability of materials needed to manufacture
our products or the means to transport those materials to manufacturing facilities and finished products to customers. In addition, any of these events could increase volatility in the United States
and world financial markets which may depress the price of the Company's Common Stock and may limit the capital resources available to the Company or its customers or suppliers, which could result in
decreased orders from customers, less favorable financing terms from suppliers, and scarcity or increased costs of materials and components of our products. Any of these occurrences could have a
significant impact on our operating results, revenues and costs and may result in increased volatility of the market price of our Common Stock.

16

---



ITEM 2.PROPERTIES

The Company maintains its headquarters and manufacturing operations in San Jose, California in three leased facilities, totaling approximately 194,000 square
feet, which contain general administration and finance, marketing and sales, customer service and support, manufacturing and research, development, and engineering. The leases for these facilities
expire at various dates from February 2003 to March 2010. The Company also leases three sales and support offices in the United States in Allentown, Pennsylvania; Woburn, Massachusetts
and Austin, Texas under leases with terms expiring between 6 months and three years. The Company maintains offices outside the United States in Taiwan, Philippines, Japan, and the United
Kingdom, with terms expiring between seven months and fourteen years. The Company believes that its existing facilities will be adequate to meet its currently anticipated requirements and that
suitable additional or substitute space will be available as needed.

ITEM 3.LEGAL PROCEEDINGS

On
February 29, 2000, in the U.S. District Court of Virginia, the Company filed patent infringement lawsuits against Nikon, Canon and ASML. In April 2000, the Company
reached a settlement with Nikon and in September 2001, the Company reached a settlement with Canon. The litigation against ASML is ongoing. On October 12, 2001, the Company was sued in
the District Court in Massachusetts for alleged infringement of certain patents owned by Silicon Valley Group, Inc. ("SVG"), a company recently acquired by ASML. The case is in its early stages
and the Company is evaluating the claim.

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

No
matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2001.

Executive Officers of the Registrant

As of December 31, 2001, the executive officers of the Company, who are appointed by and serve at the discretion of the Board of Directors, were as
follows:

|Name                  |  | Age |  | Position with the Company                                                
|--------------------- |  | --- |  | -------------------------------------------------------------------------
|Arthur W. Zafiropoulo |  | 62  |  | Chairman of the Board of Directors, Chief Executive Officer and President
|Bruce R. Wright       |  | 53  |  | Senior Vice President, Finance, Chief Financial Officer and Secretary    
|Ellery R. Buchanan    |  | 51  |  | Senior Vice President, Marketing and Corporate Development               
|John E. Denzel        |  | 42  |  | Senior Vice President of Operations                                      
|Eric C. Smith         |  | 37  |  | Senior Vice President of World Wide Sales and Service                    

Mr. Zafiropoulo
founded the Company in September 1992 to 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 Chairman of the Board. Additionally, Mr. Zafiropoulo served as President of the
Company from March 1993 to March 1996 and from May 1997 until April 1999. Mr. Zafiropoulo resumed the position of President in April 2001. 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 Equipment Group International, a semiconductor equipment company. From August 1980 to February 1989, Mr. Zafiropoulo was President and Chief Executive Officer of
Drytek, Inc., a plasma dry-etch company that he founded in August 1980, and which was later sold to General Signal in 1986. From July 1987 to September 1989,
Mr. Zafiropoulo was also President of Kayex, a semiconductor

17

---

equipment manufacturer, which is a unit of General Signal. From July 2001, Mr. Zafiropoulo has served as Vice Chairman of SEMI (Semiconductor Equipment and Materials International), an
international trade association representing the semiconductor, flat panel display equipment and materials industry; and Mr. Zafiropoulo has been on the Board of Directors of SEMI since
July 1995. In addition,
Mr. Zafiropoulo also serves on the Board of Directors of Advanced Energy Industries, Inc., a leading manufacturer of power conversion and control systems.

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 Executive Vice President, Finance and Chief Financial Officer of Spectrian Corporation, a radio frequency (RF) amplifier company. From November 1994
through May 1997, Mr. Wright was Senior Vice President of Finance and Administration, and Chief Financial Officer of Tencor Instruments until its acquisition by KLA Instruments
Corporation in 1997, which formed KLA-Tencor Corporation, and from December 1991 through October 1994, Mr. Wright was Vice President and Chief Financial Officer of
Tencor Instruments.

Mr. Buchanan
has served as Senior Vice President, Marketing and Corporate Development since January, 2002. From July 2000 to December 2001, Mr. Buchanan
served as Vice President of Strategic Planning. From March 2000 to June 2000, Mr. Buchanan served as Vice President of Corporate Development. Following the Company's acquisition of
Integrated Solutions, Inc. ("ISI") in June 1998 and up to February 2000, Mr. Buchanan served as President of Ultratech Capital. Prior to that, Mr. Buchanan was
founder of ISI, and served as its Chief Executive Officer from 1993 until its acquisition by the Company. From 1980 through 1993, Mr. Buchanan was Senior Vice President and General Manager of
the Sales and Service Division of GCA Corporation, Massachusetts, a semiconductor equipment company. Before joining GCA Corporation, from 1977 to 1980, Mr. Buchanan was Senior Manager in the
international finance area with Polaroid Corporation, and prior to that, Mr. Buchanan was working as a Certified Public Accountant, Manager with Price Waterhouse and Company. In 2001,
Mr. Buchanan was elected the inaugural Chairman of the Advanced Packaging and Interconnect Alliance.

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

Mr. Smith
has served as Senior Vice President, World Wide Sales and Service since January 2002. From January 2001 to December 2001, Mr. Smith served as
Vice President of Worldwide Sales. From March 1999 to December 1999, Mr. Smith served as Director of Marketing, and from August 1997 to February 1999, he served as
Director of International Marketing. From June 1997 to July 1997, Mr. Smith was the Director of International Business Development. From July 1992 to May 1997,
Mr. Smith was appointed Director of Operation for the Company's Japan and Korea offices. Prior to joining the Company, Mr. Smith was the Manager of Business Development with SEMI, Japan
from 1991 to 1992, and before that, he was working for SEMI, Washington, DC.

18

---

PART II

ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The
following table sets forth, for the periods indicated, the range of high and low sale prices of the Company's Common Stock, as reported by the National Association of Securities
Dealers, Inc.'s Automated Quotation System:

|Fiscal 2001Fiscal Quarter Ended |  | March 31 |         | June 30 |   | September 30 |  | December 31
|-------------------------------- |  | -------- | ------- | ------- | - | ------------ |  | -----------
|Market Price: (1) High           |  | $        | 39.3750 |         | $ | 35.0000      |  | $          
|Low                              |  | $        | 20.0000 |         | $ | 18.0300      |  | $          

|Fiscal 2000Fiscal Quarter Ended |  | March 31 |         | June 30 |   | September 30 |  | December 31
|-------------------------------- |  | -------- | ------- | ------- | - | ------------ |  | -----------
|Market Price: (1) High           |  | $        | 18.5000 |         | $ | 16.8125      |  | $          
|Low                              |  | $        | 12.8750 |         | $ | 11.0000      |  | $          

---

The
Company's fiscal quarters in 2001 ended on March 31, 2001, June 30, 2001, September 29, 2001 and December 31, 2001, and the Company's fiscal quarters in
2000 ended on April 1, 2000, July 1, 2000, September 30, 2000, and December 31, 2000, respectively. For convenience of presentation, the Company's 2001 fiscal quarters have
been shown as ending on March 31, 2001, June 30, 2001, September 30, 2001 and December 31, 2001, and the Company's 2000 fiscal quarters have been shown as ending on
March 31, 2000, June 30, 2000, September 30, 2000 and December 31, 2000.

The
Company has not paid cash dividends on its Common Stock since inception, and its Board of Directors presently plans to reinvest the Company's earnings in its business. Accordingly,
it is anticipated that no cash dividends will be paid to holders of Common Stock in the foreseeable future.

19

---



ITEM 6.SELECTED FINANCIAL DATA

|In thousands, except per share data                                                                         |  | 2001***** |         | 2000**** |   | 1999    |    | 1998*** |         | 1997** |   | 1996    |    | 1995 |         | 1994 |   | 1993 *  |   | 1992* |        
|----------------------------------------------------------------------------------------------------------- |  | --------- | ------- | -------- | - | ------- | -- | ------- | ------- | ------ | - | ------- | -- | ---- | ------- | ---- | - | ------- | - | ----- | -------
|Operations:                                                                                                 |  |           |         |          |   |         |    |         |         |        |   |         |    |      |         |      |   |         |   |       |        
|Net sales                                                                                                   |  | $         | 130,680 |          | $ | 146,655 |    | $       | 113,123 |        | $ | 81,457  |    | $    | 147,349 |      | $ | 193,508 |   | $     | 157,831
|Gross profit (loss)                                                                                         |  |           | 44,781  |          |   | 57,667  |    |         | 44,420  |        |   | (1,319  | )  |      | 77,678  |      |   | 104,893 |   |       | 82,288 
|Gross profit (loss) as a percentage of net sales                                                            |  |           | 34      | %        |   | 39      | %  |         | 39      | %      |   | (2      | )% |      | 53      | %    |   | 54      | % |       | 52     
|Operating income (loss)                                                                                     |  | $         | (24,465 | )        | $ | (11,171 | )  | $       | (11,213 | )      | $ | (70,426 | )  | $    | 18,001  |      | $ | 46,678  |   | $     | 31,782 
|Income (loss) before income taxes (benefit) and cumulative effect of a change in accounting principle       |  |           | (16,806 | )        |   | 12,159  |    |         | (4,168  | )      |   | (64,126 | )  |      | 25,094  |      |   | 52,707  |   |       | 36,170 
|Pre-tax income (loss) as a percentage of net sales                                                          |  |           | (13     | )%       |   | 8       | %  |         | (4      | )%     |   | (79     | )% |      | 17      | %    |   | 27      | % |       | 23     
|Income taxes (benefit)                                                                                      |  | $         | 1,038   |          | $ | 2,433   |    | $       |        |        | $ | (6,182  | )  | $    | 7,528   |      | $ | 17,396  |   | $     | 11,936 
|Income (loss) before cumulative effect of a change in accounting principle                                  |  |           | (17,844 | )        |   | 9,726   |    |         | (4,168  | )      |   | (57,944 | )  |      | 17,566  |      |   | 35,311  |   |       | 24,234 
|Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements"                   |  |           |        |          |   | (18,883 | )  |         |        |        |   |        |    |      |        |      |   |        |   |       |       
|Net income (loss)                                                                                           |  |           | (17,844 | )        |   | (9,157  | )  |         | (4,168  | )      |   | (57,944 | )  |      | 17,566  |      |   | 35,311  |   |       | 24,234 
|Income (loss) before cumulative effect of a change in accounting principle per sharebasic                  |  | $         | (0.81   | )        | $ | 0.46    |    | $       | (0.20   | )      | $ | (2.76   | )  | $    | 0.85    |      | $ | 1.76    |   | $     | 1.32   
|Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements" per sharebasic   |  | $         | 0.00    |          | $ | (0.89   | )  | $       | 0.00    |        | $ | 0.00    |    | $    | 0.00    |      | $ | 0.00    |   | $     | 0.00   
|Net income (loss) per sharebasic                                                                           |  | $         | (0.81   | )        | $ | (0.43   | )  | $       | (0.20   | )      | $ | (2.76   | )  | $    | 0.85    |      | $ | 1.76    |   | $     | 1.32   
|Number of shares used in per share computationbasic                                                        |  |           | 22,143  |          |   | 21,236  |    |         | 21,279  |        |   | 20,958  |    |      | 20,553  |      |   | 20,079  |   |       | 18,425 
|Income (loss) before cumulative effect of a change in accounting principle per sharediluted                |  | $         | (0.81   | )        | $ | 0.46    |    | $       | (0.20   | )      | $ | (2.76   | )  | $    | 0.81    |      | $ | 1.66    |   | $     | 1.20   
|Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements" per sharediluted |  | $         | 0.00    |          | $ | (0.89   | )  | $       | 0.00    |        | $ | 0.00    |    | $    | 0.00    |      | $ | 0.00    |   | $     | 0.00   
|Net income (loss) per sharediluted                                                                         |  | $         | (0.81   | )        | $ | (0.43   | )  | $       | (0.20   | )      | $ | (2.76   | )  | $    | 0.81    |      | $ | 1.66    |   | $     | 1.20   
|Number of shares used in per share computationdiluted                                                      |  |           | 22,143  |          |   | 21,236  |    |         | 21,279  |        |   | 20,958  |    |      | 21,681  |      |   | 21,271  |   |       | 20,154 
|Balance sheet:                                                                                              |  |           |         |          |   |         |    |         |         |        |   |         |    |      |         |      |   |         |   |       |        
|Cash, cash equivalents and short-term investments                                                           |  | $         | 169,154 |          | $ | 163,681 |    | $       | 143,544 |        | $ | 146,107 |    | $    | 164,349 |      | $ | 167,409 |   | $     | 161,356
|Working capital                                                                                             |  |           | 162,826 |          |   | 151,434 |    |         | 163,601 |        |   | 166,417 |    |      | 223,226 |      |   | 212,684 |   |       | 176,174
|Total assets                                                                                                |  |           | 243,419 |          |   | 264,069 |    |         | 236,808 |        |   | 245,935 |    |      | 300,001 |      |   | 280,772 |   |       | 245,428
|Long-term obligations, less current portion                                                                 |  |           |        |          |   |        |    |         |        |        |   |        |    |      |        |      |   |        |   |       |       
|Stockholders' equity                                                                                        |  |           | 195,281 |          |   | 194,257 |    |         | 204,214 |        |   | 210,151 |    |      | 263,632 |      |   | 239,947 |   |       | 199,658
|Other data:                                                                                                 |  |           |         |          |   |         |    |         |         |        |   |         |    |      |         |      |   |         |   |       |        
|Return on average equity                                                                                    |  |           | (9      | )%       |   | (5      | )% |         | (2      | )%     |   | (24     | )% |      | 7       | %    |   | 16      | % |       | 17     
|Book value per common share outstanding                                                                     |  | $         | 8.70    |          | $ | 9.13    |    | $       | 9.55    |        | $ | 9.96    |    | $    | 12.68   |      | $ | 11.81   |   | $     | 10.08  
|Current ratio                                                                                               |  |           | 4.39    |          |   | 3.18    |    |         | 6.06    |        |   | 5.81    |    |      | 7.60    |      |   | 6.40    |   |       | 4.94   
|Long term debt to equity ratio                                                                              |  |           | 0.00    |          |   | 0.00    |    |         | 0.00    |        |   | 0.00    |    |      | 0.00    |      |   | 0.00    |   |       | 0.00   
|Capital expenditures                                                                                        |  | $         | 5,389   |          | $ | 18,439  |    | $       | 6,948   |        | $ | 9,510   |    | $    | 9,337   |      | $ | 7,849   |   | $     | 0      
|Income tax (benefit) as percentage of pre-tax income (loss)                                                 |  |           | (6      | )%       |   | N/C     |    |         | 0       | %      |   | 10      | %  |      | 30      | %    |   | 33      | % |       | 33     

20

---

Quarterly Data

|Unaudited, in thousands, except per share data                                                              |  | 1st |         | 2nd |   | 3rd    |   | 4th |        
|----------------------------------------------------------------------------------------------------------- |  | --- | ------- | --- | - | ------ | - | --- | -------
|2001 *****                                                                                                  |  |     |         |     |   |        |   |     |        
|Net sales                                                                                                   |  | $   | 44,165  |     | $ | 40,659 |   | $   | 24,349 
|Gross profit (loss)                                                                                         |  |     | 21,173  |     |   | 17,643 |   |     | (2,556 
|Operating income (loss)                                                                                     |  |     | 4,146   |     |   | 3,155  |   |     | (27,680
|Net income (loss)                                                                                           |  |     | 5,644   |     |   | 4,955  |   |     | (26,025
|Net income (loss) per sharebasic                                                                           |  | $   | 0.26    |     | $ | 0.22   |   | $   | (1.17  
|Number of shares used in per share computationbasic                                                        |  |     | 21,715  |     |   | 22,118 |   |     | 22,296 
|Net income (loss) per sharediluted                                                                         |  | $   | 0.25    |     | $ | 0.22   |   | $   | (1.17  
|Number of shares used in per share computationdiluted                                                      |  |     | 22,961  |     |   | 22,919 |   |     | 22,296 
|2000****                                                                                                    |  |     |         |     |   |        |   |     |        
|Net sales                                                                                                   |  | $   | 29,900  |     | $ | 33,528 |   | $   | 42,216 
|Gross profit                                                                                                |  |     | 9,413   |     |   | 12,283 |   |     | 17,020 
|Operating income (loss)                                                                                     |  |     | (4,735  | )   |   | (9,494 | ) |     | (385   
|Income (loss) before income taxes and cumulative effect of a change in accounting principle                 |  |     | (3,023  | )   |   | (7,822 | ) |     | 17,504 
|Income taxes (benefit)                                                                                      |  |     |        |     |   |       |   |     | 2,433  
|Income (loss) before cumulative effect of a change in accounting principle                                  |  |     | (3,023  | )   |   | (7,822 | ) |     | 15,071 
|Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements"                   |  |     | (18,883 | )   |   |       |   |     |       
|Net income (loss)                                                                                           |  |     | (21,906 | )   |   | (7,822 | ) |     | 15,071 
|Income (loss) before cumulative effect of a change in accounting principle per sharebasic                  |  | $   | (0.14   | )   | $ | (0.37  | ) | $   | 0.71   
|Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements" per sharebasic   |  | $   | 0.86    |     | $ | 0.00   |   | $   | 0.00   
|Net income (loss) per sharebasic                                                                           |  | $   | (1.02   | )   | $ | (0.37  | ) | $   | 0.71   
|Number of shares used in per share computationbasic                                                        |  |     | 21,442  |     |   | 21,178 |   |     | 21,093 
|Income (loss) before cumulative effect of a change in accounting principle per sharediluted                |  | $   | (0.14   | )   | $ | (0.37  | ) | $   | 0.70   
|Cumulative effect on prior years of SAB 101 "Revenue Recognition in Financial Statements" per sharediluted |  | $   | (0.88   | )   | $ | 0.00   |   | $   | 0.00   
|Net income (loss) per sharediluted                                                                         |  | $   | (1.02   | )   | $ | (0.37  | ) | $   | 0.70   
|Number of shares used in per share computationdiluted                                                      |  |     | 21,442  |     |   | 21,178 |   |     | 21,669 

---

|*  |  | Ultratech Stepper, Inc. (the "Company") acquired certain assets and liabilities of the Ultratech Stepper Division (the "Predecessor") of General Signal Technology Corporation ("General Signal") on
March 8, 1993. The amounts, as presented above, reflect historical results and do not include pro forma adjustments, which may have been incurred as an independent company. Net income per share for each of the two years in the period ended
December 31, 1993 is not presented because of a lack of comparability between the capital structure of the Company and the Predecessor.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** |  | Results of operations in 1997 include a charge of $3,619,000, or $0.12 per sharebasic and diluted, to reflect research and development cost incurred in the first quarter of 1997 in conjunction with the acquisition of the assets of
Lepton Inc., and a special charge of $3,450,000, or $0.12 per sharebasic, $0.11 per sharediluted, to account for termination of the Company's Japan distributor in the fourth quarter of 1997.                                                                                                                                                    
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

21

---

|***   |  | Gross profit (loss) in 1998 includes special charges of $15,231,000 and $11,177,000 in the third and fourth quarters, respectively, relating primarily to the write-down of inventories and provisions for estimated losses on purchase commitments.
Results of operations in 1998 include a charge of $12,566,000 in the second quarter, or $0.60 per sharebasic and diluted, to reflect acquired in-process research and development incurred in conjunction with the acquisition of ISI, and a related
adjustment to operations of $7,458,000 in the fourth quarter, or $0.35 per share, to reduce the in-process research and development charge as a result of the final purchase price allocation. Additionally, results of operations in 1998 include special
charges of $5,775,000 and $5,400,000 in the third and fourth quarters, respectively, reflecting provisions for doubtful accounts and leases receivable, provisions for sales returns and allowances and costs associated with a reduction in the Company's
workforce.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|****  |  | Operating income (loss) in 2000 includes special charges of $7,984,000 and $1,686,000 in the second and third quarters, respectively, relating to the shutdown of the Company's UltraBeam unit. Net income (loss) in 2000 includes a non-operating gain of
$15,983,000 in the third quarter, relating to the sale of land and income taxes of $2,433,000 relating to the sale of land and other special items. Additionally, net income in 2000 includes a charge of $18,883,000 in the first quarter related to the
cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements."                                                                                                                                                                                                                                                                                                                                                                                                         
|***** |  | Operating income (loss) in 2001 includes third and fourth quarter charges of $10,993,000 and $77,000, respectively, or $0.50 per sharebasic and diluted, related to cost of discontinued products, and $11,988,000 and $290,000, respectively, or
$0.55 per sharebasic and diluted, related to restructure of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

22

---



ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Certain of the statements contained in this report may be considered forward-looking statements under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve a number of risks and uncertainties. In addition to the factors discussed herein, factors that could
cause actual results to differ materially include the following: cyclicality in the Company's served markets, including the current severe downturn in the semiconductor industry; delays, deferrals and
cancellations of orders by customers; expiration of technology support and licensing arrangements, and the resulting adverse impact on the Company's licensing revenues; timing and degree of success of
technologies licensed to outside parties; product concentration and lack of product revenue diversification; high degree of industry competition; lengthy development cycles for advanced lithography
technologies and applications; mix of products sold; lengthy sales cycles, including the timing of system acceptances; inventory obsolescence; manufacturing inefficiencies and the ability to volume
produce systems; integration and development of Verdant operations; failure to develop and commercialize the Company's reduction stepper products; the ability and resulting costs to attract or retain
sufficient personnel to achieve the Company's targets for a particular period; sole or limited sources of supply; international sales; customer concentration; rapid technological change and the
importance of timely product introductions; future acquisitions; changes to financial accounting standards; intellectual property matters; environmental regulations; effects of certain
anti-takeover provisions; volatility of stock price; any adverse effects of the recent terrorist attacks in the United Sates, or the related U.S. retaliation, on the economy, in general or
on our business in particular; and the other risk factors listed in this filing and other Company filings with the SEC. The Company undertakes no obligation to update any of its disclosures to reflect
such future events.

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

In
April 2000, the Company reached a decision to shut down its UltraBeam operations.

In
April 2000, the Company settled litigation it had initiated against Nikon and in September 2001, the Company settled related litigation it had initiated against Canon.
The Company is presently proceeding in a related action against ASML There can be no assurance that the Company will prevail in this action.

In
July 2000, the Company entered into an agreement with Applied Materials, Inc. ("Applied Materials") under which Applied Materials has licensed the laser thermal
processing technology of the Company's Verdant Technologies Division. Additionally, Ultratech develops, manufactures and markets its own laser thermal processing systems used in the development and
future production of advanced semiconductor devices.

During
the quarter ended September 30, 2000, the Company exercised an option it held to purchase 6.34 acres of undeveloped land it leased in San Jose, California and sold this
property to a third party. This transaction resulted in a net gain of $16.0 million before related income taxes, or $0.75 per share (diluted).

The
Applied Materials and Nikon agreements and the land sale resulted in special income tax charges during the quarter ended September 30, 2000 of $2.4 million, or $0.11
per share (diluted). Excluding special items and the taxes associated with them, net income for the quarter ended September 30, 2000 was $3.2 million, or $0.15 per share (diluted).

23

---

In
September 2001, the Company reached a decision to discontinue its XLS product line and to close its Wilmington, Massachusetts facility. The Company also announced a workforce
reduction of approximately 20%, inclusive of those employees impacted by the plant closure. These decisions resulted in special charges for the quarter ended September 30, 2001 of
$11.0 million, or $0.49 per share (diluted), for inventory write-downs and purchase order commitment reserves related to the discontinuance of the XLS product line and $12.0 million, or
$0.54 per share (diluted), related to plant closure, asset impairment, employee severance and other costs of restructuring the Company's operations. Additionally, the Company recognized special
charges in the quarter ended December 31, 2001 of $77,000, related to the discontinuance of the XLS product line and $290,000 related to employee severance, net of certain adjustments to
previous restructuring cost estimates.

The
Company previously recognized revenue from the sales of its systems generally upon shipment, which usually preceded installation and final customer acceptance, provided that final
customer acceptance and collection of the related receivable were probable. Effective January 1, 2000, the Company changed its method of accounting for system sales to recognize such revenues
when the contractual obligations for installation and customer acceptance have been satisfied, provided collections of the related receivable are probable. The Company believes the change in
accounting principle is preferable based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101),
"Revenue Recognition in Financial Statements." In conjunction with this change in accounting method, the Company recognized a charge in the quarter ended March 31, 2000 of $18.9 million,
or $0.89 per share (diluted), representing the cumulative effect on prior years of the application of SAB 101.

As
of March 8, 2002, the Company had approximately 4.7 million stock options outstanding. Among other determinants, the market price of the Company's stock has a major
bearing on the number of stock options outstanding that are included in the weighted-average shares used in determining the Company's net income (loss) per share. During periods of extreme volatility,
the impact of higher stock prices can have a materially dilutive effect on the Company's net income (loss) per share (diluted). Additionally, options are excluded from the calculation of net income
(loss) per share when the Company has a net loss or when the exercise price of the stock option is greater than the average market price of the Company's Common Stock, as the impact of the stock
options would be anti-dilutive.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States, The preparation of these financial statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to inventories, warranty obligations, purchase order commitments, bad debts, income taxes, intangible assets, restructuring and contingencies and litigation.
Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.

24

---

The
Company believes the following critical accounting policies affect its more significant judgements and estimates used in the preparation of its consolidated financial statements:

Revenue Recognition

Effective January 1, 2000, the Company adopted SEC staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements" and,
accordingly, recognizes revenues when the contractual obligation for installation (if any) has been satisfied, or installation is substantially complete,
and customer acceptance provisions have lapsed, provided collections of the related receivable are probable.

Deferred
income related to the Company's products is recognized upon satisfying the contractual obligations for installation and customer acceptance. Deferred income related to service
revenue is recognized ratably over the life of the related service contract. Deferred income relative to the Company's licensing activities is recognized over the estimated useful life of the licensed
technologies, or the contract period of any technology transfer support arrangements.

Inventories and Purchase Order Commitments

The Company reserves for purchase order commitments, and estimates the effects of obsolescence and unrealizable carrying values of its inventories based upon
estimates of future demand and market conditions. With the exception of certain long lead time items, principally optical components, the Company presently reserves inventories and purchase order
commitments in excess of 18 months of production demand. Due to the cyclical nature of the Company's business, during periods of peak demand, the Company has shortened this production outlook
to as few as 12 months of production demand. Should actual production demand differ from management's estimates, revisions to inventory write-downs and purchase order commitment reserves would
be required.

Warranty Obligations

The Company provides for the 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 is corrected. Should actual product failure rates, material usage rates and labor efficiencies differ from the
Company's estimates, revisions to the estimated warranty liability would be required.

Bad Debt

The Company maintains an allowance for doubtful accounts receivable for estimated losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to deteriorate, or even a single customer was otherwise unable to make payments, additional allowances may be required. The average selling
price of the Company's systems is in excess of $1.0 million dollars. Accordingly, a single customer default could have a material adverse effect on the Company's results of operations.

Deferred Taxes

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Based on the uncertainty of
future pre-tax income, the Company has presently fully reserved its deferred tax assets. In the event the Company was to determine that it would be able to realize its deferred tax assets
in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made.

25

---

RESULTS OF OPERATIONS

The Company's operating results have fluctuated significantly in the past and most likely will continue to fluctuate significantly in the future. Factors that
have caused operating results to fluctuate significantly in the past and most likely will continue to cause fluctuations in the future include those mentioned above as well as: patterns of capital
spending by customers; lengthy development cycles for new products; market acceptance of new products and enhanced versions of the Company's existing products; delayed shipments to customers due to
customer configuration changes and other factors; lengthy manufacturing cycles for the Company's products; the timing of new product announcements and releases by the Company or its competitors;
manufacturing inefficiencies associated with the startup of new product introductions; product discounts; changes in pricing by the Company, its competitors or suppliers; shutdown of operations;
acquisition activities requiring issuance of additional equity or debt securities, the expenditure of cash and the devotion of substantial management resources; sale of assets; outcome of litigation;
political and economic instability throughout the world, in particular the Asia/Pacific region; changes in sales or distribution agreements; natural disasters; regulatory changes; business
interruptions related to the Company's occupation of its facilities, including related to the recent energy crisis in California, where the Company's headquarters and principal operations are located;
and any adverse effects of the recent terrorist attacks in the United States, or related U.S. retaliation, on the economy, in general or on our business in particular.

The
Company's gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including the mix of products sold;
product discounts and competition in the Company's targeted markets; technology support and licensing revenues, which have little, if any, associated cost of sales; inventory and open purchase
commitment reserve provisions; the rate of capacity utilization; non-linearity of shipments during the quarter; the introduction of new products, which typically have higher manufacturing
costs until manufacturing efficiencies are realized and are typically discounted more than existing products until the products gain market acceptance; the percentage of international sales, which
typically have lower gross margins than domestic sales principally due to higher field service and support costs; and the implementation of subcontracting arrangements.

The
Company derives a substantial portion of its total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $900,000 to
$3.4 million for the Company's 1X steppers, and from $1.5 million per system to more than $7.0 million per system for the Company's reduction steppers. As a result of these high
sale prices, the timing of recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on the Company's net sales and operating results for any
particular period.

The
Company's backlog at the beginning of a period typically does not include all of the sales needed to achieve the Company's sales objectives for that period. In addition, orders in
backlog are subject to cancellation, shipment or customer acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. Consequently, the Company's net sales and
operating results for a period have been and will continue to be dependent upon the Company obtaining orders for systems to be shipped and accepted in the same period in which the order is received.
The Company's business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and
customer acceptance during that period. Furthermore, a substantial portion of the Company's shipments has historically been realized near the end of each quarter. Delays in installation and customer
acceptance due, for example, to the inability of the Company to successfully demonstrate the agreed-upon specifications or criteria at the customer's facility, or to the failure of the
customer to permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below the Company's expectations, which may materially adversely
affect the Company's operating results for such period. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to

26

---

reschedulings, delays, deferrals or cancellations by customers, additional customer configuration requirements, or to unexpected manufacturing difficulties or delays in deliveries by suppliers due to
their long production lead times or otherwise, have caused and may continue to cause net sales in a particular period to fall significantly below the Company's expectations, materially adversely
affecting the Company's operating results for that period. In particular, the long manufacturing cycles of the Company's Saturn Wafer Stepper®, and the Company's reduction stepper product
offerings, and the long lead time for lenses and other materials, could cause shipments of such products to be delayed from one quarter to the next, which could materially adversely affect the
Company's financial condition and results of operations for a particular quarter.

The
Company's business has in prior years been subject to seasonality, although the Company believes such seasonality has been masked in recent years by cyclical trends within the
semiconductor and thin film head industries. In addition, the need for continued expenditures for research and development, capital equipment, ongoing training and worldwide customer service and
support, among other factors, will make it difficult for the Company to reduce its operating expenses in a particular period if the Company fails to achieve its net sales goals for the period.

Net sales

2001 vs. 2000

Net sales consist of revenues from system sales, spare parts sales, service and licensing of technologies. For the year ended December 31, 2001, net sales
were $130.7 million, a decrease of 11% as compared with net sales of $146.7 million for the year ended December 31, 2000. System sales decreased 18%, to $90.6 million, on a
unit volume decline of 35%. System sales were favorably impacted by a 10% increase in weighted-average selling prices and a change in product mix in favor of the Company's more expensive models. The
decline in unit volume was primarily attributable to weaker demand from semiconductor customers throughout the world and thin film head customers in Asia, excluding Japan, partially offset by higher
demand from micromachining and optical networking customers during the first half of 2001. Revenues from services declined 17%, to $14.3 million, primarily as a result of decreased utilization
of plant capacity within the semiconductor industry. Revenues from licensing and licensing support arrangements increased to $12.7 million, from $6.0 million in 2000, as a result of
agreements entered into in late 2000 and 2001. The Company presently anticipates that revenues from licensing and licensing support arrangements will decline to $2.4 million in the quarter
ending March 31, 2002, from $3.2 million in the quarter ended December 31, 2001, and will decline to $0.9 million in the quarter ending June 30, 2002. This
sequential decline is the result of a licensing and licensing support arrangement that expired in February 2002. Spare part sales decreased 1%, to $13.1 million.

At
December 31, 2001, the Company had approximately $6.0 million of deferred revenue resulting from products shipped but not yet installed and accepted, as compared with
$15.7 million at December 31, 2000, resulting in a net decrease in deferred product and service income of approximately $3.2 million. During the year ended December 31,
2001, deferred license income decreased by $8.7 million, to $13.7 million, as a result of amortization of proceeds received in 2000, partially offset by certain proceeds received in
2001. Deferred income related to the Company's products is recognized upon satisfying the contractual obligations for installation and customer acceptance. Deferred income related to service revenue
is recognized over the life of the related service contract. Deferred income relative to the Company's licensing activities is recognized over the estimated useful life of the licensed technologies,
or the period of any technology transfer support arrangements.

On
a product market application basis, system sales to the semiconductor and semiconductor packaging industries were $57.2 million for the year ended December 31, 2001, a
decrease of 41% as compared with system sales of $96.8 million in 2000. System sales to the nanotechnology market were

27

---

$33.4 million, an increase of 149% as compared with sales of $13.4 million in 2000. This increase was primarily attributable to the sale of the Company's systems to micromachining and
optical networking device customers, partially offset by fewer sales of the Company's systems to thin film head customers.

For
the year ended December 31, 2001, international net sales were $67.0 million, or 51% of total net sales, as compared with $79.3 million, or 54% of total net
sales for 2000. The decline in international net sales, both in terms of absolute dollars and as a percentage of total net sales, was primarily attributable to decreased sales of the Company's Saturn
Spectrum 3 Wafer Stepper to semiconductor packaging companies in Japan. The Company anticipates that a substantial portion of its overall sales
will continue to come from sales of its Saturn Spectrum 3e wafer stepper to semiconductor packaging manufacturers in the Japan and Asia, excluding Japan territories. The Company's
operations in foreign countries are not generally subject to significant exchange rate fluctuations, principally because sales contracts for the Company's systems are generally denominated in U.S.
dollars. In Japan, however, orders are typically denominated in Japanese yen. This subjects the Company to the risk of currency fluctuations. The Company attempts to mitigate this exposure through the
use of foreign exchange contracts; however, this effort can be costly and there can be no assurance of the success of any such efforts. International sales expose the Company to a number of additional
risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which, in turn, impact the relative cost of ownership of the Company's products. (See "Additional Risk
Factors: International Sales; Japanese Market").

The
semiconductor, semiconductor packaging, thin film head and optical networking industries are presently experiencing severe downturns due, in part, to the macro-economic conditions
facing the U.S. and world economies. Although the Company's total backlog increased substantially during 2000, the Company's backlog has decreased substantially during the year ended
December 31, 2001. This decline was a result of slowing order rates and customer cancellations. Additionally, the Company has recently experienced a high level of customer reschedulings. The
Company presently believes that weakness in orders may continue for at least the next couple of quarters, materially adversely impacting the Company's sales, gross margins and results of operations.
Further, the anticipated timing of shipments and customer acceptances will require the Company to fill a number of production slots in the current and subsequent quarters in order to meet its
near-term sales targets. If the Company is unsuccessful in its efforts to secure those production orders, or if existing production orders are delayed or cancelled, its results of
operations will be materially adversely impacted in the near-term. Accordingly, the Company can give no assurance that it will be able to achieve or maintain its current or prior level of
sales.

As
a result of current order trends, the severe downturn in the industries the Company serves and generally weak macro-economic conditions, the Company presently expects that net sales
for the quarter ending March 31, 2002 will be substantially lower than net sales in the comparable period in 2001 and sequentially lower than net sales recognized in the quarter ended
December 31, 2001. Further, the Company anticipates that it will experience operating and net losses for the three-month period ending March 31, 2002.

Because
the Company's net sales are subject to a number of risks, including intense competition in the capital equipment industry and uncertainty relating to the timing and market
acceptance of the Company's products, the Company may not exceed or maintain its current or prior level of net sales for any period in the future. Additionally, the Company believes that the market
acceptance and volume production of its Saturn Spectrum 3e, its 300mm offerings and its 1000 series family of wafer steppers, are of critical importance to its future financial results.
To the extent that these products do not achieve significant sales due to difficulties involving manufacturing or engineering, the inability to reduce the current long manufacturing cycles for these
products, competition, excess capacity in the semiconductor or nanotechnology device industries, customer acceptances, or any other reason, the Company's business, financial condition and results of
operations would be materially adversely affected.

28

---

2000 vs. 1999

For the year ended December 31, 2000, net sales were $146.7 million, an increase of 30% as compared with net sales of $113.1 million for
1999. System sales increased 35%, to $110.2 million, as a result of a 15% increase in unit shipments, a product mix shift toward higher-priced systems and an increase in weighted-average
selling prices. The year-over-year improvement in system sales was primarily attributable to improved conditions within the semiconductor industry, which have resulted in
higher capital spending levels. Revenues from services declined 2.2%, to $17.3 million, primarily as a result of fewer reduction steppers under service contract. Revenues from licensing and
licensing support increased to $6.0 million, from $0 in 1999, as a result of licensing agreements entered in 2000. Spare part sales declined 6%, to $13.2 million, primarily as a result
of fewer system upgrades.

Approximately
25% of the Company's net sales for the year ended December 31, 2000 resulted from systems shipped in 1999. At December 31, 2000, the Company had approximately
$15.7 million of deferred revenue resulting from systems shipped but not yet installed and accepted, as compared with $36.7 million at December 31, 1999. All of the revenue
deferred at December 31, 1999 was recognized during 2000. Total Company backlog, including systems shipped but not yet installed and accepted, was approximately $106.8 million as of
December 31, 2000, as compared with $65.4 million as of December 31, 1999. The net result of shipments and acceptances during the year ended December 31, 2000 was a net
reduction in deferred product and service income of approximately $14.4 million (after giving effect to the cumulative adjustment resulting from the implementation of SAB 101). During the year
ended December 31, 2000, deferred license income increased by $22.4 million, as a result of proceeds from licensing and licensing support agreements entered into in 2000. Deferred income
relative to the Company's products is recognized upon installation and customer acceptance of the systems. Deferred income relative to service revenue is recognized over the life of the related
service contract. Deferred income relative to the Company's licensing activities is recognized over the longer of the estimated useful life of the licensed technologies, or the period of any
technology transfer support arrangements.

On
a market application basis, system sales to the semiconductor industry were $96.8 million for the year ended December 31, 2000, an increase of 58% as compared with
system sales of $61.1 million in 1999. Sales to the nanotechnology device market, which includes sales to thin film head manufacturers, were $13.4 million, a decline of 33% as compared
with sales of $20.2 million in 1999. The Company believes that this decline was primarily attributable to the continued excess capacity situation within the thin film head industry. The
increased sales to the semiconductor industry were primarily a result of improved conditions within the industry and higher sales of the Company's Saturn Spectrum 3 Wafer Stepper, which addresses the
market for advanced packaging of integrated circuits. During the year ended December 31, 2000, the Company recognized revenue for its first 300mm Saturn Spectrum 3 Wafer Stepper, for advanced
packaging applications, and its first Verdant laser thermal processing system, sold for research and development applications. Additionally, during 2000, the Company recognized revenue for its first
157nm XLS reduction stepper system, sold for research and development applications. Partially offsetting this increase was a decline in unit sales of the Company's Model 1700, which serves the market
for back-end thin film head production. The thin film head industry is currently experiencing a period of excess capacity, and the Company presently anticipates that this trend will
continue for at least the next several quarters, which will continue to materially adversely impact the Company's results of operations.

For
the year ended December 31, 2000, international net sales were $79.3 million, or 54% of total net sales, as compared with $61.8 million, or 55% of total net
sales for 1999. The increase in international sales, in terms of absolute dollars, was primarily attributable to increased sales of the Company's Saturn Spectrum 3 to semiconductor companies in Japan
and Asia, excluding Japan, partially offset by lower sales to thin film head customers in Asia, excluding Japan.

29

---

Gross profit

2001 vs. 2000

The Company's gross profit as a percentage of net sales, or gross margin, was 34.3% for the year ended December 31, 2001, as compared with 39.3% for 2000.
Exclusive of special charges, gross margin for 2001 was 42.7%, as compared with 39.3% for 2000. On a comparative basis, gross margin was favorably affected in 2001 by higher weighted-average selling
prices, increased licensing and licensing support revenues (which have no corresponding cost of sales) and cost reduction measures. Exclusive of licensing and licensing support revenues and special
charges, gross margin was 36.6% for the year ended December 31, 2001, as compared with 36.7% for 2000. Gross margin for 2001 was adversely affected by a special charge of $11.1 million
relating to the discontinuance of the Company's XLS product platform, a shift in product mix, and production and after-sales inefficiencies caused by lower production and shipment levels.

As
a direct result of dramatically worsening conditions in the semiconductor industry, heightened by the events of the terrorist attacks on September 11, 2001, which further
weakened the U.S. and world economies, the Company decided to discontinue its XLS reduction stepper production and focus its efforts on developing next-generation platforms for its
reduction technologies, principally 157nm. As a result of this decision, the Company recognized inventory write-downs of $11.1 million.

The
Company believes that gross margin for the quarter ending March 31, 2002 will be significantly lower than levels achieved during the comparable period a year ago, resulting
primarily from higher inefficiencies caused by decreased production and shipment levels, partially offset by cost containment measures. Additionally, the Company presently expects that gross margin in
the quarter ending March 31, 2002 will be sequentially lower than gross margin achieved in the quarter ended December 31, 2001 due to product mix, lower systems sales and lower revenues
from licensing and technology support agreements. Continued weakness in the Company's business may result in a higher risk of inventory obsolescence, which would materially adversely impact results of
operations. In particular, the Company
has made significant investments in long-lead items relating to the introduction of its 157nm reduction stepper technologies. These assets face certain technology risks in addition to the
risks inherent with slowing business conditions. Additionally, increased price-based competition and declining revenues from licensing and technology support agreements may contribute to further
erosion of gross margin.

New
products generally have lower gross margins until there is widespread market acceptance and until production and after-sales efficiencies can be achieved. Should significant market
demand fail to develop for the Company's 300mm offerings, its Saturn Spectrum 3e, Verdant laser thermal processing system or the Company's advanced reduction stepper offerings, the
Company's business, financial condition and results of operations would be materially adversely affected.

2000 vs. 1999

The Company's gross profit as a percentage of net sales was 39.3% for the year ended December 31, 2000, as compared with a gross margin of 39.3% for 1999.
On a comparative basis, gross margins were adversely impacted by a shift in product mix toward the Company's more advanced 1X lithography systems and reduction steppers, which generally have lower
gross margin percentages than the Company's more mature product lines. Additionally, comparisons with the prior year were adversely impacted by lower margins on service revenues and higher inventory
reserve requirements. However, these adverse trends were offset by higher license revenues ($6.0 million in 2000, as compared with $0 in 1999), higher weighted-average system selling prices and
from manufacturing efficiencies achieved as a result of higher production levels.

30

---

Research, development and engineering expenses

2001 vs. 2000

The Company's research, development and engineering expenses were $25.8 million for the year ended December 31, 2001, as compared with
$26.8 million for 2000. The decline in spending was primarily attributable to the shutdown of the Company's UltraBeam operations, which occurred early in the second quarter of 2000, and cost
containment measures implemented in 2001, partially offset by increased spending on the Company's laser thermal processing and 1X and advanced reduction stepper technologies.

The
Company continues to invest significant resources in the development and enhancement of its Verdant laser thermal processing systems and technologies and its 1X and advanced
reduction optical products and related technologies. The Company presently expects that the absolute dollar amount of research, development and engineering expenses for the quarter ending
March 31, 2002 will be significantly lower than levels incurred in the comparable period in 2001, primarily as a result of continuing cost containment efforts, and will be flat to slightly
lower as compared with expenses for the quarter ended December 31, 2001.

2000 vs. 1999

The Company's research, development and engineering expenses were $26.8 million for the year ended December 31, 2000, as compared with
$27.7 million for 1999. This decrease in spending was primarily attributable to the shutdown of the Company's UltraBeam operations, which occurred early in the second quarter of 2000, and lower
spending on the Company's laser thermal processing technology, partially offset by higher spending on the Company's reduction stepper technologies and higher facilities and personnel costs.

Amortization of goodwill

2001 vs. 2000

Amortization of goodwill was $1.5 million for the year ended December 31, 2001, as compared with $2.1 million for 2000. The reduction in
amortization was a direct result of impairment charges recognized in the quarter ended September 30, 2001 relating to certain intangible assets (see "Restructure of operations").

2000 vs. 1999

Amortization of goodwill was $2.1 million for the year ended December 31, 2000, as compared with $1.6 million for the comparable period in
1999. The additional amortization expense was directly related to intangible assets purchased in December 1999.

Selling, general and administrative expenses

2001 vs. 2000

Selling, general and administrative expenses were $29.7 million for the year ended December 31, 2001, as compared with $30.3 million for
2000. As a percentage of net sales, selling, general and administrative expenses increased to 22.7% in 2001, as compared with 20.6% in 2000. The current year decline, in absolute dollars, was
primarily attributable to cost containment measures implemented in 2001 and lower sales and support expenses, including sales commissions, typically associated with a decline in sales, partially
offset by higher legal and consulting expenses incurred in conjunction with the Company's recent restructuring and planned expansion into China. The Company presently anticipates that selling, general
and administrative expenses for the three-month period ending March 31, 2002 will be significantly lower than the comparable period in 2001, due primarily to lower anticipated net sales, the
Company's recent restructuring and continued efforts at cost containment. However, the Company presently expects that selling, general and administrative expenses will be flat, as compared to the
quarter ended December 31, 2001.

31

---



2000 vs. 1999

Selling, general and administrative expenses were $30.3 million for the year ended December 31, 2000, as compared with $26.3 million for the
comparable period in 1999. As a percentage of net sales, selling, general and administrative expenses declined to 20.6% in 2000, as compared with 23.3% of net sales for 1999. The increase, in terms of
absolute dollars, is primarily attributable to significant additions to the sales and marketing infrastructure within the Company and higher facilities and personnel costs, partially offset by the
shutdown of the Company's UltraBeam operations.

Restructure of operations

In September 2001, the Company reached a decision to consolidate its manufacturing operations and eliminate approximately 20% of its workforce. As a result
of this decision, the Company recognized a restructuring charge of $12.0 million, or $0.54 per share (diluted) in the quarter ended September 30, 2001. Additionally, the Company
recognized restructuring charges of $0.3 million, or $0.01 per share (diluted) in the quarter ended December 31, 2001, primarily related to employee severance costs of
$0.6 million (from additional personnel actions) and higher fixed asset disposal costs of $0.4 million, partially offset by revised facility closure 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 charge for intangible assets related to the
Company's XLS reduction product platform acquired in 1998 and a $1.5 million impairment charge for fixed assets disposed of in conjunction with the consolidation of manufacturing facilities.
The cash components of this charge included $4.0 million for estimated expenditures related to the closure of facilities, $2.5 million for employee severance costs and
$0.1 million of other restructuring costs. As of December 31, 2001, the amount of restructuring costs accrued but unpaid was $4.3 million.

Shutdown of operations

During the quarter ended June 30, 2000, the Company shut down the operations of its UltraBeam unit. As a direct result of this decision, the Company
recognized a charge in the quarter ended June 30, 2000 of $8.0 million, or $0.38 per share (diluted). During the quarter ended September 30, 2000, the Company recognized an
additional charge of $1.7 million, or $0.08 per share (diluted), primarily attributable to revised estimates of amounts to be realized upon the sale of operating assets. Of the
full-year charge of $9.7 million, approximately $6.8 million related to the disposition of operating and capital assets, $0.4 million related to termination benefits
associated with the termination of 14 employees, $2.3 million
related to facilities and other non-employee amounts paid for shutdown and $0.2 million related to accrued liabilities still outstanding as of December 31, 2000. There were
no significant revisions to the original termination provisions established by the Company.

Gain on sale of land

In September 2000, the Company exercised an option it held to purchase 6.34 acres of undeveloped land it leased in San Jose, California and sold this
property to a third party. This transaction resulted in a net gain of $16.0 million, or $0.75 per share (diluted), before related income taxes. In conjunction with this transaction, the Company
had collateralized a loan payable by the former owner to a third party with securities valued at $5.5 million. Upon completion of this transaction, the restriction on these securities was
removed.

Interest and other income, net

Interest and other income, net, which consists primarily of interest income, was $7.9 million for the year ended December 31, 2001, as compared with
$7.6 million for 2000 and $7.4 million for 1999. The increase in interest and other income, net, in 2001, relative to levels achieved in 2000, was primarily

32

---

related to interest income from higher invested balances, partially offset by lower interest rates. The Company presently expects that interest and other income, net, for 2002 will be lower than
levels achieved in the comparable periods in 2001, primarily as a result of lower interest rates.

Income Tax Expense

The Company recognized income taxes of $1.0 million during the year ended December 31, 2001, related primarily to foreign tax requirements. There
was no income tax benefit recognized on the Company's pre-tax losses in 2001, 2000 and 1999, due to uncertainty related to the utilization of its net operating loss carry-forward. The
Company recognized income taxes of $2.4 million during 2000. This provision for 2000 consists primarily of foreign withholding taxes, as well as state and federal minimum taxes.

The
Company presently anticipates that it will recognize income tax expense in 2002, primarily as a result of foreign income taxes. However, the Company believes that the tax rate in
2002 will be substantially less than the statutory rate, primarily as a result of available federal net operating loss carry-forwards.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $7.0 million for the year ended December 31, 2001, as compared with $17.4 million provided by
operating activities during 2000. Cash flow used in operating activities was primarily attributable to the Company's net loss of $17.8 million and a net change in operating assets and
liabilities of $16.2 million, partially offset by non-cash charges to income of $27.0 million. Included in both the net loss and non-cash charges to income for
the year ended December 31, 2001 is a $11.1 million charge relating to the write-off of inventories, resulting from the discontinuance of the Company's XLS reduction stepper
product line; a $4.1 million impairment charge for intangible assets related to the Company's XLS reduction product platform acquired in 1998 and a $1.5 million impairment charge for
fixed assets disposed of in conjunction with the consolidation of manufacturing facilities. The $16.2 million net change in operating assets and liabilities was primarily a result of a decline
in deferred license income of $8.7 million, an increase in inventories of $6.9 million, a decline of $4.5 million in advance billings (to customers), a decline of
$4.5 million in accrued expenses, a decline of $3.2 million in deferred product and services income and a $3.1 million reduction in accounts payable, partially offset by the
impact of a $10.1 million reduction in accounts receivable and $4.3 million in accrued restructuring expenses.

The
Company sells certain of its accounts receivable in order to mitigate its credit risk and to enhance cash flow. Sales of accounts receivable typically precede final customer
acceptance of the system. Although credit risk effectively passes to the third party financial institution, among other terms and conditions, the agreements include provisions that require the Company
to repurchase receivables if disputes arise with the customer regarding suitability of the product. At December 31, 2001, there were no sold accounts receivable outstanding to third-party
financial institutions. The Company may continue to sell certain of its accounts receivable in the future. There can be no assurance that this form of financing will be available on reasonable terms,
or at all.

The
Company believes that because of the relatively long manufacturing cycle of certain of its systems, particularly newer products, the Company's inventories will continue to represent
a significant portion of working capital. In particular, the Company recently increased its purchases of inventory, long-term prepaid inventory and capital equipment for its Saturn
Spectrum 3e wafer stepper, Verdant laser thermal processing system and its 157nm advanced reduction stepper. Higher inventory and capital asset levels may increase the risk of inventory
obsolescence and asset impairment, which may adversely impact the Company's results of operations.

33

---

The
semiconductor industry is presently experiencing a severe downturn due, in part, to macro-economic conditions facing the U.S. and world economies. As a result, the Company has
recently experienced significantly lower order rates for its systems and this trend may continue in the near-term. Prolonged weakness in the Company's business would place the Company's
inventories at a greater risk of obsolescence. Lower demand for the Company's systems may lead to additional inventory write-offs and purchase commitment reserves, which would materially
adversely impact the Company's results of operations. Additionally, worsening business conditions increase the likelihood of further restructuring
of operations and impairments to the Company's assets, either of which would materially adversely impact results of operations.

During
the year ended December 31, 2001, net cash used in investing activities was $0.6 million, attributable to capital expenditures of $5.4 million, partially
offset by a net decrease in available-for-sale securities of $4.8 million.

Cash
generated by financing activities was $14.9 million during the year ended December 31, 2001, attributable to $16.0 million in proceeds received from the
issuance of Common Stock under the Company's stock option plans and its employee stock purchase plans, partially offset by the repayment of $1.1 million of notes payable.

At
December 31, 2001, the Company had working capital of $162.8 million. The Company's principal source of liquidity at December 31, 2001 consisted of
$169.2 million in cash, cash equivalents and short-term investments. The Company presently anticipates that it will use a significant amount of cash during the three month period
ending March 31, 2002, primarily as a result of anticipated operating and net losses for the period; non-linearity of system shipments and slowing customer payment cycles, resulting
in higher levels of accounts receivable; cash expenditures related to the Company's recent restructuring of operations and anticipated reductions in other current liabilities.

The
following summarizes the Company's contractual obligations at December 31, 2001, and the effect such obligations are expected to have on its liquidity and cash flows in future
periods:

|December 31
(in millions)                  |  | Total |      | Less than
1 year |   | 13 years |  | After 3 years
|------------------------------------------ |  | ----- | ---- | ---------------- | - | --------- |  | -------------
|Contractual obligations:                   |  |       |      |                  |   |           |  |              
|Non-cancelable operating lease obligations |  | $     | 23.1 |                  | $ | 4.3       |  | $            
|                                           |  |       |      |                  |   |           |  |              
|Total contractual cash obligations         |  | $     | 23.1 |                  | $ | 4.3       |  | $            
|                                           |  |       |      |                  |   |           |  |              

The
development and manufacture of new lithography systems and enhancements are highly capital-intensive. In order to be competitive, the Company must continue to make significant
expenditures for capital equipment; sales, service, training and support capabilities; systems, procedures and controls; and expansion of operations and research and development, among many other
items. The Company expects that anticipated cash flows from operations and its cash, cash equivalents and short-term investments will be sufficient to meet the Company's cash requirements
for the next twelve months. Beyond the next twelve months, the Company may require additional equity or debt financing to address its working capital or capital equipment needs. In addition, the
Company may seek to raise equity or debt capital at any time that it deems market conditions to be favorable.

Additionally,
the Company may in the future pursue additional acquisitions of complementary product lines, technologies or businesses. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses and impairment charges related to goodwill and other intangible assets,
which could materially adversely affect any Company profitability. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies,
personnel and products of the acquired companies; the diversion of management's attention from other business concerns; risks of entering

34

---

markets in which the Company has limited or no direct experience; and the potential loss of key employees of the acquired company. In the event the Company acquires product lines, technologies or
businesses which do not complement the Company's business, or which otherwise do not enhance the Company's sales or operating results, the Company may incur substantial write-offs and
higher recurring operating costs, which could have a material adverse effect on the Company's business, financial condition and results of operations. In the event that any such acquisition does
occur, there can be no assurance as to the effect thereof on the Company's business or operating results.

To
the extent that the Company's financial resources are insufficient to fund the Company's activities, additional funds will be required. There can be no assurance that additional
financing will be available on reasonable terms, or at all.

Foreign Currency

The Company uses foreign exchange contracts to hedge the risk that unremitted Japanese yen denominated receipts from customers for actual or forecasted sales of
equipment after receipt of customer purchase orders and the unremitted Japanese yen denominated payments to suppliers for actual or forecasted deliveries of raw material from Japan after issuance of
Company purchase orders may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy
to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, the Company attempts to hedge most of these Japanese yen denominated foreign currency exposures anticipated
over the ensuing twelve-month period. At December 31, 2001, the Company had taken action to hedge approximately 100% of these Japanese yen denominated exposures. To hedge this exposure, the
Company used foreign exchange forward contracts that generally have maturities of nine months or less, which generally will be rolled over to provide continuing coverage throughout the year. The
Company often closes foreign exchange sale contracts by purchasing an offsetting purchase contract. At December 31, 2001, the Company had contracts for the sale of $3.5 million and the
purchase of $1.5 million of foreign currencies at fixed rates.

Adoption of the Euro

The introduction of a European single currency, the Euro, was initially implemented as of January 1, 1999, and the transition period continued through
January 1, 2002. As of December 31, 2001, the adoption of the Euro had not had a material effect on the Company's foreign exchange and hedging activities or the Company's use of
derivative instruments. While the Company will continue to evaluate the impact of the Euro introduction over time, based on currently available information, management does not believe that the
introduction of the Euro currency will have a material adverse impact on the Company's financial condition or overall trends in results of operations.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk:

The Company's exposure to market risk due to potential changes in interest rates, relates primarily to the Company's investment portfolio, which consisted
primarily of fixed interest rate instruments as of December 31, 2001. The Company maintains a strict investment policy, which is designed to ensure the safety and preservation of its invested
funds by limiting market risk and the risk of default.

The
following table presents the hypothetical changes in fair values in the financial instruments held by the Company at December 31, 2001, that are sensitive to changes in
interest rates. These instruments are comprised of cash, cash equivalents, short-term investments and corporate equity securities. These instruments are not leveraged and are held for
purposes other than trading. The modeling techniques used measure the change in fair values arising from selected hypothetical changes in interest rates. Assumed market value changes to the Company's
portfolio reflects immediate

35

---

hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (BPS), 100 BPS, and 150 BPS over a twelve-month time horizon. Beginning fair values represent the market
principal plus
accrued interest for financial reporting purposes at December 31, 2001. Ending fair values comprise the estimated market principal plus accrued interest at a twelve-month time horizon, and
assumes no change in the investment principal or portfolio mix. This table estimates the fair value of the portfolio at a twelve-month time horizon:

|                                                                     |  | Valuation of securities
given an interest rate decrease
of X basis points |         | No change in
interest rate |   | Valuation of securities
given an interest rate increase
of X basis points
|-------------------------------------------------------------------- |  | ------------------------------------------------------------------------- | ------- | -------------------------- | - | -------------------------------------------------------------------------
|
|
|U.S. Treasury securities and obligations of U.S. government agencies |  | $                                                                         | 18,012  |                            | $ | 17,937                                                                   
|Obligations of states and political subdivisions                     |  |                                                                           | 5,077   |                            |   | 5,052                                                                    
|U.S. corporate debt securities                                       |  |                                                                           | 134,908 |                            |   | 134,372                                                                  
|Corporate equity securities                                          |  |                                                                           | 349     |                            |   | 350                                                                      
|                                                                     |  |                                                                           |         |                            |   |                                                                          
|Total short-term investments                                         |  | $                                                                         | 158,346 |                            | $ | 157,711                                                                  
|                                                                     |  |                                                                           |         |                            |   |                                                                          

The
table was developed based on the fact that a 50-BPS move in the Federal Funds Rate has occurred twenty-three times in the last ten years; a 100-BPS move in
the Federal Funds Rate has occurred fifteen times in the last ten years; and a 150-BPS move in the Federal Funds Rate has occurred eight times in the last ten years.

The
Company has not materially altered its investment objectives or criteria and believes that, although the composition of the Company's portfolio has changed from the preceding year,
the portfolio's sensitivity to changes in interest rates is materially the same.

Credit risk:

The Company mitigates default risk by attempting to invest in high credit quality securities and by constantly positioning its portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio
liquidity and is diversified in accordance with the Company's investment policy. To date, the Company has not experienced liquidity problems with its portfolio.

Foreign Exchange Risk:

Foreign exchange contracts are used primarily by the Company to hedge the risk that unremitted Japanese yen denominated receipts from customers for actual or
forecasted sales of equipment after receipt of customer purchase orders, and the unremitted Japanese yen denominated payments to suppliers for actual or forecasted deliveries of raw material from
Japan after issuance of Company purchase orders, may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of
foreign currency exchange rate fluctuations, the Company attempts to hedge most of these Japanese yen denominated foreign currency exposures anticipated over the ensuing twelve-month period. At
December 31, 2001, the Company had taken action to hedge approximately 100% of these Japanese yen denominated exposures. To hedge
this exposure, the Company used foreign exchange contracts that generally have maturities of nine months or less, which generally will be rolled over to provide continuing coverage throughout the
year. The Company often closes foreign exchange sale contracts by purchasing an offsetting purchase contract.

36

---

The
Company records these foreign exchange contracts at fair value in its consolidated balance sheet and the related gains or losses on these contracts are deferred in stockholders'
equity (as a component of comprehensive income). These deferred gains and losses are recognized in income in the period in which the sales or purchases being hedged are received and recognized in
income. However, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the sales or purchases being hedged, any changes in
fair value relating to the ineffective portion of these contracts are immediately recognized in income. Gains and losses on foreign exchange contracts are generally included as a component of interest
and other income, net, in the Company's consolidated statement of operations.

At
December 31, 2001, the Company had contracts for the sale of $3.5 million and the purchase of 1.5 million of foreign currencies at fixed rates. The Company had
deferred $0.1 million of gains on foreign exchange contracts at December 31, 2001.

37

---



ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The
Selected Financial Data information contained in Item 6 of Part II hereof is hereby incorporated by reference into this Item 8 of Part II of this
form 10-K.

ULTRATECH STEPPER, INC.  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS  AND FINANCIAL STATEMENT SCHEDULE

Consolidated
Financial Statements included in Item 8:

|                                                                                              |  | Page Number
|--------------------------------------------------------------------------------------------- |  | -----------
|Consolidated Balance SheetsDecember 31, 2001 and 2000.                                       |  | 39         
|Consolidated Statements of OperationsYears ended December 31, 2001, 2000, and 1999.          |  | 40         
|Consolidated Statements of Cash FlowsYears ended December 31, 2001, 2000, and 1999.          |  | 41         
|Consolidated Statements of Stockholders' EquityYears ended December 31 2001, 2000, and 1999. |  | 42         
|Notes to Consolidated Financial Statements                                                    |  | 43-58      
|Report of Ernst & Young LLP, Independent Auditors                                             |  | 59         

38

---



CONSOLIDATED BALANCE SHEETS

|In thousands, except share and per share amounts |                                                                                            | December 31, 2001                                                                                                         |         | December 31, 2000 |   
|------------------------------------------------ | ------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------- | ------- | ----------------- | --
|Assets                                           |                                                                                            |                                                                                                                           |         |                   |   
|Current assets:                                  |                                                                                            |                                                                                                                           |         |                   |   
|                                                 | Cash and cash equivalents                                                                  |                                                                                                                           | $       | 62,729            |   
|                                                 | Short-term investments                                                                     |                                                                                                                           |         | 106,425           |   
|                                                 | Accounts receivable, less allowance for doubtful accounts of $540 in 2001 and $327 in 2000 |                                                                                                                           |         | 13,802            |   
|                                                 | Inventories                                                                                |                                                                                                                           |         | 26,047            |   
|                                                 | Prepaid expenses and other current assets                                                  |                                                                                                                           |         | 1,786             |   
|                                                 |                                                                                            |                                                                                                                           |         |                   |   
|Total current assets                             |                                                                                            |                                                                                                                           | 210,789 |                   |   
|Equipment and leasehold improvements, net        |                                                                                            |                                                                                                                           | 24,619  |                   |   
|Intangible assets, net                           |                                                                                            |                                                                                                                           | 1,239   |                   |   
|Demonstration inventory, net                     |                                                                                            |                                                                                                                           | 3,684   |                   |   
|Other assets                                     |                                                                                            |                                                                                                                           | 3,088   |                   |   
|                                                 |                                                                                            |                                                                                                                           |         |                   |   
|Total assets                                     |                                                                                            | $                                                                                                                         | 243,419 |                   | $ 
|                                                 |                                                                                            |                                                                                                                           |         |                   |   
|Liabilities and Stockholders' Equity             |                                                                                            |                                                                                                                           |         |                   |   
|Current liabilities:                             |                                                                                            |                                                                                                                           |         |                   |   
|                                                 | Notes payable                                                                              |                                                                                                                           | $       |                  |   
|                                                 | Accounts payable                                                                           |                                                                                                                           |         | 9,093             |   
|                                                 | Accrued expenses                                                                           |                                                                                                                           |         | 9,943             |   
|                                                 | Deferred license income                                                                    |                                                                                                                           |         | 13,707            |   
|                                                 | Deferred product and services income                                                       |                                                                                                                           |         | 3,568             |   
|                                                 | Advance billings                                                                           |                                                                                                                           |         | 3,010             |   
|                                                 | Accrued restructuring expenses                                                             |                                                                                                                           |         | 4,338             |   
|                                                 | Income taxes payable                                                                       |                                                                                                                           |         | 4,304             |   
|                                                 |                                                                                            |                                                                                                                           |         |                   |   
|Total current liabilities                        |                                                                                            |                                                                                                                           | 47,963  |                   |   
|Other liabilities                                |                                                                                            |                                                                                                                           | 175     |                   |   
|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: 22,451,137 at December 31, 2001 and 21,284,555 at December 31, 2000 |         |                   | 23
|                                                 | Additional paid-in capital                                                                 |                                                                                                                           |         | 195,612           |   
|                                                 | Treasury Stock                                                                             |                                                                                                                           |         | (6,867            | ) 
|                                                 | Accumulated other comprehensive income (loss), net                                         |                                                                                                                           |         | 2,486             |   
|                                                 | Retained earnings                                                                          |                                                                                                                           |         | 4,027             |   
|                                                 |                                                                                            |                                                                                                                           |         |                   |   
|Total stockholders' equity                       |                                                                                            |                                                                                                                           | 195,281 |                   |   
|                                                 |                                                                                            |                                                                                                                           |         |                   |   
|Total liabilities and stockholders' equity       |                                                                                            | $                                                                                                                         | 243,419 |                   | $ 
|                                                 |                                                                                            |                                                                                                                           |         |                   |   

See accompanying notes to consolidated financial statements.

39

---



CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                             |                                                                                                              | Years Ended December 31,      |        
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------ | ----------------------------- | -------
|
|
|Net sales                                                                                                    |                                                                                                              |                               |        
|                                                                                                             |                                                                                                              | Products                      |        
|                                                                                                             |                                                                                                              | Services                      |        
|                                                                                                             |                                                                                                              | Licenses                      |        
|                                                                                                             |                                                                                                              |                               |        
|                                                                                                             | Total net sales                                                                                              |                               |        
|Cost of sales                                                                                                |                                                                                                              |                               |        
|                                                                                                             |                                                                                                              | Cost of products sold         |        
|                                                                                                             |                                                                                                              | Cost of services              |        
|                                                                                                             |                                                                                                              | Cost of discontinued products |        
|                                                                                                             |                                                                                                              |                               |        
|Gross profit                                                                                                 |                                                                                                              |                               | 44,781 
|Research, development, and engineering                                                                       |                                                                                                              |                               | 25,759 
|Amortization of goodwill                                                                                     |                                                                                                              |                               | 1,508  
|Selling, general, and administrative                                                                         |                                                                                                              |                               | 29,701 
|Restructure of operations                                                                                    |                                                                                                              |                               | 12,278 
|Shutdown of operations                                                                                       |                                                                                                              |                               |       
|                                                                                                             |                                                                                                              |                               |        
|Operating loss                                                                                               |                                                                                                              |                               | (24,465
|Gain on sale of land                                                                                         |                                                                                                              |                               |       
|Interest expense                                                                                             |                                                                                                              |                               | (198   
|Interest and other income, net                                                                               |                                                                                                              |                               | 7,857  
|                                                                                                             |                                                                                                              |                               |        
|Income (loss) before income taxes and cumulative effect of a change in accounting principle                  |                                                                                                              |                               | (16,806
|Income taxes                                                                                                 |                                                                                                              |                               | 1,038  
|                                                                                                             |                                                                                                              |                               |        
|Income (loss) before cumulative effect of a change in accounting principle                                   |                                                                                                              |                               | (17,844
|Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                                                                                                              |                               |       
|                                                                                                             |                                                                                                              |                               |        
|Net loss                                                                                                     |                                                                                                              | $                             | (17,844
|                                                                                                             |                                                                                                              |                               |        
|Net loss per sharebasic                                                                                     |                                                                                                              |                               |        
|                                                                                                             | Income (loss) before cumulative effect of a change in accounting principle                                   |                               | $      
|                                                                                                             | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                               |        
|                                                                                                             | Net loss                                                                                                     |                               | $      
|                                                                                                             | Number of shares used in per share computationsbasic                                                        |                               |        
|Net loss per sharediluted                                                                                   |                                                                                                              |                               |        
|                                                                                                             | Income (loss) before cumulative effect of a change in accounting principle                                   |                               | $      
|                                                                                                             | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                               |        
|                                                                                                             | Net loss                                                                                                     |                               | $      
|                                                                                                             | Number of shares used in per share computationsdiluted                                                      |                               |        

See accompanying notes to consolidated financial statements.

40

---



CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                |                                                                  | Years Ended December 31,                  |         
|------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | --------
|
|
|Cash flows from operating activities:                                           |                                                                  |                                           |         
|Net loss                                                                        |                                                                  | $                                         | (17,844 
|Adjustments to reconcile net loss to net cash provided by operating activities: |                                                                  |                                           |         
|                                                                                | Depreciation                                                     |                                           |         
|                                                                                | Amortization                                                     |                                           |         
|                                                                                | Non-cash restructuring and asset impairment charges:             |                                           |         
|                                                                                |                                                                  | Intangible assets, net                    |         
|                                                                                |                                                                  | Equipment and leasehold improvements, net |         
|                                                                                |                                                                  | Inventories                               |         
|                                                                                |                                                                  | Other, net                                |         
|                                                                                | Loss on disposal of equipment                                    |                                           |         
|                                                                                | Deferred compensation and others, net                            |                                           |         
|                                                                                | Cumulative adjustment due to SAB 101                             |                                           |         
|                                                                                | Gain from sale of land                                           |                                           |         
|                                                                                | Changes in operating assets and liabilities:                     |                                           |         
|                                                                                |                                                                  | Accounts receivable                       |         
|                                                                                |                                                                  | Inventories                               |         
|                                                                                |                                                                  | Prepaid expenses and other current assets |         
|                                                                                |                                                                  | Leases receivablecurrent portion         |         
|                                                                                |                                                                  | Leases receivablelong term               |         
|                                                                                |                                                                  | Intangible assets                         |         
|                                                                                |                                                                  | Demonstration Inventory                   |         
|                                                                                |                                                                  | Other assets                              |         
|                                                                                |                                                                  | Accounts payable                          |         
|                                                                                |                                                                  | Accrued expenses                          |         
|                                                                                |                                                                  | Advance billings                          |         
|                                                                                |                                                                  | Income taxes payable                      |         
|                                                                                |                                                                  | Deferred product and services income, net |         
|                                                                                |                                                                  | Deferred license income                   |         
|                                                                                |                                                                  | Accrued restructuring expenses            |         
|                                                                                |                                                                  | Other liabilities                         |         
|                                                                                |                                                                  |                                           |         
|Net cash provided by (used in) operating activities                             |                                                                  |                                           | (6,984  
|                                                                                |                                                                  |                                           |         
|Cash flows from investing activities:                                           |                                                                  |                                           |         
|Capital expenditures                                                            |                                                                  |                                           | (5,389  
|Investments in securities                                                       |                                                                  |                                           | (313,130
|Proceeds from sales of investments                                              |                                                                  |                                           | 82,333  
|Proceeds from maturing investments                                              |                                                                  |                                           | 235,619 
|Proceeds from sale of land                                                      |                                                                  |                                           |        
|Purchase of licensed technology                                                 |                                                                  |                                           |        
|Restricted investments                                                          |                                                                  |                                           |        
|                                                                                |                                                                  |                                           |         
|Net cash used in investing activities                                           |                                                                  |                                           | (567    
|                                                                                |                                                                  |                                           |         
|Cash flows from financing activities:                                           |                                                                  |                                           |         
|Net proceeds from (repayments of) notes payable                                 |                                                                  |                                           | (1,152  
|Proceeds from issuance of Common Stock                                          |                                                                  |                                           | 16,021  
|Buy back of Common Stock                                                        |                                                                  |                                           |        
|                                                                                |                                                                  |                                           |         
|Net cash provided by (used in) financing activities                             |                                                                  |                                           | 14,869  
|                                                                                |                                                                  |                                           |         
|Net effect of exchange rate changes on cash                                     |                                                                  |                                           | 65      
|Net increase (decrease) in cash and cash equivalents                            |                                                                  |                                           | 7,383   
|Cash and cash equivalents at beginning of period                                |                                                                  |                                           | 55,346  
|                                                                                |                                                                  |                                           |         
|Cash and cash equivalents at end of period                                      |                                                                  | $                                         | 62,729  
|                                                                                |                                                                  |                                           |         
|Supplemental disclosures of cash flow information:                              |                                                                  |                                           |         
|Cash paid during the period for:                                                |                                                                  |                                           |         
|                                                                                | Interest                                                         |                                           | $       
|                                                                                | Income taxes (refund), net                                       |                                           |         
|Other non-cash changes:                                                         |                                                                  |                                           |         
|                                                                                | Systems transferred from inventory to equipment and other assets |                                           | $       

See accompanying notes to consolidated financial statements.

41

---



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                                                       |                                                                  | Stockholders' Equity           |  
|-------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------------------------ | -
|
|
|
|Balance at December 31, 1998                                                           |                                                                  | 21,106                         |  
|Net issuance of Common Stock under stock option plans and employee stock purchase plan |                                                                  | 286                            |  
|Components of comprehensive loss:                                                      |                                                                  |                                |  
|                                                                                       | Change in net unrealized loss on available-for-sale investments  |                                | 
|                                                                                       | Net loss                                                         |                                | 
|                                                                                       |                                                                  |                                |  
|Total comprehensive loss                                                               |                                                                  |                                |  
|                                                                                       |                                                                  |                                |  
|Balance at December 31, 1999                                                           |                                                                  | 21,392                         |  
|                                                                                       |                                                                  |                                |  
|Net issuance of Common Stock under stock option plans and employee tock purchase plan  |                                                                  | 368                            |  
|Buyback of Common Stock                                                                |                                                                  | (475                           | )
|Deferred Compensation                                                                  |                                                                  |                               |  
|Components of comprehensive loss:                                                      |                                                                  |                                |  
|                                                                                       | Change in net unrealized gains on available-for-sale investments |                                | 
|                                                                                       | Net loss                                                         |                                | 
|                                                                                       |                                                                  |                                |  
|Total comprehensive loss                                                               |                                                                  |                                |  
|                                                                                       |                                                                  |                                |  
|Balance at December 31, 2000                                                           |                                                                  | 21,285                         |  
|                                                                                       |                                                                  |                                |  
|Net issuance of Common Stock under stock option plans and employee stock purchase plan |                                                                  | 1,166                          |  
|Deferred Compensation                                                                  |                                                                  |                               |  
|Components of comprehensive loss:                                                      |                                                                  |                                |  
|                                                                                       | Change in net unrealized gains on:                               |                                |  
|                                                                                       |                                                                  | Available-for-sale investments |  
|                                                                                       |                                                                  | Foreign exchange contracts     |  
|                                                                                       | Net loss                                                         |                                | 
|                                                                                       |                                                                  |                                |  
|Total comprehensive loss                                                               |                                                                  |                                |  
|                                                                                       |                                                                  |                                |  
|Balance at December 31, 2001                                                           |                                                                  | 22,451                         |  
|                                                                                       |                                                                  |                                |  

See accompanying notes to consolidated financial statements.

42

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    COMPANY AND INDUSTRY INFORMATION

Major customers

In 2001, no single customer accounted for 10% or more of the Company's net sales. In 2000, one customer accounted for 10% of the Company's net sales. In 1999, no
single customer accounted for 10% or more of the Company's net sales.

Business segments

In evaluating its business segments, the Company gave consideration to the Chief Executive Officer's review of financial information and the organizational
structure of the Company's management. Based on this review, the Company concluded that, at the present time, resources are allocated and other financial decisions are made based, primarily, on
consolidated financial information. Accordingly, the Company has determined that it operates in one business segment, which is the manufacture and distribution of photolithography equipment to
manufacturers of integrated circuits and nanotechnology components.

Enterprise-wide disclosures

The Company's products are manufactured in the United States and are sold worldwide. The Company markets internationally through domestic and foreign-based sales
and service operations and
independent sales organizations. The following table presents enterprise-wide sales to external customers and long-lived assets by geographic region:

|(In thousands)     |                          | 2001  |   | 2000   |         | 1999
|------------------ | ------------------------ | ----- | - | ------ | ------- | ----
|Net sales:         |                          |       |   |        |         |     
|                   | United States of America |       | $ | 63,653 |         | $   
|                   | Japan                    |       |   | 22,534 |         |     
|                   | Rest of world            |       |   | 44,493 |         |     
|                   |                          |       |   |        |         |     
|                   |                          | Total |   | $      | 130,680 |     
|                   |                          |       |   |        |         |     
|Long-lived assets: |                          |       |   |        |         |     
|                   | United States of America |       | $ | 31,687 |         | $   
|                   | Rest of world            |       |   | 943    |         |     
|                   |                          |       |   |        |         |     
|                   |                          | Total |   | $      | 32,630  |     
|                   |                          |       |   |        |         |     

The
Company's operations in foreign countries are not currently subject to significant exchange rate fluctuations, principally because sales contracts for the Company's systems are
generally denominated in U.S. dollars. However, international sales expose the Company to a number of additional risk factors, including fluctuations in the value of local currencies relative to the
U.S. dollar, which, in turn, impact the relative cost of ownership of the Company's products.

2.    CONCENTRATIONS OF RISKS

Sales of the Company's systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity or to restructure
current manufacturing facilities, either of which typically involves a significant commitment of capital. For this and other reasons, the Company's systems typically have a lengthy sales cycle during
which the Company may expend substantial funds and management effort in securing a sale. Additionally, the markets for the Company's products are

43

---

subject to rapid technological change, which requires the Company to respond with new products and enhanced versions of existing products. Lengthy sales cycles and rapid technological change subject
the Company to a number of significant risks, including inventory obsolescence, significant after-sales support and fluctuations in operating results, which are difficult to estimate and over which
the Company has little or no control. Sole-source and single-source suppliers provide critical components and services for the manufacture of the Company's products. The reliance on sole
or limited groups of suppliers may subject the Company from time to time to quality, allocation and pricing constraints.

Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, short-term investments and trade
receivables. These credit risks include the potential inability of an issuer or customer to honor their obligations under the terms of the instrument. The Company places its cash equivalents,
short-term investments and restricted investments with high credit-quality financial institutions. The Company invests its excess cash in commercial paper, readily marketable debt
instruments and collateralized funds of U.S. and state government entities. The Company has established guidelines relative to credit ratings, diversification and maturities that seek to maintain
safety and liquidity.

A
majority of the Company's trade receivables are derived from sales in various geographic areas, principally the U.S., Europe, Japan and the rest of Asia, to large companies within the
semiconductor, semiconductor packaging and nanotechnology industries. The Company performs ongoing credit evaluations of its customers' financial condition and requires collateral, whenever deemed
necessary. The Company maintains an allowance for uncollectible accounts receivable based upon expected collectibility and a reserve for estimated returns and allowances. From time to time the Company
may grant extended payment terms or may lease its systems to customers. Long-term receivables and the granting of extended customer payment terms exposes the Company to additional risks,
including potentially higher customer concentration and higher potential operating expenses relating to customer defaults.

The
Company sells certain of its accounts receivable in order to mitigate its credit risk and to enhance cash flow. Sales of accounts receivable typically precede final customer
acceptance of the system. Although credit risk effectively passes to the third party financial institution, among other terms and conditions, the agreements include provisions that require the Company
to repurchase receivables if disputes arise with the customer regarding suitability of the product. At December 31, 2001 and 2000,
there were $0.0 million and $5.6 million, respectively, of sold accounts receivable outstanding to third-party financial institutions.

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Intercompany balances
and transactions have been eliminated.

Reclassifications
have been made to prior years' consolidated financial statements to conform to the current year presentation. These reclassifications had no impact on previously
reported operating losses or net losses.

The
preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgements that affect the reported
amounts in

44

---

the financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to inventories, warranty obligations, purchase order commitments, bad
debts, income taxes, intangible assets, restructuring and contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.

Cash equivalents

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

Investments

Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the classification at each balance
sheet date. At December 31, 2001 and 2000, all investments in the Company's portfolio were classified as "available for sale" and are stated at fair value, with the unrealized gains and losses,
net of tax, reported in accumulated other comprehensive income (loss), as a separate component of stockholders' equity. Among other factors, the value of the Company's investment portfolio is
sensitive to changes in interest rates.

The
amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as interest, dividends, realized gains
and losses and declines in value judged to be other than temporary are included in interest and other income, net. The cost of securities sold is based on the specific identification method.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Reserves are
established for excess or slow-moving inventories as deemed necessary.

Long-lived assets

Equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Equipment is depreciated on 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 of the related assets or the lease term, whichever
is shorter.

Demonstration
inventory is stated at cost, less accumulated amortization. Demonstration inventory is amortized over the estimated useful life of the systems, generally four years.

Intangible
assets are carried at cost less accumulated amortization, which is being provided on a straight-line basis over the economic lives of the respective assets,
generally five to seven years. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the related asset may not be recoverable.
Intangible assets are presented net of accumulated amortization of $763,000 and $4,390,000 as of December 31, 2001 and 2000, respectively.

45

---

Derivative instruments and hedging

Foreign currency transactions, in the form of forward currency contracts, are utilized by the Company to hedge obligations denominated in foreign currencies. The
Company does not enter into derivative financial instruments for trading purposes. Gains and losses related to qualified accounting hedges of firm commitments are deferred and recognized into
operating income when the firm commitment is converted into income. Gains and losses related to qualified accounting hedge of recognized financial assets and liabilities are recognized in interest and
other income, net. There were approximately $5.0 million and $17.3 million of foreign exchange forward contracts outstanding as of December 31, 2001 and 2000, respectively.

Revenue recognition

The Company previously recognized revenue from the sales of its products generally upon shipment, which usually preceded installation and final customer
acceptance, provided that final customer acceptance and collection of the related receivable were probable. Effective January 1, 2000, the Company changed its method of accounting for product
sales to recognize such revenues when the contractual obligation for installation (if any) has been satisfied, or installation is substantially complete, and customer acceptance provisions have
lapsed, provided collections of the related receivable are probable. The Company believes the change in accounting principle is preferable based on guidance provided in SEC staff Accounting Bulletin
No. 101 (SAB 101), "Revenue Recognition in Financial Statements." The cumulative effect of the change in accounting principle, $18.9 million or $0.89 per share (diluted), was reported as
a charge in the quarter ended March 31, 2000 in the accompanying statement of operations.

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

The
Company sells service contracts for which revenue is recognized ratably over the contract period. The Company recognizes revenue from licensing and technology support agreements
ratably over the contract period, or the estimated useful life of the licensed technologies, whichever is applicable.

During
2000, the Company substantially changed its operations to implement SAB 101. Approximately 25% of the Company's net sales for the year ended December 2000, or $37,600,000,
resulted from systems shipped in 1999 and accepted in 2000. This reflects the Company's traditional time frame for shipment, installation and customer acceptance. The net result of shipments and
acceptances during 2000 was a reduction of approximately $14.4 million in deferred product and service income. The
Company estimates that its sales for the year ended December 31, 2000 would have approximated $126,000,000 under its previous method of accounting for revenue recognition. However, the Company
believes that estimates of its system revenue under its prior method of accounting are not indicative of results that would have been achieved had the Company not substantially changed its operations
to implement SAB 101.

46

---

Warranty

The Company generally warrants its products for a period of 12 months from the date of customer acceptance for material and labor to repair the product;
accordingly, a provision for the estimated cost of the warranty is recorded at the time revenue is recognized.

Research, development, and engineering expenses

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

Impact of recently issued accounting standards and SEC staff accounting bulletins

In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business
Combinations." SFAS 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method. The adoption of SFAS 141 did not have a material effect on the Company's financial condition or results of operations.

In
July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which requires the discontinuance of goodwill amortization. SFAS 142 is required to
be applied for fiscal years beginning after December 15, 2001, with certain early adoption permitted. The Company expects to adopt SFAS 142 for its first fiscal quarter of 2002, and does
not expect the adoption to have a material effect on its financial condition or results of operations.

In
August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated retirement costs. The Company does not anticipate a material effect on its financial condition or results of
operations from the adoption of SFAS 143, which will take place in the Company's first fiscal quarter of 2003.

In
October 2001, the FASB issued SFAS 144, "Accounting for the Impairment of Disposal of Long-lived Assets." SFAS 144 supersedes SFAS 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of," and addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. The Company is in the process of assessing the effect of adopting SFAS 144, which will be effective for
the Company's first fiscal quarter of 2003.

Foreign currency accounting

The U.S. dollar is the functional currency for all foreign operations. Foreign exchange gains and losses, which result from the process of remeasuring foreign
currency financial statements into U.S. dollars or from transactions during the period, have been immaterial and are included in interest and other income, net.

47

---

Stock-based compensation

The Company has elected to follow the intrinsic value method in accounting for its employee stock options and stock purchase plan. Pro forma information regarding
net income (loss) and net income (loss) per share are disclosed as if the Company accounted for its stock-based compensation subsequent to December 31, 1994 under the fair value method.

4.    BASIC AND DILUTED NET LOSS PER SHARE

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

|                           |                                                                                                              | Years Ended December 31, |  
|-------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------ | -
|
|
|Numerator:                 |                                                                                                              |                          |  
|                           | Income (loss) before cumulative effect of a change in accounting principle                                   |                          | $
|                           | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                          |  
|                           |                                                                                                              |                          |  
|                           | Net loss                                                                                                     |                          | $
|                           |                                                                                                              |                          |  
|Denominator:               |                                                                                                              |                          |  
|                           | Denominator for earnings per sharebasic                                                                     |                          |  
|                           | Effect of dilutive Employee Stock Options                                                                    |                          |  
|                           |                                                                                                              |                          |  
|                           | Denominator for earnings per sharediluted                                                                   |                          |  
|                           |                                                                                                              |                          |  
|Earnings per sharebasic   |                                                                                                              |                          |  
|                           | Income (loss) before cumulative effect of a change in accounting principle                                   |                          | $
|                           |                                                                                                              |                          |  
|                           | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                          |  
|                           |                                                                                                              |                          |  
|                           | Net loss                                                                                                     |                          | $
|                           |                                                                                                              |                          |  
|Earnings per sharediluted |                                                                                                              |                          |  
|                           | Income (loss) before cumulative effect of a change in accounting principle                                   |                          | $
|                           |                                                                                                              |                          |  
|                           | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                          |  
|                           |                                                                                                              |                          |  
|                           | Net loss                                                                                                     |                          | $
|                           |                                                                                                              |                          |  

For
the year ended December 31, 2001, options to purchase 3,346,000 shares of Common Stock at an average exercise price of $17.84 were excluded from the computation of diluted net
loss per share as the effect would have been anti-dilutive. This compares to the exclusion of 3,864,000 options at an average exercise price of $15.23 for the year ended
December 31, 2000, and 3,428,000 options at an average exercise price of $16.11 for the year ended December 31, 1999. Options are anti-dilutive when the Company has a net
loss or when the exercise price of the stock option is greater than the average market price of the Company's Common Stock.

48

---



5.    REPORTING COMPREHENSIVE INCOME

Comprehensive income includes net income plus other comprehensive income. Other comprehensive income for the Company is comprised of changes in unrealized gains
or losses on available-for-sale securities, net of tax. Accumulated other comprehensive income and changes thereto at December 31 consist of:

|In thousands                                                            |                                                  | 2001 |       | 2000  |   | 1999 |       
|----------------------------------------------------------------------- | ------------------------------------------------ | ---- | ----- | ----- | - | ---- | ------
|Accumulated other comprehensive loss at beginning of year               |                                                  |      |       |       |   |      |       
|                                                                        | Unrealized gain (loss), net of tax               |      | $     | (299  | ) | $    | (2,408
|Change of accumulated other comprehensive income (loss) during the year |                                                  |      |       |       |   |      |       
|                                                                        | Unrealized gain on available-for-sale securities |      |       | 2,720 |   |      | 2,109 
|                                                                        | Unrealized gain on forign exchange contracts     |      |       | 65    |   |      |      
|                                                                        | Tax effect                                       |      |       |      |   |      |      
|                                                                        |                                                  |      |       |       |   |      |       
|Accumulated other comprehensive income (loss) at end of year            |                                                  | $    | 2,486 |       | $ | (299 | )     
|                                                                        |                                                  |      |       |       |   |      |       

6.    INVESTMENTS

The Company classified all of its investments as "available for sale" as of December 31, 2001 and 2000. Accordingly, the Company states its investments at
estimated fair value. Fair values are determined based on quoted market prices or pricing models using current market rates. The Company deems all investments to be available to meet current working
capital requirements.

The
following is a summary of the Company's investments:

|                                                                     |  | December 31, 2001 |         | December 31, 2000
|-------------------------------------------------------------------- |  | ----------------- | ------- | -----------------
|
|
|
|U.S. Treasury securities and obligations of U.S. government agencies |  | $                 | 17,355  |                  
|Obligations of states and political subdivisions                     |  |                   | 5,001   |                  
|U.S. corporate debt securities                                       |  |                   | 131,516 |                  
|Corporate equity securities                                          |  |                   | 146     |                  
|                                                                     |  |                   |         |                  
|                                                                     |  | $                 | 154,018 |                  
|                                                                     |  |                   |         |                  

The
following is a reconciliation of the Company's investments to the balance sheet classifications at December 31:

In thousands

2001

2000Cash equivalents

$
50,014

$
39,214Short-term investments


106,425


108,335Investments, at estimated fair value

$
156,439

$
147,549


Gross
realized gains and losses were not material for the years ended December 31, 2001, 2000 and 1999.

49

---

The
gross amortized cost and estimated fair value of the Company's investments at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

In thousands

Gross
Amortized
Cost

Fair
ValueDue in one year or less

$
87,186

$
88,272Due after one year through five years


66,832


68,167$
154,018

$
156,439


7.    BALANCE SHEET DETAILS

|                                           |                                                  | December 31, |       
|------------------------------------------ | ------------------------------------------------ | ------------ | ------
|
|
|Inventories:                               |                                                  |              |       
|                                           | Raw materials                                    |              | $     
|                                           | Work-in-process                                  |              |       
|                                           | Finished products                                |              |       
|                                           |                                                  |              |       
|                                           |                                                  | Total        |       
|                                           |                                                  |              |       
|Equipment and leasehold improvements, net: |                                                  |              |       
|                                           | Machinery and equipment                          |              | $     
|                                           | Leasehold improvements                           |              |       
|                                           | Office equipment and furniture                   |              |       
|                                           |                                                  |              |       
|                                           |                                                  | $            | 60,229
|                                           | Accumulated depreciation and amortization        |              |       
|                                           |                                                  |              |       
|                                           |                                                  | Total        |       
|                                           |                                                  |              |       
|Accrued expenses:                          |                                                  |              |       
|                                           | Salaries and benefits                            |              | $     
|                                           | Warranty reserves                                |              |       
|                                           | Reserve for losses on purchase order commitments |              |       
|                                           | Other                                            |              |       
|                                           |                                                  |              |       
|                                           |                                                  | Total        |       
|                                           |                                                  |              |       

8.    COST OF DISCONTINUED PRODUCTS

As a result of dramatically worsening conditions in the semiconductor industry, heightened by the events of the terrorist attack on September 11, 2001,
which further weakened the U.S. and world economies, the Company decided to discontinue its XLS reduction stepper production and focus its efforts on developing next-generation platforms
for its reduction technologies, principally 157nm. As a result of this decision, the Company recognized inventory write-downs of $11.1 million.

50

---

9.    RESTRUCTURE OF OPERATIONS

In September 2001, the Company reached a decision to consolidate its manufacturing operations and eliminate approximately 20% of its workforce. As a result
of this decision, the Company recognized a restructuring charge of $12.0 million, or $0.54 per share (diluted) in the quarter ended September 30, 2001. Additionally, the Company
recognized restructuring charges of $0.3 million, or $0.01 per share (diluted) in the quarter ended December 31, 2001, primarily related to employee severance costs of
$0.6 million (from additional personnel actions) and higher fixed asset disposal costs of $0.4 million, partially offset by revised facility closure 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 charge for intangible assets related to the
Company's XLS reduction product platform acquired in 1998 and a $1.5 million impairment charge for fixed assets disposed of in conjunction with the consolidation of manufacturing facilities.
The cash components of this charge included $4.0 million for estimated expenditures related to the closure of facilities, $2.5 million for employee severance costs and
$0.1 million of other restructuring costs. As of December 31, 2001, the amount of restructuring costs accrued but unpaid was $4.3 million.

Components
of accrued restructuring expenses and amounts charged against the plan as of December 31, 2001 were as follows:

(in millions)

Beginning
Accrual Balance

Expenditures/
Adjustments

December 31,
2001Facility closure costs

$
4.3

$
(1.1
)
$
3.2Employee severence costs


1.9


(0.8
)

1.1Other costs


0.5


(0.5
)

Total

$
6.7

$
(2.4
)
$
4.3


10.    SHUTDOWN OF OPERATIONS

During the quarter ended June 30, 2000, the Company shut down the operations of its UltraBeam unit. As a direct result of this decision, the Company
recognized a charge in the quarter ended June 30, 2000 of $8.0 million, or $0.38 per share (diluted). During the quarter ended September 30, 2000, the Company recognized an
additional charge of $1.7 million, or $0.08 per share (diluted) primarily attributed to revised estimates of amounts to be realized upon the disposition of operating assets. Of the
full-year charge of $9.7 million, approximately $6.8 million related to the disposition of operating and capital assets, $0.4 million related to termination benefits
associated with the termination of 14 employees, $2.3 million related to facilities and other non-employee amounts paid for shutdown and $0.2 million related to accrued
liabilities still outstanding as of December 31, 2000. There were no significant revisions to the original termination provisions established by the Company. At December 31, 2001, there
were no outstanding payables or accruals associated with this charge.

11.    GAIN ON SALE OF LAND

In September 2000, the Company exercised an option it held to purchase 6.34 acres of undeveloped land it leased in San Jose, California and sold this
property to a third party. This transaction resulted in a net gain of $16.0 million before related income taxes, or $0.75 per share (diluted). In conjunction with
this transaction, the Company had collateralized a loan payable by the former owner to a third party with securities valued at $5.5 million. Upon completion of this transaction, the restriction
on these securities was removed.

51

---

12.    STOCK BASED COMPENSATION

1993 Stock Option Plan

Under the Company's 1993 Stock Option Plan, as amended, qualified employees, nonemployee Board members and consultants may receive options to purchase shares of
Common Stock at 85% to 100% of fair value at certain specified dates. These options generally vest in equal monthly installments over a period of approximately four years, with a minimum vesting
period of twelve months from grant date, and generally expire ten years from date of grant. The plan will terminate on the earlier of February 28, 2011 or the date on which all shares available
for issuance under the plan have been issued. The plan contains an automatic share increase feature pursuant to which the share reserve will automatically increase on the first trading day in January
of each calendar year, beginning with the 2002 calendar year and continuing through and including calendar year 2006, by an amount equal to four percent (4%) of the total number of shares of Common
Stock outstanding on the last trading day in December of the immediately preceding calendar year, but in no event would such annual increase exceed 1.7 million shares, subject to adjustment in
the event of certain changes to the Company's capital structure. Under the plan, approximately 184,000 options, 603,000 options and 511,000 options were available for issuance at December 31,
2001, 2000 and 1999, respectively.

1998 Supplemental Stock Option/Stock Issuance Plan

Under the Company's 1998 Supplemental Stock Option/Stock Issuance Plan, as amended, qualified employees may receive options to purchase shares of Common Stock at
100% or above of fair value at certain specified dates. These options generally vest in equal monthly installments over a period determined by the Company's Plan Administrator, and generally expire
ten years from date of grant. The plan will terminate on the earlier of October 19, 2008, or the date on which all shares available for issuance under the plan have been issued. Under the plan,
approximately 218,000 options, 354,000 options and 469,000 options were available for issuance at December 31, 2001, 2000 and 1999, respectively.

A
summary of the Company's stock option activity, and related information follows:

|                           |  | 2001       |   | 2000 |       | 1999
|-------------------------- |  | ---------- | - | ---- | ----- | ----
|
|Outstanding at January 1   |  | 3,863,819  |   | $    | 15.23 |     
|Granted                    |  | 835,819    |   | $    | 25.70 |     
|Exercised                  |  | (1,073,116 | ) | $    | 13.67 |     
|Forfeited                  |  | (280,242   | ) | $    | 21.24 |     
|                           |  |            |   |      |       |     
|Outstanding at December 31 |  | 3,346,280  |   | $    | 17.84 |     

52

---



12.    STOCK BASED COMPENSATION (Continued)

At
December 31, 2001, options outstanding were as follows:

|  |                  | Options Outstanding |           | Options Exercisable
|- | ---------------- | ------------------- | --------- | -------------------
|
|$ | 0.0500$11.9999  |                     | 537,365   |                    
|$ | 12.0000$14.8999 |                     | 970,927   |                    
|$ | 14.9000$17.4999 |                     | 238,788   |                    
|$ | 17.5000$19.9999 |                     | 666,030   |                    
|$ | 20.0000$33.6250 |                     | 933,170   |                    
|  |                  |                     |           |                    
|$ | 0.0500$33.6250  |                     | 3,346,280 |                    

Employee Stock Purchase Plan

Under the provisions of the Company's Employee Stock Purchase Plan, virtually all employees may purchase Common Stock through payroll deductions at 85% of the
lower of the fair market value of the Common Stock on the first or last day of the offering period. Prior to February 2001, the offering period was twelve months, with one annual purchase date.
In February 2001, the Company commenced a plan which allows twenty-four month offering periods with semi-annual purchase dates. Under the Plan, approximately 409,000
shares and 503,000 shares of Common Stock were reserved and available for issuance at December 31, 2001 and 2000, respectively.

Accounting for Stock-Based Compensation

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

Pro
forma information regarding net income and net income per share is required as if the Company had accounted for its employee stock options (including purchase rights issued under the
Employee Stock Purchase Plan) under the fair value method. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of
the

53

---

fair value of its employee stock options. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average
assumptions:

|                                                       |  | 2001 |   | 2000 |   | 1999 |  
|------------------------------------------------------ |  | ---- | - | ---- | - | ---- | -
|Expected life (in years): stock options                |  | 3.5  |   | 3.5  |   | 3.5  |  
|Expected life (in years): Employee Stock Purchase Plan |  | 1.0  |   | 1.0  |   | 1.0  |  
|Risk-free interest rate                                |  | 3.5  | % | 5.2  | % | 6.3  | %
|Volatility factor                                      |  | 0.61 |   | 0.57 |   | 0.54 |  
|Dividend yield                                         |  | 0    | % | 0    | % | 0    | %

The
weighted-average expected life of stock options is computed assuming a multiple-point approach with annual vesting periods. The weighted-average fair value per share of stock options
granted during 2001, 2000 and 1999 were $12.09, $6.18, and $5.83, respectively.

The
weighted average fair value of purchase rights granted under the Company's Employee Stock Purchase Plan during 2001, 2000 and 1999 were $6.43, $7.34, and $6.23, respectively.

For
purposes of pro forma disclosures, the estimated fair value of options granted is amortized to expense over the stock options' four-year vesting period and the Employee
Stock Purchase Plan's one year purchase period. Stock option grants are divided into annual vesting periods, resulting in the recognition of approximately 50% of the total compensation expense of the
grant in the first year. Additionally, the potential tax benefit associated with the issuance of incentive stock options is not reflected until realized upon the disqualifying disposition of the
shares. The Company's pro forma information follows:

|In thousands, except per share amounts  |  | 2001 |         | 2000 |   | 1999    |  
|--------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|Net loss as reported                    |  | $    | (17,844 | )    | $ | (9,157  | )
|Pro forma net loss                      |  | $    | (25,442 | )    | $ | (14,117 | )
|Net loss per sharebasic, as reported   |  | $    | (0.81   | )    | $ | (0.43   | )
|Pro forma net loss per sharebasic      |  | $    | (1.17   | )    | $ | (0.68   | )
|Net loss per sharediluted, as reported |  | $    | (0.81   | )    | $ | (0.43   | )
|Pro forma net loss per sharediluted    |  | $    | (1.17   | )    | $ | (0.68   | )

13.    STOCKHOLDERS' EQUITY

Treasury Stock

In April 2000, the Company's Board of Directors authorized the purchase of up to 2,000,000 shares of the Company's Common Stock at prevailing market
prices. To date, the Company has purchased 475,000 shares of Common Stock at a cost of $6,867,000.

Shareholder Rights Plan

The Company's Shareholder Rights Plan provides that Preferred Share Purchase Rights ("Rights") are attached at the rate of one Right on each outstanding share of
the Company's Common Stock held by stockholders. These rights expire on February 9, 2007.

The
Rights will be exercisable only if a person or group acquires 15% or more of the Company's Common Stock or announces a tender offer the consummation of which would result in
ownership by a person or group of 15% or more of the Company's Common Stock. Each Right will entitle

54

---

stockholders to buy one one-hundredth of a share of a new series of Junior Participating Preferred Stock at an exercise price of $145.00 upon certain events.

The
Rights are redeemable, in whole but not in part, at the option of the Board of Directors at $.01 per Right, at any time within 10 days of the date they become exercisable and
in certain other circumstances and will not become exercisable in certain instances where the Company's Board of Directors approves a transaction. The Rights will not prevent a takeover of the
Company, but are designed to encourage anyone seeking to acquire the Company to negotiate with the Company's Board of Directors.

Shares
reserved for issuance under the plan were 350,000 at December 31, 2001.

14.  EMPLOYEE BENEFIT PLANS

Employee bonus plans

The Company currently sponsors a profit sharing plan and an executive incentive bonus plan that distribute employee awards based on the achievement of
predetermined operating income targets. The Company has not recognized expense under these various employee bonus plans for 2001, 2000 and 1999.

Employee savings and retirement plan

The Company currently sponsors a 401(k) employee salary deferral plan that allows voluntary contributions by all full-time employees of from 1% to 20%
of their pretax earnings. Prior to 2000, Company contributions were made only if certain predetermined operating income targets were achieved. In 2001 and 2000, the Company's Board of Directors
elected to provide Company matching of employee contributions up to a maximum of $2,000 per employee. In conjunction with this benefit plan, the Company recognized $686,000, $643,000, and $0 of
expense for 2001, 2000 and 1999, respectively.

15.    INCOME TAXES

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

Years Ended December 31,In thousands2001

2000

1999Domestic

$
(18,074
)
$
10,834

$
(5,694
)Foreign


1,268


1,325


1,526Income (loss) before income taxes

$
(16,806
)
$
12,159

$
(4,168
)


55

---

Income
taxes included the following:

Years Ended December 31,In thousands2001

2000

1999Federal:Current

$
(644
)
$
1,035

$
Deferred


859


(859
)

215


176


State:Current


187


80


Deferred








187


80


Foreign:Current


636


2,177


Deferred








636


2,177


Total income tax provision

$
1,038

$
2,433

$



The
difference between the provision for income taxes and the amount computed by applying the U.S. federal statutory rate (35 percent) to income before income taxes is explained
below:

Years Ended December 31,In thousands2001

2000

1999Tax computed at statutory rate

$
(5,882
)
$
4,256

$
(1,417
)State income taxes, net of federal benefit


122


52


Foreign taxes


192


1,713


Non-taxable income





(6,609
)Tax exempt income








Credits for research and development








Losses not benefited


6,325


2,353


1,320Other, net


281


668


97Income tax provision

$
1,038

$
2,433

$



56

---

Significant
components of deferred income tax assets and liabilities are as follows:

In thousands

2001

2000Deferred tax assets:Net operating loss carryforwards

$
15,336

$
657Inventory valuation


6,987


6,881Bad debt reserve


203


123Fixed assets





1,502Tax credit carryforwards


4,106


3,633Warranty reserves


727


1,298Deferred license income


9,643


9,114Deferred product and services income


295


1,675Other non-deductible accruals and reserves


6,162


1,803Total deferred tax assets


43,459


26,686Valuation allowance


(43,459
)

(25,827
)Net deferred tax assets

$


$
859Total deferred tax liabilities

$


$
Net deferred tax assets

$


$
859


Based
upon the weight of available evidence, which includes the Company's historical operating performance and carryback potential, the Company has determined that a valuation allowance
continues to be necessary.

The
net valuation allowance increased by $17,632,000, $3,161,000 and $3,103,000 during the years ended December 31, 2001, 2000 and 1999, respectively. Approximately $6,100,000 of
the valuation allowance as of December 31, 2001 is attributable to stock options, the benefit of which will be credited to paid-in capital when realized.

As
of December 31, 2001, the Company had net operating loss carryforwards for federal and state tax purposes of $41,053,000 and $24,055,000, respectively. The Company also had
federal research and development tax credit carryforwards of approximately $2,578,000. The federal and state net operating loss carryforwards will expire at various dates beginning in year 2002
through 2021, if not utilized. The tax credit carryforwards will expire at various dates beginning in 2009 through 2021, if not utilized.

Utilization
of the Company's net operating loss and tax credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue
Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses and credits before utilization.

16.    COMMITMENTS AND CONTINGENCIES

The Company leases its facilities, and certain equipment under operating leases expiring through December 2015. Under certain of its leasing arrangements,
the Company is subject to letter of credit

57

---

requirements, escalation charges and also retains certain renewal options. As of December 31, 2001, the minimum annual rental commitments are as follows:

(in thousands)2002

$4,3312003

3,4072004

3,2772005

2,3682006

2,122Thereafter

7,561$23,066


Rent
expense was approximately $5,422,000, $5,964,000 and $5,037,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

On
February 29, 2000, in the U.S. District Court of Virginia, the Company filed patent infringement lawsuits against Nikon Inc. ("Nikon"), Canon, Inc. ("Canon") and
ASM Lithography ("ASML"). In April 2000, the Company reached a settlement with Nikon and in September 2001, the Company reached a settlement with Canon. The litigation
against ASML is ongoing. On October 12, 2001, the Company was sued in the District Court in Massachusetts for alleged infringement of certain patents owned by Silicon Valley Group, Inc.,
a company recently acquired by ASML. The case is in its early stages and the Company is evaluating the claim.

58

---



REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To
The Board Of Directors and Stockholders Of Ultratech Stepper, Inc.

We
have audited the accompanying consolidated balance sheets of Ultratech Stepper, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the index at Item
14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ultratech Stepper, Inc. at
December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth therein.

| |  | /s/ Ernst & Young LLP
| |  | ---------------------

San
Jose, California
January 21, 2002

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

Not
applicable.

59

---



PART III

Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement within
120 days after the end of its fiscal year pursuant to Regulation 14A for its 2002 Annual Meeting of Stockholders to be held June 6, 2002 and the information included therein is
incorporated herein by reference as set forth below.

ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The
information concerning the Company's directors required by this Item is incorporated by reference from the Item captioned "Election of Directors" in the Company's Proxy Statement for
the 2002 Annual Meeting of Stockholders (the "Proxy Statement"). The information required by this Item relating to the Company's executive officers is included under the caption "Executive Officers of
the Registrant" in Part I of this Annual Report on Form 10-K.

ITEM 11.EXECUTIVE COMPENSATION

The
information required by this Item is incorporated by reference from the Item captioned "Executive Compensation and Related Information" in the Proxy Statement.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The
information required by this Item is incorporated by reference from the Items captioned "Election of Directors" and "Ownership of Securities" in the Proxy Statement.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The
information required by this Item is incorporated by reference from the item captioned "Certain Transactions" in the Proxy Statement.

60

---

PART IV

ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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



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



|Exhibit    |  | Description                                                                                                                                                                                                                                            
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(1)     |  | Asset Purchase Agreement, dated March 8, 1993, among Registrant, General Signal Corporation and General Signal Technology Corporation.                                                                                                                 
|3.1(1)     |  | Amended and Restated Certificate of Incorporation of the Registrant, filed October 6, 1993.                                                                                                                                                            
|3.1.1(7)   |  | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, filed June 17, 1998.                                                                                                                              
|3.2(3)     |  | Bylaws of Registrant, as amended.                                                                                                                                                                                                                      
|3.2.1 (14) |  | Amendment to Bylaws of Registrant as amended.                                                                                                                                                                                                          
|3.3(3)     |  | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company dated May 17, 1995.                                                                                                                                   
|4.5(1)     |  | Specimen Common Stock Certificate of Registrant.                                                                                                                                                                                                       
|4.6(4)     |  | Shareholder Rights Agreement between Registrant and the First National Bank of Boston dated February 11, 1997.                                                                                                                                         
|4.6.1(5)   |  | Shareholder Rights Agreement between Registrant and the First National Bank of Boston, filed on February 11, 1997, as amended on March 18, 1998.                                                                                                       
|4.6.2(9)   |  | 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.
|10.3.2(16) |  | 1993 Stock Option/Stock Issuance Plan (Amended and Restated as of March 14, 2001).                                                                                                                                                                     
|10.4(1)    |  | Form of Indemnification Agreement entered into between the Registrant and each of its officers and directors.                                                                                                                                          
|10.5(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.                                                                    
|10.6(2)    |  | Executive Incentive Plan.                                                                                                                                                                                                                              
|10.7(2)    |  | Profit Sharing Plan.                                                                                                                                                                                                                                   

61

---

|10.11(12)   |  | 1995 Employee Stock Purchase Plan (Amended and Restated as of March 16, 1999).                                                                                                                                                                                                                                                          
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.11.1(15) |  | 1995 Employee Stock Purchase Plan (Amended and Restated as of October 17, 2000).                                                                                                                                                                                                                                                        
|10.12.1(13) |  | 1998 Supplemental Stock Option/ Stock Issuance Plan filed on August 17, 2000 (Amended and Restated effective June 29, 2000).                                                                                                                                                                                                            
|10.15(11)   |  | Employment agreement between Registrant and Mr. Bruce R. Wright, Senior Vice President, Finance and Chief Financial Officer.                                                                                                                                                                                                            
|11.1(6)     |  | Asset Purchase Agreement, dated May 19, 1998, by and among the Registrant, Ultratech Stepper East, Inc. (formerly known as Ultratech Acquisition Sub, Inc., formerly known as Ultratech Capital, Inc., formerly known as
Ultratech Stepper Capital, Inc.), Integrated Solutions, Inc., and Integrated Acquisition Corp.                 
|11.1.1(8)   |  | Amendment to the Asset Purchase Agreement, dated May 19, 1998, by and among the Registrant, Ultratech Stepper East, Inc. (formerly known as Ultratech Acquisition Sub, Inc., formerly known as Ultratech Capital, Inc.,
formerly known as Ultratech Stepper Capital, Inc.), Integrated Solutions, Inc., and Integrated Acquisition Corp.
|11.2 (10)   |  | Sublease between Lam Research Corporation, as Sublessor, and Registrant, as Sublessee dated September 16, 1998, regarding the leased building premises known as 16 Jonspin Road, Wilmington, Massachusetts.                                                                                                                             
|11.3 (15)   |  | Lease Agreement between Montague LLC, As Landlord, and Registrant, As Tenant dated November 22, 1999.                                                                                                                                                                                                                                   
|11.4 (15)   |  | 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.                                                                                                                                
|21          |  | Subsidiaries of Registrant.                                                                                                                                                                                                                                                                                                             
|23          |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                                                                                                                     
|24          |  | Power of Attorney (contained in Signature page hereto).                                                                                                                                                                                                                                                                                 

---

62

---



63

---





SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunder duly authorized.

| |  | ULTRATECH STEPPER, INC. |                                                                                                            | 
| |  | ----------------------- | ---------------------------------------------------------------------------------------------------------- | 
| |  | By:                     | /s/ARTHUR W. ZAFIROPOULOArthur W. Zafiropoulo Chairman of the Board,
Chief Executive Officer
and President | 

The
undersigned directors and officers of Ultratech Stepper, Inc. (the "Company"), a Delaware corporation, hereby constitute and appoint Arthur W. Zafiropoulo and Bruce R. Wright,
and each of them with full power to act without the other, the undersigned's true and lawful attorney-in-fact, with full power of substitution and resubstitution, for the
undersigned and in the undersigned's name, place and stead in the undersigned's capacity as an officer and/or director of the Company, to execute in the name and on behalf of the undersigned this
Report and to file such Report, with exhibits thereto and other documents in connection therewith and any and all amendments thereto, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done and to take any other action of
any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required of, the
undersigned, it
being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain
such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion.

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

|Signature                                     |  | Title                                                                                                              |  | Date          
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | --------------
|                                              |  |                                                                                                                    |  |               
|/s/ARTHUR W. ZAFIROPOULOArthur W. Zafiropoulo |  | Chairman of the Board of Directors, Chief Executive Officer (Principal Executive Officer) and President            |  | March 25, 2002
|/s/BRUCE R. WRIGHTBruce R. Wright             |  | Senior Vice President, Finance, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) |  | March 25, 2002
|/s/KENNETH LEVYKenneth Levy                   |  | Director                                                                                                           |  | March 25, 2002
|                                              |  |                                                                                                                    |  |               

64

---

|/s/GREGORY HARRISONGregory Harrison       |  | Director |  | March 25, 2002
|----------------------------------------- |  | -------- |  | --------------
|/s/RICK TIMMINSRick Timmins               |  | Director |  | March 25, 2002
|/s/THOMAS D. GEORGEThomas D. George       |  | Director |  | March 25, 2002
|/s/JOEL GEMUNDERJoel Gemunder             |  | Director |  | March 25, 2002
|/s/NICHOLAS KONIDARISNicholas Konidaris   |  | Director |  | March 25, 2002
|/s/VINCENT F. SOLLITTOVincent F. Sollitto |  | Director |  | March 25, 2002

65

---



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, 1999 |                                |       |                               |       |                           |   |                |      |                         
|                                |                              | Trade accounts receivable      |       | $                             | 2,196 |                           | $ | 6              |      | $                       
|                                |                              | Leases receivable              |       |                               | 6,444 |                           |   | 506            |      |                         
|                                |                              |                                |       |                               |       |                           |   |                |      |                         
|                                |                              | $                              | 8,640 |                               | $     | 512                       |   | $              | 529  |                         
|                                |                              |                                |       |                               |       |                           |   |                |      |                         
|                                | Year ended December 31, 2000 |                                |       |                               |       |                           |   |                |      |                         
|                                |                              | Trade accounts receivable      |       | $                             | 2,046 |                           | $ | (446           | )    | $                       
|                                |                              | Leases receivable              |       |                               | 4,293 |                           |   | 237            |      |                         
|                                |                              |                                |       |                               |       |                           |   |                |      |                         
|                                |                              | $                              | 6,339 |                               | $     | (209                      | ) | $              | (534 | )                       
|                                |                              |                                |       |                               |       |                           |   |                |      |                         
|                                | Year ended December 31, 2001 |                                |       |                               |       |                           |   |                |      |                         
|                                |                              | Trade accounts receivable      |       | $                             | 327   |                           | $ | 216            |      | $                       
|                                |                              | Leases receivable              |       |                               |      |                           |   |                |      |                         
|                                |                              |                                |       |                               |       |                           |   |                |      |                         
|                                |                              | $                              | 327   |                               | $     | 216                       |   | $              |     |                         
|                                |                              |                                |       |                               |       |                           |   |                |      |                         

---

S-1

---

QuickLinks