**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark one)**

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

**                                               **For the Fiscal Year Ended December 31,2006

**Or**

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

**                                               **For the transition periodfrom                     to                     

**CommissionFile Number: 0-22248**

**ULTRATECH, INC.**

(Exact name of registrant as specified in its charter)

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

 

**(408) 321-8835**

(Registrant’s telephonenumber, including area code)

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

**None**

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

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

Indicate by check mark if the Registrant is awell-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct. Yes o* * No x

Indicate by check mark if the Registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o* * No x

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes x* * No o

Indicate by check mark if disclosure of delinquentfilers 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 definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

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

The aggregate market value of voting stock held bynon-affiliates of the Registrant, as of July 1, 2006, was approximately$277,274,000 (based upon the closing price for shares of the Registrant’sCommon Stock as reported by the NASDAQ Global Market on that date, the lasttrading date of the Registrant’s most recently completed second quarter).Shares of Common Stock held by each officer, director and holder of 5% or moreof the outstanding Common Stock have been excluded in that such persons may bedeemed to be affiliates. This determination of affiliate status is notnecessarily a conclusive determination for other purposes.

As ofMarch 1, 2007, the Registrant had 23,243,322 shares of Common Stockoutstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the Registrant’sProxy Statement for the 2007 Annual Meeting of Stockholders are incorporated byreference into Part III of this Annual Report on Form 10-K.

 

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**PART I**

**ITEM 1.**                *BUSINESS*

This Annual Report on Form 10-Kcontains, in addition to historical information, certain forward-lookingstatements that involve significant risks and uncertainties. Such statementscan generally be identified by words such as “anticipates”, “expects”, “intends”,“will”, “could”, “believes”, “estimates”, “continue”, and similar expressions.Our actual results could differ materially from the information set forth inany such forward-looking statements. Factors that could cause or contribute tosuch differences include those discussed below, as well as those discussedunder “Item 1A Risk Factors” and elsewhere in this Annual Report on Form 10-K.

**The Company**

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

*Lithography*

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

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

*Laser AnnealTechnology*

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

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By leveraging our core competencies in opticsengineering and system integration and our extensive knowledge of laserprocessing, we introduced the LSA100 laser spike annealing system to enablethermal annealing solutions at the 65 nm technology node and below. Thisadvanced annealing technology provides solutions to the difficult challenge offabricating ultra-shallow junctions and highly activated source/drain contacts.Laser processing offers the flexibility to operate at near-instantaneoustimeframes (microseconds to milliseconds) at temperatures below the meltingpoint of silicon (1412° C). At these temperatures and anneal times, full activationis achieved with negligible diffusion. In addition, Ultratech’s proprietaryhardware design minimizes the pattern density effect, reducing absorptivityvariations. 

Our products and marketsare more fully described below.

**General Background**

The fabrication of devices such as integrated circuits(“semiconductors” or “ICs”) requires a large number of complex processingsteps, including deposition, photolithography and etching. Deposition is aprocess in which a layer of either electrically insulating or electricallyconductive material is deposited on the surface of a wafer. Typicallydeposition is followed by the photolithography imaging process in which thedeposited layer is coated with a photosensitive layer called photoresist orresist. Exposure of the resist to an image formed by ultraviolet light followedby development, results in some of the resist being removed. A subsequentetching step selectively removes the deposited material from areas notprotected by the remaining resist pattern.

Photolithography is one of the most critical andexpensive steps in IC device manufacturing. Photolithography exposure equipmentis used to create device features by patterning a light-sensitive polymercoating on the wafer surface using a photomask containing the master image of aparticular device layer. Typically, each exposure results in the patterning ofa different deposited layer and therefore, requires a different pattern on thedevice. Each new device layer must be properly aligned to previously defined layersbefore imaging takes place, so that structures formed on the wafers arecorrectly placed, one on top of the other, in order to ensure a functioningdevice.

Since the introduction of the earliest commercialphotolithography tools for IC manufacturing in the early 1960s, a number oftools have been introduced to enable manufacturers to produce ever more complexdevices that incorporate progressively finer line widths. In the early 1970s,photolithography tools included contact printers and proximity aligners, whichrequired the photomask to physically contact or nearly contact the wafer inorder to transfer the entire pattern during a single exposure. By the mid1970s, there were also projection scanners, which transferred the device imagethrough reflective optics having a very narrow annular field that spanned thewidth of the wafer. Exposure was achieved by scanning the entire photomask andwafer in a single, continuous motion across the annular field. Scanners werefollowed by steppers, which expose a rectangular area or field on the wafercontaining one or more chip patterns in a single exposure, then move or “step”the wafer to an adjacent site to repeat the exposure. This stepping process isrepeated as often as necessary until the entire wafer has been exposed. Byimaging a small area, steppers are able to achieve finer resolution, improvedimage size control and better alignment between the multiple device layersresulting in higher yield and higher performance devices than was possible withearlier tools.

The two principal types of steppers currently in useby the semiconductor industry are reduction steppers, which are the most widelyused steppers, and 1X steppers. Reduction steppers, which typically havereduction ratios of four or five-to-one, employ photomask patternsthat are four or five times larger than the device pattern that is to beexposed on the wafer surface. In addition, there is now a fourth generation oflithography tools, known as step-and-scan systems, that address device sizes of0.35 micron and below. In contrast to steppers, which require lenses that coverthe entire field, step-and-scan optical systems have an instantaneous fieldjust large enough to span the width of a field and employ scanning to 

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stretch coverage over theentire field. Each scan is followed by re-registration of the wafer withrespect to the mask, i.e. “stepping”, to create multiple fields covering theentire wafer. The smaller instantaneous field sizes of step-and-scan systemprojection optical systems allows them to resolve finer geometries and scanningallows them to cover larger fields. 

The principal advantage of reduction steppers andstep-and-scan systems is that they may be used in manufacturing steps requiringcritical feature sizes and are therefore necessary for manufacturing advancedICs. 1X steppers, on the other hand, employ photomask patterns that are thesame scale as the device pattern that is exposed on the wafer surface. Theoptical projection system, employed in Ultratech’s 1X steppers is based on aWynne Dyson design, which uses both a reflective mirror and refractive lenselements. This design approach leads to a very simple and versatile opticalsystem that is less expensive than those employed in reduction steppers.Because our 1X optical design covers a much broader spectral range thanreduction steppers, it delivers a greater proportion of the exposure energyfrom the lamp to the wafer surface. Depending on the size of the lamp used andthe exposure energy required for an application, this can result in appreciablyhigher throughput. Resolution considerations currently limit 1X steppers tomanufacturing steps involving less-critical, larger feature sizes. Accordingly,we believe that sales of these systems are highly dependent upon capacityexpansions by our current 1X customers, or by customers making the transitionto chips containing “bump” connections, that facilitate the use of higher datarates and a higher number of connections.

In the past, manufacturers of ICs and similar devicespurchased capital equipment based principally on performance specifications. Inview of the significant capital expenditures required to construct, equip andmaintain advanced fabrication facilities, relatively short product cycles andmanufacturers’ increasing concern for overall fabrication costs, we believethat focus is shifting to the total cost of ownership. Cost of ownershipincludes the costs associated with the acquisition of equipment, as well ascomponents based on throughput, yield, up-time, service, labor overhead,maintenance, and various other costs associated with owning and using theequipment. As a result, in many cases the most technologically advanced systemwill not necessarily be the manufacturing system of choice. 

In addition to enhancingour current lithography solutions, we have been developing new tools to servenew markets. The LSA100 tool is aimed at volume production of advanced state ofthe art devices. This product, based on the same platform and stage technologyas our advanced lithography tools, employs a 3500 Watt CO2 laser to activate ultra-shallow, transistorjunctions. Annealing times are reduced from several seconds, typical for thecurrent generation of Rapid Thermal Processing (RTP) equipment, to amillisecond or less. This results in more abrupt junctions with a higher dopantactivation levels and leads to transistors with higher drive currents and lowerleakage. While this technology is expected to be useful for multiple ICgenerations, we anticipate that eventually this technology will be supersededby a laser processing technology that will reduce the processing time below onemicrosecond, thereby achieving even higher performance characteristics withalmost “zero” thermal budget. We believe these new LP technologies—forwhich we have been awarded 55 patents and have 63 patent applications pending—removeseveral critical barriers to future device scaling and will help to extendMoore’s Law well into the future.

**Products**

We currently offer two different series of 1X lithographysystems for use in the semiconductor fabrication process: the 1000 Family,which addresses the markets for scanner replacement, high volume/low costsemiconductor fabrication and R&D packaging activities and nanotechnologyapplications; and the Saturn Spectrum and the AP series, which were designed tomeet the requirements in the advanced packaging market. These stepperscurrently offer minimum feature size capabilities ranging from 2.0 micronsto 0.75 microns. 

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For the advanced packaging market, we offer our SaturnSpectrum Family as well as our new AP series built on the Unity PlatformTM. These advanced packagingsystems were developed for high volume bump and wafer level CSP manufacturingand post passivation lithography applications. They provide broadband (g, h andi-line) exposure or selective exposure (gh or i-line), and are used inconjunction with downstream processes to produce a pattern of bumps, or metalconnections, on the bond pads of the die for flip chip devices. Using flip chipinterconnect offers reducedsignal inductance, reducedpower/ground inductance, die shrink advantages and reduced packagefootprint.

The AP series, consisting of the AP300 &AP200, are built on our Unity Platform and feature a customer-configurabledesign that supports flexible manufacturing requirements as well as toolextendibility for multiple device generations. Designed to optimizeproductivity, the AP systems integrate the processing advantages associatedwith our advanced packaging lithography equipment with the productivitybenefits of our new Unity Platform. We believe that these new lithographysystems support a lower cost-of-ownership strategy due to significantthroughput enhancements, higher reliability, and superior alignment andillumination systems.

The 1000 family is a small field system available withgh-line and i-line illumination options. In semiconductor applications, weoffer the Star 100. This platform is typically used in the manufacture of powerdevices, ASICs, analog devices and compound semiconductors. In addition, thisplatform is well suited for a number of nanotechnology applications.

Nanotechnology manufacturing combines electronics withmechanics in small devices. We have defined a nanotechnology device as a devicethat has at least one dimension in the XYZ direction less than0.1 microns. Examples include accelerometers used to activate air bags inautomobiles and membrane pressure sensors used in industrial control systems.These micro-machined devices are manufactured on silicon substrates usingphotolithography techniques similar to those used for manufacturingsemiconductors and thin film head devices. In addition, these systems are usedin applications such as LED and laser diodes. In 2002, we introduced theNanoTech product family that consists of the NanoTech 100, NanoTech 160 andNanoTech 190. The NanoTech 160 system utilizes a platform based on the previous1000 Series steppers, incorporating Dual Side Alignment (“DSA”) capabilityfor applications requiring lithography on both sides of a wafer. The NanoTech160 is an extension of the model 1600DSA stepper, and enhances the capabilitiesof the 1000 Series steppers by offering Dual Side Alignment capability,providing customers with a 1X stepper solution for this special processingrequirement. Additionally, we believe that our NanoTech steppers offerresolution and depth of focus advantages over alternative technologies to themanufacturers of nanotechnology components.

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

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

We also offer an advanced laser-based thermalannealing tool, the LSA100, built on a platform that is essentially the same asour Unity Platform. Thermal annealing is used by the semiconductor industry fora variety of process steps, including activation of implanted impurities,dielectric film formation, formation of silicides and stabilization of coppergrain structure. Annealing tools currently in use by manufacturers of semiconductordevices are furnaces and rapid thermal annealing, or Rapid Thermal Processing (“RTP”),systems. We believe there is a need for tools that anneal at highertemperatures for shorter periods of time and that our future laser annealingtools may ultimately provide this capability to the industry. The near-termapplication of our laser-based thermal annealing tools is anticipated to be inthe area of source/drain dopant activation. However, we are also researchingthe use of these tools for other applications. In 2006 we shipped and revenuedproduction systems for multiple customers. 

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Ourcurrent systems are set forth below:

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

 

**Research,Development and Engineering**

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

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

We have historicallydevoted a significant portion of our financial resources to research anddevelopment programs and expect to continue to allocate significant resourcesto these efforts in the future. As of December 31, 2006, we hadapproximately 84 full-time employees engaged in research, development,and engineering. For 2006, 2005 and 2004, total research, development, andengineering expenses were approximately $26.2 million, $27.0 million and $25.9million, respectively, and represented 22%, 22% and 24% of our net sales,respectively.

**Sales and Service**

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

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We believe that as semiconductor and nanotechnologydevice manufacturers produce increasingly complex devices, they will require anincreased level of support. Global support capability as well as productreliability, performance, yield, cost, uptime and mean time between failuresare increasingly important factors by which customers evaluate potentialsuppliers of photolithography equipment. We believe that the strength of ourworldwide service and support organization is an important factor in ourability to sell our systems, maintain customer loyalty and reduce themaintenance costs of our systems. In addition, we believe that working with oursuppliers and customers is necessary to ensure that our systems are costeffective, technically advanced and designed to satisfy customer requirements.

We support our customers with field service,applications, technical service engineers and training programs. We provide ourcustomers with comprehensive support and service before, during and afterdelivery of our systems. To support the sales process and to enhance customerrelationships, we work closely with prospective customers to develop hardware,software and applications test specifications and benchmarks, and often designcustomized applications to enable prospective customers to evaluate ourequipment for their specific needs. Prior to shipment, our support personnel typicallyassist the customer in site preparation and inspection, and provide customerswith training at our facilities or at the customer’s location. We currentlyoffer our customers various courses of instruction on our systems, includinginstructions in system hardware, software and applications tools for optimizingour systems to fit a customer’s particular needs. Our customer training programalso includes instructions in the maintenance of our systems. Our field supportpersonnel work with the customer’s employees to install the system anddemonstrate system readiness. Technical support is also available via telephoneand through on-site Ultratech personnel.

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

**Manufacturing**

We perform all of our manufacturing activities (finalassembly, system testing and certain subassembly) in clean room environmentstotaling approximately 25,000 square feet located in San Jose, California.Performing manufacturing operations in California exposes us to a higher riskof natural disasters, including earthquakes. In addition, in the pastCalifornia has experienced power shortages, which have interrupted ouroperations. Such shortages could occur in the future and could again interruptour operations resulting in product shipment delays, increased costs and otherproblems, any of which could have a material adverse effect on our business, customerrelationships and results of operations. We are not insured against naturaldisasters and power shortages and the occurrence of such an event could have amaterial adverse impact on our business, financial condition and results ofoperations.

Our manufacturing activities consist of assembling andtesting components and subassemblies, which are then integrated into finishedsystems. We rely on a limited number of outside suppliers and subcontractors tomanufacture certain components and subassemblies. We order one of the mostcritical components of our technology, the glass for our 1X lenses, fromexternal suppliers. We design the 1X lenses and provide the lensspecifications and the glass to other suppliers, who then machine the lenselements. We then assemble and test the optical 1X lenses. We have recorded thecritical parameters of each of our optical lenses sold since 1988, and believethat such information enables us to supply lenses to our customers that matchthe characteristics of our customers’ existing lenses.

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

We maintain a company-widequality program. Our operations achieved ISO 9001:1994 certification in 1996and ISO 14001:1996 certification in March 2001. Our ISO 9001 certificationwas upgraded to the ISO 9001:2000 standard in January 2002. Our ISO 14001certification was upgraded to the ISO 14001:2004 standard in June 2006.All certifications have been maintained uninterrupted through the date of thisreport.

**Competition**

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

**Advanced Packaging**

We experience competition in advanced packaging fromvarious proximity aligner companies such as Suss Microtec AG (Suss Microtec)and projection companies such as Ushio, Inc. (Ushio) and TamarackScientific Co., Inc. (Tamarack). We expect our competitors to continue toimprove the performance of their current products and to introduce new productswith improved price and performance characteristics. This could cause a declinein sales or loss of market acceptance of our steppers in our served markets,and thereby materially adversely affect our business, financial condition andresults of operations. Enhancements to, or future generations of, competingproducts may be developed that offer superior cost of ownership and technicalperformance features. We believe that to be competitive will requiresignificant financial resources in order to continue to invest in new productdevelopment, to invest in new features and enhancements to existing products,to introduce new generation stepper systems in our served markets on a timelybasis, and to maintain customer service and support centers worldwide. Inmarketing our products, we may also face competition from suppliers employingother technologies. In addition, increased competitive pressure has led tointensified price-based competition in certain of our markets, resulting inlower prices and margins. Should these competitive trends continue, ourbusiness, financial condition and operating results may be materially adverselyaffected.

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

**Laser Processing**

With respect to our laser annealing technologies,marketed under the LSA100 product name, our primary competition comes fromcompanies such as Applied Materials, Inc. and Dainippon ScreenManufacturing Co., LTD. Many of these companies offer products utilizing rapidthermal processing (RTP), which is the current manufacturing technology. RTPdoes not prevent semiconductor device manufacturers from scaling the lateraldimensions of their transistors to obtain improved performance, but diffusionresulting from the time scales associated with RTP seriously limits thevertical dimension of the junctions. Faster annealing times result in shallowerand more abrupt junctions and faster transistors. We believe that RTPmanufacturers recognize the need to reduce thermal cycle times and are workingtoward this goal. Several companies have published papers on annealing toolsthat incorporate flash lamp anneal (FLA) technology in order to reduceannealing times and increase anneal temperatures. Developers of FLA technologyclaim to have overcome annealing difficulties at the 65nm node. This technique,which employs xenon flash lamps, has shown improvements over RTP in junctiondepth and sheet resistance, but we believe FLA suffers from pattern-related non-uniformitiesand could require additional, costly processes to equalize the reflectivity ofdifferent areas within the chip or wafer. Our proprietary laser processingsolution has been specifically developed to provide junction annealing onnear-instantaneous timescales, while achieving high activation levels. LSA, ourfirst implementation of laser processing, activates dopants in themicrosecond-to-millisecond time frame without melting. Our research indicatesthat, at temperatures just below the melting point of silicon, time durationsin the microsecond to millisecond range, are required to achieve fullactivation, and minimal dopant diffusion.

In July 2000, welicensed certain rights to our then existing laser processing technology, withreservations, to a competing manufacturer of semiconductor equipment. Wepresently anticipate that this company and others intend to offer laserannealing tools to the semiconductor industry that will compete with ourofferings. We believe that Applied Materials is working to introduce a laserbased system thatwill suffer cost of ownership disadvantages.

**IntellectualProperty Rights**

Although we attempt to protect our intellectualproperty rights through patents, copyrights, trade secrets and other measures,we believe that our success will depend more upon the innovation, technologicalexpertise and marketing abilities of our employees. Nevertheless, we have apolicy of seeking patents when appropriate on inventions resulting from ourongoing research and development and manufacturing activities. We own 116United States and foreign patents, which expire on dates ranging from April 2007to December 2024 and have 87 United States and foreign patent applicationspending. We also have various registered trademarks and copyright registrationscovering mainly software programs 

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used in the operation ofour systems. We also rely upon trade secret protection for our confidential andproprietary information. We may not be able to protect our technologyadequately and competitors may be able to develop similar technologyindependently. Our pending patent applications may not be issued or U.S. orforeign intellectual property laws may not protect our intellectual propertyrights. In addition, litigation may be necessary to enforce our patents, copyrightsor other intellectual property rights, to protect our trade secrets, todetermine the validity and scope of the proprietary rights of others or todefend against claims of infringement. Such litigation has resulted in, and inthe future could result in, substantial costs and diversion of resources andcould have a material adverse effect on our business, financial condition andresults of operations, regardless of the outcome of the litigation. Patentsissued to us may be challenged, invalidated or circumvented and the rightsgranted thereunder may not provide competitive advantages to us. Furthermore,others may independently develop similar technology or products, or, if patentsare issued to us, design around the patents issued to us. Invalidation of ourpatents related to those technologies could allow our competitors to moreeffectively compete against us, which could result in less revenue for us.

On February 29, 2000, wefiled lawsuits asserting patent infringement and related claims against Nikon, Canon,and ASML in the U.S. District Court for the Eastern District of Virginia. In April 2000,we reached a settlement with Nikon, and in September 2001, we reached asettlement with Canon. In the patent litigation against ASML, a jury trial wasconducted in the U.S. District Court for the Northern District of Californiaduring the three-month period ended July 2, 2005. The jury reached averdict that the patent was infringed, but that the asserted claims of thepatent were invalid. We filed a post-trial motion for a new trial and forjudgment as a matter of law in our favor. ASML also filed a motion for judgmentas a matter of law seeking to invalidate three of the asserted claims for lackof enablement and requested that the court awards costs. On February 13th,2006, the Court denied our post-trial motions, including the motion for a newtrial, and entered judgment in favor of ASML invalidating three claims of thepatent for lack of enablement. The Court also awarded ASML approximately$330,000 in costs. We have filed an appeal with the Federal CircuitCourt of Appeals, and filed our opening appellate brief on August 30,2006. Although ASML originally filed a notice of cross-appeal, ASMLsubsequently withdrew its cross appeal and the Court entered an order to thateffect on December 8, 2006. ASML’s opening appellate brief was filed on December 6,2006, and Ultratech’s reply brief was filed January 12, 2007. We expectthe case to be set for oral argument in late Spring 2007.

On July 11, 2003, we filed a lawsuit against aSouthern California company asserting infringement of certain claims related toU.S. patent No. 5,621,813 in the U.S. District Court in and for theNorthern District of California. On May 17, 2005, the court found thesubject patent to be invalid. We appealed this decision. The defendantsubsequently brought a motion for reimbursement of its attorneys’ fees andcosts in a total asserted amount of approximately $2 million. We opposed thismotion, and on October 12, 2005, the District Court denied the defendant’srequest for attorneys’ fees in its entirety. The defendant appealed thatdecision. On November 3, 2005, the defendant filed a notice of appeal withrespect to the court’s ruling on its motion for attorneys’ fees. In March 2006,the Federal Circuit court upheld the district court’s ruling that the subjectpatent is invalid. On August 8, 2006, the Federal Circuit court upheld theDistrict Court’s denial of attorneys’ fees.

In May 2006, the same company filed a state courtlawsuit against us for malicious prosecution and abuse of process claiming thatattorney’s fees, costs and other damages were due based on the outcome of afederal patent litigation suit brought against it by us. We do not believe thisnew action has merit, particularly given the denial by the federal court andthe subsequent federal appellate court’s affirmation of the order denying theaward of any attorney’s fees payable to this company by us in the federalpatent litigation. We filed a motion to have the state court complaintdismissed under California’s anti-SLAPP and demurrer statutes. Nonetheless thestate court has preliminarily stated that it would deny our motion to dismissas to the malicious prosecution claim, while granting it as to the abuse ofprocess claim. In such 

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event, we intend to appealthe denial of our motion to dismiss the malicious prosecution claim andotherwise vigorously defend against this action and to seek fees and/orsanctions against this company in relation thereto.

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

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

**Environmental Regulations**

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

**Customers,Applications and Markets**

We sell our systems to semiconductor, advanced packaging,thin film head, ink jet printer/accelerometer and various other nanotechnologymanufacturers located throughout North America, Europe, Japan, Taiwan and therest of Asia. Semiconductor manufacturers have purchased the 1000 Series steppers,the AP series of steppers, and the NanoTech steppers for the fabrication and/orpackaging of microprocessors, microcontrollers, DRAMs, ASICs and a host ofother devices. Such systems could be used in mix-and-matchapplications with other lithography tools, as replacements for scanners andcontact proximity printers, in packaging for flip chip applications and forhigh volume, low cost, less critical feature size production.

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

On a market application basis, sales to thesemiconductor industry, primarily for advanced packaging applications,accounted for approximately 94% of system revenue for the year ended December 31,2006, as compared to 79% and 75% for each of the years ended December 31,2005 and 2004, respectively. During 2006, 2005 and 2004, approximately 6%, 21%and 25%, respectively, of our systems revenue was derived from sales tonanotechnology manufacturers, including micro systems, thin film head andoptical networking device manufacturers. Our future results of operations andfinancial position would be 

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materially adverselyimpacted by a downturn in any of these industries, or by loss of market sharein any of these industries.

International sales accounted for approximately 64%,69% and 65% of total net sales for the years 2006, 2005 and 2004, respectively,with Japan representing 26%, 13% and 32% of sales for those same years.

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

**Backlog**

We schedule production ofour systems based upon order backlog, informal customer commitments and generaleconomic forecasts for our targeted markets. We include in our backlog allaccepted customer orders for our systems with assigned shipment dates withinone year, as well as all orders for service, spare parts and upgrades, in eachcase, that management believes to be firm. However, all orders are subject tocancellation or rescheduling by the customer with limited or no penalties.Because of changes in system delivery schedules, cancellations of orders andpotential delays in system shipments, our backlog at any particular date maynot necessarily be representative of actual sales for any succeeding period. Asof December 31, 2006, our backlog was approximately $82.7 million,including $0.3 million of products shipped but not yet installed. In 2005, wehad backlog of $108.8 million, and all products shipped had been installed andaccepted as of December 31, 2005. Cancellation, deferrals or reschedulingof orders by these customers would have a material adverse impact on our futureresults of operations.

**Employees**

At December 31, 2006,we had approximately 332 full-time employees, including 84 engaged inresearch, development, and engineering, 27 in sales and marketing, 110 incustomer service and support, 64 in manufacturing and 47 in generaladministration and finance. We believe our future success depends, in largepart, on our ability to attract and retain highly skilled employees. None ofour employees are covered by a collective bargaining agreement. We have,however, entered into employment agreements with a limited number of ouremployees, including our executive officers. We consider our relationships withour employees to be good.

**InformationAvailable on Our Web-site**

Our web-site is located at*www.ultratech.com*. We make available,free of charge, through our web-site, our annual report on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K(and amendments to those reports), as soon as reasonably practicable after suchreports are filed electronically with the SEC. We have adopted a Code of Ethics for our principal executive officer,principal financial 

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officer, principal accounting officer or controller, orpersons performing similar functions. We have posted this Code of Ethicson our website. Any future amendments to this Code will also be posted on ourwebsite.

**Item 1A**                   *Risk Factors*

In addition to risks described in the foregoingdiscussions under “Business,” including but not limited to those under “Products,”“Research, Development and Engineering,” “Sales and Service,” “Manufacturing,” “Competition,”“Intellectual Property Rights,” “Environmental Regulations,” “Customers,Applications and Markets,” “Backlog,” and “Employees,” the following risksapply to us and our business:

**We currently spend,and expect to continue to spend, significant resources to develop, introduceand commercialize our laser processing systems and AP wafer stepper products,and we may not be successful in achieving or increasing sales of theseproducts.**

Currently, we are devoting significant resources tothe development, introduction and commercialization of our laser products aswell as our lithography wafer steppers. We intend to continue to develop theseproducts and technologies during 2007, and will continue to incur significantoperating expenses in the areas of research, development and engineering,manufacturing and general and administrative costs in order to develop, produceand support these new products. Additionally, gross profit margins andinventory levels may be further adversely impacted in the future by costsassociated with the initial production of our laser processing systems and byfuture generations of our 1X lithography systems. Introduction of new productsgenerally involves higher installation costs and product performanceuncertainties that could delay customer acceptance of our systems, resulting ina delay in recognizing revenue associated with those systems and a reduction ingross margins. These costs include, but are not limited to, additionalmanufacturing overhead, additional inventory write-offs, costs of demonstrationsystems and facilities, costs associated with the establishment of additionalafter-sales support organizations. Additionally, operating expenses mayincrease, relative to sales, as a result of adding additional marketing andadministrative personnel, among other costs, to support our new products. If weare unable to achieve significantly increased net sales or if our sales fallbelow expectations, our operating results will be materially adverselyaffected.

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

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

Sales of our systems depend, in significant part, uponthe decision of a prospective customer to increase manufacturing capacity or torestructure current manufacturing facilities, either of which typicallyinvolves a significant commitment of capital. Many of our customers in the pasthave cancelled the development of new manufacturing facilities and have substantiallyreduced their capital equipment budgets. In view of the significant investmentinvolved in a system purchase, we have experienced and may continue toexperience delays following initial qualification of our systems as a result ofdelays in a customer’s approval process. Additionally, we are presentlyreceiving orders for systems that have lengthy 

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delivery schedules, whichmay be due to longer production lead times or a result of customers’ capacityscheduling requirements. For these and other reasons, our systems typicallyhave a lengthy sales cycle during which we may expend substantial funds andmanagement effort in securing a sale. Lengthy sales cycles subject us to anumber of significant risks, including inventory obsolescence and fluctuationsin operating results, over which we have little or no control. In order tomaintain or exceed our present level of net sales, we are dependent uponobtaining orders for systems that will ship and be accepted in the currentperiod. We may not be able to obtain those orders.

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

Although we attempt to protect our intellectualproperty rights through patents, copyrights, trade secrets and other measures,we believe that our success will depend more upon the innovation, technologicalexpertise and marketing abilities of our employees. Nevertheless, we have apolicy of seeking patents when appropriate on inventions resulting from ourongoing research and development and manufacturing activities. We own 116United States and foreign patents, which expire on dates ranging from April 2007to December 2024 and have 87 United States and foreign patent applicationspending. In addition, we have various registered trademarks and copyrightregistrations covering mainly software programs used in the operation of oursystems. We also rely upon trade secret protection for our confidential andproprietary information. We may not be able to protect our technologyadequately and competitors may be able to develop similar technologyindependently. Our pending patent applications may not be issued or U.S. orforeign intellectual property laws may not protect our intellectual propertyrights. In addition, litigation may be necessary to enforce our patents,copyrights or other intellectual property rights, to protect our trade secrets,to determine the validity and scope of the proprietary rights****of others or to defend against claims of infringement. Suchlitigation has resulted in, and in the future could result in, substantialcosts and diversion of resources and could have a material adverse effect onour business, financial condition and results of operations, regardless of theoutcome of the litigation. Patents issued to us may be challenged, invalidatedor circumvented and the rights granted thereunder may not provide competitiveadvantages to us. Furthermore, others may independently develop similartechnology or products, or, if patents are issued to us, design around thepatents issued to us. Invalidation of our patents related to those technologiescould allow our competitors to more effectively compete against us, which couldresult in less revenue for us.

On February 29, 2000, wefiled lawsuits asserting patent infringement and related claims against Nikon,Canon, and ASML in the U.S. District Court for the Eastern District of Virginia.In April 2000, we reached a settlement with Nikon, and in September 2001,we reached a settlement with Canon. In the patent litigation against ASML, ajury trial was conducted in the U.S. District Court for the Northern Districtof California during the three-month period ended July 2, 2005. The juryreached a verdict that the patent was infringed, but that the asserted claimsof the patent were invalid. We filed a post-trial motion for a new trial andfor judgment as a matter of law in our favor. ASML also filed a motion forjudgment as a matter of law seeking to invalidate three of the asserted claimsfor lack of enablement and requested that the court awards costs. On February 13th,2006, the Court denied our post-trial motions, including the motion for a newtrial, and entered judgment in favor of ASML invalidating three claims of thepatent for lack of enablement. The Court also awarded ASML approximately$330,000 in costs. We have filed an appeal with the Federal Circuitcourt of Appeals, and filed our opening appellate brief on August 30,2006. Although ASML originally filed a notice of cross-appeal, ASMLsubsequently withdrew its cross appeal and the Court entered an order to thateffect on December 8, 2006. ASML’s opening appellate brief was filed on December 6,2006, and Ultratech’s reply brief was filed January 12, 2007. We expectthe case to be set for oral argument in late Spring 2007.

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On July 11, 2003, we filed a lawsuit against aSouthern California company asserting infringement of certain claims related toU.S. patent No. 5,621,813 in the U.S. District Court in and for theNorthern District of California. On May 17, 2005, the court found thesubject patent to be invalid. We appealed this decision. The defendantsubsequently brought a motion for reimbursement of its attorneys’ fees andcosts in a total asserted amount of approximately $2 million. We opposed thismotion, and on October 12, 2005, the District Court denied the defendant’srequest for attorneys’ fees in its entirety. The defendant appealed thatdecision. On November 3, 2005, the defendant filed a notice of appeal withrespect to the court’s ruling on its motion for attorneys’ fees. In March 2006,the Federal Circuit court upheld the district court’s ruling that the subjectpatent is invalid. On August 8, 2006, the Federal Circuit court upheld theDistrict Court’s denial of attorneys’ fees.

In May 2006, the same company filed a state courtlawsuit against us for malicious prosecution and abuse of process claiming thatattorney’s fees, costs and other damages were due based on the outcome of afederal patent litigation suit brought against it by us. We do not believe thisnew action has merit, particularly given the denial by the federal court andthe subsequent federal appellate court’s affirmation of the order denying theaward of any attorney’s fees payable to this company by us in the federalpatent litigation. We filed a motion to have the state court complaintdismissed under California’s anti-SLAPP and demurrer statutes. Nonetheless thestate court has preliminarily stated that it would deny our motion to dismissas to the malicious prosecution claim, while granting it as to the abuse ofprocess claim. In such event, we intend to appeal the denial of our motion todismiss the malicious prosecution claim and otherwise vigorously defend againstthis action and to seek fees and/or sanctions against this company in relationthereto.

We believe that the outcome of these matters will notbe material to our business, financial condition or results of operations.

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

Infringement claims by third parties or claims forindemnification resulting from infringement claims may be asserted in thefuture and such assertions could materially adversely affect our business,financial condition and results of operations, regardless of the outcome of anylitigation. With respect to any such future claims, we may seek to obtain alicense under the third party’s intellectual property rights. However, alicense may not be available on reasonable terms or at all. We could decide, inthe alternative, to resort to litigation to challenge such claims. Suchchallenges could be expensive and time consuming and could materially adverselyaffect our business, financial condition and results of operations, regardlessof the outcome of any litigation.

**We operate in a highly competitive industry in whichcustomers are required to invest substantial resources in each product, whichmakes it difficult to achieve significant sales to a particular customer onceanother vendor’s equipment has been purchased by that customer.**

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

We experience competition in advanced packaging fromvarious proximity aligner companies such as Suss Microtec AG (Suss Microtec)and projection companies such as Ushio, Inc. (Ushio). In 

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

With respect to our laser annealing technologies,marketed under the LSA100 product name, the primary competition comes fromcompanies such as Applied Materials, Inc. and Dainippon ScreenManufacturing Co., LTD. Many of these companies offer products utilizing rapidthermal processing, or RTP, which is the current manufacturing technology. RTPdoes not prevent semiconductor device manufacturers from scaling the lateraldimensions of their transistors to obtain improved performance, but diffusionresulting from the time scales associated with RTP limits the verticaldimension of the junctions. Faster annealing times result in shallower and moreabrupt junctions and faster transistors. We believe that RTP manufacturersrecognize the need to reduce thermal cycle times and are working toward thisgoal. In July 2000, we licensed certain rights to our then existing laserprocessing technology, with reservations, to a competing manufacturer ofsemiconductor equipment. We presently anticipate that this company will offerlaser-annealing tools to the semiconductor industry that will compete with ourofferings.

Another potential advanced annealing solution utilizesflash lamp annealing technology, or FLA. Several companies have publishedpapers on annealing tools that incorporate flash lamp technology in order toreduce annealing times and increase anneal temperatures. Developers of FLAtechnology claim to have overcome annealing difficulties at the 65nm node. Thistechnique, which employs xenon flash lamps, has shown improvements over RTP injunction depth and sheet resistance, but we believe FLA suffers frompattern-related non-uniformities and could require additional, costly processesto equalize the reflectivity of different areas within the chip or wafer. Ourproprietary laser processing solution has been specifically developed toprovide junction annealing on near-instantaneous time-scales, while achievinghigh activation levels. Laser spike annealing, the first implementation oflaser processing, activates dopants in the microsecond-to-millisecond timeframe without melting. Our research indicates that, at temperatures just belowthe melting point of silicon, time durations in the microsecond to millisecondrange, are required to achieve full activation, and minimal dopant diffusion.

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

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

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

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Historically, we have sold a substantial portion ofour systems to a limited number of customers. In 2006, Matsushita and Intelaccounted for 12% and 11%, respectively, of our net sales. In 2005, and 2004,Intel Corporation accounted for 13% and 10%, respectively, of our net sales. Weexpect that sales to a relatively few customers will continue to account for a highpercentage of our net sales in the foreseeable future and believe that ourfinancial results depend in significant part upon the success of these majorcustomers and our ability to meet their future capital equipment needs.Although the composition of the group comprising our largest customers may varyfrom period to period, the loss of a significant customer or any reduction inorders by a significant customer, including reductions due to market, economicor competitive conditions in the semiconductor, semiconductor packaging ornanotechnology industries or in the industries that manufacture productsutilizing integrated circuits, thin film heads or other nanotechnologycomponents, would likely have a material adverse effect on our business,financial condition and results of operations. Our ability to maintain orincrease our sales in the future depends, in part, on our ability to obtainorders from new customers as well as the financial condition and success of ourexisting customers, the semiconductor and nanotechnology industries and theeconomy in general.

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

On a market application basis, sales to thesemiconductor industry, primarily for advanced packaging applications,accounted for approximately 94% and 79% of system revenue for the years ended2006 and 2005, respectively. In 2006 and 2005, approximately 6% and 21%,respectively, of our systems revenue was derived from sales to nanotechnologymanufacturers, including micro systems, thin film head and optical devicemanufacturers. Our future operating results and financial condition would bematerially adversely impacted by a downturn in any of these industries, or byloss of market share in any of these industries. A growing portion of our backlogof system orders is comprised of laser spike annealing tools. To date, we havelimited customer experience with this technology. Should significant demand notmaterialize, due to technical, production, market, or other factors, ourbusiness, financial position and results of operations would be materiallyadversely impacted.

**We rely on a limited number of outside suppliers andsubcontractors to manufacture certain components and subassemblies, and onsingle or a limited group of outside suppliers for certain materials for ourproducts, which could result in a potential inability to obtain an adequatesupply of required components due to the suppliers’ failure or inability toprovide such components in a timely manner, or at all, and reduced control overpricing and timely delivery of components and materials, any of which couldadversely affect our results of operations.**

Our manufacturing activities consist of assembling andtesting components and subassemblies, which are then integrated into finished systems.We rely on a limited number of outside suppliers and subcontractors tomanufacture certain components and subassemblies. We order one of the mostcritical components of our technology, the glass for our 1X lenses, fromexternal suppliers. We design the 1X lenses and provide the lensspecifications and the glass to other suppliers, who then grind and polish thelens elements. We then assemble and test the optical 1X lenses.

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

**The semiconductorindustry historically has been highly cyclical and has experienced periods ofoversupply, which has in turn affected the market for semiconductor equipmentsuch as ours and which can adversely affect our results of operations duringsuch periods.**

Our business depends in significant part upon capitalexpenditures by******manufacturers ofsemiconductors, advanced packaging semiconductors and nanotechnologycomponents, including thin film head magnetic recording devices, which in turndepend upon the current and anticipated market demand for such devices andproducts utilizing such devices. The semiconductor industry historically hasbeen highly cyclical and has experienced recurring periods of oversupply. Thishas, from time to time, resulted in significantly reduced demand for capitalequipment including the systems manufactured and marketed by us. We believethat markets for new generations of semiconductors and semiconductor packagingwill also be subject to similar fluctuations. Our business and operatingresults would be materially adversely affected by downturns or slowdowns in thesemiconductor packaging market or by loss of market share. Accordingly, we maynot be able to achieve or maintain our current or prior level of sales. Weattempt to mitigate the risk of cyclicality by participating in multiplemarkets including semiconductor, semiconductor packaging, and nanotechnologysectors, as well as diversifying into new markets such as laser-based annealingfor implant activation and other applications. Despite such efforts, when oneor more of such markets experiences a downturn or a situation of excesscapacity, our net sales and operating results are materially adverselyaffected.

**Our industry issubject to rapid technological change and product innovation, which couldresult in our technologies and products being replaced by those of ourcompetitors, which would adversely affect our business and results ofoperations.**

The semiconductor and nanotechnology manufacturingindustries are subject to rapid technological change and new productintroductions and enhancements. Our ability to be competitive in these andother markets will depend, in part, upon our ability to develop new andenhanced systems and related software tools, and to introduce these systems andrelated software tools at competitive prices and on a timely and cost-effectivebasis to enable customers to integrate them into their operations either priorto or as they begin volume product manufacturing. We will also be required toenhance the performance of our existing systems and related software tools. Oursuccess in developing new and enhanced systems and related software toolsdepends upon a variety of factors, including product selection, timely andefficient completion of product design, timely and efficient implementation ofmanufacturing and assembly processes, product performance in the field andeffective sales and marketing. Because new product 

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development commitmentsmust be made well in advance of sales, new product decisions must anticipateboth future demand and the technology that will be available to meet thatdemand. We may not be successful in selecting, developing, manufacturing ormarketing new products and related software tools or enhancing our existingproducts and related software tools. Any such failure would materiallyadversely affect our business, financial condition and results of operations.

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

We may encounter additional technical, manufacturingor other difficulties that could further delay future introductions or volumeproduction of systems or enhancements. Our inability to complete thedevelopment or meet the technical specifications of any of our systems orenhancements and related software tools, or our inability to manufacture andship these systems or enhancements and related  tools in volume and in time to meet therequirements for manufacturing the future generation of semiconductor ornanotechnology devices would materially adversely affect our business,financial condition and results of operations. In addition, we may incursubstantial unanticipated costs to ensure the functionality and reliability ofour products early in the products’ life cycles. If new products havereliability or quality problems, reduced orders or higher manufacturing costs,delays in customer acceptance, revenue recognition and collecting accountsreceivable and additional service and warranty expenses may result. Any of suchevents may materially adversely affect our business, financial condition andresults of operations.

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

International sales accounted for approximately 64%,69% and 65% of total net sales for the years 2006, 2005 and 2004, respectively.We anticipate that international sales will continue to account for asignificant portion of total net sales. As a result, a significant portion ofour net sales will continue to be subject to certain risks, includingunexpected changes in regulatory requirements; difficulty in satisfyingexisting regulatory requirements; exchange rate fluctuations; tariffs and otherbarriers; political and economic instability; difficulties in accountsreceivable collections; natural disasters; difficulties in staffing andmanaging foreign subsidiary and branch operations; and potentially adverse taxconsequences.

Although we generally transact our international salesin U.S. dollars, international sales expose us to a number of additional riskfactors, including fluctuations in the value of local currencies relative tothe U.S. dollar, which, in turn, impact the relative cost of ownership of ourproducts and may further impact the purchasing ability of our internationalcustomers. However, in Japan, we have direct sales operations and orders areoften denominated in Japanese yen. This may subject us to a higher degree ofrisk from currency fluctuations. We attempt to mitigate this exposure throughthe use of foreign currency forward exchange contracts. We are also subject tothe risks associated with the imposition of legislation and regulationsrelating to the import or export of semiconductors and nanotechnology products.We cannot predict whether the United States or any other country will implementchanges to quotas, duties, taxes or other charges or restrictions upon theimportation or exportation of our products. These factors, or the adoption ofrestrictive policies, may have a material adverse effect on our business,financial condition and results of operations.

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**We are dependent on our key personnel, especially Mr. Zafiropouloour Chief Executive Officer, and our business and results of operations wouldbe adversely affected if we were to lose our key employees.**

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

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

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

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

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

The Sarbanes-Oxley Act of 2002 required changes in ourcorporate governance, public disclosure and compliance practices. The number ofrules and regulations applicable to us have increased and will continue toincrease our legal and financial compliance costs, and have made some activitiesmore difficult, such as by requiring stockholder approval of new option plans.In addition, we have incurred and expect to continue to incur significant costsin connection with compliance with Section 404 of the Sarbanes-Oxley Actregarding internal controls over financial reporting. We incurred significantcosts to achieve initial compliance with Section 404, and we expectongoing annual costs to maintain compliance to also be 

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substantial. We alsoexpect these developments to make it more difficult and more expensive toobtain director and officer liability insurance, and we may be required toaccept reduced coverage or incur substantially higher costs to obtain coverage.These developments could make it more difficult for us to attract and retainqualified members of our board of directors, particularly to serve on our auditcommittee, and qualified executive officers. In addition, in connection withour Section 404 certification process, we may identify from time to timedeficiencies in our internal controls. Any material weakness or deficiency inour internal controls over financial reporting could materially and negativelyimpact our reported financial results and the market price of our stock couldsignificantly decline. Additionally, adverse publicity related to thedisclosure of a material weakness or deficiency in internal controls overfinancial reporting could have a negative impact on our reputation, businessand stock price.

**Our equityincentive plans, certain provisions of our Certificate of Incorporation andBylaws, and Delaware law may discourage third parties from pursuing a change ofcontrol transaction with us.**

Certain provisions of our Certificate ofIncorporation, equity incentive plans, licensing agreements, Bylaws and Delaware law may discourage certaintransactions involving a change in control of our company. In addition to theforegoing, our classified board of directors, the shareholdings of ourofficers, directors and persons or entities that may be deemed affiliates andthe ability of the Board of Directors to issue “blank check” preferred stockwithout further stockholder approval could have the effect of delaying,deferring or preventing us from experiencing a change in control and mayadversely affect the voting and other rights of holders of our Common Stock.

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

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

As of March 1, 2007, we had options to purchaseapproximately 5,685,727 shares of our Common Stock outstanding. Among otherdeterminants, the market price of our stock has a major bearing on the numberof shares subject to outstanding stock options that are included in theweighted-average shares used in determining our net income (loss) per share.During periods of extreme volatility, the impact of higher stock prices canhave a materially dilutive effect on our net income (loss) per share.****Additionally,****shares subject****to outstanding options are excluded from the calculation ofnet income (loss) per share when we have a net loss or when the exercise priceof the stock option is greater than the average market price of our CommonStock, as the impact of the stock options would be anti-dilutive.

**Our results ofoperations and business could be adversely affected by wars and other militaryaction, as well as terrorist attacks and threats and government responsesthereto, especially if any such actions were directed at us or our facilitiesor customers.**

Terrorist attacks in the United States and elsewhere,government responses thereto, and military actions in Iraq, Afghanistan andelsewhere, may disrupt our operations or those of our customers and suppliersand may affect the availability of materials needed to manufacture our productsor the means to transport those materials to manufacturing facilities andfinished products to customers. In addition, any of 

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these events couldincrease volatility in the United States and world financial markets which maydepress the price of our Common Stock and may limit the capital resourcesavailable to us or our customers or suppliers, which could result in decreasedorders from customers, less favorable financing terms from suppliers, andscarcity or increased costs of materials and components of our products.Additionally, terrorist attacks directly upon us may significantly disrupt ourability to conduct our business. Any of these occurrences could have asignificant impact on our operating results, revenues and costs and may resultin increased volatility of the market price of our Common Stock.

**If we acquirecompanies, products, or technologies, we may face risks associated with thoseacquisitions.**

On July 26, 2006 we purchased certain assets ofOraxion, Inc. Oraxion produced inspection equipment for surface metrologyand stress analysis for the semiconductor industry. We may not realize the anticipated benefits of any acquisition orinvestment. We may in the future pursue additional acquisitions ofcomplementary product lines, technologies or businesses. Future acquisitionsmay result in potentially dilutive issuances of equity securities, theincurrence of debt and contingent liabilities and amortization expenses andimpairment charges related to goodwill and other intangible assets, which couldmaterially adversely affect our financial condition and results of operations.In addition, acquisitions involve numerous risks, including difficulties in theassimilation of the operations, technologies, personnel and products of theacquired companies; the diversion of management’s attention from other businessconcerns; risks of entering markets in which we have limited or no directexperience; and the potential loss of key employees of the acquired company. Inthe event we acquire product lines, technologies or businesses which do notcomplement our business, or which otherwise do not enhance our sales oroperating results, we may incur substantial write-offs and higher recurringoperating costs, which could have a material adverse effect on our business,financial condition and results of operations. In the event that any suchacquisition does occur, there can be no assurance as to the effect thereof onour business or operating results.

**Our long-termexpenses reduction programs may result in an increase in short-term expenses.**

Inthe fourth quarter of 2006, we eliminated approximately 29 full-time positions,69% in the United States and 31% internationally, and entered into a leasebuyout agreement for the operating lease in the United Kingdom facility as partof our long-term expense reduction initiatives. As of December 31,2006, we have reduced our workforce by 27 personnel in connection with thisplan and recorded exit activity charges of approximately $1.9 millionrelated to this plan. We may from time to time undertake additional expensereduction programs or actions, any of which could result in current period chargesand expenses that could have a material adverse effect on that period’soperating results.

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

***Not applicable.***

**ITEM 2.**                *PROPERTIES*

Ultratech maintains itsheadquarters and manufacturing operations in San Jose, California in two leasedfacilities, totaling approximately 177,000 square feet, which contain generaladministration and finance, marketing and sales, customer service and support,manufacturing and research, development, and engineering. The leases for thesefacilities expire at various dates from March 2010****toJanuary 2011. We also lease sales and support offices in the United Statesin East Fishkill, New York and Woburn, Massachusetts under leases expiring in2007 and 2008, respectively. We maintain offices outside the United States inTaiwan, the Philippines, Japan, Korea, France, and China, with terms expiringbetween seven months and five years from December 31, 2006. We believethat our existing facilities will be adequate to meet our currently anticipatedrequirements and that suitable additional or substitute space will be 

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availableas needed. In the fourth quarter of 2006,in order to drive company-wide savings, we entered into a lease buyoutagreement for the operating lease in the United Kingdom facility and we alsoexited a Texas facility when the lease expired.

**ITEM 3.**                *LEGAL PROCEEDINGS*

On February 29, 2000, wefiled lawsuits asserting patent infringement and related claims against Nikon,Canon, and ASML in the U.S. District Court for the Eastern District ofVirginia. In April 2000, we reached a settlement with Nikon, and in September 2001,we reached a settlement with Canon. In the patent litigation against ASML, ajury trial was conducted in the U.S. District Court for the Northern Districtof California during the three-month period ended July 2, 2005. The juryreached a verdict that the patent was infringed, but that the asserted claimsof the patent were invalid. We filed a post-trial motion for a new trial andfor judgment as a matter of law in our favor. ASML also filed a motion forjudgment as a matter of law seeking to invalidate three of the asserted claimsfor lack of enablement and requested that the court awards costs. On February 13th,2006, the Court denied our post-trial motions, including the motion for a newtrial, and entered judgment in favor of ASML invalidating three claims of thepatent for lack of enablement. The Court also awarded ASML approximately$330,000 in costs. We have filed an appeal with the Federal CircuitCourt of Appeals, and filed our opening appellate brief on August 30,2006. Although ASML originally filed a notice of cross-appeal, ASMLsubsequently withdrew its cross appeal and the Court entered an order to thateffect on December 8, 2006. ASML’s opening appellate brief was filed on December 6,2006, and Ultratech’s reply brief was filed January 12, 2007. We expectthe case to be set for oral argument in late Spring 2007.

On July 11, 2003, we filed a lawsuit against aSouthern California company asserting infringement of certain claims related toU.S. patent No. 5,621,813 in the U.S. District Court in and for theNorthern District of California. On May 17, 2005, the court found thesubject patent to be invalid. We appealed this decision. The defendantsubsequently brought a motion for reimbursement of its attorneys’ fees andcosts in a total asserted amount of approximately $2 million. We opposed thismotion, and on October 12, 2005, the District Court denied the defendant’srequest for attorneys’ fees in its entirety. The defendant appealed thatdecision. On November 3, 2005, the defendant filed a notice of appeal withrespect to the court’s ruling on its motion for attorneys’ fees. In March 2006,the Federal Circuit court upheld the district court’s ruling that the subjectpatent is invalid. On August 8, 2006, the Federal Circuit court upheld theDistrict Court’s denial of attorneys’ fees. 

In May 2006, the samecompany filed a state court lawsuit against us for malicious prosecution andabuse of process claiming that attorney’s fees, costs and other damages weredue based on the outcome of a federal patent litigation suit brought against itby us. We do not believe this new action has merit, particularly given thedenial by the federal court and the subsequent federal appellate court’saffirmation of the order denying the award of any attorney’s fees payable tothis company by us in the federal patent litigation. We filed a motion to havethe state court complaint dismissed under California’s anti-SLAPP and demurrerstatutes. Nonetheless the state court has preliminarily stated that it woulddeny our motion to dismiss as to the malicious prosecution claim, whilegranting it as to the abuse of process claim. In such event, we intend toappeal the denial of our motion to dismiss the malicious prosecution claim andotherwise vigorously defend against this action and to seek fees and/orsanctions against this company in relation thereto.

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

Nomatters were submitted to a vote of security holders during the fourth quarterended December 31, 2006.

**Executive Officersof the Registrant**

As of December 31,2006, the executive officers of Ultratech, who are appointed by and serve atthe discretion of the Board of Directors, were as follows:

| **Name**              | ** ** | ** ** | ** ** | **Age**                                                                    | ** ** | **Position with the Company** |
|-----------------------|------------|------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------|
| Arthur W. Zafiropoulo |       | 67         |       | Chairman of the Board of  Directors, Chief Executive Officer and President |
| Bruce R. Wright       |       | 58         |       | Senior Vice President,  Finance, Chief Financial Officer and Secretary     |

 

Mr. Zafiropoulo founded Ultratech in September 1992to acquire certain assets and liabilities of the Ultratech Stepper Division(the “Predecessor”) of General Signal Technology Corporation (“General Signal”)and, since March 1993, has served as Chief Executive Officer and Chairmanof the Board. Additionally, Mr. Zafiropoulo served as President ofUltratech from March 1993 to March 1996, from May 1997 until April 1999and from April 2001 to January 2004. In October 2006, he resumedthe responsibilities of President and Chief Operating Officer. Between September 1990and March 1993, he was President of the Predecessor. From February 1989to September 1990, Mr. Zafiropoulo was President of General Signal’sSemiconductor Equipment Group International, a semiconductor equipment company.From August 1980 to February 1989, Mr. Zafiropoulo was Presidentand Chief Executive Officer of Drytek, Inc., a plasma dry-etchcompany that he founded in August 1980, and which was later sold toGeneral Signal in 1986. From July 1987 to September 1989, Mr. Zafiropoulowas also President of Kayex, a semiconductor equipment manufacturer, which wasa unit of General Signal. From July 2001 to July 2002, Mr. Zafiropouloserved as Vice Chairman of SEMI (Semiconductor Equipment and Materials International),an international trade association representing the semiconductor, flat paneldisplay equipment and materials industry. From July 2002 to June 2003,Mr. Zafiropoulo served as Chairman of SEMI, and Mr. Zafiropoulo hasbeen on the Board of Directors of SEMI since July 1995.

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

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**PART II**

**ITEM 5.**                *MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES*

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

| **Fiscal 2006—Fiscal Quarter Ended** | ** ** | ** ** | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|----------------------------------------------------------|------------|------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
| Market Price:                                            | High       |       |       | $                 | 25.01      |             |       | $                     | 25.03      |                 |       | $ | 15.96 |   |   |   | $ | 15.04 |   |   |   |
|                                                     | Low        |       |       | $                 | 15.76      |             |       | $                     | 14.65      |                 |       | $ | 12.75 |   |   |   | $ | 10.56 |   |   |   |
|                                                          |            |            |            |                   |            |                  |            |                       |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

As of March 1, 2007, we had approximately 337stockholders of record.

Ultratech’s fiscal quarters in 2006 ended on April 1,2006, July 1, 2006, September 30, 2006 and December 31, 2006,and our fiscal quarters in 2005 ended on April 2, 2005, July 2, 2005,October 1, 2005 and December 31, 2005. For convenience ofpresentation, our fiscal quarters in each year have been shown as ending on March 31,June 30, September 30, and December 31.

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

On August 15, 2006, we issued 2,000 shares of ourCommon Stock in an unregistered, private placement under Section 4(2) ofthe Securities Act of 1933 to SEMI Foundation, a non-profit organization, tosupport their efforts to educate youth interested in science and math aboutcareer opportunities in the semiconductor industry.

On August 24, 2005, we issued 1,500 shares of ourCommon Stock in an unregistered, private placement under Section 4(2) ofthe Securities Act of 1933 to SEMI Foundation, a non-profit global tradeorganization, to support their efforts to educate youth interested in scienceand math about career opportunities in the semiconductor industry.

In August 2004, we issued 1,250 shares of ourCommon Stock in an unregistered, private placement under Section 4(2) ofthe Securities Act of 1933 to SEMI Foundation, a non-profit global tradeorganization, to support their efforts to educate youth interested in scienceand math about career opportunities in the semiconductor equipment industry.

We announced on September 19, 2005 that our Boardof Directors authorized the repurchase of up to $30.0 million of our commonstock in the open market at then prevailing market prices during the periodcommencing September 19, 2005 through September 30, 2007. During2006, we repurchased 742,045 shares of our common stock at a total purchaseprice of $10.8 million. As of December 31, 2006, we had repurchased1,386,580 shares of our common stock for a total of $20.0 million since thestock repurchase authorization date.

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**ITEM6.**                *SELECTED FINANCIAL DATA*

| **In thousands, except per share data  and percentage information** | ** **   | ** **   | ** **   | **2006(c)**  | ** **   | **2005**     | ** ** | **2004** | ** ** | **2003(b)** | ** ** | **2002(a)** | ** ** |
|--------------------------------------------------------------------------------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|------------|----------|------------|-------------|------------|-------------|------------|
| ***Operations:***                                                                                      | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |       |     |       |        |       |
| Net sales                                                                                              |         | $            | 119,633      |         | $            | 122,366      |       | $        | 109,892    |        | $          | 100,121     |       | $ | 68,506 |   |
| Gross profit                                                                                           |         | 46,024       |         | 52,047       |         | 52,693       |       | 46,611   |       | 14,850      |       |
| Gross profit as a  percentage of net sales                                                             |         | 38           | %            | 43           | %            | 48           | %          | 47       | %          | 22          | %          |
| Operating income  (loss)                                                                               |         | $            | (14,371      | )            | $            | (4,875       | )          | $        | (2,429     | )           | $          | 2,972       |       | $ | (36,506 | ) |
| Income (loss)  before income taxes and cumulative effect of a change in accounting principle           |         | $       | (8,014       | )            | $       | (522         | )          | $   | 1,069      |        | $     | 6,996       |       | $  | (30,248 | ) |
| Pre-tax income  (loss) as a percentage of net sales                                                    |         | (6.7)        | %            | (0.4)        | %            | 1.0          | %          | 7.0      | %          | (44.2)      | %          |
| Provision  (benefit) for income taxes                                                                  |         | $            | 954          |         | $            | 699          |       | $        | 445        |        | $          | (570        | )          | $ | (4,866 | ) |
| Income (loss)  before cumulative effect of a change in accounting principle                            |         | $       | (8,968       | )            | $       | (1,221       | )          | $   | 624        |        | $     | 7,566       |       | $  | (25,382 | ) |
| Cumulative effect  of the adoption of FIN 47                                                      |         | $            | —       |         | $            | (1,122       | )          | $        | —     |        | $          | —      |       | $ | — |   |
| Net income (loss)                                                                                      |         | $            | (8,968       | )            | $            | (2,343       | )          | $        | 624        |        | $          | 7,566       |       | $ | (25,382 | ) |
| Income (loss)  before cumulative effect of a change in accounting principle per share—basic       |         | $       | (0.38        | )            | $       | (0.05        | )          | $   | 0.03       |        | $     | 0.33        |       | $  | (1.12 | ) |
| Cumulative effect  of the adoption of FIN 47 per share—basic                                 |         | $            | —       |         | $            | (0.05        | )          | $        | —     |        | $          | —      |       | $ | — |   |
| Net income (loss)  per share—basic                                                                |         | $            | (0.38        | )            | $            | (0.10        | )          | $        | 0.03       |        | $          | 0.33        |       | $ | (1.12 | ) |
| Number of shares  used in per share computation—basic                                             |         | 23,764       |         | 23,964       |         | 23,733       |       | 23,017   |       | 22,586      |       |
| Income (loss)  before cumulative effect of a change in accounting principle per share—diluted     |         | $       | (0.38        | )            | $       | (0.05        | )          | $   | 0.03       |        | $     | 0.31        |       | $  | (1.12 | ) |
| Cumulative effect  of the adoption of FIN 47 per share—diluted                               |         |         |         | $            | (0.05        | )            | $          | —   |       | $           | —     |        | $          | — |   |
| Net income (loss)  per share—diluted                                                              |         | $            | (0.38        | )            | $            | (0.10        | )          | $        | 0.03       |        | $          | 0.31        |       | $ | (1.12 | ) |
| Number of shares  used in per share computation—diluted                                           |         | 23,764       |         | 23,964       |         | 24,734       |       | 24,476   |       | 22,586      |       |
| ***Balance  sheet:***                                                                                  | *** *** | *** *** | *** *** | *** *** |         |         |       |     |       |        |       |
| Cash, cash  equivalents and short-term investments (Note 8)                                            |         | $            | 78,090       |         | $            | 141,067      |       | $        | 151,627    |        | $          | 165,902     |       | $ | 157,529 |   |
| Working capital                                                                                        |         | 104,951      |         | 165,181      |         | 169,621      |       | 170,501  |       | 152,160     |       |
| Total assets                                                                                           |         | 216,050      |         | 222,309      |         | 230,546      |       | 220,748  |       | 222,366     |       |
| Stockholders’ equity                                                                              |         | 174,108      |         | 188,950      |         | 193,290      |       | 190,739  |       | 171,754     |       |

 

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***Quarterly Data***

| **Unaudited, in thousands, except per share data** | ** ** | ** ** | ** ** | **1st**    | ** ** | **2nd**    | ** ** | **3rd**    | ** ** | **4th** | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|---------|------------|
| **2006**                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                        |       | $          | 34,944     |       | $          | 26,043     |       | $          | 33,943     |    | $          | 24,703 |   |
| Gross profit                                                                     |       | 13,657     |       | 11,811     |       | 12,450     |       | 8,106      |       |
| Operating income  (loss)                                                         |       | 207        |       | (2,884     | )          | (3,568     | )          | (8,126     | )          |
| Net income (loss)                                                                |       | 1,582      |       | (1,176     | )          | (2,568     | )          | (6,806     | )          |
| Net income (loss)  per share—basic                                          |       | $          | 0.07       |       | $          | (0.05      | )          | $          | (0.11      | )       | $          | (0.29 | ) |
| Number of shares  used in per share computation—basic                       |       | 23,830     |       | 23,927     |       | 23,477     |       | 23,213     |       |
| Net income (loss)  per share—diluted                                        |       | $          | 0.06       |       | $          | (0.05      | )          | $          | (0.11      | )       | $          | (0.29 | ) |
| Number of shares  used in per share computation—diluted                     |       | 25,127     |       | 23,927     |       | 23,477     |       | 23,213     |       |
| **2005**                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                        |       | $          | 27,962     |       | $          | 28,826     |       | $          | 30,349     |    | $          | 35,229 |   |
| Gross profit                                                                     |       | 12,278     |       | 11,689     |       | 13,014     |       | 15,066     |       |
| Operating income  (loss)                                                         |       | (2,855     | )          | (3,340     | )          | (214       | )          | 1,534      |       |
| Income before  cumulative effect of change in accounting principle               |       | —     |       | —     |       | —     |       | 2,474      |       |
| Cumulative effect  of the adoption of FIN 47                                     |       | —     |       | —     |       | —     |       | (1,122     | )          |
| Net income (loss)                                                                |       | (1,896     | )          | (1,994     | )          | 195        |       | 1,352      |       |
| Net income (loss) per  share—basic:                                         |       |       |       |       |       |       |       |       |       |
| Income before  cumulative effect of change in accounting principle               |       | $          | (0.08      | )          | $          | (0.08      | )          | $          | 0.01       |    | $          | 0.10 |   |
| Cumulative effect  of the adoption of FIN 47                                     |       | $          | —     |       | $          | —     |       | $          | —     |    | $          | (0.04 | ) |
| Net Income (loss)                                                                |       | $          | (0.08      | )          | $          | (0.08      | )          | $          | 0.01       |    | $          | 0.06 |   |
| Number of shares  used in per share computation—basic                       |       | 23,877     |       | 23,944     |       | 24,129     |       | 23,905     |       |
| Net income (loss) per  share—diluted:                                       |       |       |       |       |       |       |       |       |       |
| Income before  cumulative effect of change in accounting principle               |       | $          | (0.08      | )          | $          | (0.08      | )          | $          | 0.01       |    | $          | 0.10 |   |
| Cumulative effect  of the adoption of FIN 47                                     |       | $          | —     |       | $          | —     |       | $          | —     |    | $          | (0.04 | ) |
| Net Income (loss)                                                                |       | $          | (0.08      | )          | $          | (0.08      | )          | $          | 0.01       |    | $          | 0.06 |   |
| Number of shares used in  per share computation—diluted                     |       | 23,877     |       | 23,944     |       | 25,067     |       | 24,323     |       |

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

(b)          Operating income in2003, includes the favorable impact of selling inventory and discontinuedproducts previously written down of $1,672,000. Operating income in 2003 alsoincludes the favorable impact of reducing reserves established in prior yearsfor the restructuring of operations of $728,000.

(c)           Operating loss in 2006includes a charge of  $1,907,000 relatedto certain exit activities (of which $96,000 relating to the acceleration ofrestricted stock units and options are included in stock-based compensationexpenses) and $1,957,000 of stock-based compensation expenses. Refer to Notes 5and 11 of our consolidated financial statements herein for further disclosuresrelated to these items.

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

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

**OVERVIEW**

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

We supply step-and-repeat photolithography systemsbased on one-to-one imaging technology. Within the integrated circuit industry,we target the market for advanced packaging applications. Within thenanotechnology industry, our target markets include thin film head magneticrecording devices, optical networking devices, laser diodes and LEDs (lightemitting diodes). Our laser thermal processing equipment is targeted atadvanced annealing applications within the semiconductor industry.

In July 2006, we completed the acquisition ofcertain assets of Oraxion, Inc., a manufacturer of advancedsurface-metrology and stress-analysis equipment for the semiconductor andrelated industries. As a result of this acquisition, we plan to utilize Oraxion’sCGS-300 wafer inspection/metrology tool in conjunction with our own LSA100laser spike anneal system used for 65nm and other next-generation devices. 

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In the fourth quarter of 2006,in order to reduce company-wide expenses, we eliminated approximately 29full-time positions, 69% in the United States and 31% internationally, andentered into a lease buyout agreement for the operating lease in the UnitedKingdom facility.  In addition, we planto take similar actions during the first quarter of 2007. We expect theseactivities to be substantially completed by March 31, 2007.

Beginning in fiscal 2006,we accounted for stock-based compensation in accordance with SFAS No. 123R(revised 2004), “Share-Based Payment” (“SFAS 123R”) as interpreted by SECStaff Accounting Bulletin No. 107. As a result of adoptingSFAS 123R on January 1, 2006, and excluding the expense related torestricted stock units which would have been included in our ConsolidatedStatements of Operations under the provisions of APB No. 25, ourConsolidated Statements of Operations for the year ended December 31, 2006changed by $0.9 million as compared to what we would have reported had wecontinued to account for share-based compensation under APB No. 25.

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

The discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these consolidated financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities at the date of the consolidated financialstatements. By their nature, these estimates and judgments are subject to aninherent degree of uncertainty. On an on-going basis, we evaluate ourestimates, including those related to inventories, warranty obligations,purchase order commitments, bad debts, income taxes, intangible assets, restructuringliabilities, asset retirement obligations, and contingencies and litigation.Management bases its estimates and judgments on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

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

**Revenue Recognition**

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

Provided all other criteria are met, we recognizerevenues on system sales when we have received customer acceptance of thesystem. In the event that terms of the sale provide for a lapsing customer acceptanceperiod, we recognize revenue upon the expiration of the lapsing acceptanceperiod or customer acceptance, whichever occurs first. In these instances,revenue is recorded only if the product has met product specifications prior toshipment and management deems that no significant uncertainties as to productperformance exist.

Our transactions frequently include the sale ofsystems and services under multiple element arrangements. In situations withmultiple deliverables, revenue is recognized upon the delivery of the separateelements and when we receive customer acceptance or are otherwise released fromour customer acceptance obligations. Consideration from multiple elementarrangements is allocated among the separate accounting units based on the residualmethod under which the revenue is allocated to 

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undelivered elements basedon fair value of such undelivered elements and the residual amounts of revenueallocated to delivered elements, provided the undelivered elements have valueon a stand alone basis, there is objective and reliable evidence of fair valuefor the undelivered elements, the arrangement does not include a general rightof return relative to the delivered item and delivery or performance of theundelivered item(s) is considered probable and substantially in ourcontrol. The maximum revenue recognized on a delivered element is limited tothe amount that is not contingent upon the delivery of additional items.

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

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

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

**Inventories andPurchase Order Commitments**

The semiconductor industryis characterized by rapid technological change, changes in customerrequirements and evolving industry standards. We perform a detailed assessmentof inventory at each balance sheet date, which includes a review of, amongother factors, demand requirements and market conditions. Based on thisanalysis, we record adjustments, when appropriate, to reflect inventory at lowerof cost or market. Although we make every effort to ensure the accuracy of ourforecasts of product demand, any significant unanticipated changes in demand,product mix or technological developments would significantly impact the valueof our inventory and our reported operating results. In the future, if we findthat our estimates are too optimistic and we determine that our inventory needsto be written down, we will be required to recognize such costs in our cost ofsales at the time of such determination. For example, if the demand assumptionused in our assessment at December 31, 2006 was reduced by 10%, assumingall other assumptions such as product mix are kept the same and that mitigationefforts were not possible, we would have had to write down our inventory andopen purchase commitments by $0.2 million. Conversely, if we find our estimatesare too pessimistic and we subsequently sell product that has previously beenwritten down, our gross margin in that period will be favorably impacted. During2002, we recorded a write down of inventory of $6.7 million and subsequently werealized favorable gross margin impacts of $0.1 million and $1.0 million in 2005 and 2004, respectively, due tosales of inventory that was previously written down. In 2006, we did not sellany previously written down inventory.

**WarrantyObligations**

We recognize the estimatedcost of our product warranties at the time revenue is recognized. Our warrantyobligation is affected by product failure rates, material usage rates and theefficiency by which the product failure is corrected. Should actual productfailure rates, material usage rates and labor efficiencies differ from ourestimates, revisions to the estimated warranty liability would be requiredwhich could result in future charges or credits to our gross margins. As mayoccur with new product introductions, warranty costs in 2006 were higher thananticipated by approximately $1.5 million. We believe our warrantyaccrual, as of December 31, 2006, will be sufficient to satisfyoutstanding obligations as of that date.

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**Allowance for BadDebts**

We maintain an allowancefor estimated losses resulting from the inability of our customers to makerequired payments. This reserve is established based upon historical trends,current economic conditions, delinquency status based on contractual terms andan analysis of specific exposures. If the financial condition of our customerswere to deteriorate, or even a single customer was otherwise unable to makepayments, additional allowances may be required. The average selling price ofour systems is in excess of $2.5 million. Accordingly, a single customerdefault could have a material adverse effect on our results of operations. Ourbad debt reserve as a percentage of gross accounts receivable increased from1.2% at December 31, 2004 to 2.9% and 2.5% at December 31, 2005 and2006 due principally to the impact of bad debt expense associated with acustomer bankruptcy filing ($0.3 million) during 2005.

**Deferred IncomeTaxes**

We record a valuationallowance to reduce our deferred tax assets to the amount that is more likelythan not to be realized. As of December 31, 2006, we had recorded avaluation allowance of $77.7 million against our net deferred tax assets exceptthose in Japan and Taiwan. As of December 31, 2006, we had recordedapproximately $0.4 million of net foreign deferred tax assets related to ouroperations in Japan and Taiwan. Based on projected future pre-tax income inJapan and Taiwan, these assets were not subject to a valuation allowance as itis more likely than not that they will be realized in the future.

**Stock-BasedCompensation****

Beginning in fiscal 2006,we have accounted for stock-based compensation in accordance with SFAS No. 123R(revised 2004), “Share-Based Payment” (“SFAS 123R”) as interpreted by SECStaff Accounting Bulletin No. 107. Under the fair value recognitionprovisions of this statement, share-based compensation cost is measured at thegrant date based on the value of the award and is recognized as expense overthe vesting period. Determining the fair value of share-based awards at thegrant date requires judgment, including estimating our stock price volatility,employee stock option exercise behaviors and employee option forfeiture rates.If actual results differ significantly from these estimates, stock-basedcompensation expense recognized in our results of operations could bematerially affected. As stock-based compensation expense recognized in theConsolidated Statement of Operations is based on awards that ultimately areexpected to vest, the amount of the expense has been reduced for estimatedforfeitures. SFAS 123R requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. Forfeitures were estimated based on historicalexperience. If factors change and we employ different assumptions in theapplication of SFAS 123R, the compensation expense that we record infuture periods may differ significantly from what we have recorded in thecurrent period.

**RESULTS OFOPERATIONS**

We derive a substantial portion of our total net salesfrom sales of a relatively small number of newly manufactured systems, whichtypically range in price from $1.2 million to $5.6 million. As a result ofthese high sale prices, the timing and recognition of revenue from a singletransaction has had and most likely will continue to have a significant impacton our net sales and operating results for any particular period. Our backlogat the beginning of a period typically does not include all of the sales neededto achieve our sales objectives for that period. In addition, orders in backlogare subject to cancellation, shipment or customer acceptance delays, anddeferral or rescheduling by a customer with limited or no penalties.Consequently, our net sales and operating results for a period have been andwill continue to be dependent upon our obtaining orders for systems to beshipped and accepted in the same period in which the order is received. Ourbusiness and financial results for a particular period could be materiallyadversely affected if an anticipated order for even one system is not receivedin time to permit shipment and customer 

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acceptance during thatperiod. Furthermore, a substantial portion of our shipments has historicallyoccurred near the end of each quarter. Delays in installation and customeracceptance due, for example, to our inability to successfully demonstrate theagreed-upon specifications or criteria at the customer’s facility, or to thefailure of the customer to permit installation of the system in the agreed upontime, may cause net sales in a particular period to fall significantly below ourexpectations, which may materially adversely affect our operating results forthat period. This risk is especially applicable in connection with theintroduction and initial sales of a new product line. Additionally, the failureto receive anticipated orders or delays in shipments due, for example, torescheduling, delays, deferrals or cancellations by customers, additionalcustomer configuration requirements, or to unexpected manufacturingdifficulties or delays in deliveries by suppliers due to their long productionlead times or otherwise, have caused and may continue to cause net sales in aparticular period to fall significantly below our expectations, materiallyadversely affecting our operating results for that period. In particular, thelong manufacturing and acceptance cycles of our advanced packaging family ofwafer steppers and laser thermal processing systems and the long lead time forlenses and other materials, could cause shipments and acceptances of suchproducts to be delayed from one quarter to the next, which could materiallyadversely affect our financial condition and results of operations for aparticular quarter.

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

**Net sales**

**2006 vs. 2005**

| **(in millions)** | ** ** | ** ** | ** ** | **2006**   | ** ** | **2005** | ** ** | **Amount of  Change** | ** ** | **Percentage  Change** | ** ** |
|------------------------|------------|------------|------------|------------|------------|----------|------------|----------------------------|------------|------------------------|------------|
| Sales of:              | ** ** | ** ** | ** ** | ** ** | ** ** |     | ** ** | ** **                 |       |                   | ** ** | ** ** |   |
| Systems                | ** ** | $          | 87.9       |       | $          | 93.2     |       |                       | $          | (5.3                   | )          |   |   | -6 | % |   |
| Spare parts            | ** ** | 17.3       |       | 15.2       |       |     | 2.1        |                       |       |                   | 14         | % |   |
| Services               | ** ** | 14.2       |       | 12.5       |       |     | 1.7        |                       |       |                   | 13         | % |   |
| Licenses               | ** ** | 0.2        |       | 1.5        |       |     | (1.3       | )                          |       |                   | -87        | % |   |
| Total Net Sales        | ** ** | $          | 119.6      |       | $          | 122.4    |       |                       | $          | (2.9                   | )          |   |   | -2 | % |   |

 

Net sales consist of revenues from system sales, spareparts sales, services and licensing of technologies. For the year ended December 31,2006, systems revenue accounted for approximately 73% of total net sales, andservices, licenses and spare parts accounted for the remaining 27%. Systemsales decreased 6% to $87.9 million on a system unit volume decrease of 18%.This decrease was partially offset by a 15% increase in the average sellingprice of systems sold in 2006 compared to 2005. The revenue decrease was dueprimarily to delivery push-outs in the fourth quarter of 2006, reflectingsofter business conditions. The average selling price of systems sold increasedfrom the prior year primarily as a result of a shift in product mix in favor ofour new laser processing products and away from our legacy platform productsand refurbished units. In 2006, refurbished systems accounted for approximately9% of units sold as compared to 18% of units sold in 2005. This percentage canfluctuate from year to year and, as refurbished units generally have loweraverage selling prices than new units, any such fluctuation will impact theweighted average selling price of the systems sold.

On a product market application basis, system sales tothe semiconductor industry were $82.7 million for the year ended December 31,2006, an increase of 13% as compared with system sales of $73.4 million in2005. This increase was due to a 104% increase in laser thermal processingsystem sales. These systems typically have significantly higher average sellingprices, as compared to our nanotechnology offerings. 

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System sales to thenanotechnology market were $5.2 million for the year ended December 31,2006, a decrease of 74% as compared with sales of $19.8 million in 2005. Systemsales to the nanotechnology market are highly dependent on customer capacitydemand in the thin film head industry.

Sales of spare parts in 2006 increased 14%, to $17.3million, as compared to $15.2 million in 2005. This increase was mainly due toincreased spare part usage as the result of system upgrades revenue increase in2006 as compared to 2005. Revenues from services grew 13% to $14.2 million forthe year ended December 31, 2006 as compared with $12.5 million in 2005.The increase in service revenue was primarily due to an increase in serviceprovided as the result of system upgrades and additional service contractsentered into in 2006.

Licensing and licensing support arrangements declinedto $0.2 million in 2006 as compared with $1.5 million in 2005. In 2006, werecognized license revenue of $0.2 million. In 2005, we recognized $1.0 millionof amortization revenue from prior-period licensing agreements and $0.5 millionof revenue from licensing agreements. Future revenues from licensingactivities, if any, will be contingent upon existing and future licensing androyalty arrangements, including those, if any, resulting from litigation. Wemay not be successful in generating licensing revenues and do not anticipatethe recognition of significant levels of licensing income in the future.  

At December 31, 2006, we had approximately $3.0million of deferred product and services income resulting from products shippedbut not yet installed and accepted, as compared with $2.0 million at December 31,2005.

For the year ended December 31,2006, international net sales were $76.6 million, or 64% of total net sales, ascompared with $84.9 million, or 69% of total net sales in 2005. We expect salesto international customers to continue to represent a significant majority ofour revenues during 2007. Our revenue derived from sales in foreign countriesis not generally subject to significant exchange rate fluctuations, principallybecause sales contracts for our systems are generally denominated in U.S.dollars. In Japan, however, orders are often denominated in Japanese yen. Forthe year ended December 31, 2006, we recorded system sales in Japan of$27.5 million, of which 25% were denominated in Japanese yen. This subjects usto the risk of currency fluctuations. We attempt to mitigate this risk byentering into foreign currency forward exchange contracts for the periodbetween when an order is received and when it is recorded as revenue. Afterrecording revenue, we use various mechanisms, such as foreign currency forwardexchange contracts and natural hedges, to offset substantial portions of thegains or losses associated with our Japanese yen denominated receivables due toexchange rate fluctuations. We had approximately $8.8 million of Japaneseyen-denominated receivables at December 31, 2006. International salesexpose us to a number of additional risks, including fluctuations in the valueof local currencies relative to the U.S. dollar, which impact the relative costof ownership of our products and, thus, the customer’s willingness to purchaseour product. (See “Risk Factors: International Sales”).

**Net sales**

**2005 vs. 2004**

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

 

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System sales increased 14%, to $93.2 million. Theaverage selling price of systems sold increased 29% from the prior yearprimarily as a result of increased sales to laser thermal processing andadvanced packaging customers. The number of systems sold declined by 12% as a resultof decreased sales of our 1000 and 100 series products. In 2005, refurbishedsystems accounted for approximately 18% of units sold as compared to 30% ofunits sold in 2004. This percentage can fluctuate from year to year and, asrefurbished units generally have lower average selling prices than new units,any such fluctuation will impact the weighted average selling price of thesystems sold.

On a product market application basis, system sales tothe semiconductor industry were $73.4 million for the year ended December 31,2005, an increase of 19% as compared with system sales of $61.5 million in2004. This increase was due to an 18% increase in sales to the advancedpackaging markets and a 217% increase in laser thermal processing system sales.These systems typically have significantly higher average selling prices, ascompared to our nanotechnology offerings. System sales to the nanotechnologymarket were $19.8 million for the year ended December 31, 2005, a decreaseof 3% as compared with sales of $20.5 million in 2004.

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

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

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

For the year ended December 31,2005, international net sales were $84.9 million, or 69% of total net sales, ascompared with $71.7 million, or 65% of total net sales for 2004. For the yearended December 31, 2005, we recorded system sales in Japan of $12.5million, of which 26% were denominated in Japanese yen. We had approximately$1.6 million of Japanese yen-denominated receivables at December 31, 2005.

**Gross profit**

**2006 vs. 2005**

On a comparative basis, gross margins were 38.5% and42.5% for 2006 and 2005, respectively. The 4.0 percentage point decline ingross margin in 2006 was mainly due to higher unabsorbed manufacturing expenses(2.9 points), higher unabsorbed service expenses (1.8 points) and higherinventory writedowns (0.9 points) partially offset by higher standard margin(1.3 points) due to changes in revenue mix resulting primarily from 5 laserthermal processing systems and 16 AP200/300 systems accepted during 2006 ascompared with 3 laser thermal processing systems and 7 AP200/300 systems in2005. The remaining 0.3 points are due to other miscellaneous charges,each of which individually is insignificant.

Exclusive of licensing revenues, gross margin was38.4% for 2006 as compared with 41.8% for 2005. We believe disclosure of grossmargins without reference to licensing revenues provides additional appropriatedisclosure to allow comparison of our product and service gross margins overtime because there is little, if any, cost of sales associated with ourlicensing revenues.

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Our gross profit as apercentage of sales has been and most likely will continue to be significantlyaffected by a variety of factors, including the mix of products sold; theintroduction of new products, which typically have higher manufacturing, installationand after-sale support costs until efficiencies are realized and which aretypically discounted more than existing products until the products gain marketacceptance; the rate of capacity utilization; writedowns of inventory and openpurchase commitments; technology support and licensing revenues, which have noassociated cost of sales; product discounts, pricing and competition in ourtargeted markets; non-linearity of shipments during the quarter which canresult in manufacturing inefficiencies; the percentage of international sales,which typically have lower gross margins than domestic sales principally due tohigher field service and support costs; and start-up costs and inefficienciesassociated with the implementation of subcontracting arrangements.

**2005 vs. 2004**

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

Exclusive of licensingrevenues, gross margin was 41.8% for 2005 as compared with 45.9% for 2004. Webelieve disclosure of gross margins without reference to licensing revenuesprovides additional appropriate disclosure to allow comparison of our productand service gross margins over time because there is little, if any, cost ofsales associated with our licensing revenues.

**Research, developmentand engineering expenses**

**2006 vs. 2005**

| **(in millions)**                          | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **Amount of  Change** | ** ** | **Percentage  change** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------------------------|------------|------------------------|------------|
| Research,  development and engineering expenses |       | $          | 26.2       |     | $          | 27.0     |       |                       | $          | (0.8                   | )          |   |   | -3 | % |   |
|                                                 |            |            |            |          |            |          |            |                            |            |                        |            |  |  |  |  |  |  |  |

 

The decrease in research,development and engineering expenses in 2006, as compared to 2005, wasprimarily the result of lower spending associated with the development of ourlaser processing technologies. Given that there is an inherent delay betweenthe time product development activities and expenditures occur and whenresultant product revenue is ultimately realized, we expect current yearresearch, development and engineering investments to contribute to revenue infuture years. As a percentage of net sales, research, development andengineering expenses for each of the two years ended December 31, 2006 and2005, respectively, were approximately 22%.

**2005 vs. 2004**

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

 

The increase in research,development and engineering expenses in 2005, as compared to 2004, wasprimarily due to increased investments in the development of our laserprocessing technologies during the first half of 2005. We continued to investsignificant resources in the development and enhancement of our laserprocessing systems and technologies and our 1X products and relatedtechnologies. In 2005, we revenued three laser thermal processing systems whichwas the result of our 2005 research, development and engineering effort. 

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**Amortization ofintangible assets**

Amortization of intangibleassets was $0.0 million, $0.1 million and $0.4 million for the years ended December 31, 2006, 2005 and 2004,respectively. Intangible assets consist of royalties received from prior-periodproceeds from licensing agreements and were fully amortized during the yearended December 31, 2005.

**Selling, generaland administrative expenses**

**2006 vs. 2005**

| **(in millions)**                        | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **Amount of  Change** | ** ** | **Percentage  change** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------------------------|------------|------------------------|------------|
| Selling, general  and administrative expenses |       | $          | 34.2       |     | $          | 29.9     |       |                       | $          | 4.3                    |       |   |   | 14 | % |   |
|                                               |            |            |            |          |            |          |            |                            |            |                        |            |  |  |  |  |  |  |  |

 

Selling, general andadministrative expenses increased by $4.3 million, or 14%, in 2006, as comparedto 2005. The increase was primarily due to increased hiring, marketing and demonstrationsupport marketing costs associated with our laser processing product line ($4.0million); increased expense reduction actions in the fourth quarter of 2006($1.3 million), increased stock based compensation expense (associated with theimplementation of SFAS 123R and compensation expenses related to restrictedstock units as described in Note 5 ($1.6 million); partially offset bydecreased legal costs compared to 2005 ($2.6 million).

**2005 vs. 2004**

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

 

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

**Interest and other income, net**

| **(in thousands)**         | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income                 |       | $          | 6,273      |     | $          | 4,752    |       | $        | 3,624      |   |
| Other income  (expense), net    |       | 321        |       | (19      | )          | (12      | )          |
| Interest and other  income, net |       | $          | 6,594      |     | $          | 4,733    |       | $        | 3,612      |   |

 

Interest income was $6.3 million for the year ended December 31,2006, as compared with $4.8 million for 2005. The increase in 2006 from 2005was primarily due to higher interest rates on our investments.

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

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

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**Provision forincome taxes**

For the year ended December 31, 2006, we recordedan income tax expense of $1.0 million, comprised primarily of foreign taxes.The actual expense recorded differs from the federal tax benefit at 35%primarily due to current tax expense in foreign jurisdictions and the fact thatno tax benefit is recorded for U.S. losses that are not expected to berealized.

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

For the year ended December 31, 2004, we recordedan income tax expense of $0.4 million which included a $0.1 million benefitrelated to the settlement of tax audit issues in the United Kingdom. The actualexpense recorded, excluding the benefit related to the settlement of tax auditissues in the United Kingdom, represents 51% of pre-tax income. This rate ishigher than the U.S. federal rate of 35% because the tax benefit of U.S. losseswas not recognized as domestic deferred tax assets are fully reserved.

In October 2004, the United States enacted TheAmerican Jobs Creation Act of 2004 (“the Act”). The Act provides for a threeyear phase-out of current extraterritorial income tax (“ETI”) benefits andreplaces ETI with a phased-in nine percent domestic production activitydeduction that will not be fully effective until 2010. We do not currentlyrealize ETI tax benefits. This provision of the Act is not expected to have amaterial effect on our results of operations or financial position in the nearfuture. The Act also includes a temporary deduction of 85% for certain foreignearnings that are repatriated, as defined in the Act. We did not repatriate anyof our foreign earnings during the effective period of this deduction.

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

**Cumulative effectof the adoption of FIN 47**

In December 2005 weadopted FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations” (“FIN 47”), an interpretation of FASB Statement No. 143,“Asset Retirement Obligations” (“SFAS 143”). FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in SFAS 143 refers to a legal obligationto perform an asset retirement activity in which the timing and (or) method ofsettlement are conditional on a future event that may or may not be within thecontrol of the entity. An entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fair value ofthe liability can be reasonably estimated, even if conditional on a futureevent. As permitted, we recognized the effect of applying FIN 47 as acumulative effect of a change in accounting principle. Our adoption of FIN 47in 2005 resulted in an increase in net equipment and leasehold improvements ofapproximately $1.0 million, recognition of an asset retirement obligation (the “ARO”)liability of $2.1 million, and a cumulative effect of adoption of $1.1 millionor $0.05 per share, for the year ended December 31, 2005. The AROliability is principally for estimable asset retirement obligations related toremediation costs, which we estimate will be incurred upon the expiration ofcertain operating leases. Refer to Note 17 of our consolidated financialstatements herein for further disclosures related to this.

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**Outlook**

The anticipated timing of orders, shipments andcustomer acceptances usually requires us to fill a number of production slotsin any given quarter in order to meet our sales targets. If we are unsuccessfulin our efforts to secure those production orders, or if existing productionorders are delayed or cancelled, our results of operations will be materiallyadversely impacted. Accordingly, we may not be able to achieve or maintain ourcurrent or prior level of sales. We presently expect that net sales for 2007will increase 5% to 10% from the level of net sales reported in 2006 of $119.6million.

Because our net sales are subject to a number ofrisks, including risks associated with the market acceptance of our new laserprocessing product line, delays in customer acceptance, intense competition inthe capital equipment industry, uncertainty relating to the timing and marketacceptance of our products, and the condition of the macro-economy and thesemiconductor industry and the other risks described in this report, we may notexceed or maintain our current or prior level of net sales for any period inthe future. Additionally, we believe that the market acceptance and volumeproduction of our advanced packaging systems, laser processing systems, and our1000 series family of wafer steppers are of critical importance to our futurefinancial results. At December 31, 2006, these critical systemsrepresented 86% of our backlog. To the extent that these products do notachieve or maintain significant sales due to difficulties involvingmanufacturing or engineering, the inability to reduce the current longmanufacturing cycles for these products, competition, excess capacity in thesemiconductor or nanotechnology device industries, or any other reason, ourbusiness, financial condition and results of operations would be materiallyadversely affected.

We believe we will achieveoperating income breakeven for 2007 and that net income per share will bebetween $0.05 and $0.10. Cash flow for fiscal 2007 is anticipated to bepositive.

**LIQUIDITY ANDCAPITAL RESOURCES**

Net cash used in operating activities was $6.4 millionfor the year ended December 31, 2006, as compared with net cash used inoperations of $4.1 million for the comparable period in 2005. Net loss of$9.0 million for the year ended December 31, 2006 included non-cashcharges of $7.4 million for depreciation, amortization, and accretionexpenses and $2.0 million for stock-based compensation, offset partially by$0.2 million of gains on disposal of equipment and settlement of assetretirement obligations.  Cash used inoperations was further impacted by a net change in operating assets andliabilities of $6.5 million. The $6.5 million use of cash from thenet change in operating assets and liabilities was primarily a result of anincrease in inventories of $12.0 million mainly due to the increase in thenumber of laser thermal processing evaluation units at our customer sites andinventory build-up in anticipation of increasing production of our laserprocessing products for the 65-nanometer high performance node that did notmaterialize in 2006, an increase of prepaid expenses, demonstration inventory,and other assets of $1.3 million, and a decrease in accrued rent of $0.4 million.These uses were partially offset by an increase in accounts payable of $2.0 million,an increase in advanced billings of $1.9 million, an increase in accruedexpenses of $1.1 million due primarily to an increase in exit andtermination liabilities, a decrease in accounts receivable of $1.1 million,an increase in deferred product and services income of $1.0 million, and adecrease in other liabilities of $0.1 million.

We believe that because of the relatively longmanufacturing cycle of certain of our systems, particularly newer products, ourinventories will continue to represent a significant portion of workingcapital. Currently, we are devoting significant resources to the development,introduction and commercialization of our laser processing system and to thedevelopment of our next generation 1X lithography technologies. We currentlyintend to continue to incur significant operating expenses in the areas ofresearch, development and engineering, manufacturing, and selling, general andadministrative costs in order to further develop, produce and support these newproducts. Additionally, gross profit 

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margins, inventory andcapital equipment levels may be adversely impacted in the future by costsassociated with the initial production of the laser processing system and byfuture generations of our 1X wafer steppers. These costs include, but are notlimited to, additional manufacturing overhead, costs of demonstration systemsand facilities and the establishment of additional after-sales supportorganizations. Additionally, there can be no assurance that operating expenseswill not increase, relative to sales, as a result of adding technical,marketing and administrative personnel, among other costs, to support our newproducts. If we are unable to achieve significantly increased net sales or ifour sales fall below expectations, our cash flow and operating results will bematerially adversely affected until, among other factors, costs and expensescan be reduced. Our failure to achieve our sales targets for these new productscould result in additional inventory write-offs and asset impairment charges,either of which could materially adversely impact our results of operations.

During the year ended December 31, 2006, net cashused in investing activities was $0.8 million , attributable to net proceeds ofshort and long-term investments of $2.5 million and proceeds from the sale offixed assets of $0.1 million, offset by capital expenditures of $3.3 million.We are planning to incur capital expenditures in 2007 of approximately $3.1million for equipment and facility improvements driven primarily by our newproduct introductions. 

Net cash used in financing activities was $5.1 millionduring the year ended December 31, 2006, attributable to stock repurchasesof $10.8 million, offset by net proceeds under our notes payable of $2.7million, and $3.0 million of proceeds received from the issuance of commonstock under our employee stock option plans. 

At December 31, 2006, we had working capital of$105.0 million. Our principal source of liquidity at December 31, 2006consisted of $71.1 million in cash, cash equivalents and short-terminvestments, net of related borrowings under our line of credit and $48.3million of long-term investments. 

In December 2004, we entered into a line ofcredit agreement with a brokerage firm replacing a similar arrangement that wehad with a different firm. Under the terms of this agreement, we may borrowfunds at a cost equal to the current Federal funds rate plus 100 basis points(6.25% as of December 31, 2006). Certain of our cash, cash equivalents andshort-term investments secure but do not legally restrict borrowingsoutstanding under this facility. Funds are advanced to us under this facilitybased on pre-determined advance rates on the cash and securities held by us inthis brokerage account. This agreement has no set expiration date and there areno loan covenants. As of December 31, 2006, $7.0 million was outstandingunder this facility, with a related collateral requirement of approximately$9.3 million of our cash, cash equivalents and investments. As of December 31,2005, $4.3 million was outstanding under the facility, with a relatedcollateral requirement of approximately $5.7 million of our cash, cashequivalents and short-term investments.

On September 19, 2005, our Board of Directorsauthorized the repurchase of up to $30.0 million of our common stock in theopen market at then prevailing market prices during the period commencing September 19,2005 through September 30, 2007. At December 31, 2006, we hadrepurchased 1,386,580 shares of its common stock at a total purchase price of$20 million. Future repurchases of our common stock could have a significantimpact on our cash position.

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Thefollowing summarizes our contractual obligations at December 31, 2006, andthe effect such obligations are expected to have on our liquidity and cashflows in future periods:

| **(in millions)**                      | ** ** | ** ** | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After  5 years** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------|------------|
| Notes payable  obligations                  |       | $          | 7.0        |      |       | $                               | 7.0        |               |       |               |       |                    |       |   |   |   |   |   |   |   |   |
| Non-cancelable  operating lease obligations |       | 16.9       |       |      | 4.6        |                            |       |               | 12.0       |               |       |                    | 0.3        |   |   |   |   |   |   |
| Long-term  payables                         |       | 0.7        |       |      |       |                            |       |               |       |               |       |                    |       |   |   |   | 0.7 |   |   |
| Asset retirement  obligations               |       | 2.0        |       |      |       |                            |       |               | 1.0        |               |       |                    | 1.0        |   |   |   |   |   |   |
| Open purchase  order commitments            |       | 34.4       |       |      | 31.9       |                            |       |               | 2.5        |               |       |                    |       |   |   |   |   |   |   |
| Total contractual cash  obligations         |       | $          | 61.0       |      |       | $                               | 43.5       |               |       |               | $          | 15.5                    |       |   |   | $ | 1.3 |   |   |   | $ | 0.7 |   |   |
|                                             |            |            |            |           |            |                                 |            |                    |            |                    |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amounts shown in the table above for open purchaseorder commitments are primarily related to the purchase of inventories,equipment and leasehold improvements. We record charges to operations forpurchase order commitments we deem in excess of normal operating requirements(see “Critical Accounting Policies and Estimates”).

The development and manufacture of new lithographysystems and enhancements are highly capital-intensive. In order to becompetitive, we believe we must continue to make significant expenditures forcapital equipment; sales, service, training and support capabilities; systems,procedures and controls; and expansion of operations and research anddevelopment, among many other items. We expect that cash generated fromoperations and our cash, cash equivalents and short-term investments will besufficient to meet our cash requirements for at least the next twelve months.However, in the near-term, we may continue to utilize existing and future linesof credit, and other sources of financing, in order to maintain our presentlevels of cash, cash equivalents and short-term investments. Beyond the nexttwelve months, we may require additional equity or debt financing to addressour working capital or capital equipment needs. In addition, we may seek toraise equity or debt capital at any time that we deem market conditions to befavorable. Additional financing, if needed, may not be available on reasonableterms, or at all.

We may in the futurepursue additional acquisitions of complementary product lines, technologies orbusinesses. Future acquisitions may result in potentially dilutive issuances ofequity securities, the incurrence of debt and contingent liabilities andamortization expenses and impairment charges related to goodwill and otherintangible assets, which could materially adversely affect our financialcondition and results of operations. In addition, acquisitions involve numerousrisks, including difficulties in the assimilation of the operations,technologies, personnel and products of the acquired companies; the diversionof management’s attention from other business concerns; risks of enteringmarkets in which we have limited or no direct experience; and the potentialloss of key employees of the acquired company. In the event we acquire productlines, technologies or businesses which do not complement our business, orwhich otherwise do not enhance our sales or operating results, we may incursubstantial write-offs and higher recurring operating costs, which could have amaterial adverse effect on our business, financial condition and results ofoperations. In the event that any such acquisition does occur, there can be noassurance as to the effect thereof on our business or operating results.

**Off-Balance SheetTransactions**

Our off-balance sheettransactions consist of certain financial guarantees, both expressed andimplied, related to indemnification for product liability, patent infringementand latent product defects. Other than liabilities recorded pursuant to knownproduct defects, at December 31, 2006, we did not record a liabilityassociated with these guarantees, as we have little or no history of costsassociated with such indemnification requirements. (See Note 16)

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**Foreign currency**

As part of our overallstrategy to manage the level of exposure to the risk of foreign currencyexchange rate fluctuations, we attempt to hedge most of our Japanese yendenominated foreign currency exposures. We use foreign currency forwardcontracts to hedge the risk that unremitted Japanese yen denominated receiptsfrom customers for actual or forecasted sales of equipment after receipt ofcustomer orders may be adversely affected by changes in foreign currencyexchange rates. We use foreign currency forward exchange contracts and naturalhedge positions, to offset substantial portions of the potential gains orlosses associated with our Japanese yen denominated assets and liabilities dueto exchange rate fluctuations. We enter into foreign currency forward contractsthat generally have maturities of nine months or less. 

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

**Interest rate risk**

Our exposure to market risk due to potential changesin interest rates, relates primarily to our investment portfolio, whichconsisted primarily of fixed interest rate instruments as of December 31,2006 and 2005. We maintain an investment policy designed to ensure the safetyand preservation of our invested funds by limiting market risk and the risk ofdefault.

Certain of our cash, cash equivalents and investmentsserve as collateral for a line of credit we maintain with a brokerage firm. Theline of credit is used for liquidity purposes, mitigating the need to liquidateinvestments in order to meet our current operating cash requirements.

Thefollowing table presents the hypothetical changes in fair values in thefinancial instruments held by us at December 31, 2006 that are sensitiveto changes in interest rates. These instruments are comprised of cash, cashequivalents and investments. These instruments are held for purposes other thantrading. The modeling techniques used measure the change in fair values arisingfrom selected hypothetical changes in interest rates. Assumed market valuechanges to our portfolio reflects immediate hypothetical parallel shifts in theyield curve of plus or minus 50 basis points (BPS), 100 BPS, and 150 BPS:

| **Cash equivalents and  Available-for-sale  Investments,**  | ** ** | ** ** | ** ** | **Valuation of securities  given an interest rate  decrease of X basis points** | ** ** | **No change in  interest rate** | ** ** | **Valuation of securities  given an interest rate  increase of X basis points** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| **in thousands:**                                                | ** ** | ** ** | ** ** | **(150 BPS)**                                                                                                           | ** ** | **(100 BPS)**                             | ** ** | **(50 BPS)**                                                                                                            | ** ** | **0 BPS** | ** ** | **50 BPS** | ** ** | **100 BPS** | ** ** | **150 BPS** | ** ** |
| U.S. Treasury  securities and obligations of U.S. government agencies |       | $          | 83,883     |                                                                                                                         | $          | 83,289                                         |       | $                                                                                                                            | 82,703     |   |   | $ | 82,126 |   |   | $ | 81,558 |   | $ | 80,999 |   | $ | 80,447 |   |
| U.S. corporate  debt securities                                       |       | 40,788     |       | 40,669                                                                                                                       |       | 40,552                                         |       |                                                                                                                         | 40,438     |   |   | 40,325 |   | 40,214 |   | 40,105 |   |
| Total investments                                                     |       | $          | 124,672    |                                                                                                                         | $          | 123,958                                        |       | $                                                                                                                            | 123,255    |   |   | $ | 122,564 |   |   | $ | 121,883 |   | $ | 121,213 |   | $ | 120,553 |   |

 

During 2006, we did notmaterially alter our investment objectives or criteria and believe that,although the composition of our portfolio has changed from the preceding year,the portfolio’s sensitivity to changes in interest rates is materially thesame.

**Credit risk**

We mitigate credit defaultrisk by attempting to invest in high credit quality securities and bypositioning our portfolio to respond appropriately to a significant reductionin a credit rating of any investment issuer or guarantor. The portfolioincludes only marketable securities with active secondary or resale markets toensure portfolio liquidity and is diversified in accordance with our investmentpolicy. To 

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date, wehave not experienced significant liquidity problems with our portfolio. Ourlargest holding at December 31, 2006, excluding the United Statesgovernment and its agencies, was $3.9 million.

**Foreign exchangerisk**

The majority of our revenue, expense and capitalpurchasing activities are transacted in U.S. dollars. However, we do enter intothese transactions in other currencies, primarily Japanese Yen. To protectagainst reductions in value and the volatility of future cash flows caused bychanges in currency exchange rates we have established cash flow and balancesheet hedging programs.

We use foreign currency forward contracts to hedge therisk that outstanding Japanese yen denominated receipts from customers foractual or forecasted sales of equipment may be adversely affected by changes inforeign currency exchange rates. Our hedging programs reduce, but do not alwaysentirely eliminate, the impact of currency movements. (See “Derivativeinstruments and hedging” in Note 4 of Notes to Consolidated FinancialStatements for additional disclosures.)

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

The Selected Financial Data information contained inItem 6 of Part II hereof is hereby incorporated by reference into thisItem 8 of Part II of this Form 10-K.

**ULTRATECH, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

ConsolidatedFinancial Statements included in Item 8:

|                                                                                                               | ** ** | **Page Number** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| Consolidated  Balance Sheets—December 31, 2006 and 2005                                             |       |                 | 44         |   |   |
| Consolidated Statements of Operations—Years ended  December 31, 2006, 2005, and 2004      |       |                 | 45         |   |   |
| Consolidated Statements of Cash Flows—Years ended  December 31, 2006, 2005, and 2004      |       |                 | 46         |   |   |
| Consolidated Statements of Stockholders’ Equity—Years  ended December 31, 2006, 2005, and 2004 |       |                 | 47         |   |   |
| Notes to Consolidated Financial Statements                                                                    |       |                 | 48-71      |   |   |
| Reports of Ernst & Young LLP, Independent  Registered Public Accounting   Firm                       |       |                 | 72         |   |   |

 

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**CONSOLIDATED BALANCE SHEETS**

| **In thousands, except share and per share amounts**                                               | ** **   | ** ** | ** **   | **December 31,  2006** | ** ** | **December 31,  2005** | ** **   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------------|------------|--------------|-----------------------------|------------|-----------------------------|--------------|
| ***Assets***                                                                                                                          | *** *** |       | *** *** | *** ***                |       |                        | *** *** | *** *** |   |
| Current assets:                                                                                                                       |         |       |         |                        |       |                        |         |   |   |
| Cash and cash equivalents                                                                                                             |         |       | $            | 23,883                      |       |                        |         | $ | 36,344 |   |   |
| Short-term investments                                                                                                                |         |       | 54,207       |                        |       |                        | 104,723      |   |   |
| Accounts receivable, less allowance for doubtful accounts  of $466 in 2006 and $577 in 2005                                           |         |       | 18,054       |                        |       |                        | 19,110       |   |   |
| Inventories                                                                                                                           |         |       | 40,988       |                        |       |                        | 28,969       |   |   |
| Prepaid expenses and other current assets                                                                                             |         |       | 2,181        |                        |       |                        | 1,589        |   |   |
| Total current  assets                                                                                                                 |         |       | 139,313      |                        |       |                        | 190,735      |   |   |
| Long-term investments                                                                                                                 |         |       | 48,328       |                        |       |                        | —       |   |   |
| Equipment and  leasehold improvements, net                                                                                            |         |       | 20,326       |                        |       |                        | 25,117       |   |   |
| Demonstration  inventory                                                                                                              |         |       | 4,717        |                        |       |                        | 3,367        |   |   |
| Other assets                                                                                                                          |         |       | 3,366        |                        |       |                        | 3,090        |   |   |
| Total assets                                                                                                                          |         |       | $            | 216,050                     |       |                        |         | $ | 222,309 |   |   |
| ***Liabilities  and Stockholders’ Equity***                                                                                      | *** *** |       | *** *** | *** ***                |       |                        | *** *** | *** *** |   |
| Current liabilities:                                                                                                                  |         |       |         |                        |       |                        |         |   |   |
| Notes payable                                                                                                                         |         |       | $            | 6,974                       |       |                        |         | $ | 4,289 |   |   |
| Accounts payable                                                                                                                      |         |       | 10,440       |                        |       |                        | 8,403        |   |   |
| Accrued expenses                                                                                                                      |         |       | 10,409       |                        |       |                        | 9,270        |   |   |
| Deferred product and services income                                                                                                  |         |       | 2,950        |                        |       |                        | 1,970        |   |   |
| Advance billings                                                                                                                      |         |       | 2,713        |                        |       |                        | 854          |   |   |
| Income taxes payable                                                                                                                  |         |       | 876          |                        |       |                        | 768          |   |   |
| Total current  liabilities                                                                                                            |         |       | 34,362       |                        |       |                        | 25,554       |   |   |
| Accrued rent                                                                                                                          |         |       | 2,737        |                        |       |                        | 3,157        |   |   |
| Other liabilities                                                                                                                     |         |       | 4,843        |                        |       |                        | 4,648        |   |   |
| Commitments and  contingencies                                                                                                        |         |       |         |                        |       |                        |         |   |   |
| Stockholders’  equity:                                                                                                           |         |       |         |                        |       |                        |         |   |   |
| Preferred Stock, $.001 par value:                                                                                                     |         |       |         |                        |       |                        |         |   |   |
| 2,000,000 shares authorized; none issued                                                                                              |         |       | —       |                        |       |                        | —       |   |   |
| Common Stock, $.001 par value:                                                                                                        |         |       |         |                        |       |                        |         |   |   |
| 40,000,000 shares authorized; issued and  outstanding: 23,218,722 at December 31, 2006 and 23,749,789 at  December 31, 2005 |         |       | 25           |                        |       |                        | 25           |   |   |
| Additional paid-in capital                                                                                                            |         |       | 226,146      |                        |       |                        | 221,225      |   |   |
| Treasury stock, 1,847,801 shares at  December 31, 2006 and 1,107,756 shares at December 31, 2005                            |         |       | (26,670      | )                           |       |                        | (15,904      | ) |   |
| Accumulated other comprehensive loss, net                                                                                             |         |       | (915         | )                           |       |                        | (886         | ) |   |
| Accumulated deficit                                                                                                                   |         |       | (24,478      | )                           |       |                        | (15,510      | ) |   |
| Total  stockholders’ equity                                                                                                      |         |       | 174,108      |                        |       |                        | 188,950      |   |   |
| Total liabilities and  stockholders’ equity                                                                                      |         |       | $            | 216,050                     |       |                        |         | $ | 222,309 |   |   |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands, except per share amounts**                                               | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                                                                         |       |                                        |       |   |   |   |   |
| Products                                                                                                          |       | $                                           | 105,277    |   | $ | 108,377 |   | $ | 93,392 |   |
| Services                                                                                                          |       | 14,156                                      |       | 12,472 |   | 12,289 |   |
| Licenses                                                                                                          |       | 200                                         |       | 1,517 |   | 4,211 |   |
| Total net sales                                                                                                   |       | 119,633                                     |       | 122,366 |   | 109,892 |   |
| Cost of sales                                                                                                     |       |                                        |       |   |   |   |   |
| Cost of products sold                                                                                             |       | 64,256                                      |       | 60,647 |   | 48,466 |   |
| Cost of services                                                                                                  |       | 9,353                                       |       | 9,672 |   | 8,733 |   |
| Gross profit                                                                                                      |       | 46,024                                      |       | 52,047 |   | 52,693 |   |
| Research,  development, and engineering                                                                           |       | 26,206                                      |       | 26,963 |   | 25,936 |   |
| Amortization of  intangible assets                                                                                |       | —                                      |       | 95 |   | 381 |   |
| Selling, general,  and administrative                                                                             |       | 34,189                                      |       | 29,864 |   | 28,805 |   |
| Operating loss                                                                                                    |       | (14,371                                     | )          | (4,875 | ) | (2,429 | ) |
| Interest expense                                                                                                  |       | (237                                        | )          | (380 | ) | (114 | ) |
| Interest and  other income, net                                                                                   |       | 6,594                                       |       | 4,733 |   | 3,612 |   |
| Income (loss)  before income taxes and cumulative effect of change in accounting principle                        |       | (8,014                                      | )          | (522 | ) | 1,069 |   |
| Provision for  income taxes                                                                                       |       | 954                                         |       | 699 |   | 445 |   |
| Income (loss)  before cumulative effect of change in accounting principle                                         |       | $                                           | (8,968     | ) | $ | (1,221 | ) | $ | 624 |   |
| Cumulative effect  of the adoption of FIN 47 “Accounting for Conditional Asset Retirement  Obligations” |       | —                                      |       | (1,122 | ) | — |   |
| Net income (loss)                                                                                                 |       | $                                           | (8,968     | ) | $ | (2,343 | ) | $ | 624 |   |
| *Net  income (loss) per share—basic*                                                                         |       |                                        |       |   |   |   |   |
| Income (loss) before cumulative effect of change in  accounting principle                                         |       | $                                           | (0.38      | ) | $ | (0.05 | ) | $ | 0.03 |   |
| Cumulative effect of the adoption of FIN 47  “Accounting for Conditional Asset Retirement Obligations”  |       | $                                           | —     |   | $ | (0.05 | ) | $ | — |   |
| Net income (loss)                                                                                                 |       | $                                           | (0.38      | ) | $ | (0.10 | ) | $ | 0.03 |   |
| Number of shares used in per share computations—basic                                                        |       | 23,764                                      |       | 23,964 |   | 23,733 |   |
| *Net  income (loss) per share—diluted*                                                                       |       |                                        |       |   |   |   |   |
| Income (loss) before cumulative effect of change in  accounting principle                                         |       | $                                           | (0.38      | ) | $ | (0.05 | ) | $ | 0.03 |   |
| Cumulative effect of the adoption of FIN 47  “Accounting for Conditional Asset Retirement Obligations”  |       | $                                           | —     |   | $ | (0.05 | ) | $ | — |   |
| Net income (loss)                                                                                                 |       | $                                           | (0.38      | ) | $ | (0.10 | ) | $ | 0.03 |   |
| Number of shares  used in per share computations—diluted                                                     |       | 23,764                                      |       | 23,964 |   | 24,734 |   |
|                                                                                                                   |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

45

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**CONSOLIDATED STATEMENTS OFCASH FLOWS**

| ** **                                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands**                                                                               | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Cash flows from operating activities:*                                                             |       |                                        |       |   |   |   |   |
| Net income (loss)                                                                                   |       | $                                           | (8,968     | ) | $ | (2,343 | ) | $ | 624 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                        |       |   |   |   |   |
| Cumulative effect  of adoption of FIN 47                                                            |       | —                                      |       | 1,122 |   | — |   |
| Depreciation                                                                                        |       | 5,846                                       |       | 6,413 |   | 6,235 |   |
| Amortization                                                                                        |       | 1,344                                       |       | 1,118 |   | 2,306 |   |
| Accretion of asset  retirement obligations                                                          |       | 179                                         |       | — |   | — |   |
| (Gain)/loss on  disposal of equipment and settlement of asset retirement obligations                |       | (217                                        | )          | 1 |   | 122 |   |
| Stock-based  compensation                                                                           |       | 1,957                                       |       | 77 |   | 235 |   |
| Deferred income  taxes                                                                              |       | (26                                         | )          | 46 |   | 269 |   |
| Changes in operating  assets and liabilities:                                                       |       |                                        |       |   |   |   |   |
| Accounts  receivable                                                                                |       | 1,056                                       |       | 797 |   | (10,509 | ) |
| Inventories                                                                                         |       | (11,955                                     | )          | (1,127 | ) | (8,805 | ) |
| Prepaid expenses  and other current assets                                                          |       | (593                                        | )          | 574 |   | 25 |   |
| Demonstration  inventory                                                                            |       | (486                                        | )          | 191 |   | (2,099 | ) |
| Other assets                                                                                        |       | (249                                        | )          | (439 | ) | (740 | ) |
| Accounts payable                                                                                    |       | 2,037                                       |       | (5,184 | ) | 5,858 |   |
| Accrued expenses                                                                                    |       | 1,139                                       |       | 1,570 |   | (183 | ) |
| Deferred license  revenue                                                                           |       | —                                      |       | (1,041 | ) | (3,711 | ) |
| Deferred product  and services income                                                               |       | 980                                         |       | 726 |   | 156 |   |
| Advance billings                                                                                    |       | 1,859                                       |       | 439 |   | (1,108 | ) |
| Income taxes  payable                                                                               |       | 108                                         |       | 737 |   | (745 | ) |
| Accrued rent                                                                                        |       | (420                                        | )          | (137 | ) | 510 |   |
| Other liabilities                                                                                   |       | 28                                          |       | 540 |   | 1,101 |   |
| Net cash provided  by (used in) operating activities                                                |       | (6,381                                      | )          | 4,080 |   | (10,459 | ) |
| *Cash flows from investing activities:*                                                             | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Capital  expenditures                                                                               |       | (3,317                                      | )          | (8,596 | ) | (9,868 | ) |
| Proceeds from sale  of fixed assets                                                                 |       | 79                                          |       | — |   | — |   |
| Investments in  securities                                                                          |       | (42,155                                     | )          | (95,994 | ) | (102,513 | ) |
| Proceeds from  sales and maturities of investments                                                  |       | 44,612                                      |       | 93,549 |   | 137,195 |   |
| Net cash provided  by (used in) investing activities                                                |       | (781                                        | )          | (11,041 | ) | 24,814 |   |
| *Cash flows from financing activities:*                                                             | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Proceeds from  notes payable                                                                        |       | 62,954                                      |       | 108,929 |   | 37,900 |   |
| Repayment of notes  payable                                                                         |       | (60,269                                     | )          | (112,541 | ) | (32,564 | ) |
| Proceeds from  issuance of common stock                                                             |       | 2,992                                       |       | 7,511 |   | 3,120 |   |
| Repurchase of  common stock                                                                         |       | (10,794                                     | )          | (9,188 | ) | — |   |
| Net cash provided  by (used in) financing activities                                                |       | (5,117                                      | )          | (5,289 | ) | 8,456 |   |
| **Net  effect of exchange rate changes on cash**                                                    |       | (182                                        | )          | 609 |   | 25 |   |
| **Net  increase (decrease) in cash and cash equivalents**                                           |       | (12,461                                     | )          | (11,641 | ) | 22,836 |   |
| **Cash and  cash equivalents at beginning of period**                                               |       | 36,344                                      |       | 47,985 |   | 25,149 |   |
| **Cash and  cash equivalents at end of period**                                                     |       | $                                           | 23,883     |   | $ | 36,344 |   | $ | 47,985 |   |
| Supplemental disclosures of cash flow information:                                                  |       |                                        |       |   |   |   |   |
| Cash paid during the  period for:                                                                   |       |                                        |       |   |   |   |   |
| Interest                                                                                            |       | $                                           | 201        |   | $ | 312 |   | $ | 94 |   |
| Income taxes paid  (tax refund received)                                                            |       | 936                                         |       | (154 | ) | 668 |   |
| Other non-cash changes:                                                                             |       |                                        |       |   |   |   |   |
| Systems  transferred from (to) inventory to (from) equipment and demonstration  inventory           |       | $                                           | 60         |   | $ | 5,782 |   | $ | 3,522 |   |
| Systems  transferred from (to) equipment to (from) demonstration inventory                          |       | —                                      |       | $ | 952 |   | $ | 1,097 |   |
| Increase/(decrease)  in net equipment and leasehold improvements due to adoption of FIN 47     |       | $                                           | (229       | ) | $ | 943 |   | — |   |
| Increase/(decrease)  in asset retirement obligations resulting from adoption of FIN 47         |       | $                                           | (82        | ) | $ | 2,064 |   | — |   |
|                                                                                                     |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

| ** **                                                                              | ** ** | **Stockholders’ Equity** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                              | ** ** | ** **                         | ** ** | ** ** | ** ** | **Additional** | ** ** | ** ** | ** ** | **Accumulated  Other** | ** ** | ** ** | ** ** | **Total** | ** ** |
| ** **                                                                              | ** ** | **Common Stock**              | ** ** | **Paid-in** | ** ** | **Treasury** | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| **In thousands**                                                                   | ** ** | ** **                         | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Stock** | ** ** | **Income (Loss)** | ** ** | **(Deficit)** | ** ** | **Equity** | ** ** |
| Balance at December 31, 2003                                                       |       |                               | 23,582     |   |   |   | $ | 24 |   |   |   | $ | 210,323 |   |   |   | $ | (6,756 | ) |   |   | $ | 937 |   |   |   | $ | (13,789 | ) |   |   | $ | 190,739 |   |   |
| Net issuance of Common Stock under stock option plans  and employee stock purchase plan |       |                               | 272        |   |   |   | — |   |   |   | 3,102 |   |   |   | 18 |   |   |   | — |   |   |   | — |   |   |   | 3,120 |   |   |
| Stock-based compensation                                                                |       |                               | —     |   |   |   | — |   |   |   | 235 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 235 |   |   |
| Components of  comprehensive income:                                                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change  in net unrealized gains (losses) on:                                            |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale investments                                                          |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (1,451 | ) |   |   | — |   |   |   | (1,451 | ) |   |
| Foreign exchange contracts                                                              |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 25 |   |   |   | — |   |   |   | 25 |   |   |
| Net income                                                                              |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 624 |   |   |   | 624 |   |   |
| Total comprehensive loss                                                                |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (802 | ) |   |
| Balance at December 31, 2004                                                       |       |                               | 23,854     |   |   |   | 24 |   |   |   | 213,660 |   |   |   | (6,738 | ) |   |   | (489 | ) |   |   | (13,167 | ) |   |   | 193,290 |   |   |
| Net issuance of Common Stock under stock option plans                                   |       |                               | 541        |   |   |   | 1 |   |   |   | 7,488 |   |   |   | 22 |   |   |   | — |   |   |   | — |   |   |   | 7,511 |   |   |
| Repurchase of common stock                                                              |       |                               | (645       | ) |   |   | — |   |   |   | — |   |   |   | (9,188 | ) |   |   | — |   |   |   | — |   |   |   | (9,188 | ) |   |
| Stock-based compensation                                                                |       |                               | —     |   |   |   | — |   |   |   | 77 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 77 |   |   |
| Components of  comprehensive loss:                                                      |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change  in net unrealized gains (losses) on:                                            |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale investments                                                          |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (1,006 | ) |   |   | — |   |   |   | (1,006 | ) |   |
| Foreign exchange contracts                                                              |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 609 |   |   |   | — |   |   |   | 609 |   |   |
| Net loss                                                                                |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (2,343 | ) |   |   | (2,343 | ) |   |
| Total comprehensive loss                                                                |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (2,740 | ) |   |
| Balance at December 31, 2005                                                       |       |                               | 23,750     |   |   |   | 25 |   |   |   | 221,225 |   |   |   | (15,904 | ) |   |   | (886 | ) |   |   | (15,510 | ) |   |   | 188,950 |   |   |
| Net issuance of Common Stock under stock option plans                                   |       |                               | 211        |   |   |   | — |   |   |   | 2,964 |   |   |   | 28 |   |   |   | — |   |   |   | — |   |   |   | 2,992 |   |   |
| Repurchase of common stock                                                              |       |                               | (742       | ) |   |   | — |   |   |   | — |   |   |   | (10,794 | ) |   |   | — |   |   |   | — |   |   |   | (10,794 | ) |   |
| Stock-based compensation                                                                |       |                               | —     |   |   |   | — |   |   |   | 1,957 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,957 |   |   |
| Components of  comprehensive loss:                                                      |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change  in net unrealized gains (losses) on:                                            |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale investments                                                          |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 353 |   |   |   | — |   |   |   | 353 |   |   |
| Foreign exchange contracts                                                              |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (182 | ) |   |   | — |   |   |   | (182 | ) |   |
| Minimum postretirement medical obligation                                               |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (200 | ) |   |   | — |   |   |   | (200 | ) |   |
| Net loss                                                                                |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (8,968 | ) |   |   | (8,968 | ) |   |
| Total comprehensive loss                                                                |       |                               | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (8,997 | ) |   |
| Balance at  December 31, 2006                                                      |       |                               | 23,219     |   |   |   | $ | 25 |   |   |   | $ | 226,146 |   |   |   | $ | (26,670 | ) |   |   | $ | (915 | ) |   |   | $ | (24,478 | ) |   |   | $ | 174,108 |   |   |
|                                                                                         |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanyingnotes to consolidated financial statements.

47

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**   COMPANY AND INDUSTRY INFORMATION

***Nature of operations***

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

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

***Major customers***

In 2006, Matsushita andIntel accounted  for 12% and 11% of ournet sales. In 2005 and 2004, Intel Corporation accounted for 13% and 10% of ournet sales. Intel Corporation accounted for 22% of our accounts receivable at December 31,2006.

***Business segments***

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

***Enterprise-wide disclosures***

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

| **In thousands**    | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales:               |       |       |       |     |       |     |       |
| United States of America |       | $          | 43,064     |     | $          | 37,506   |       | $        | 38,152     |   |
| Japan                    |       | 31,482     |       | 16,081   |       | 35,631   |       |
| Europe                   |       | 10,698     |       | 21,156   |       | 4,346    |       |
| Taiwan                   |       | 15,936     |       | 20,890   |       | 13,912   |       |
| Rest of world            |       | 18,453     |       | 26,733   |       | 17,851   |       |
| Total                    |       | $          | 119,633    |     | $          | 122,366  |       | $        | 109,892    |   |
| Long-lived assets:       |       |       |       |     |       |     |       |
| United States of America |       | $          | 27,598     |     | $          | 30,494   |       | $        | 27,211     |   |
| Rest of world            |       | 811        |       | 1,080    |       | 1,796    |       |
| Total                    |       | $          | 28,409     |     | $          | 31,574   |       | $        | 29,007     |   |

 

48

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

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

**2.**   CONCENTRATIONS OF RISKS

Financial instruments that potentially subjectUltratech to concentrations of credit risk consist principally of cashequivalents, short- and long-term investments and trade receivables. Thesecredit risks include the potential inability of an issuer or customer to honortheir obligations under the terms of the instrument or the sales agreement. Weplace our cash equivalents and investments with high credit-quality financialinstitutions. We invest our excess cash in commercial paper, readily marketabledebt instruments and collateralized funds of U.S. and state governmententities. We have established guidelines relative to credit ratings,diversification and maturities that seek to maintain safety and liquidity.

A majority of our trade receivables are derived fromsales in various geographic areas, principally the U.S., Europe, Japan, Taiwanand the rest of Asia, to large companies within the integrated circuit andnanotechnology industries. We perform ongoing credit evaluations of our customers’financial condition and require collateral, whenever deemed necessary. Wemaintain an allowance for uncollectible accounts receivable based upon expectedcollectibility and estimated returns and allowances. This reserve isestablished based upon historical trends, current economic conditions,delinquency status based on contractual terms and an analysis of specificexposures. As of December 31, 2006 and 2005, the recorded value of ouraccounts receivable approximated fair value due to the short-term nature of ouraccounts receivable.

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

**3.**   BASIS OF PRESENTATION

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

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

***Use of Estimates***

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

49

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

**4.**   SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

***Cash equivalents***

Cash equivalents consistof highly liquid investments with an original maturity date at acquisition ofthree months or less. The carrying value of cash equivalents approximates fairvalue.

***Investments***

Management determines the appropriate classificationof its investments at the time of purchase and re-evaluates the classificationat each balance sheet date. At December 31, 2006 and 2005, all investmentsand cash equivalents in our portfolio were classified as “available for sale”and are stated at fair value, with the unrealized gains and losses, net of tax,reported in accumulated other comprehensive income (loss), as a separatecomponent of stockholders’ equity. As of December 31, 2006, we classifiedcertain investment securities with remaining maturities of one year or more aslong-term investments.

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

***Allowances for Bad Debts***

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

***Inventories***

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

***Long-lived assets***

Equipment and leasehold improvements are stated atcost, less accumulated depreciation and amortization. Equipment is depreciatedon a straight-line basis over the estimated useful lives (three to ten years).Leasehold improvements are amortized on a straight-line basis over the life ofthe related assets or the lease term, whichever is shorter. Depreciation andamortization expense for the year ended 2006 was $7.2 million.

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

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Intangible assets which are carried at cost, lessaccumulated amortization, are recognized on a straight-line basis over theeconomic lives of the respective assets, generally five to seven years.Intangible assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of the related asset may not berecoverable. As of December 31, 2006 and 2005, all the intangible assetshad been fully amortized.  Amortizationof intangible assets was $0.1 million and $0.4 million for the years ended December 31,2005 and 2004, respectively.

We review long-livedassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of these assets may not be recoverable. We assess theseassets for impairment based on estimated future cash flows from these assets.Other than as noted on Note 11, “Exit Activities”, and Note 17, “AssetRetirement Obligations,” no disposal charges have been recorded during thethree years ended December 31, 2006.

***Related-Party Transactions***

In April 2006, weappointed a new member to our Board of Directors who is also an officer of oneof our customers. During 2006, sales to that customer totaled$7.8 million. At December 31, 2006, we had $0.4 million ofaccounts receivables from that customer.

***Derivative Instruments and Hedging***

The majority of ourrevenue, expense and capital purchasing activities are transacted in U.S.dollars. However, we do enter into these transactions in other currencies,primarily Japanese yen.  Our policy is tominimize foreign currency denominated transaction and remeasurement exposureswith derivative instruments, mainly forward contracts. The gains and losses onthese derivatives are intended to at least partially offset the transaction andremeasurement gains and losses recognized in earnings. We do not enter intoforeign exchange forward contracts for speculative purposes. Under Statement ofFinancial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (SFAS No. 133) all derivatives arerecorded on the balance sheet at fair value. The gains and losses resultingfrom changes in fair value are accounted for depending on the use of thederivative and whether it is designated and qualifies for hedge accounting.

***Cash Flow Hedging***

We designate and document as cash flow hedges foreignexchange forward contracts that are used by us to hedge the risk thatforecasted revenue may be adversely affected by changes in foreign currency exchangerates. The effective portion of the contracts’ gains or losses is included inaccumulated other comprehensive income (loss) (OCI) until the period in whichthe forecasted sale or purchase being hedged is recognized , at which time theamount in OCI is reclassified to earnings as a component of revenue. To theextent that any of these contracts are not considered to be effective inoffsetting the change in the value of the forecasted sales being hedged, theineffective portion of these contracts is immediately recognized in income as acomponent of interest and other income, net. For the year ended December 31,2006 there was no hedge ineffectiveness. We calculate hedge effectiveness at aminimum each fiscal quarter. We measure hedge effectiveness by comparing thecumulative change in the spot rate of the derivative with the cumulative changein the spot rate of the anticipated sales transactions. The maturity of theseinstruments is generally nine months or less. We record any excluded componentsof the hedge in interest and other income, net. As of December 31, 2006the excluded components recorded in earnings were immaterial. 

In the event theunderlying forecasted transaction does not occur within the designated hedgeperiod or it becomes probable that the forecasted transaction will not occur,the related gains and losses on the cash flow hedge are reclassified from OCIto interest and other income, net on the consolidated statement of operations.In the event it becomes probable that a hedged anticipated transaction will notoccur, the 

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gains orlosses on the related cash flow hedges will immediately be reclassified fromOCI to interest and other income, net.

***Balance Sheet Hedging***

We manage the foreign currency risk associated withyen denominated assets and liabilities using foreign exchange forward contractswith maturities of less than nine months. The change in fair value of thesederivatives is recognized as a component of interest and other income, net andis intended to offset the remeasurement gains and losses associated with thenon-functional currency denominated assets and liabilities.

At December 31, 2006 and 2005, we had currencyforward contracts for the sale of Japanese yen of $15.0 million and $6.5million, respectively. We had recorded $0.1 million and $0.3 million ofaccumulated gains as a component of other comprehensive income (loss) at December 31,2006 and 2005, respectively. These amounts are expected to be reclassified intoearnings within the next twelve months. The fair value of derivativesclassified as cash-flow hedges at December 31, 2006 and 2005 was an assetof $0.3 million and an asset of $0.2 million, respectively. The fair value ofother derivatives at December 31, 2006 and 2005 was an asset of $0.3million and $0.0 million, respectively.

Our derivative financialinstruments are subject to both credit and market risk. Credit risk is the riskof loss due to failure of a counterparty to perform its obligations inaccordance with contractual terms. Market risk is the potential change in aninvestment’s value caused by fluctuations in interest and currency exchangerates, credit spreads or other variables. We monitor the credit-worthiness ofthe financial institutions that are counterparties to our derivative financialinstruments and do not consider the risks of counterparty nonperformance to bematerial. Credit and market risks (as a result of an offset by the underlyingcash flow being hedged) related to derivative instruments were not consideredmaterial at December 31, 2006 and 2005.

***Revenue recognition***

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

Provided all other criteria are met, we recognize revenueson system sales when we have received customer acceptance of the system. In theevent that terms of the sale provide for a lapsing customer acceptance period,we recognize revenue upon the expiration of the lapsing acceptance period orcustomer acceptance, whichever occurs first. In these instances, revenue isrecorded only if the product has met product specifications prior to shipmentand management deems that no significant uncertainties as to productperformance exist.

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

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recognized on a deliveredelement is limited to the amount that is not contingent upon the delivery ofadditional items.

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

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

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

***Warranty Accrual***

We generally warrant ourproducts for material and labor to repair the product for a period of12 months for new products, or 3 months for refurbished products, from thedate of customer acceptance. Accordingly, an accrual for the estimated cost ofthe warranty is recorded at the time the product is shipped and is recorded inthe statement of operations at the time revenue is recognized.

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

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

***Deferred Income Taxes***

We record a valuationallowance to reduce our net deferred tax assets to the amount that is morelikely than not to be realized. Based on the uncertainty of future taxableincome, we have presently fully reserved our net deferred tax assets exceptthose in Japan and Taiwan.

***Reclassifications***

Certain reclassificationshave been made to prior year balances to conform to current year’spresentation.

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

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement No. 158, Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans, an amendment ofFASB Statements No 87, 88, 106, and 132(R) (“SFAS 158”). SFAS 158 requiresplan sponsors of defined benefit pension and other postretirement benefit plans(collectively, “postretirement benefit plans”) to recognize the funded statusof their postretirement benefit plans in the statement of financial position,measure the fair value of plan assets and benefit obligations as of the date ofthe fiscal year-end statement of financial position, and provide additionaldisclosures. On December 31, 2006, we adopted the recognition anddisclosure provisions of SFAS 158. The immaterial effect of adopting SFAS 158on our financial condition at December 31, 2006 has been included in theaccompanying consolidated financial statements. SFAS 158 did not have an effecton our consolidated financial condition at December 31, 2005 

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or 2004. See Note 13 forfurther discussion of the effect of adopting SFAS 158 on our consolidatedfinancial statements.

In September 2006, the FASB issued Statement No. 157,“Fair Value Measurements” (“SFAS 157”). SFAS 157 replaces the differentdefinitions of fair value in the accounting literature with a singledefinition. It defines fair value as the price that would be received to sellan asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date. SFAS 157 is effective forfair-value measurements already required or permitted by other standards forfinancial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. We are currently in theprocess of determining the impact, if any, of adopting the provisions ofSFAS 157 on its results of operations or financial position.

In July 2006, theFASB issued Financial Interpretation Number (FIN) 48,*Accountingfor Uncertainty in Income Taxes* (“FIN 48”) as an interpretation ofSFAS No. 109,*Accounting for Income Taxes*.This Interpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance withSFAS 109 and prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. This Interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. FIN 48 is effective forfiscal years beginning after December 15, 2006. We are currentlyevaluating the impact of adopting FIN 48 on our financial condition,results of operations and cash flows.

**5.**   STOCK-BASED COMPENSATION

At December 31, 2006, Ultratech had severalstock-based employee compensation plans, which are described more fully in Note12.

Prior to January 1, 2006, we accounted for ourstock plans under the provisions of Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*(APB No. 25) and FIN No. 44, *Accounting for CertainTransactions Involving Stock Compensation*—an Interpretation of APBOpinion No. 25 as permitted by SFAS No. 123, *Accountingfor Stock-Based Compensation*. No stock-based employee compensationwas recognized in the Consolidated Statement of Operations under SFAS No. 123as all options granted under our stock plans had an exercise price equal to themarket value of the underlying common stock on the date of grant. We adoptedSFAS No. 123 (revised 2004), *Share-Based Payment*(“SFAS No. 123R”), effective January 1, 2006 using the modifiedprospective transition method. Under this transition method, stock-basedcompensation expense recognized during the twelve months ended December 31,2006 includes: (a) stock options granted prior to, but not yet vested, asof January 1, 2006 based on the grant-date fair value estimated inaccordance with the original provisions of SFAS No.123, and (b) stockoptions and restricted stock units granted subsequent to January 1, 2006,based on the grant-date fair value estimated in accordance with the provisionsof SFAS No. 123R. Under the modified prospective transition method,results for prior periods have not been restated. In November 2005, theFASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3, “TransitionElection Related to Accounting for Tax Effects of Share-Based Payment Awards” (“FSP123R-3”). We elected to adopt the alternative transition method provided inthe FSP 123R-3 for calculating the tax effects of stock-basedcompensation pursuant to SFAS No. 123R. The alternative transition methodincludes simplified methods to establish the beginning balance of theadditional paid-in capital pool (“APIC pool”) related to the tax effects ofemployee stock-based compensation, and to determine the subsequent impact onthe APIC pool and Consolidated Statements of Cash Flows of the tax effects ofemployee stock-based compensation awards that are outstanding upon adoption ofSFAS No. 123R.

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Thefollowing table shows total stock based compensation expense included in theaccompanying Consolidated Statement of Operations for the year ended December 31,2006. There was no tax effect:

| **In thousands**                         | ** ** | ** ** | ** ** | **Year Ended   December 31,   2006** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|
| Cost of Sales                                 |       |       | $          | 140                                                      |       |   |
| Research,  development, and engineering       |       |       | 264        |                                                     |       |
| Selling, general  and administrative expenses |       |       | 1,553      |                                                     |       |
|                                          |       |       | $          | 1,957                                                    |       |   |

 

As aresult of adopting SFAS No. 123R on January 1, 2006, andexcluding the expense related to restricted stock units which would have beenincluded in our Consolidated Statements of Operations under the provisions ofAPB No. 25, our Consolidated Statements of Operations for the year ended December 31,2006 changed by the following amounts compared to what we would have reportedhad we continued to account for stock based compensation under APB No. 25:

| ** **                                                            | ** ** | **Impact of   adoption of  SFAS No. 123R** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(In thousands, except per share amounts)** | ** ** | ** **                                                          | ** ** | **Year Ended   December 31,   2006** | ** ** |
| Loss before  income taxes                                             |       |                                                                | $          | (866 | ) |   |
| Net loss                                                              |       |                                                                | $          | (866 | ) |   |
| Net loss per  share—basic                                        |       |                                                                | $          | (0.04 | ) |   |
| Net loss per share—diluted                                       |       |                                                                | $          | (0.04 | ) |   |
|                                                                       |            |                                                                     |            |  |  |  |  |  |

 

The estimated fair value of our stock-based awards,less expected forfeitures, is amortized over the awards’ vesting period using asingle grant approach on a ratable basis for awards granted after the adoptionof SFAS No. 123R and using a multiple grant approach on an acceleratedbasis for awards granted prior to the adoption of SFAS No. 123R.

Prior to the adoption of SFAS No. 123R, wepresented all tax benefits of deductions resulting from the exercise of stockoptions as operating cash flows in the Consolidated Statement of Cash Flows.SFAS No.123R requires cash flows resulting from tax benefits resultingfrom deductions in excess of the compensation cost recognized for those options(excess tax benefits) to be classified as financing cash flows. During the yearended December 31, 2006, there was no excess tax benefit classified asfinancing cash flows that would have been classified as operating cash flows ifwe had not adopted SFAS No. 123R.

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Themodified prospective transition method of SFAS No. 123R requires thepresentation of pro forma information for periods presented prior to theadoption of SFAS No. 123R regarding net income (loss) and net income(loss) per share as if we had accounted for our stock plans under the fairvalue method of SFAS No. 123. For proforma purposes, fair value of stockoptions was estimated using the Black-Scholes option valuation model andamortized using a multiple grant approach on an accelerated basis. The fair valueof all of our stock-based awards was estimated assuming no expected dividendsand using estimates of expected life, volatility and risk-free interest rate atthe time of grant. The following table illustrates the effect on net income(loss) and net income (loss) per share if we had accounted for its stock plansunder the fair value method of accounting under SFAS No. 123:

| ** **                                                          | ** ** | **Years Ended   December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **In thousands, except per share amounts** | ** ** | ** **                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)  as reported                                      |       | $                                             | (2,343     | ) | $ | 624 |   |
| Deduct: SFAS  No. 123 compensation expense, net of tax         |       | $                                             | (10,045    | ) | $ | (25,294 | ) |
| Pro forma net  loss                                                 |       | $                                             | (12,388    | ) | $ | (24,670 | ) |
| Net income (loss)  per share—basic, as reported                |       | $                                             | (0.10      | ) | $ | 0.03 |   |
| Pro forma net  loss per share—basic                            |       | $                                             | (0.52      | ) | $ | (1.06 | ) |
| Net income (loss)  per share—diluted, as reported              |       | $                                             | (0.10      | ) | $ | 0.03 |   |
| Pro forma net loss per  share—diluted                          |       | $                                             | (0.52      | ) | $ | (1.06 | ) |
|                                                                     |            |                                               |            |  |  |  |  |  |  |

 

Included in the fair value stock-based employeecompensation expense above for 2004, was $16.2 million resulting from the accelerationof vesting of options to purchase approximately 2.3 million shares of commonstock for all optionees, except for non-employee members of the Board ofDirectors, whose exercise price, which ranges from $13.36 to $31.38 per share,exceeded the market price of our stock on the respective dates of acceleration,June 25, 2004 and July 19, 2004. We have never repriced stockoptions, thus, the exercise prices for the stock options accelerated wereunchanged. These unvested “underwater” options, in our opinion, representednegligible value in retaining or motivating our employees. We believe, however,that fully vesting these options favorably motivates our employees to continuewith our company and to work to increase stockholder value. Further, fully vestingthese options also eliminated the need to recognize remaining unrecognizednon-cash compensation expense in future periods in the Company’s statement ofoperations upon the adoption of SFAS 123R. As the exercise price of all thestock options affected was greater than their fair market price on the date ofvesting acceleration, there was no impact, under the intrinsic value method ofAPB 25, on our consolidated statements of operations in 2004.

The fair value of each option award is estimated onthe date of grant using the Black-Scholes valuation model and the assumptionsnoted in the following table. The expected life of options is based on observedhistorical exercise patterns. Groups of employees that have similar historicalexercise patterns have been considered separately for valuation purposes. Forfiscal 2006, the expected volatility of stock options is based on a combinationof historical and market-based implied volatility of our traded options.Expected volatilities for the year ended December 31, 2005 and 2004 werebased solely on the historical volatility of our stock price. The risk freeinterest rate is based on the implied yield on a U.S. Treasury zero-couponissue with a remaining term equal to the expected term of the option. Thedividend yield reflects that we have not paid any cash dividends sinceinception and does not intend to pay any cash dividends in the foreseeablefuture.

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Weused the following weighted-average assumptions to estimate the fair value ofstock options at the date of grant using the Black-Scholes option-pricingmodel. 

| ** **                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected life (in  years): stock options                |       | 4.8      |       | 4.1      |       | 2.2      |       |
| Expected life (in  years): Employee Stock Purchase Plan |       | N/A      |       | N/A      |       | 0.50     |       |
| Risk-free  interest rate                                |       | 4.93     | %          | 3.90     | %          | 2.54     | %          |
| Volatility factor                                       |       | 0.55     |       | 0.51     |       | 0.60     |       |
| Dividend yield                                          |       | 0        | %          | 0        | %          | 0        | %          |

 

The 2004 information in the table above reflects thetermination of our Employee Stock Purchase Plan in July 2004 and theimpact of the acceleration of vesting of underwater stock options discussedpreviously. The weighted average fair value of purchase rights granted underour Employee Stock Purchase Plan during 2004 was $8.21.

The weighted-averagefair value per share of stock options granted during 2006, 2005 and 2004 was$7.85, $7.13 and $5.90, respectively.

**6.**   BASIC AND DILUTED NET INCOME (LOSS) PERSHARE

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

| ** **                                                                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands, except per share amounts**       | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Numerator:                                                                |       |                                        |       |   |   |   |   |
| Income (loss)  before cumulative effect of change in accounting principle |       | $                                           | (8,968     | ) | $ | (1,221 | ) | $ | 624 |   |
| Cumulative effect  of the adoption of FIN 47                              |       | —                                      |       | (1,122 | ) | — |   |
| Net income (loss)                                                         |       | $                                           | (8,968     | ) | $ | (2,343 | ) | $ | 624 |   |
| Denominator:                                                              |       |                                        |       |   |   |   |   |
| Denominator for net income (loss) per share—basic                    |       | 23,764                                      |       | 23,964 |   | 23,733 |   |
| Effect of dilutive Employee Stock Options                                 |       | —                                      |       | — |   | 1,001 |   |
| Denominator for net income (loss) per share—diluted                  |       | 23,764                                      |       | 23,964 |   | 24,734 |   |
| Net income (loss)  per share—basic                                   |       |                                        |       |   |   |   |   |
| Income (loss)  before cumulative effect of change in accounting principle |       | $                                           | (0.38      | ) | $ | (0.05 | ) | $ | 0.03 |   |
| Cumulative effect  of the adoption of FIN 47                              |       | —                                      |       | $ | (0.05 | ) | $ | — |   |
| Net income (loss)                                                         |       | $                                           | (0.38      | ) | $ | (0.10 | ) | $ | 0.03 |   |
| Net income (loss)  per share—diluted                                 |       |                                        |       |   |   |   |   |
| Income (loss)  before cumulative effect of change in accounting principle |       | $                                           | (0.38      | ) | $ | (0.05 | ) | $ | 0.03 |   |
| Cumulative effect  of the adoption of FIN 47                              |       | $                                           | —     |   | $ | (0.05 | ) | $ | — |   |
| Net income (loss)                                                         |       | $                                           | (0.38      | ) | $ | (0.10 | ) | $ | 0.03 |   |
|                                                                           |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

For the year ended December 31,2006, options to purchase 6,107,636 shares of Common Stock at an averageexercise price of $17.68 were excluded from the computation of diluted net lossper share as the effect would have been anti-dilutive. This compares to theexclusion of 6,443,948 options at an average exercise price of $17.71 for theyear ended December 31, 2005 and 2,245,000 options at an average exerciseprice of $25.25 for the year ended December 31, 2004. Options areanti-dilutive when we have a net loss or when the exercise price of the stockoption is greater than the average market price of our Common Stock.

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**7.**   ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS)

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

| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| **In thousands:**                               | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Unrealized gains  (losses) on:                       |       |                  |       |   |   |
| Available-for-sale  investments                      |       | $                     | (847       | ) | $ | (1,200 | ) |
| Foreign exchange  contracts                          |       | 132                   |       | 314 |   |
| Change in minimum  postretirement medical obligation |       | (200                  | )          | — |   |
| Accumulated other  comprehensive loss at end of year |       | $                     | (915       | ) | $ | (886 | ) |
|                                                      |            |                       |            |  |  |  |  |  |  |

 

The amount of gain (loss) on foreign exchangecontracts reclassified to earnings was ($34,000), ($247,000) and ($655,000) in2006, 2005 and 2004, respectively. The amount of loss on available-for-saleinvestments reclassified to earnings was immaterial in each year of thethree-year period ended December 31, 2006.

As discussed in Note 4, weadopted SFAS No. 158 as of December 31, 2006. SFAS No. 158requires that we recognize on a prospective basis the funded status of ourdefined benefit pension and other postretirement benefit plans on theconsolidated balance sheet and recognize as a component of accumulated othercomprehensive income (loss), net of tax, the gains or losses and prior servicecosts or credits that arise during the period but are not recognized ascomponents of net periodic benefit cost. Additional minimum postretirementbenefit liabilities of $200,000 was recorded at December 31, 2006 uponadoption of the new standard. This $200,000 is the net sum of unrecognizedprior service cost of $210,000 and an unrecognized net gain of $10,000. Ourpostretirement benefits are further described in Note 13.

**8.**   INVESTMENTS

We classified all of our investments as “available forsale” as of December 31, 2006 and 2005. Accordingly, we state ourinvestments at estimated fair value. Fair values are determined based on quotedmarket prices or pricing models using current market rates. We deem allinvestments to be available to meet current working capital requirements. As ofDecember 31, 2006, based upon recent operating results and expectations offuture operating income, we classified certain investment securities withremaining maturities of one year or more as long-term investments.

Thefollowing is a summary of our investments:

| ** **                                                            | ** ** | **December 31, 2006** | ** ** | **December 31, 2005**       | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|
| **Cash equivalents and Available-**                    | ** ** | **Amortized**                   | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Estimated** | ** ** | **Amortized** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Estimated** | ** ** |
| **for-sale Investments, in thousands:**                     | ** ** | **Cost**                        | ** ** | **Gains**                             | ** ** | **Losses** | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| U.S. Treasury securities and obligations of U.S.  government agencies |       |                            | $          | 82,804                                |       |   |   | $ | 2 |   |   |   | $ | 679 |   |   |   | $ | 82,126 |   |   |   | $ | 70,831 |   |   |   | $ | — |   |   |   | $ | 839 |   |   |   | $ | 69,992 |   |   |
| U.S. corporate debt securities                                        |       |                            | 40,607     |                                  |       |   | 3 |   |   |   | 172 |   |   |   | 40,438 |   |   |   | 68,175 |   |   |   | 6 |   |   |   | 367 |   |   |   | 67,814 |   |   |
|                                                                  |       |                            | $          | 123,411                               |       |   |   | $ | 4 |   |   |   | $ | 851 |   |   |   | $ | 122,564 |   |   |   | $ | 139,006 |   |   |   | $ | 6 |   |   |   | $ | 1,206 |   |   |   | $ | 137,806 |   |   |

 

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

| **In thousands**                 | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Cash equivalents                      |       | $          | 20,029     |     | $          | 33,083   |       |
| Short-term  investments               |       | 54,207     |       | 104,723  |       |
| Long-term  investments                |       | 48,328     |       | —   |       |
| Investments, at  estimated fair value |       | $          | 122,564    |     | $          | 137,806  |       |

 

Gross realized gains and losses on sales ofinvestments were not material in each of the three-years ended December 31,2006.

Thegross amortized cost and estimated fair value of our investments at December 31,2006, by contractual maturity, are shown below. Expected maturities will differfrom contractual maturities because the issuers of the securities may have theright to prepay obligations without prepayment penalties.

| **In thousands**                  | ** ** | ** ** | ** ** | **Gross  Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------|------------|-----------------|------------|
| Due in one year  or less               |       | $          | 44,764     |                       | $          | 44,745          |       |
| Due after one  year through five years |       | 78,647     |       | 77,819                     |       |
|                                   |       | $          | 123,411    |                       | $          | 122,564         |       |

 

Thefollowing table provides the breakdown of the cash equivalents and investmentswith unrealized losses at December 31, 2006:

| ** **                                                           | ** ** | **In Loss Position for  Less Than 12 Months** | ** ** | **In Loss Position for  More Than 12 Months** | ** ** | **Total**                     | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------|------------|
| **Investments, in thousands**                              | ** ** | ** **                                                                  | ** ** | **Fair  Value**                                                             | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| U.S. Treasury securities and obligations of U.S. government agencies |       | $                                                                           | 20,884     |                                                                        |       | $                             | 32         |   |   | $ | 51,089 |   |   | $ | 647 |   |   | $ | 71,973 |   |   | $ | 679 |   |   |
| U.S. corporate debt securities                                       |       | —                                                                      |       |                                                                        | —     |                          |       | 12,374 |   |   | 172 |   |   | 12,374 |   |   | 172 |   |   |
|                                                                 |       | $                                                                           | 20,884     |                                                                        |       | $                             | 32         |   |   | $ | 63,464 |   |   | $ | 819 |   |   | $ | 84,347 |   |   | $ | 851 |   |   |
|                                                                      |            |                                                                             |            |                                                                             |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table provides the breakdown of the cash equivalents and investmentswith unrealized losses at December 31, 2005:

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

 

We review our investmentportfolio monthly to identify and evaluate investments that have indications ofpossible impairment. Factors considered in determining whether a loss istemporary include credit quality and our ability and intent to hold theinvestment for a period of time sufficient to allow for any anticipatedrecovery in market value. If the credit quality of the investment does not meetthe credit quality requirements of our investment policy, we will also consideradditional factors such as the length of time and extent to which fair valuehas been less than the cost basis and the financial condition and near-

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termprospects of the investee. The gross unrealized losses associated with our cashequivalents and  investments wereprimarily caused by an increase in interest rates during 2006. We havedetermined that the gross unrealized losses on our cash equivalents andshort-term investments at December 31, 2006 are temporary in naturebecause each investment meets the credit quality requirements of our investmentpolicy and because we have the ability and intent to hold these investmentsuntil they recover their unrealized losses, or until maturity.

**9.**   BALANCESHEET DETAIL

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                            | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Inventories:                                     |       |                  |       |   |   |
| Raw materials                                    |       | $                     | 18,067     |   | $ | 10,873 |   |
| Work-in-process                                  |       | 9,952                 |       | 8,322 |   |
| Finished products                                |       | 12,969                |       | 9,774 |   |
| Total                                            |       | $                     | 40,988     |   | $ | 28,969 |   |
| Equipment and  leasehold improvements, net:      |       |                  |       |   |   |
| Machinery and equipment                          |       | $                     | 41,011     |   | $ | 45,421 |   |
| Leasehold Improvements                           |       | 8,106                 |       | 8,591 |   |
| Office equipment and furniture                   |       | 14,382                |       | 14,543 |   |
|                                             |       | $                     | 63,499     |   | $ | 68,555 |   |
| Accumulated depreciation and amortization        |       | (43,173               | )          | (43,438 | ) |
| Total                                            |       | $                     | 20,326     |   | $ | 25,117 |   |
| Accrued expenses:                                |       |                  |       |   |   |
| Salaries and benefits                            |       | $                     | 3,632      |   | $ | 3,723 |   |
| Warranty accrual                                 |       | 2,264                 |       | 2,397 |   |
| Accrued taxes-other                              |       | 2,076                 |       | 1,542 |   |
| Reserve for losses on purchase order commitments |       | 623                   |       | 406 |   |
| Other                                            |       | 1,814                 |       | 1,202 |   |
| Total                                            |       | $                     | 10,409     |   | $ | 9,270 |   |
| Other  Liabilities:                              |       |                  |       |   |   |
| Deferred compensation                            |       | $                     | 2,165      |   | $ | 1,932 |   |
| Asset retirement obligations                     |       | 1,982                 |       | 2,064 |   |
| Postretirement medical obligation                |       | 701                   |       | 475 |   |
| Other                                            |       | (5                    | )          | 177 |   |
|                                             |       | $                     | 4,843      |   | $ | 4,648 |   |
|                                                  |            |                       |            |  |  |  |  |  |  |

 

***Warranty Accrual***

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

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Changesin our product liability are as follows:

| ** **                                                                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                                                                       | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance,  beginning of the period                                                           |       | $                     | 2,397      |   | $ | 2,013 |   |
| Warranties issued  during the period                                                        |       | 3,416                 |       | 3,444 |   |
| Settlements  during the period                                                              |       | (5,028                | )          | (3,519 | ) |
| Changes in  liability for pre-existing warranties during the period, including  expirations |       | 1,479                 |       | 459 |   |
| Balance, end of the  period                                                                 |       | $                     | 2,264      |   | $ | 2,397 |   |
|                                                                                             |            |                       |            |  |  |  |  |  |  |

 

As mayoccur with new product introductions, warranty costs in 2006 were higher thananticipated by approximately $1.5 million.

***Deferred Service Income***

Wesell service contracts for which revenue is deferred and recognized ratablyover the contract period, for time based service contracts, or as service hoursare delivered, for contracts based on a purchased quantity of hours. Changes inour deferred service revenue are as follows:

| ** **                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| **In thousands**                                  | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance,  beginning of the period                      |       | $                     | 1,970      |   | $ | 1,332 |   |
| Service contracts  sold during the period              |       | 10,673                |       | 9,124 |   |
| Service contract  revenue recognized during the period |       | (10,199               | )          | (8,486 | ) |
| Balance, end of the  period                            |       | $                     | 2,444      |   | $ | 1,970 |   |
|                                                        |            |                       |            |  |  |  |  |  |  |

 

**10.**   NOTES PAYABLE

In December 2004, weentered into a line of credit agreement with a brokerage firm. Under the termsof this agreement, we may borrow funds at a cost equal to the current Federalfunds rate plus 100 basis points (6.25% as of December 31, 2006). Certainof our cash, cash equivalents and short-term investments secure borrowingsoutstanding under this facility. Funds are advanced to us under this facilitybased on pre-determined advance rates on the cash and securities held by us inthis brokerage account. This agreement has no set expiration date and there areno loan covenants, other than the aforementioned collateral requirement whichdoes not legally restrict the cash and securities. As of December 31,2006, $7.0 million was outstanding under this facility, with a relatedcollateral requirement of approximately $9.3 million of our cash, cashequivalents and short-term investments. As of December 31, 2005, $4.3million was outstanding under a similar facility, with a related collateral requirementof approximately $5.7 million of our cash, cash equivalents and short-terminvestments.

**11.**   EXIT ACTIVITIES

Inthe fourth quarter of 2006, in order to reduce company-wide expenses, weeliminated approximately 29 full-time positions, 69% in the United States and31% internationally, and entered into a lease buyout agreement for ouroperating lease in the United Kingdom. As of December 31, 2006, wehad reduced our workforce by 27 personnel in connection with this plan. We recorded the exit activity charges pursuant tothe provisions of FASB Statement No. 146, Accounting for Costs Associatedwith Exit or Disposal Activities, (“SFAS 146”). In the fourth quarter of 2006,we recorded the charges of approximately $1.9 million related this plan,consisting of $1.6 million of severance and benefits charges and $0.3 millionof facility lease termination costs. The $1.9 million of charges in the fourthquarter of 2006 was recorded to Cost of sales, Research, development, andengineering, and Selling, general and administrative expenses, 

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in the Consolidated Statement of Operations in theamounts of $0.5 million, $0.1 million, and $1.3 million, respectively. We paidexit costs of $0.9 million during 2006. At December 31, 2006, there was aremaining accrual balance of $1.0 million related to severance and benefitpayments to be paid until the first quarter of 2008. In addition, we plan totake similar actions during the first quarter of 2007. We expect theseactivities to be substantially completed by March 31, 2007.

**12.**   STOCKHOLDERS’ EQUITY

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

Under Ultratech’s 1993Stock Option Plan/Stock Issuance Plan, as amended and restated as of January 30,2006,  officers and other keyemployees,  non-employee Board membersand consultants may receive equity incentive awards in the form of stockoptions to purchase shares of Common Stock at no less than 100% of fair valueat the grant date or restricted stock or restricted stock units. Optionshistorically have vested in equal monthly installments over a fifty-monthperiod, with a minimum vesting period of twelve months from the grant date, andgenerally expire ten years from the date of grant or upon the expiration of alimited period following any earlier termination of employment. In 2005 and2004, certain options were granted with no vesting requirements, and otherswere granted with non-standard vesting periods that provided full vesting as ofDecember 31, 2005 and or as of December 31, 2004 for grants made inthat calendar year. Some of these option grants imposed sale and transfer restrictionson the shares purchasable under those grants. Those restrictions  would terminate either on designated dates orthe attainment of specified performance targets. The plan was amended on January 30,2006 to allow the issuance of shares pursuant to restricted stock unit awards,and  during  fiscal year 2006, restricted stock unitawards were made which generally vest in equal annual installments over athree-year period measured from the award date but which defer the issuance ofthe vested shares until the end of the vesting period, subject to earlierissuance upon termination of employment under certain circumstances or a changein control. Awards under the plan may be subject to accelerated vesting undercertain circumstances should a change in control occur. The plan terminates onthe earlier of February 28, 2011 or the date on which all shares availablefor issuance under the plan have been issued. The plan contained an automaticshare increase feature pursuant to which the share reserve automaticallyincreased on the first trading day in January of each calendar year,through 2006, by an amount equal to four percent (4%) of the total number ofshares of Common Stock outstanding on the last trading day in December ofthe immediately preceding calendar year, but in no event would such annualincrease exceed 1.7 million shares, subject to adjustment in the event ofcertain changes to our capital structure. Under the plan, approximately1,032,000, 131,000, and 56,000 options and awards were available for issuanceat December 31, 2006, 2005 and 2004, respectively.

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

Under our 1998 Supplemental Stock Option/StockIssuance Plan, as amended, eligible employees (other than executive officers and employees holding the titleof Vice President or General Manager) may receive options to purchase shares ofCommon Stock at not less than 100%  offair value on the grant date. These options generally vest in equal monthlyinstallments over a fifty-month  period,with a minimum vesting period of twelve months from grant date, and generallyexpire ten years from date of grant, subject to earlier termination followingthe optionee’s cessation of employee status. Direct stock issuances may also bemade under the plan, subject to similar vesting provisions. Awards under theplan may be subject to accelerated vesting under certain circumstances should achange in control occur. The plan will terminate on the earlier of October 19,2008, or the date on which all shares available for issuance under the planhave been issued. Under the plan, approximately 73,000, 43,000, and 16,000options were available for issuance at December 31, 2006, 2005 and 2004,respectively.

Asummary of our stock option activity as of December 31, 2006, and relatedinformation follows:

| ** **                                             | ** ** | **Options** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value  as of December 31,  2006** | ** ** |   |
|--------------------------------------------------------|------------|-------------|------------|-------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------|------------|--------|
| Outstanding at  January 1, 2006                   |       | 6,443,948   |       |                                      | $          | 17.71                                                       |       |                                                          |       |   |   |   |   |   |   |   |
| Granted                                                |       | 153,000     |       |                                      | $          | 15.13                                                       |       |                                                          |       |   |   |   |   |   |   |   |
| Exercised                                              |       | (206,478    | )          |                                      | $          | 14.37                                                       |       |                                                          |       |   |   |   |   |   |   |   |
| Forfeitures and  cancellations                         |       | (282,834    | )          |                                      | $          | 19.40                                                       |       |                                                          |       |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2006                 |       | 6,107,636   |       |                                      | $          | 17.68                                                       |       |                                                          |       | 6.11   |   |   |   | $ | 714,420 |   |   |
| Vested and  expected to vest at December 31, 2006 |       | 6,089,857   |       |                                      | $          | 17.69                                                       |       |                                                          |       | 6.10   |   |   |   | $ | 712,404 |   |   |
| Exercisable at  December 31, 2006                 |       | 5,865,843   |       |                                      | $          | 17.85                                                       |       |                                                          |       | 6.02   |   |   |   | $ | 608,068 |   |   |

 

The aggregate intrinsic value in the table aboverepresents the total pre-tax intrinsic value (the difference between ourclosing stock price on the last trading day of fiscal 2006 and the exerciseprice, multiplied by the number of in-the-money options) that would have beenreceived by the option holders had all option holders exercised their optionson December 31, 2006. This amount changes based on the fair market valueof our stock. Total intrinsic value of options exercised in fiscal 2006 was$1.3 million. Total fair value of shares vested in fiscal 2006 was $1.0 million.

Asummary of our option activity for the prior years follows:

| ** **                       | ** ** | **2005**    | ** ** | **2004**                | ** ** |
|----------------------------------|------------|-------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** **  | ** ** | **Weighted-Average**    | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
| ** **                       | ** ** | **Options** | ** ** | **Exercise Price** | ** ** | **Options** | ** ** | **Exercise Price** | ** ** |
|                             |       |        |       |                    |       |   |   |   |   |   |   |   |   |
| Outstanding at  January 1   |       | 6,128,142   |       |                    | $          | 18.22 |   |   | 5,200,824 |   |   | $ | 17.11 |   |   |
| Granted                          |       | 1,388,500   |       |                    | $          | 16.17 |   |   | 1,213,500 |   |   | $ | 22.32 |   |   |
| Exercised                        |       | (539,286    | )          |                    | $          | 13.86 |   |   | (120,390 | ) |   | $ | 13.62 |   |   |
| Forfeitures and  cancellations   |       | (533,408    | )          |                    | $          | 23.41 |   |   | (165,792 | ) |   | $ | 16.98 |   |   |
| Outstanding at  December 31 |       | 6,443,948   |       |                    | $          | 17.71 |   |   | 6,128,142 |   |   | $ | 18.22 |   |   |

 

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At December 31,2006, options outstanding were as follows:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Options**                  | ** ** | **Weighted-Average  Remaining  Contractual Life  (Years)** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| $  8.4100  - $13.6700             |       | 1,154,301                    |       |                         | 5.28       |   |   |   | $ | 12.28 |   |   | 987,608 |   |   | $ | 12.28 |   |   |
| $13.7800 - $14.1200                         |       | 1,213,649                    |       |                         | 6.07       |   |   |   | $ | 14.01 |   |   | 1,200,549 |   |   | $ | 14.01 |   |   |
| $14.2500 - $16.0100                         |       | 1,103,318                    |       |                         | 6.99       |   |   |   | $ | 15.22 |   |   | 1,065,818 |   |   | $ | 15.23 |   |   |
| $16.1600 - $21.4500                         |       | 1,026,368                    |       |                         | 6.44       |   |   |   | $ | 18.33 |   |   | 1,001,868 |   |   | $ | 18.27 |   |   |
| $21.8300 - $27.8200                         |       | 1,049,900                    |       |                         | 5.61       |   |   |   | $ | 23.43 |   |   | 1,049,900 |   |   | $ | 23.43 |   |   |
| $28.7500 - $31.3750                         |       | 560,100                      |       |                         | 6.46       |   |   |   | $ | 29.67 |   |   | 560,100 |   |   | $ | 29.67 |   |   |
| $  8.4100 -  $31.3750             |       | 6,107,636                    |       |                         | 6.11       |   |   |   | $ | 17.68 |   |   | 5,865,843 |   |   | $ | 17.85 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31, 2006, $1.3 million of total unrecognizedcompensation cost related to stock options is expected to be recognized over aweighted-average period of 0.96 years.

Cash received from option exercises in fiscal 2006 was$3.0 million.

Asummary of our restricted stock unit activity as of December 31, 2006, andrelated information follows:

| ** **                                 | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
|--------------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | **Grant Date**  | ** ** |
| ** **                                 | ** ** | **Shares** | ** ** | **Fair Value**  | ** ** |
| Nonvested stock  at January 1, 2006   |       | —     |       |                 | $          | 0.00 |   |   |
| Granted                                    |       | 167,500    |       |                 | $          | 19.20 |   |   |
| Vested                                     |       | (53,694    | )          |                 | $          | 19.20 |   |   |
| Forfeited                                  |       | (20,125    | )          |                 | $          | 19.20 |   |   |
| Nonvested stock at  December 31, 2006 |       | 93,681     |       |                 | $          | 19.20 |   |   |

 

As of December 31,2006, $2.1 million of total unrecognized compensation cost related to nonvestedstock is expected to be recognized over a weighted-average period of 1.49years.

***Employee Stock Purchase Plan***

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

***Treasury Stock***

On September 19,2005, our Board of Directors authorized the repurchase of up to $30.0 millionof its common stock in the open market at the then prevailing market pricesduring the period commencing September 19, 2005 through September 30,2007. We had repurchased 1,386,580 and 644,535 shares of our common stock for atotal of $20.0 million and $9.2 million as of December 31, 2006 and 2005,respectively.

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***Shareholder Rights Plan***

Our Shareholder RightsPlan provided that Preferred Share Purchase Rights were attached at the rate ofone Right on each outstanding share of our Common Stock held by stockholders.These rights expired on February 9, 2007.

**13.**   EMPLOYEE BENEFIT PLANS

***Employee bonus plans***

We currently sponsor aprofit sharing plan and an executive incentive bonus plan that distributeemployee awards based on the achievement of predetermined targets. We did notrecognize expense under these various employee bonus plans in 2006, 2005 or2004.

***Employee savings and retirement plans***

Ultratech sponsors a 401(k) employeesalary deferral plan that allows voluntary contributions by all full-timeemployees of from 1% to 20% of their pretax earnings. During the three yearsended December 31, 2006, our contributions made to this plan were $0.5million, $0.4 million, and $0.0 million, respectively. Our contributionsgenerally become 20 percent vested at the end of an employee’s first year ofservice from the date of hire with us, and vest 20 percent per year of servicethereafter until they become fully vested at the end of five years of service.We also sponsor an executive non-qualified deferred compensation plan (the “Plan”)that allows qualifying executives to defer current cash compensation. At December 31,2006, Plan assets, representing the cash surrender value of life insurancepolicies held by us, and liabilities were approximately $2.1 million and $2.2million, respectively, and are included in our consolidated balance sheetsunder the captions “other assets” and “other liabilities.” In conjunction withthis Plan, we recognized $0.1 million of expense for each of the three yearsended December 31, 2006, 2005 and 2004, respectively.

***Postretirement benefits***

We have committed to providing lifetimepost-retirement medical and dental benefits to the Chief Executive Officer andChief Financial Officer and their spouses, commencing after retirement. Thesemedical and dental benefits are similar to the benefits provided to allfull-time employees while employed by us, except that we are paying the entirecost of these benefits. The Chief Financial Officer and his spouse wereincluded in the plan for the first time this year.

On December 31, 2006, weadopted the recognition and disclosure provisions of FASB Statement No. 158,which required us to recognize the funded status (i.e., the difference betweenthe fair value of plan assets and the projected benefit obligations) of ourpostretirement benefits plans in the December 31, 2006 statement offinancial position, with a corresponding adjustment to accumulated othercomprehensive income, net of tax. The adjustment to accumulated othercomprehensive income at adoption represents the net unrecognized actuariallosses and unrecognized prior service costs, all of which were previouslynetted against the plans’ funded statuses in our statement of financialposition pursuant to the provisions of FASB Statement No. 87. Theseamounts will be subsequently recognized as net periodic benefit cost pursuantto our historical accounting policy for amortizing such amounts. Further,actuarial gains and losses that arise in subsequent periods and are notrecognized as net periodic benefit cost in the same periods will be recognizedas a component of other comprehensive income. Those amounts will besubsequently recognized as a component of net periodic benefit cost on the samebasis as the amounts recognized in accumulated other comprehensive income atadoption of FASB Statement No. 158.

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The adoption of FASB Statement No. 158 did not affectour consolidated statement of operations for the year ended December 31,2006. The incremental effects of adopting the provisions of FASB Statement No. 158on our statement of financial position at December 31, 2006 are presentedin the following table:

| ** **                              | ** ** | **At December 31, 2006** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **Prior to**                       | ** ** | **Effect of** | ** ** | **As Reported** | ** ** |
| ** **                              | ** ** | **Adopting**                            | ** ** | **Adopting** | ** ** | **At December** | ** ** |
| **In thousands**                   | ** ** | ** **                              | ** ** | **SFAS No. 158** | ** ** | **SFAS No. 158** | ** ** | **31, 2006** | ** ** |
| Accrued benefit  liability              |       |                                    | $          | 501 |   |   |   | $ | 200 |   |   |   | $ | 701 |   |   |
| Deferred income  taxes                  |       |                                    | —     |   |   |   | — |   |   |   | — |   |   |
| Accumulated other  comprehensive income |       |                                    | —     |   |   |   | 200 |   |   |   | 200 |   |   |
|                                         |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Included in accumulated othercomprehensive income at December 31, 2006 are unrecognized prior servicecosts of $210,000 and unrecognized actuarial losses of ($10,000). The priorservice cost and actuarial loss included in accumulated other comprehensiveincome and expected to be recognized in net periodic benefit cost during thefiscal year ended December 31, 2007 is $30,000 and $0, respectively.

The reconciliation of the beginning and ending balanceof the accumulated postretirement benefit obligation and the fair value of planassets for the year ended December 31, 2006 and 2005 is as follows:

| **In thousands**                     | ** ** | ** ** | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------|------------|------------|------------|---------------------------------|------------|---------------------------------|------------|
| Benefit  obligation at beginning of year  |       |       | $          | 475                             |       |                            |       | $ | 475 |   |   |
| Interest cost                             |       |       | 39         |                            |       |                            | 26         |   |   |
| Additions                                 |       |       | 240        |                            |       |                            | —     |   |   |
| Actuarial  loss/(gain)                    |       |       | (53        | )                               |       |                            | (26        | ) |   |
| Benefit obligation  at end of year        |       |       | $          | 701                             |       |                            |       | $ | 475 |   |   |
| Fair value of  plan assets at end of year |       |       | —     |                            |       |                            | —     |   |   |
| Funded status at end of  year             |       |       | $          | (701                            | )          |                            |       | $ | (475 | ) |   |

 

Amounts recognized in the statement of financialposition consist of:

| **In thousands**   | ** ** | ** ** | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------|------------|------------|------------|---------------------------------|------------|---------------------------------|------------|
| Noncurrent assets       |       |       | $          | —                          |       |                            |       | $ | — |   |   |
| Current  liabilities    |       |       | —     |                            |       |                            | —     |   |   |
| Noncurrent  liabilities |       |       | (701       | )                               |       |                            | (475       | ) |   |
|                    |       |       | $          | (701                            | )          |                            |       | $ | (475 | ) |   |

 

Weighted-average discount ratesas of December 31, 2006 were 5.80% for the Chief Executive Officer’s planand 5.90% for the Chief Financial Officer’s plan. The weighted-average discountrate as of December 31, 2005 and 2004 for the Chief Executive Officer’splan was 5.50% and 4.50%, respectively.

For measurement purposes, a 14%annual rate of increase in the per capita cost of covered health care benefitswas assumed for 2007, and 13% for 2008. The rate was assumed to decreasegradually to 6% for 2015 and remain at that level thereafter.

Components of Net Periodic Benefit Cost and OtherAmounts Recognized in Other Comprehensive Income are as follows:

| **In thousands**               | ** ** | ** ** | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------|------------|------------|------------|---------------------------------|------------|---------------------------------|------------|
| Interest cost                       |       |       | $          | 40                              |       |                            |       | $ | 26 |   |   |
| Amortization of  prior service cost |       |       | 30         |                            |       |                            | —     |   |   |
| Amortization of  net (gain) loss    |       |       | (43        | )                               |       |                            | (26        | ) |   |
| Net periodic benefit  cost          |       |       | $          | 27                              |       |                            |       | $ | — |   |   |

 

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Otherchanges in plan assets and benefit obligations recognized in othercomprehensive income are as follows:

| **In thousands**                           | ** ** | ** ** | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|------------|------------|---------------------------------|------------|---------------------------------|------------|
| Net loss (gain)                                 |       |       | $          | (10                             | )          |                            |       | $ | — |   |   |
| Prior service  cost                             |       |       | 240        |                            |       |                            | —     |   |   |
| Amortization of  prior service cost             |       |       | (30        | )                               |       |                            | —     |   |   |
| Total recognized  in other comprehensive income |       |       | $          | 200                             |       |                            |       | $ | — |   |   |
| Total recognized  in net periodic benefit cost  |       |       | $          | 227                             |       |                            |       | $ | — |   |   |
| and other comprehensive income                  |       |       |       |                            |       |                            |       |   |   |

 

Theexpected benefit payments in the next 10 years are as follows:

| ** ** | ** ** | **In thousands** | ** ** |
|------------|------------|-----------------------|------------|
| 2007       |       |                  | $          | — |   |   |
| 2008       |       |                  | 20         |   |   |
| 2009       |       |                  | 22         |   |   |
| 2010       |       |                  | 24         |   |   |
| 2011       |       |                  | 26         |   |   |
| 2012-2016  |       |                  | 231        |   |   |
|       |       |                  | $          | 323 |   |   |

 

Assumed health care cost trend rates have a significanteffect on the amounts reported for the health care plan. A one-percentage-pointchange in assumed health care cost trend rates would have the followingeffects:

| ** **                                               | ** ** | **At December 31, 2006** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                               | ** ** | **1-Percentage-**                       | ** ** | **1-Percentage-** | ** ** |
| **In thousands**                                    | ** ** | ** **                              | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
| Effect on total  of service and interest cost components |       |                                    | $          | 7 |   |   |   | $ | (6 | ) |   |
| Effect on postretirement  benefit obligation             |       |                                    | 105        |   |   |   | (87 | ) |   |
|                                                          |            |                                         |            |  |  |  |  |  |  |  |  |  |  |

 

**14.**   INCOME TAXES

Thedomestic and foreign components of income (loss) before income taxes andcumulative adjustments are as follows:

| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| **In thousands**              | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Domestic                           |       | $                                           | (10,941    | ) | $ | (480 | ) | $ | (1,055 | ) |
| Foreign                            |       | 2,927                                       |       | (42 | ) | 2,124 | * * |
| Income (loss) before  income taxes |       | $                                           | (8,014     | ) | $ | (522 | ) | $ | 1,069 | * * |
|                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

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

| ** **                           | ** ** | **Years Ended December 31,** | *** *** |
|--------------------------------------|------------|---------------------------------------------|--------------|
| **In thousands**                | ** ** | ** **                                  | ** **   | **  2006  ** | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** |
| Federal:                             |       |                                        |         |   |   |   |   |   |   |   |   |   |   |
| Current                              |       |                                        | $            | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Deferred                             |       |                                        | —       |   |   |   | — |   |   |   | — |   |   |
|                                 |       |                                        | —       |   |   |   | — |   |   |   | — |   |   |
| State:                               |       |                                        |         |   |   |   |   |   |   |   |   |   |   |
| Current                              |       |                                        | 3            |   |   |   | 51 |   |   |   | 13 |   |   |
| Deferred                             |       |                                        | —       |   |   |   | — |   |   |   | — |   |   |
|                                 |       |                                        | 3            |   |   |   | 51 |   |   |   | 13 |   |   |
| Foreign:                             |       |                                        |         |   |   |   |   |   |   |   |   |   |   |
| Current                              |       |                                        | 979          |   |   |   | 691 |   |   |   | 162 |   |   |
| Deferred                             |       |                                        | (28          | ) |   |   | (43 | ) |   |   | 270 |   |   |
|                                 |       |                                        | 951          |   |   |   | 648 |   |   |   | 432 |   |   |
| Total income tax provision (benefit) |       |                                        | $            | 954 |   |   |   | $ | 699 |   |   |   | $ | 445 |   |   |
|                                      |            |                                             |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

| ** **                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| **In thousands**                       | ** ** | ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Tax computed at  statutory rate             |       | $                                           | (2,805     | ) | $ | (183 | ) | $ | 374 |   |
| State income taxes, net  of federal benefit |       | 2                                           |       | 33 |   | 8 |   |
| Foreign taxes                               |       | (73                                         | )          | 663 |   | (311 | ) |
| U.S. losses not  benefited                  |       | 3,830                                       |       | 186 |   | 374 |   |
| Income tax provision (benefit)              |       | $                                           | 954        |   | $ | 699 |   | $ | 445 |   |
|                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

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

| **In thousands**                        | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Deferred tax assets:                         |       |       |       |     |       |     |       |
| Net operating loss  carryforwards            |       | $          | 40,965     |     | $          | 39,941   |       | $        | 39,119     |   |
| Inventory valuation                          |       | 3,257      |       | 3,123    |       | 3,022    |       |
| Bad debt reserve                             |       | 181        |       | 223      |       | 92       |       |
| Basis difference in  assets                  |       | 3,326      |       | 4,334    |       | 5,186    |       |
| Tax credit carryforwards                     |       | 24,777     |       | 25,428   |       | 24,328   |       |
| Warranty reserves                            |       | 876        |       | 926      |       | 781      |       |
| Deferred license income                      |       | —     |       | —   |       | 404      |       |
| Deferred product and  services income        |       | 1,133      |       | 753      |       | 361      |       |
| Other non-deductible  accruals and reserves  |       | 6,966      |       | 5,916    |       | 4,316    |       |
| Stock compensation                           |       | 540        |       |     |       |     |       |
| Total deferred tax  assets                   |       | 82,021     |       | 80,644   |       | 77,609   |       |
| Valuation allowance                          |       | (77,726    | )          | (74,034  | )          | (72,944  | )          |
| Net deferred tax assets                      |       | 4,295      |       | 6,610    |       | 4,665    |       |
| Deferred tax liabilities:                    |       |       |       |     |       |     |       |
| Unremitted earnings of  foreign subsidiaries |       | $          | (3,827     | )        | $          | (6,170   | )          | $        | (4,376     | ) |
| Other                                        |       | (109       | )          | (109     | )          | —   |       |
| Total deferred tax  liabilities              |       | (3,936     | )          | (6,279   | )          | (4,376   | )          |
| Net deferred tax assets                      |       | $          | 359        |     | $          | 331      |       | $        | 289        |   |

 

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

The net valuation allowance increased by $3.7 million,$1.1 million and $5.5 million during the years ended December 31, 2006,2005 and 2004, respectively. Approximately $13.3 million of the valuationallowance as of December 31, 2006 is attributable to pre-2006windfall stock option deductions, the benefit of which will be credited topaid-in capital if and when realized through a reduction in income taxespayable. Beginning in 2006, we will track the windfall stock option deductionsoff balance sheet, as required by SFAS No. 123R. During 2006, we recorded $1.1million of windfall stock option deductions that are being tracked off balancesheet. If and when realized, the tax benefit associated with those deductionsof $0.4 million will be credited to additional paid-in capital.

As of December 31, 2006, we had net operatingloss carryforwards for federal and state tax purposes of $111 million and $43million, respectively. We also had federal research and development tax creditcarryforwards of approximately $10.1 million. The federal and state netoperating loss carryforwards will expire at various dates beginning in 2007through 2026, if not utilized. The federal tax credit carryforwards will expireat various dates beginning in 2011 through 2026, if not utilized.

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

**15.**   COMMITMENTS AND CONTINGENCIES

Welease our facilities, and certain equipment under operating leases expiringthrough December 2011. Certain of our leasing arrangements subject us toletter of credit requirements. The leases for our headquarters andmanufacturing operations contain a five-year renewal option subject to a fairmarket value pricing adjustment. As of December 31, 2006, the minimumannual rental commitments are as follows:

| ** ** | ** ** | **in thousands** | ** ** |
|------------|------------|-----------------------|------------|
| 2007       |       |                  | $          | 4,610 |   |   |
| 2008       |       |                  | 4,702      |   |   |
| 2009       |       |                  | 4,573      |   |   |
| 2010       |       |                  | 2,736      |   |   |
| 2011       |       |                  | 273        |   |   |
| Thereafter |       |                  | —     |   |   |
|       |       |                  | $          | 16,894 |   |   |

 

Rent expense was approximately $4.5 million, $4.2million and $4.2 million for the years ended December 31, 2006, 2005 and2004, respectively.

Under terms of certain of our leases, we are obligatedto provide a $2.4 million bank letter of credit as security to the landlord.

On February 29, 2000, wefiled lawsuits asserting patent infringement and related claims against Nikon,Canon, and ASML in the U.S. District Court for the Eastern District ofVirginia. In April 2000, we reached a settlement with Nikon, and in September 2001,we reached a settlement with Canon. In the patent litigation against ASML, ajury trial was conducted in the U.S. District Court for the Northern Districtof California during the three-month period ended July 2, 2005. The juryreached a verdict that the patent was infringed, but that the asserted claimsof the patent were invalid. We filed a post-trial motion 

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fora new trial and for judgment as a matter of law in our favor. ASML also filed amotion for judgment as a matter of law seeking to invalidate three of theasserted claims for lack of enablement and requested that the court awardscosts. On February 13th, 2006, the Court denied our post-trial motions,including the motion for a new trial, and entered judgment in favor of ASMLinvalidating three claims of the patent for lack of enablement. The Court alsoawarded ASML approximately $330,000 in costs. We have filed an appealwith the Federal Circuit Court of Appeals, and filed our opening appellatebrief on August 30, 2006. Although ASML originally filed a notice ofcross-appeal, ASML subsequently withdrew its cross appeal and the Court enteredan order to that effect on December 8, 2006. ASML’s opening appellatebrief was filed on December 6, 2006, and Ultratech’s reply brief was filedJanuary 12, 2007. We expect the case to be set for oral argument in lateSpring 2007.

On July 11, 2003, we filed a lawsuit against aSouthern California company asserting infringement of certain claims related toU.S. patent No. 5,621,813 in the U.S. District Court in and for theNorthern District of California. On May 17, 2005, the court found thesubject patent to be invalid. We appealed this decision. The defendantsubsequently brought a motion for reimbursement of its attorneys’ fees andcosts in a total asserted amount of approximately $2 million. We opposed thismotion, and on October 12, 2005, the District Court denied the defendant’srequest for attorneys’ fees in its entirety. The defendant appealed thatdecision. On November 3, 2005, the defendant filed a notice of appeal withrespect to the court’s ruling on its motion for attorneys’ fees. In March 2006,the Federal Circuit court upheld the district court’s ruling that the subjectpatent is invalid. On August 8, 2006, the Federal Circuit court upheld theDistrict Court’s denial of attorneys’ fees.

In May 2006, the samecompany filed a state court lawsuit against us for malicious prosecution andabuse of process claiming that attorney’s fees, costs and other damages weredue based on the outcome of a federal patent litigation suit brought against itby us. We do not believe this new action has merit, particularly given thedenial by the federal court and the subsequent federal appellate court’saffirmation of the order denying the award of any attorney’s fees payable tothis company by us in the federal patent litigation. We filed a motion to havethe state court complaint dismissed under California’s anti-SLAPP and demurrerstatutes. Nonetheless the state court has preliminarily stated that it woulddeny our motion to dismiss as to the malicious prosecution claim, whilegranting it as to the abuse of process claim. In such event, we intend toappeal the denial of our motion to dismiss the malicious prosecution claim andotherwise vigorously defend against this action and to seek fees and/orsanctions against this company in relation thereto.

**16.**   FINANCIAL GUARANTEES

Our off-balance sheettransactions consist of certain financial guarantees, both express and implied,related to indemnification for product liability, patent infringement andlatent product defects. Other than liabilities recorded pursuant to knownproduct defects, at December 31, 2006, we did not record a liabilityassociated with these guarantees, as we have little or no history of costsassociated with such indemnification requirements. Contingent liabilitiesassociated with product liability may be mitigated by insurance coverage we maintain.

**17.**   ASSET RETIREMENT OBLIGATIONS

In the fourth quarter 2005 we adopted FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations” (“FIN 47”), an interpretation of FASB Statement No. 143, “AssetRetirement Obligations” (“SFAS 143”). FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in SFAS 143 refers to a legal obligationto perform an asset retirement activity in which the timing and (or) method ofsettlement are conditional on a future event that may or may not be within thecontrol of the entity. An entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fair value ofthe liability can be reasonably estimated, even if conditional 

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on a future event. Aspermitted, we recognized the effect of applying FIN 47 as a cumulative effectof a change in accounting principle in 2005. Our adoption of FIN 47 resulted inan increase in net equipment and leasehold improvements of approximately  $1.0 million, recognition of an assetretirement obligation (“ARO”) liability of $2.1 million, and a cumulative effect of adoption of $1.1 million, or$0.05 per share, for the year ended December 31, 2005. The ARO liabilityis principally for estimable asset retirement obligations related toremediation costs, which we estimate will be incurred upon the expiration ofcertain operating leases.

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

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

----

*                    Priorto the cumulative effect of change in accounting principle

Thefollowing table sets forth an analysis of the ARO activity for the fiscal yearended December 31, 2006:

| **In thousands**           | ** ** | ** ** | ** ** | **2006** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|
| Balance as of  January 1   |       | $          | 2,064      |     |
| Accretion expense               |       | 179        |       |
| Liabilities  incurred           |       | 3          |       |
| Liabilities  settled            |       | (264       | )          |
| Balance as of  December 31 |       | $          | 1,982      |     |

 

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**REPORT OFERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Stockholders ofUltratech, Inc.

We have audited the accompanying consolidated balancesheets of Ultratech, Inc. as of December 31, 2006 and 2005, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2006.Our audits also included the financial statement schedule listed in the Indexat Item 15(a)(2). These financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Ultratech, Inc. at December 31, 2006 and 2005, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2006, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the relatedfinancial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

As discussed in Note 5 to the consolidated financialstatements, in 2006, Ultratech, Inc. changed its method of accounting forshare-based payments in accordance with the guidance provided in Statement ofFinancial Accounting Standards No. 123(R), “Share-Based Payment.”  As discussed in Note 4 to the consolidatedfinancial statements, in 2005, Ultratech, Inc. changed its method of accountingfor asset retirement obligations in accordance with the guidance provided inFASB Interpretation No. 47, “Accounting for Conditional Asset RetirementObligations.” 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness ofUltratech, Inc.’s internal control over financial reporting as ofDecember 31, 2006, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 5, 2007expressed an unqualified opinion thereon.

|                      | /s/ ERNST &  YOUNG LLP |
|----------------------|---------------------------------|
| San Jose, California |                            |
| March 5, 2007   |                            |

 

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**REPORT OFERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Stockholders ofUltratech, Inc.

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Ultratech, Inc. maintained effective internal control overfinancial reporting as of December 31, 2006, based on criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Ultratech, Inc.’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

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

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

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

In our opinion, management’s assessment thatUltratech, Inc. maintained effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion,Ultratech, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2006, based on****the COSO criteria**.**

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofUltratech, Inc. as of December 31, 2006 and 2005, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2006 ofUltratech, Inc. and our report dated March 5, 2007 expressed anunqualified opinion thereon.

|                                            | /s/ ERNST &  YOUNG LLP |
|--------------------------------------------|--------------------------------------|
| San Jose,  California   March 5, 2007 |                                 |

 

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**ITEM9.****  *****CHANGES******IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND******FINANCIAL******DISCLOSURE***

Not applicable.

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

**Controls andProcedures**

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

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

**Management’s Reporton Internal Control Over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended. Ourinternal control over financial reporting is designed to provide reasonableassurance to our management and board of directors regarding the preparationand fair presentation of published financial statements. Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Therefore, even those systems determined to beeffective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

Management, including our principal executive officerand principal financial officer, assessed the effectiveness of our internalcontrol over financial reporting as of December 31, 2006. In making thisassessment, management used the criteria set forth by the committee ofSponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework*. Based on thisassessment, our management has concluded that, as of December 31, 2006,our internal control over financial reporting is effective based on thosecriteria.

Management’s assessment ofthe effectiveness of internal control over financial reporting as of December 31,2006, has been audited by Ernst & Young, LLP, the independentregistered public accounting firm who also audited our consolidated financialstatements. Ernst & Young’s attestation report on management’sassessment of our internal control over financial reporting appears elsewhereherein.

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**Changes in InternalControl Over Financial Reporting**

There were no changes inour internal controls over financial reporting during the quarter ended December 31,2006 that have materially affected, or are reasonably likely to materiallyaffect our internal controls over financial reporting.

**ITEM9B.****   *OTH******E******R******INFORMATION***

**None.**

**PART III**

The information requiredby Part III is omitted from this Report and is incorporated herein byreference from our definitive proxy statement to be filed within 120 days afterthe end of our fiscal year pursuant to Regulation 14A for our 2007 AnnualMeeting of Stockholders to be held  July 24, 2007.

***ITEM 10.******  *DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

The information concerningour directors required by this Item is incorporated by reference from the Itemcaptioned “Election of Directors” in our Proxy Statement for the 2007 AnnualMeeting of Stockholders (the “Proxy Statement”). The information required bythis Item relating to our executive officers is included under the caption “ExecutiveOfficers of the Registrant” in Part I of this Annual Report on Form 10-K.Other information required by this Item is incorporated herein by referencefrom the Item captioned “Section 16(a) Beneficial Ownership ReportingCompliance” in the Proxy Statement.

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

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

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

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

***ITEM 13.  *CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

The information requiredby this Item is incorporated by reference from the items captioned “Election ofDirectors” and “Certain Relationships and Related Transactions” in the ProxyStatement.

***ITEM 14.  *PRINCIPALACCOUNTANT FEES AND SERVICES**

The information required by this Item is incorporatedby reference from the item captioned “Fees billed to Ultratech by Ernst &Young LLP during fiscal year 2006” in the Proxy Statement.

75

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**PART IV**

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

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

(1)         Financial Statements

The financialstatements (including the notes thereto) listed in the Index to ConsolidatedFinancial Statement Schedule (set forth in Item 8 of Part II of this Form 10-K)are filed within this Annual Report on Form 10-K.

(2)         Financial StatementSchedules

The following consolidated financial statementschedule is included herein:

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

 

Schedules otherthan those listed above have been omitted since they are either not required,are not applicable, or the required information is shown in the financialstatements or related notes.

(3)         Exhibits

The following exhibits are referenced or included inthis report:

| Exhibit               | ** ** | ** **                                                                                                                                                                                       | ** ** | **Description** |
|-----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
|   3.1(10)   |       | Amended and Restated  Certificate of Incorporation of the Registrant, filed October 6, 1993.                                                                                                |
|   3.1.1(10) |       | Certificate of  Amendment of the Amended and Restated Certificate of Incorporation of the  Company, dated May 17, 1995.                                                                     |
|   3.1.2(10) |       | Certificate of  Amendment of the Amended and Restated Certificate of Incorporation of the  Registrant, filed June 17, 1998.                                                                 |
|   3.1.3(10) |       | Certificate of  Amendment of the Amended and Restated Certificate of Incorporation of the  Registrant, filed June 20, 2003.                                                                 |
|   3.2(17)   |       | Bylaws of  Registrant, as amended.                                                                                                                                                               |
|   4.5(1)    |       | Specimen Common  Stock Certificate of Registrant.                                                                                                                                                |
| 10.1(20)              |       | 1993 Stock  Option/Stock Issuance Plan (Amended and Restated as of January 30, 2006.                                                                                                        |
| 10.2(1)               |       | Form of  Indemnification Agreement entered into between the Registrant and each of its  officers and directors.                                                                             |
| 10.3(8)               |       | Form of  Indemnification Agreement entered into between the Registrant and certain  officers.                                                                                               |
| 10.4(1)               |       | Standard  Industrial Lease—Single Tenant, Full Net between The Equitable Life Assurance  Society of the United States, as Landlord, and Registrant, as Tenant, dated  August 27, 1993. |
| 10.4.1(8)             |       | First Amendment  to Lease between The Equitable Life Assurance Society of the United States,  as Landlord, and Registrant, as Tenant, dated November 1999.                                  |
| 10.5(2)               |       | Profit Sharing  Plan.                                                                                                                                                                            |

 

76

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| Exhibit   | ** ** | ** **                                                                                                                                                                                   | ** ** | **Description** |
|-----------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 10.6(6)   |       | 1998 Supplemental  Stock Option/ Stock Issuance Plan (Amended and Restated effective  January 29, 2002).                                                                                |
| 10.7(15)  |       | Brokerage Line of  Credit Agreement with Morgan Stanley, dated December 16, 2004.                                                                                                       |
| 10.8(5)   |       | Lease Agreement between  Montague LLC, As Landlord, and Registrant, As Tenant dated November 22,  1999.                                                                                 |
| 10.10(14) |       | Employment  agreement between Registrant and Mr. Arthur Zafiropoulo, Chief Executive  Officer.                                                                                          |
| 10.11(14) |       | Employment  agreement between Registrant and Mr. John Denzel, former President and  Chief Operating Officer                                                                             |
| 10.12(14) |       | Employment  agreement between Registrant and Mr. Bruce Wright, Senior Vice President  and Chief Financial Officer.                                                                      |
| 10.13(19) |       | Employment  agreement between Registrant and Mr. Rick Friedman, former Senior Vice  President, World-Wide Sales and Customer Service.                                                   |
| 10.14(22) |       | Amended and  Restated Employment Agreement between Registrant and Mr. John Denzel,  former President and Chief Operating Officer.                                                       |
| 10.15(22) |       | Separation and  General Release Agreement between Registrant and Mr. John Denzel, former  President and Chief Operating Officer.                                                        |
| 10.16(21) |       | Form of  Restricted Stock Unit Issuance Agreement for Executive Officers with  Employment Agreements.                                                                                   |
| 10.17(21) |       | Form of  Restricted Stock Unit Issuance Agreement for Other Employees.                                                                                                                  |
| 10.18(12) |       | Description of  2005 Cash Bonus Plan.                                                                                                                                                        |
| 10.19(18) |       | Description of  2006 Long-Term Incentive Plan, as amended.                                                                                                                                   |
| 21        |       | Subsidiaries of  Registrant.                                                                                                                                                                 |
| 23        |       | Consent of  Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                                       |
| 24        |       | Power of Attorney  (contained in Signature page hereto).                                                                                                                                |
| 31.1      |       | Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                    |
| 31.2      |       | Certification of  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                    |
| 32.1      |       | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

----

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

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

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

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

77

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

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

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

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

(9)          Previously filed withour Registration Statement on Form S-8, dated February 14, 2003.File No. 333-103228.

(10) Previously filed with our Quarterly Report on Form 10-Qfor the quarter ended June 28, 2003 (Commission File No. 0-22248).

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

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

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

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

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

(16) Previously filed with our Annual Report on Form 10-K forthe year ended December 31, 2005 (Commission File No. 0-22248).

(17) Previously filed with our Current Report on Form 8-Kfiled on February 2, 2007 (Commission File No. 0-22248).

(18) Incorporated by reference to Item 1.01 of our Current Report on Form 8-Kfiled on February 3, 2006 (Commission File No. 0-22248) and toItem 1.01 of our Current Report on Form 8-K filed on March 20,2006 (Commission File No. 0-22248).

(19) Previously filed with our Current Report on Form 8-Kfiled on February 3, 2006 (Commission File No. 0-22248).

(20) Previously filed with our Registrant Statement on Form S-8filed with the Securities and Exchange Commission on March 9, 2006. File No. 333-132302.

(21) Previously filed with our Quarterly Report on Form 10-Qfiled on May 5, 2006 (Commission File No. 0-22248).

(22) Previously filed with our Current Report on Form 8-Kfiled on November 8, 2006 (Commission File No. 0-22248).

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

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

78

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunder duly authorized.

|        |     |               |   | ULTRATECH, INC. |
|--------|----------|--------------------|--------|----------------------|
| Date:  |     | March 6, 2007 |   | By:                  |   | /s/ ARTHUR ZAFIROPOULO |
|   |     |               |   |                 |   | Arthur Zafiropoulo |
|   | * * | * *           |   |                 |   | *Chairman of the Board of Directors and* |
|   | * * | * *           |   |                 |   | *Chief Executive Officer* |

 

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

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report has beensigned below (and the above Powers of Attorney granted) by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

|                             | **Signature** | ** **                                                          | ** ** | ** **         | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-----------------------------|---------------|---------------------------------------------------------------------|------------|--------------------|-----------|------------|------------|------------|----------|------------|
| /s/ ARTHUR ZAFIROPOULO |          | Chairman of the Board of  Directors and Chief                       |       | March 6, 2007 |
| Arthur  Zafiropoulo         |          | Executive Officer (Principal Executive Officer)                     |       |               |
| /s/  BRUCE WRIGHT           |          | Senior Vice President,  Finance, Chief Financial                    |       | March 6, 2007 |
| Bruce Wright                |          | Officer and Secretary (Principal Financial and  Accounting Officer) |       |               |
| /s/ DENNIS RANEY       |          | Director                                                            |       | March 6, 2007 |
| Dennis Raney                |          |                                                                |       |               |
| /s/ RICK TIMMINS       |          | Director                                                            |       | March 6, 2007 |
| Rick Timmins                |          |                                                                |       |               |
| /s/  HENRI RICHARD          |          | Director                                                            |       | March 6, 2007 |
| Henri P Richard             |          |                                                                |       |               |

79

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| /s/ JOEL GEMUNDER       |   | Director |   | March 6, 2007 |
|------------------------------|--------|----------|--------|--------------------|
| Joel Gemunder                |   |     |   |               |
| /s/ NICHOLAS KONIDARIS  |   | Director |   | March 6, 2007 |
| Nicholas  Konidaris          |   |     |   |               |
| /s/ VINCENT F. SOLLITTO |   | Director |   | March 6, 2007 |
| Vincent F.  Sollitto         |   |     |   |               |

 

80

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**SCHEULEII**

**ULTRATECH, INC.**

**VALUATIONAND QUALIFYING ACCOUNTS**

**(inthousands)**

| **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, 2004 |       |       |       |                                           |       |                                          |       |                                 |       |              |       |                                     |       |   |   |   |   |   |   |   |   |
| Trade accounts receivable          |       |       | $          | 146                                            |       |                                          |       | $                                    | 93         |              |       |                                     | $          | — |   |   |   | $ | (2 | ) |   |   | $ | 237 |   |   |
|                               |       |       | $          | 146                                            |       |                                          |       | $                                    | 93         |              |       |                                     | $          | — |   |   |   | $ | (2 | ) |   |   | $ | 237 |   |   |
| Year ended  December 31, 2005 |       |       |       |                                           |       |                                          |       |                                 |       |              |       |                                     |       |   |   |   |   |   |   |   |   |
| Trade accounts receivable          |       |       | $          | 237                                            |       |                                          |       | $                                    | 339        |              |       |                                     | $          | — |   |   |   | $ | 1 |   |   |   | $ | 577 |   |   |
|                               |       |       | $          | 237                                            |       |                                          |       | $                                    | 339        |              |       |                                     | $          | — |   |   |   | $ | 1 |   |   |   | $ | 577 |   |   |
| Year ended  December 31, 2006 |       |       |       |                                           |       |                                          |       |                                 |       |              |       |                                     |       |   |   |   |   |   |   |   |   |
| Trade accounts receivable          |       |       | $          | 577                                            |       |                                          |       | $                                    | (112       | )                 |       |                                     | $          | 1 |   |   |   | $ | — |   |   |   | $ | 466 |   |   |
|                               |       |       | $          | 577                                            |       |                                          |       | $                                    | (112       | )                 |       |                                     | $          | 1 |   |   |   | $ | — |   |   |   | $ | 466 |   |   |

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

S-1

----

**EXHIBITINDEX**

| Exhibit               | ** ** | ** **                                                                                                                                                                                                                                                                 | ** ** | **Description** |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
|   3.1(10)   |       | Amended and Restated  Certificate of Incorporation of the Registrant, filed October 6, 1993.                                                                                                                                                                          |
|   3.1.1(10) |       | Certificate of  Amendment of the Amended and Restated Certificate of Incorporation of the  Company, dated May 17, 1995.                                                                                                                                               |
|   3.1.2(10) |       | Certificate of  Amendment of the Amended and Restated Certificate of Incorporation of the  Registrant, filed June 17, 1998.                                                                                                                                           |
|   3.1.3(10) |       | Certificate of  Amendment of the Amended and Restated Certificate of Incorporation of the  Registrant, filed June 20, 2003.                                                                                                                                           |
|   3.2(10)   |       | Bylaws of  Registrant, as amended.                                                                                                                                                                                                                                         |
|   4.5(1)    |       | Specimen Common  Stock Certificate of Registrant.                                                                                                                                                                                                                          |
|   4.6(3)    |       | Shareholder  Rights Agreement between Registrant and the First National Bank of Boston,  filed on February 11, 1997, as amended on March 18, 1998.                                                                                                               |
|   4.6.1(4)  |       | Second Amendment  to Shareholder Rights Agreement dated February 11, 1997 between  Registrant and BankBoston, N.A. (formerly known as the First National Bank of  Boston) as of October 12, 1998, and Certification of Compliance with  Section 27 thereof. |
| 10.1(13)              |       | 1993 Stock  Option/Stock Issuance Plan (Amended and Restated as of March 2, 2004).                                                                                                                                                                                    |
| 10.2(1)               |       | Form of  Indemnification Agreement entered into between the Registrant and each of its  officers and directors.                                                                                                                                                       |
| 10.3(8)               |       | Form of  Indemnification Agreement entered into between the Registrant and certain  officers.                                                                                                                                                                         |
| 10.4(1)               |       | Standard  Industrial Lease—Single Tenant, Full Net between The Equitable Life Assurance  Society of the United States, as Landlord, and Registrant, as Tenant, dated  August 27, 1993.                                                                           |
| 10.4.1(8)             |       | First Amendment  to Lease between The Equitable Life Assurance Society of the United States,  as Landlord, and Registrant, as Tenant, dated November 1999.                                                                                                            |
| 10.5(2)               |       | Profit Sharing  Plan.                                                                                                                                                                                                                                                      |
| 10.6(6)               |       | 1998 Supplemental  Stock Option/ Stock Issuance Plan (Amended and Restated effective  January 29, 2002).                                                                                                                                                              |
| 10.7(15)              |       | Brokerage Line of  Credit Agreement with Morgan Stanley, dated December 16, 2004.                                                                                                                                                                                     |
| 10.8(5)               |       | Lease Agreement  between Montague LLC, As Landlord, and Registrant, As Tenant dated  November 22, 1999.                                                                                                                                                               |
| 10.10(14)             |       | Employment  agreement between Registrant and Mr. Arthur Zafiropoulo, chief Executive  Officer.                                                                                                                                                                        |
| 10.11(14)             |       | Employment  agreement between Registrant and Mr. John Denzel, former President and  Chief Operating Officer                                                                                                                                                           |
| 10.12(14)             |       | Employment  agreement between Registrant and Mr. Bruce Wright, Senior Vice President  and Chief Financial Officer.                                                                                                                                                    |
| 10.13(19)             |       | Employment  agreement between Registrant and Mr. Rick Friedman, former Senior Vice  President, World-Wide Sales and Customer Service.                                                                                                                                 |
| 10.14(22)             |       | Amended and  Restated Employment Agreement between Registrant and Mr. John Denzel,  former President and Chief Operating Officer.                                                                                                                                     |

----

 

| 10.15(22) |   | Separation and  General Release Agreement between Registrant and Mr. John Denzel, former  President and Chief Operating Officer.                                                        |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.16(21) |   | Form of  Restricted Stock Unit Issuance Agreement for Executive Officers with  Employment Agreements.                                                                                   |
| 10.17(21) |   | Form of  Restricted Stock Unit Issuance Agreement for Other Employees.                                                                                                                  |
| 10.18(12) |   | Description of  2005 Cash Bonus Plan.                                                                                                                                                        |
| 10.19(18) |   | Description of  2006 Long-Term Incentive Plan, as amended.                                                                                                                                   |
| 21        |   | Subsidiaries of  Registrant.                                                                                                                                                                 |
| 23        |   | Consent of  Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                                       |
| 24        |   | Power of Attorney  (contained in Signature page hereto).                                                                                                                                |
| 31.1      |   | Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                    |
| 31.2      |   | Certification of  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                               |
| 32.1      |   | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

----

(1)          Previouslyfiled with our Registration Statement on Form S-1 declared effectivewith the Securities and Exchange Commission on September 28, 1993. File No. 33-66522.

(2)          Previouslyfiled with our 1993 Annual Report on Form 10-K (Commission File No. 0-22248).

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

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

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

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

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

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

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

(10)   Previouslyfiled with our Quarterly Report on Form 10-Q for the quarter ended June 28,2003 (Commission File No. 0-22248).

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

(12)   Incorporatedby reference to Item 1.01 of our Current Report on Form 8-K filed onJanuary 27, 2005 (Commission File No. 0-22248).

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

----

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

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

(16) Previously filed with our Annual Report on Form 10-K forthe year ended December 31, 2005 (Commission File No. 0-22248).

(17) Previously filed with our Current Report on Form 8-Kfiled on February 2, 2007 (Commission File No. 0-22248).

(18) Incorporated by reference to Item 1.01 of our Current Report on Form 8-Kfiled on February 3, 2006 (Commission File No. 0-22248) and toItem 1.01 of our Current Report on Form 8-K filed on March 20,2006 (Commission File No. 0-22248).

(19) Previously filed with our Current Report on Form 8-Kfiled on February 3, 2006 (Commission File No. 0-22248).

(20) Previously filed with our Registrant Statement on Form S-8filed with the Securities and Exchange Commission on March 9, 2006. File No. 333-132302.

(21) Previously filed with our Quarterly Report on Form 10-Qfiled on May 5, 2006 (Commission File No. 0-22248).

(22) Previously filed with our Current Report on Form 8-Kfiled on November 8, 2006 (Commission File No. 0-22248).

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