<PAGE>

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                 FORM  10-Q

(Mark One)
    [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

             FOR THE QUARTERLY PERIOD ENDED     JUNE 30, 1998
                                            ---------------------

    [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934


      For the transition period from _______________ to _______________


                      Commission File Number     0-22248
                                             ---------------


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


           DELAWARE                                 94-3169580
-------------------------------------------------------------------------------
(State or other jurisdiction of        (I.R.S. employer identification number)
incorporation or organization)


 3050 Zanker Road, San Jose, California               95134
-------------------------------------------------------------------------------
(Address of principal executive offices)            (Zip Code)


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

Indicate by check mark whether the Registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.

                          Yes    X        No
                              -------         -------

Indicate the number of shares of the issuer's class of common stock, as of 
the latest practical date:


          Class                          Outstanding as of August 6, 1998
-------------------------------------    --------------------------------------
Common Stock, $.001 par value                         21,031,754


                                       1
<PAGE>

                             ULTRATECH STEPPER, INC.

                                     INDEX

                                                                        Page No.
                                                                        --------
PART 1. FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

         Condensed Consolidated Balance Sheets as of June 30, 1998
         and December 31, 1997 . . . . . . . . . . . . . . . . . . . .      3

         Condensed Consolidated Statements of Income and Comprehensive 
         Income for the three months ended June 30, 1998 and 1997 and 
         the six months ended June 30, 1998 and 1997 . . . . . . . . .      4

         Condensed Consolidated Statements of Cash Flows for the three
         months ended June 30, 1998 and 1997 and the six months ended 
         June 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . .      5

         Notes to Condensed Consolidated Financial Statements. . . . .      6

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
         AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . .      9


PART 2. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . .     22

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . .     22

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . .     22

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . .     22

ITEM 5.  OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . .     22

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . .     22


SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     24

                                       2
<PAGE>

PART 1.  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

                             ULTRATECH STEPPER, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                   June 30,         Dec. 31,
(In thousands)                                       1998             1997*
-----------------------------------------------------------------------------
ASSETS                                            (Unaudited)
<S>                                               <C>                <C>
Current assets:
   Cash, cash equivalents and 
    short-term investments                          $150,116         $164,349
   Accounts receivable, net                           27,506           45,947
   Inventories                                        53,931           37,337
   Current portion of leases receivable,           
    prepaid expenses and other current assets         10,458            4,248
   Deferred income taxes                               5,139            5,142
-----------------------------------------------------------------------------
Total current assets                                 247,150          257,023
                                                  
Equipment and leasehold                           
 improvements, net                                    27,977           22,285
                                                  
Restricted investments                                 5,445            5,325
                                                  
Leases receivable                                      9,062           11,354
                                                  
Other assets                                           8,353            4,014
-----------------------------------------------------------------------------

Total assets                                        $297,987         $300,001
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Notes payable                                    $  1,531         $     94
   Accounts payable                                   14,223           12,295
   Other current liabilities                          29,419           21,408
-----------------------------------------------------------------------------
Total current liabilities                             45,173           33,797

Other liabilities                                      2,507            2,572

Stockholders' equity                                 250,307          263,632
-----------------------------------------------------------------------------

Total liabilities and stockholders' equity          $297,987         $300,001
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
*The Balance Sheet as of December 31, 1997 has been derived from the audited 
financial statements at that date.

     SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                       3
<PAGE>

                             ULTRATECH STEPPER, INC.
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                             AND COMPREHENSIVE INCOME
                                    (UNAUDITED)

<TABLE>
<CAPTION>
                                                                Three Months Ended        Six Months Ended
                                                               ---------------------    ---------------------
                                                               JUNE 30,     June 30,    JUNE 30,     June 30,
(In thousands, except per share amounts)                         1998        1997         1998        1997
-------------------------------------------------------------------------------------------------------------
<S>                                                            <C>          <C>         <C>          <C>
Net sales                                                      $ 22,395     $38,054     $ 50,177     $76,787

Cost of sales                                                    16,148      18,075       32,066      35,775
-------------------------------------------------------------------------------------------------------------
Gross profit                                                      6,247      19,979       18,111      41,012

OPERATING EXPENSES:
   Research, development, and engineering                         6,841       6,793       14,014      13,013
   Selling, general, and administrative                           6,292       6,643       12,768      12,921
   Acquired in-process research and development                  12,566           0       12,566       3,619
-------------------------------------------------------------------------------------------------------------
Operating income (loss)                                         (19,452)      6,543      (21,237)     11,459

Interest expense                                                    (82)        (43)        (109)        (85)

Other income, net                                                 1,592       1,799        3,295       3,495
-------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                               (17,942)      8,299      (18,051)     14,869

Income taxes (benefit)                                           (2,578)      2,572       (3,048)      4,609
-------------------------------------------------------------------------------------------------------------

Net income (loss)                                               (15,364)      5,727      (15,003)     10,260
-------------------------------------------------------------------------------------------------------------

Other comprehensive income (expense), net of tax:

   Unrealized gain (loss) on available-for-sale securities          (66)        340           68          20
-------------------------------------------------------------------------------------------------------------
Comprehensive income (loss)                                    $(15,430)    $ 6,067     $(14,935)    $10,280
-------------------------------------------------------------------------------------------------------------
Net income (loss) per share - basic                            $  (0.74)    $  0.28     $  (0.72)    $  0.50

Number of shares used in per share computations - basic          20,895      20,451       20,864      20,411

Net income (loss) per share - diluted                          $  (0.74)    $  0.27     $  (0.72)    $  0.48

Number of shares used in per share computations - diluted        20,895      21,442       20,864      21,511
-------------------------------------------------------------------------------------------------------------
</TABLE>


     SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                       4
<PAGE>

                             ULTRATECH STEPPER, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                   Six Months Ended
                                                                ---------------------
                                                                 JUNE 30,    June 30,
(In thousands)                                                    1998        1997
-------------------------------------------------------------------------------------
<S>                                                             <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                               $(15,003)    $10,260
Charges to income not affecting cash                              17,844       6,625
Net effect of changes in operating assets and liabilities          7,867      (8,191)
-------------------------------------------------------------------------------------
Net cash provided by operating activities                         10,708       8,694

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures                                              (8,281)     (3,108)
Net reduction (investment) in available-for-sale securities       31,227      (2,327)
Purchase of certain assets of Lepton Inc.                              -      (3,101)
Purchase of certain assets and liabilities of Integrated
 Solutions, Inc., net of cash acquired                           (19,429)          -
Segregation of restricted investments                               (117)       (151)
-------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                3,400      (8,687)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable                                        1,437          99
Repayment of note payable                                              -         (99)
Net proceeds from issuance of common stock
 pursuant to employee stock plans                                  1,300         516
-------------------------------------------------------------------------------------
Net cash provided by financing activities                          2,737         516

Net increase in cash and cash equivalents                         16,845         523

Cash and cash equivalents at beginning of period                  43,898      47,771
-------------------------------------------------------------------------------------

Cash and cash equivalents at end of period                      $ 60,743     $48,294
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>

     SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                       5
<PAGE>

                             ULTRATECH STEPPER, INC.
               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                 JUNE 30, 1998


(1)  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have 
been prepared by the Company in accordance with generally accepted accounting 
principles for interim financial information and with the instructions to 
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include 
all of the information and footnotes required by generally accepted 
accounting principles for complete financial statements.  In the opinion of 
management, all adjustments (consisting of normal recurring adjustments) 
considered necessary for fair presentation have been included.

USE OF ESTIMATES - The preparation of the accompanying unaudited condensed 
consolidated financial statements in conformity with generally accepted 
accounting principles requires management to make estimates and assumptions 
that affect the amounts reported in the financial statements and accompanying 
notes.  Actual results could differ from those estimates.

The Company's second fiscal quarter in 1998 and 1997 ended on July 4, 1998 
and July 5, 1997, respectively.  For convenience of presentation, the 
Company's financial statements have been shown as ending on June 30, 1998 and 
June 30, 1997.

Operating results for the three-month and six-month periods ended June 30, 
1998 are not necessarily indicative of the results that may be expected for 
the year ending December 31, 1998, or any future period.

(2) INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                       June 30, 1998     Dec. 31, 1997
                                       -------------     -------------
(In thousands)                          (Unaudited) 
<S>                                    <C>               <C>
Raw materials . . . . . . . . . . . .     $31,754           $20,297
Work-in-process . . . . . . . . . . .      11,812             9,739
Finished products . . . . . . . . . .      10,365             7,301
                                          -------           -------
                                          $53,931           $37,337
                                          -------           -------
                                          -------           -------
</TABLE>

(3) OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

<TABLE>
<CAPTION>
                                       June 30, 1998     Dec. 31, 1997
                                       -------------     -------------
(In thousands)                          (Unaudited) 
<S>                                    <C>               <C>
Salaries and benefits                     $ 9,327           $ 5,018
Warranty reserves                           7,849             5,871
Advance billings                            2,978               872
Income taxes payable                            0             3,034
Settlement/Japan distributor                    0             3,051
Other                                       9,265             3,562
                                          -------           -------
                                          $29,419           $21,408
                                          -------           -------
                                          -------           -------
</TABLE>

(4) COMPUTATION OF NET INCOME (LOSS) PER SHARE

The Company adopted Statement of Financial Accounting Standards Board 
Statement No. 128 (FAS 128), "Earnings Per Share" in the fourth fiscal quarter 
of 1997.  Under the provision of FAS 128, primary net income per share has 
been replaced by basic net income per share, which does not include the 
dilutive effect of stock options in its calculation.  In addition, fully 
diluted net income per share has been replaced by diluted net income per 
share.  All prior period net income per share amounts have been replaced by 
basic and diluted net income per share.  Net income has not been adjusted for 
any period presented for purposes of computing basic and diluted earnings per 
share.

                                       6
<PAGE>

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

<TABLE>
<CAPTION>
                                                            Three Months Ended        Six Months Ended
                                                           --------------------     ---------------------
                                                           June 30,    June 30,     June 30,     June 30,
(in thousands, except per share amounts)                     1998        1997         1998         1997
---------------------------------------------------------------------------------------------------------
<S>                                                        <C>         <C>          <C>          <C>
Numerator:
   Net income (loss)                                       $(15,364)    $ 5,727     $(15,003)    $10,260

Denominator:
   Denominator for basic net income (loss) per share         20,895      20,451       20,864      20,411
   Effect of dilutive employee stock options                      0         991            0       1,100
                                                           --------     -------     --------     -------
   Denominator for diluted net income (loss) per share       20,895      21,442       20,864      21,511
                                                           --------     -------     --------     -------
Net income (loss) per share - basic                        $  (0.74)    $  0.28     $  (0.72)    $  0.50
                                                           --------     -------     --------     -------
                                                           --------     -------     --------     -------
Net income (loss) per share - diluted                      $  (0.74)    $  0.27     $  (0.72)    $  0.48
                                                           --------     -------     --------     -------
                                                           --------     -------     --------     -------
</TABLE>

For the three-month and six-month periods ended June 30, 1998, options to 
purchase 2,719,000 shares of common stock at an average exercise price of 
$15.68 were excluded from the computation of diluted net loss per share as 
the effect would have been antidilutive. This compares to the exclusion of 
407,000 options at an average exercise price of $30.20 and 400,000 options at 
an average exercise price of $30.43 for the three-month and six-month 
periods ended June 30, 1998, respectively. Options are antidilutive when the 
Company has a net loss or when the exercise price of the stock option is 
greater than the average market price of the Company's common stock.

(5) ACQUISITION

On June 11, 1998, the Company completed the acquisition of substantially all 
of the assets and the assumption of certain liabilities of Integrated 
Solutions, Inc. (ISI), a privately held manufacturer of i-line and deep 
ultra-violet reduction lithography systems.  The purchase price consisted of 
net cash consideration of approximately $19.4 million, and $13.7 million for 
transaction expenses and assumed liabilities.  As a result of this acquisition,
the Company recognized a charge in the quarter ended June 30, 1998 for 
acquired in-process research and development expense of $12.6 million, or 
$0.60 per share, representing products in development stage that were not 
considered to have reached technological feasibility and had no alternative 
future use. Based on the preliminary purchase price allocation, the Company 
recorded $2.7 million in excess cost over fair value of net assets to be 
amortized on a straight-line basis over a five year period.

The Company accounted for this acquisition based on the purchase method of 
accounting.  The results of ISI are included from the date of acquisition and 
were not material to the Company's results of operations.

The following unaudited pro forma net sales, net income (loss) and net income 
(loss) per share combine the historical net sales, net income (loss) and net 
income (loss) per share of the Company and ISI for the six months ended June 
30, 1998 and June 30, 1997, as if the acquisition had occurred at the 
beginning of the earliest period presented.  These balances do not reflect 
the charge for acquired in-process research and development of $12.6 million, 
or $0.60 per share, due to its non-recurring nature.

<TABLE>
<CAPTION>
                                                    Six Months Ended
                                            -------------------------------
                                               June 30,          June 30,
(in thousands, except per share data)           1998              1997
---------------------------------------------------------------------------
<S>                                        <C>               <C>
Net sales...............................     $ 62,389           $97,841
Net income (loss).......................      (25,274)            8,957

Net income (loss) per share - basic.....        (1.21)             0.44
Net income (loss) per share - diluted...        (1.21)             0.42
</TABLE>

                                       7
<PAGE>

During the first quarter of 1997, the Company completed the acquisition of 
certain assets of Lepton Inc., a developer of electron beam lithography 
systems. As a result of this acquisition, the Company recognized a one-time 
pre-tax charge in the quarter ended March 31, 1997 for acquired in-process 
research and development expense of $3.6 million, or $0.12 per share, net of 
related income tax benefits.

6) SEGMENT OF AN ENTERPRISE AND RELATED INFORMATION.

In June 1997, the Financial Accounting Standards Board issued Statement No. 
131 (FAS 131), "Disclosures about Segments of an Enterprise and Related 
Information", which is required to be applied for years beginning after 
December 15, 1997.  FAS 131 establishes standards for the way that public 
business enterprises report information about operating segments in annual 
financial statements and requires that those enterprises report selected 
information about operating segments in interim financial reports.  It also 
establishes standards for related disclosures about products and services, 
geographic areas, and major customers.  FAS 131 is effective for annual 
financial statements for fiscal years beginning after December 15, 1997, and 
therefore the Company will adopt the new requirements retroactively in 1998. 
The Company anticipates that the adoption of this statement will not have a 
significant effect on the presentation of the Company's financial statements.

(7) REPORTING COMPREHENSIVE INCOME.

Statement of Financial Accounting Standards No. 130 (FAS 130) "Reporting 
Comprehensive Income" is effective beginning with the Company's first fiscal 
quarter of 1998. FAS 130 requires, for all periods presented, comprehensive 
income be reported with the same prominence as other financial statements. As 
such, the Company has included these amounts on the face of the income 
statement.

Comprehensive income includes net income plus other comprehensive income.  
Other comprehensive income for the Company is comprised of changes in 
unrealized gains or losses on available-for-sale securities, net of tax. 
Accumulated other comprehensive income and changes thereto in 1998 consist of:

<TABLE>
<CAPTION>
                                                                            Quarter Ended     Six Months Ended
(in thousands)                                                              June 30, 1998       June 30, 1998
---------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>               <C>
Accumulated other comprehensive income at December 31, 1997:
   Unrealized gain on available-for-sale securities, net of tax . . . . .                             $271

Accumulated other comprehensive income at March 31, 1998:
   Unrealized gain on available-for-sale securities, net of tax . . . . .        $405

Change for the six months ended June 30, 1998:
   Unrealized gain on available-for-sale securities, net of tax . . . . .                               68

Change for the three months ended June 30, 1998:
   Unrealized loss on available-for-sale securities, net of tax . . . . .         (66)
                                                                                 ----                 ----
Accumulated other comprehensive income at June 30, 1998:  . . . . . . . .        $339                 $339
                                                                                 ----                 ----
                                                                                 ----                 ----
</TABLE>

(8) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.

In June 1998, the Financial Accounting Standards Board issued Statement No. 
133 (FAS 133), "Accounting for Derivative Instruments and Hedging 
Activities", which is required to be adopted in years beginning after June 
15, 1999.  Because of the Company's minimal use of derivatives, management 
does not anticipate that the adoption of the new Statement will have a 
significant effect on earnings or the financial position of the Company.

Given the complexity of the new Standard and that the impact hinges on market 
values at the date of adoption, it is extremely difficult to estimate the 
impact of adoption unless adoption is imminent.


                                       8

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

OVERVIEW

Ultratech develops, manufactures and markets photolithography equipment 
(steppers) designed to reduce the cost of manufacturing integrated circuits 
(ICs), thin film heads (TFHs) for disk drives and micromachined components. 
The Company supplies step-and-repeat systems based on one-to-one and 
reduction optical technologies to customers located throughout the United 
States, Europe, Asia/Pacific and Japan. These products range from low-cost 
systems for high-volume manufacturing to advanced systems for cost-effective 
production of leading-edge devices and for research and development 
applications. Additionally, the Company recently shipped its first UltraBeam 
Model V2000 electron beam pattern generation system based on vector-scan 
technology for use in the development and production of photomasks for the IC 
industry.

On June 11, 1998, the Company completed the acquisition of substantially all 
of the assets and the assumption of certain liabilities of Integrated 
Solutions, Inc. ("ISI"), a privately held manufacturer of i-line and deep 
ultra-violet (DUV) reduction lithography systems (the "Acquisition") for 
approximately $19.4 million in cash and the assumption of certain liabilities 
and expenses.

The following discussion should be read in conjunction with the Company's 
1997 Annual Report on Form 10-K, which is available upon request.

RESULTS OF OPERATIONS

The Company's operating results have fluctuated significantly in the past and 
will continue to fluctuate significantly in the future depending upon a 
variety of factors, including substantial cyclicality in the Company's target 
markets; various competitive factors including price-based competition and 
competition from vendors employing other technologies; the timing and terms 
of significant orders; lengthy sales cycles for the Company's products; 
delayed shipments to customers due to customer configuration changes and 
other factors; acquisition activities requiring the devotion of substantial 
management resources; the mix of products sold; lengthy manufacturing cycles 
for the Company's products; lengthy product development cycles for new 
products; the timing of new product announcements and releases by the Company 
or its competitors; market acceptance of new products and enhanced versions 
of the Company's products; manufacturing inefficiencies associated with the 
startup of new product introductions; customer concentration; ability to 
volume produce systems and meet customer requirements; patterns of capital 
spending by customers; product discounts; changes in pricing by the Company, 
its competitors or suppliers; political and economic instability throughout 
the world, in particular the Asia/Pacific region; natural disasters; 
regulatory changes; and business interruptions related to the Company's 
occupation of its facilities. The Company's gross profit as a percentage of 
sales has been and will continue to be significantly affected by a variety of 
factors, including the mix of products sold; nonlinearity of shipments during 
the quarter; increased competition in the Company's targeted markets; the 
rate of capacity utilization; the introduction of new products, which 
typically have higher manufacturing costs until manufacturing efficiencies 
are realized and are typically discounted more than existing products until 
the products gain market acceptance; the percentage of international sales, 
which typically have lower gross margins than domestic sales principally due 
to higher field service and support costs; and the implementation of 
subcontracting arrangements.  

The Company derives a substantial portion of its total net sales from sales 
of a relatively small number of new systems, which typically range in price 
from $800,000 to $4.0 million. Additionally, the Company's UltraBeam Model 
V2000 electron beam lithography system has an approximate price range of $6.0 
million to $9.0 million. As a result of these high sale prices, the timing of 
recognition of revenue from a single transaction has had and will continue to 
have a significant impact on the Company's net sales and operating results. 
The Company's backlog at the beginning of a period typically does not include 
all of the sales needed to achieve the Company's objectives for that period. 
In addition, orders in backlog are subject to cancellation, delay, deferral 
or rescheduling by a customer with limited or no penalties. Consequently, the 
Company's net sales and operating results for a period have been and continue 
to depend upon the Company obtaining orders for systems to be shipped in the 
same period in which the order is received. The Company's business and 
financial results for a particular period could be materially adversely 
affected if an anticipated order for even one system is not received in time 
to permit shipment during the particular period. Furthermore, a substantial 
portion of the Company's net sales has historically been realized near the 
end of each quarter. Accordingly, the failure to receive anticipated orders 
or delays in shipments near the end of a particular quarter, due, for 
example, to reschedulings, delays, deferrals or cancellations by customers, 
additional customer configuration requirements, or to unexpected 
manufacturing 

                                       9
<PAGE>

difficulties or delays in deliveries by suppliers due to their long 
production lead times or otherwise, has caused and may continue to cause net 
sales in a particular period to fall significantly below the Company's 
expectations, which has and could continue to materially adversely affect the 
Company's operating results for such period. In particular, the significantly 
long manufacturing cycles of the Company's Titan-TM- and Saturn-TM- steppers, 
and the Company's newly acquired XLS advanced reduction stepper and 193nm 
small-field research and development reduction stepper (both product lines 
were acquired through the acquisition of certain assets and liabilities of 
ISI), and the long lead time for lenses and other materials, could cause 
shipments of such products to be delayed from one quarter to the next, which 
could materially adversely affect the Company's financial condition and 
results of operations for a particular quarter. Additionally, the Company has 
very limited experience in the manufacture of its UltraBeam Model V2000 
electron beam pattern generation system, and the Company is in the process of 
documenting the manufacturing processes for this product. The UltraBeam Model 
V2000 production process is extremely complex and the product has 
significantly long manufacturing and sales cycles, which greatly increases 
the likelihood of delays in shipments from one quarter to the next. Due to 
the high list price for these systems, shipment delays would materially 
adversely affect the Company's financial condition and results of operations 
for a particular quarter if the shipment were delayed to the following 
quarter. Additionally, the Company may experience difficulties in 
assimilating the operations acquired in the Acquisition. (See "Development of 
New Product Lines; Expansion of Operations; Assimilation of Acquired Product 
Lines"). The impact of these and other factors on the Company's sales and 
operating results in any future period cannot be forecast with certainty. 

The Company's business has in prior years been subject to seasonality, 
although the Company believes such seasonality has been masked in recent 
years by cyclical trends within the semiconductor and thin film industries. 
In addition, the need for continued expenditures for research and 
development, capital equipment purchases and ongoing training and customer 
service and support worldwide, among other factors, will make it difficult 
for the Company to reduce its significant operating expenses in a particular 
period if the Company fails to achieve its net sales goals for the period. 
Additionally, the Company has recently experienced manufacturing 
inefficiencies associated with shifts in product demand and underutilization 
of manufacturing capacity and the Company presently anticipates that these 
trends will continue for at least the next few quarters. Such continuation 
would materially adversely affect the Company's business, financial condition 
and results of operations.

Based on current market conditions in both the semiconductor and thin film 
head industries and nonlinearity of system shipments, the Company presently 
expects that net sales for the quarter ending September 30, 1998 will be 
flat, compared to net sales for the quarter ended June 30, 1998. However, due 
to lack of order visibility and the current trend of order delays, deferrals 
and cancellations, the Company can give no assurance that it will be able to 
achieve or maintain its current sales levels. Accordingly, the Company 
presently expects to recognize an operating and net loss for the quarter 
ending September 30, 1998, exclusive of any charges the Company may take 
during the period. Should current market conditions continue to deteriorate, 
the Company may incur operating and net losses in subsequent periods. 
Additionally, management continues to evaluate market conditions in both the 
semiconductor and thin film head industries, in order to assess the need to 
take further action to more closely align its cost structure with anticipated 
revenues. Any subsequent actions by the Company would result in restructuring 
charges, inventory write-downs and provisions for the impairment of 
long-lived assets, which would materially adversely impact the Company's 
business, financial condition and results of operations.

Certain of the statements contained in this Report on Form 10-Q are 
forward-looking statements that involve a number of risks and uncertainties. 
In addition to the factors discussed herein, among other factors that could 
cause actual results to differ materially include the following: highly 
competitive industry; difficulties in assimilating acquired operations; 
international sales; development of new product lines; rapid technological 
change; importance of timely product introductions; importance of the 
Company's mix-and-match strategy; year 2000 compliance; future acquisitions; 
difficulties in disposing of non-essential operations recently acquired; 
expansion of the Company's product lines; dependence on key personnel; sole 
or limited sources of supply; intellectual property matters; environmental 
regulations; effects of certain anti-takeover provisions; volatility of stock 
price; and the other risk factors listed from time to time in the Company's 
SEC reports, including but not limited to the Company's 1997 Annual Report on 
Form 10-K and this Quarterly Report on Form 10-Q.

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

NET SALES

Net sales consist of revenue from system sales, spare parts sales, and 
service. Net sales for the quarter ended June 30, 1998 were $22.4 million, a 
decrease of 41% as compared with net sales of $38.1 million for the 
comparable 

                                       10
<PAGE>

period in 1997. For the six months ended June 30, 1998, net sales were $50.2 
million, a decrease of  35% as compared with net sales of $76.8 million for 
the comparable period in 1997. Both the current quarter and year-to-date 
declines, relative to the comparable periods in 1997, were primarily 
attributed to lower unit sales across all market segments the Company serves, 
particularly the markets for the production of thin film heads and 
semiconductor mix-and-match applications.  Overall, unit shipments for the 
three and six-month periods ended June 30, 1998 declined approximately 45% 
from 1997 levels, while the weighted-average selling price of all units sold 
decreased modestly. Spare parts and service revenue for the quarter ended 
June 30, 1998 declined by 7% over 1997 levels. However, on a year-to-date 
basis, spare parts and service revenue increased 36%, primarily due to 
technology upgrades. 

The decline in thin film head system shipments occurred in both the market 
for front-end systems, currently served by the Company's model 4700 and 6700 
steppers; and the market for back-end systems for the processing of inductive 
and magneto-resistive thin film heads, a market served by the Company's model 
1700 and 1800 series steppers with machine vision system.

The decline in system sales to the semiconductor industry was primarily 
attributed to lower unit sales of the Company's Titan and Saturn family of 
steppers for use by semiconductor manufacturers in mix-and-match 
applications, partially offset by sales of the Company's Model 193 reduction 
stepper product line, acquired from ISI.

The Company believes that its sales have been and continue to be materially 
adversely impacted by reduced capital capacity spending levels within the 
semiconductor industry, particularly in the Japanese and other Asian 
marketplaces. The Company continues to experience shipment delays and 
purchase order restructurings by several of its customers, and has also 
experienced purchase order cancellations. There can be no assurance that this 
trend will not continue in the future. Accordingly, the Company can give no 
assurance that it will be able to achieve or maintain its current or prior 
level of sales. The Company believes that the current strength of the U.S. 
dollar, particularly in relation to the Japanese yen, places the Company at a 
competitive disadvantage. Additionally, the Company has recently experienced 
a significant downturn in orders from customers in the thin film head 
industry. Several companies within the thin film head and disk drive 
industries have announced significantly lower than expected earnings, layoffs 
and restructuring or other charges. The Company believes these events 
indicate that, as the Company has recently experienced, the thin film head 
and disk drive industries have excess capacity in the near-term. This will 
continue to result in lower sales as a result of cancellations, delays and 
deferrals of customer orders from these industries, which will materially 
adversely affect the Company's business, financial condition and results of 
operations in the near-term. Based on current market conditions in both the 
semiconductor and thin film head industries and nonlinearity of system 
shipments, the Company presently expects that sales for the quarter ending 
September 30, 1998 will be flat, compared to net sales for the quarter ended 
June 30, 1998. However, due to lack of order visibility and the current trend 
of order delays, deferrals and cancellations, the Company can give no 
assurance that it will be able to achieve or maintain its current sales 
levels.

International net sales for the quarter ended June 30, 1998 were $8.6 
million, as compared with $11.1 million for the comparable period in 1997. 
For the six months ended June 30, 1998, international net sales were $22.2 
million, as compared with $27.8 million for the comparable period in 1997. 
International net sales represented 38% and 44% of total net sales for the 
three-month and six-month periods ended June 30, 1998, respectively. This 
compares to 29% and 36% in the comparable periods in 1997. The year-to-date 
decline, in absolute dollars, was primarily a result of lower system sales to 
thin film head manufacturers in Southeast Asia, partially offset by higher 
sales to Japan and Europe. The Company's operations in foreign countries are 
not generally subject to significant exchange rate fluctuations, principally 
because sales contracts for the Company's systems are generally denominated 
in U.S. dollars. In Japan, however, the Company has recently commenced direct 
sales operations and orders are typically denominated in Japanese yen. This 
may subject the Company to a higher degree of risk from currency 
fluctuations. The Company attempts to mitigate this exposure through the use 
of foreign exchange contracts. International sales expose the Company to a 
number of additional risk factors, including fluctuations in the value of 
local currencies relative to the U.S. dollar, which, in turn, impact the 
relative cost of ownership of the Company's products. (See "Additional Risk 
Factors: International Sales; Japanese Market").

Because the Company's net sales are subject to a number of risks, including 
intense competition in the capital equipment industry and the timing and 
market acceptance of the Company's products, there can be no assurance that 
the Company will exceed or maintain its current level of net sales for any 
period in the future. Additionally, the Company believes that the market 
acceptance and volume production of its UltraBeam Model V2000 electron beam 
lithography system, XLS advanced reduction stepper (acquired from ISI), and 
its Titan and Saturn families 

                                       11
<PAGE>

of wafer steppers, are of critical importance to its future financial 
results. To the extent that these products do not achieve significant sales 
due to difficulties involving manufacturing or engineering, an inability to 
reduce the current long manufacturing cycles for such products, direct 
competition, or any other reason, the Company's business, financial condition 
and results of operations would be materially adversely affected. 
Additionally, the Company is presently transitioning from its Model 1700 MVS 
Series steppers, which address the market for back-end processing of 
inductive thin film heads, to the Model 1800 MVS Series steppers, which 
address the market for back-end processing of magneto-resistive (MR) thin 
film heads. To the extent that the Model 1800 Series steppers do not achieve 
significant sales due to competition from alternative technologies, excess 
capacity in the thin film industry or any other reason, the Company's 
business, financial condition and results of operations would be materially 
adversely affected.

GROSS PROFIT

Gross margin for the quarter ended June 30, 1998 was 27.9% of net sales, as 
compared with 52.5% for the comparable period in 1997. For the six months 
ended June 30, 1998, gross margin was 36.1% of net sales, as compared with 
53.4% for the comparable period in 1997. Both the current quarter and 
year-to-date declines in gross margin as a percentage of net sales, as 
compared with the comparable periods in 1997, were primarily attributed to 
manufacturing and after-sales inefficiencies caused by significant 
under-utilization of capacity, non-linearity of shipments during the period 
and significantly higher inventory reserve requirements. During the quarter 
ended June 30, 1998, gross margins were also negatively impacted by 
acquisition-related issues, which resulted in a stepped-up basis for purposes 
of determining cost of sales of product lines acquired from ISI. 
Additionally, despite higher standard costs, weighted-average selling prices 
declined during the 1998 periods due to the highly competitive environment 
the Company is operating in, further pressuring gross margins.  

The Company believes that increased competition from Canon Inc., Nikon Inc., 
and ASM Lithography, Ltd. ("ASML"), among others, together with generally 
weak conditions in the markets the Company serves, will make it difficult for 
the Company to increase gross margin percentages in the near term. 
Additionally, the Company is nearing completion of capacity additions for the 
anticipated volume production of several new products that are outside of the 
Company's core reflective and refractive optical technologies. Commencement 
of production of these new products has resulted and will continue to result 
in the purchase and retention of significant levels of inventory to support 
manufacturing requirements, hiring of additional production and manufacturing 
support personnel, purchase of significant levels of plant and equipment and 
the incurrence of other related manufacturing overhead costs. The purchase of 
additional inventories will result in a significantly higher risk of 
obsolescence, which may require additional inventory reserves and would 
negatively impact gross margins. Additionally, new products generally have 
lower gross margins until production and after-sales efficiencies can be 
achieved. Should these new products fail to develop or generate significant 
market demand, the Company's business, financial condition and results of 
operations would be materially adversely affected. As a result of these and 
other factors, the Company presently expects that gross profit as a 
percentage of sales will be significantly lower for the remainder of 1998, 
relative to levels achieved in the comparable periods in 1997, exclusive of 
special charges the Company may take in the remaining 1998 periods.

RESEARCH, DEVELOPMENT, AND ENGINEERING

The Company's research, development, and engineering expenses, net of third 
party funding, were $6.8 million for the quarter ended June 30, 1998, as 
compared with $6.8 million for the comparable period in 1997. As a percentage 
of net sales, research, development and engineering expenses for the quarter 
increased to 30.6%, as compared to 17.8% in the same period a year ago. For 
the six months ended June 30, 1998, research, development, and engineering 
expenses, net of third party funding, were $14.0 million, or 28.0% of net 
sales, as compared with $13.0 million, or 17.0% of net sales for the 
comparable period in 1997. Despite lower net sales, the Company continues to 
invest significant resources in the development and enhancement of its 
UltraBeam electron beam lithography system and the development of its Verdant 
rapid thermal annealing/laser doping systems and technologies, together with 
continuing expenditures for its 1X and reduction optical products and 
technologies. Based on current sales levels, the Company presently expects 
the absolute dollar amount of research, development and engineering expenses 
for the quarter ending September 30, to remain flat or increase relative to 
the quarter ended June 30, 1998, exclusive of any special charges the Company 
may take. The Company presently anticipates that research, development and 
engineering expenses may decline during the quarter ending December 31, 1998, 
relative to the quarter ending September 30, 1998. (See "Additional Risk 
Factors: Development of New Product Lines; Expansion of Operations; 
Assimilation of Acquired Businesses").

                                       12
<PAGE>

SELLING, GENERAL, AND ADMINISTRATIVE

The Company's selling, general, and administrative expenses were $6.3 million 
for the quarter ended June 30, 1998, a decrease of 5% as compared with $6.6 
million for the comparable period in 1997. As a percentage of net sales, 
selling, general, and administrative expenses increased to 28.1% for the 
quarter ended June 30, 1998, as compared with 17.5% for the comparable period 
in 1997. For the six months ended June 30, 1998, selling, general, and 
administrative expenses were $12.8 million, a decrease of 1% as compared with 
$12.9 million for the comparable period in 1997. As a percentage of net 
sales, selling, general, and administrative expenses increased to 25.4% for 
the six months ended June 30, 1998, as compared with 16.8% for the comparable 
period in 1997.  The dollar decrease in the current quarter, relative to the 
comparable period in 1997, was primarily attributed to lower sales, service 
and support expenses typically associated with a reduction in sales; lower 
required provisions for the Company's profit sharing and executive incentive 
plans, which are dependent upon the Company achieving certain operating 
income targets; and lower commission expense due to lower commissions on 
international sales; partially offset by increased expenses associated with 
the Company's UltraBeam subsidiary, which is presently developing, marketing 
and manufacturing its electron beam lithography system; and higher expenses 
associated with the Company's Verdant Technologies subsidiary, which is 
presently developing its rapid thermal annealing/laser doping technologies 
and systems. Based on current sales levels, the Company presently expects the 
absolute dollar amount of these expenses for the quarter ending September 30, 
1998, exclusive of any special charges the Company may take, to increase 
relative to the quarter ended June 30, 1998 due to seasonal and other 
factors. The Company presently anticipates that selling, general and 
administrative expenses may decline during the quarter ending December 31, 
1998, relative to the quarter ending September 30, 1998, due primarily to 
current business conditions and various seasonal factors. (See "Additional 
Risk Factors: Development of New Product Lines; Expansion of Operations; 
Assimilation of Acquired Businesses").

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

During the quarter ended June 30, 1998, the Company completed the acquisition 
of substantially all of the assets and certain liabilities of ISI, a 
privately held manufacturer of i-line and deep ultra violet (DUV) reduction 
lithography systems. As a result of this acquisition, the Company recognized 
a charge in the quarter ended June 30, 1998 for acquired in-process research 
and development expense of  $12.6 million, or $0.60 per share.

During the first quarter of 1997, the Company completed the acquisition of 
certain assets of Lepton Inc., a developer of electron beam lithography 
systems. As a result of this acquisition, the Company recognized a pre-tax 
charge in the quarter ended March 31, 1997 for acquired in-process research 
and development expense of  $3.6 million, or $0.12 per share, net of related 
income tax benefits. 

OTHER INCOME, NET

Other income, net, which consists primarily of interest income, was $1.6 
million for the quarter ended June 30, 1998, as compared with $1.8 million 
for the comparable period in 1997. For the six months ended June 30, 1998, 
other income, net, was $3.3 million, as compared with $3.5 million for the 
comparable period in 1997.

INCOME TAXES (BENEFIT)

The Company recognized a benefit from income taxes of $2.6 million and $3.0 
million for the quarter and six months ended June 30, 1998, respectively. 
This benefit was primarily attributed to the pre-tax loss incurred during the 
quarter before one time charges, together with the anticipated carry-back of 
certain other tax benefits. This compares with an effective tax rate of 31% 
for the quarter and six months ended June 30, 1997. The Company's effective 
tax rate differs from the U.S. statutory rate as a result of state income 
taxes and benefits associated with the Company's foreign sales corporation, 
tax-exempt income and credits for research and development, net of other 
individually immaterial benefits.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows provided by operating activities were $10.7 million for the six 
month period ended June 30, 1998, as compared with $8.7 million provided by 
operating activities during the comparable period in 1997. Positive cash 
flows from operating activities during the first six months of 1998 were 
attributed to non-cash charges to income of $17.8 million and a positive net 
effect from changes in operating assets and liabilities of $7.9 million, 
partially offset by the Company's year-to-date net loss of $15.0 million. 
Non-cash charges for the six months ended June 30, 1998 include a $12.6 
million charge for the write-off of in-process research and development 
expense associated with the Company's purchase of certain assets and 
liabilities of ISI. The positive net effect from changes in operating assets 
and liabilities, net of the impact of the acquired assets and liabilities 
from ISI, was 

                                       13
<PAGE>

primarily due to a decrease in accounts receivable of $21.5 million and a 
decrease in the long-term portion of leases receivable of $2.3 million, 
partially offset by a decrease in accrued liabilities of $5.4 million, an 
increase in inventories of $5.6 million, an increase of $2.2 million in other 
current assets, an increase of $1.5 million in other non-current assets and a 
decrease in accounts payable of $1.2 million. The significant dollar decrease 
in accounts receivable was partially the result of the factoring of 
approximately $9.4 million of accounts receivable to Wells Fargo HSBC Trade 
Bank N.A. The Company presently anticipates that the current trend of 
non-linear shipments and extended customer payment cycles will continue for 
some time. Accordingly, the Company expects that accounts receivable will 
remain at unusually high levels throughout the remainder of 1998. Such 
trends, should they continue, would expose the Company to numerous risks, 
which could materially adversely affect the Company's business, financial 
condition and results of operations. The Company may attempt to mitigate the 
impact of extended payment terms by factoring up to a substantial portion of 
its accounts receivable in the future. There can be no assurance that this 
financing will be available on reasonable terms, or at all.

In addition to inventories acquired in the acquisition of certain assets and 
liabilities from ISI, the significant dollar increase in inventories during 
the six months ended June 30, 1998 were attributed to higher inventories for 
the Company's UltraBeam subsidiary. Additionally, lower-than-anticipated net 
sales for the six months ended June 30, 1998 contributed to the higher 
inventory levels. The Company believes that because of the relatively long 
manufacturing cycle of certain of its systems, particularly newer products, 
the Company's investment in inventories will continue to represent a 
significant portion of working capital. Additionally, the Company has 
incurred significant additional levels of inventory, plant and equipment as a 
result of the anticipated volume production of its electron beam lithography 
system and anticipated introduction of its rapid thermal annealing/laser 
doping system. As a result of such investment in inventories, plant and 
equipment, the Company may be subject to an increased risk of inventory 
obsolescence, impairment of long-lived assets and other factors  which could 
materially adversely affect the Company's operating results.

At June 30, 1998, the Company had working capital of $202.0 million. The 
Company's principal sources of liquidity at June 30, 1998 consisted of $150.1 
million in cash, cash equivalents and short-term investments and $4.0 million 
in various unsecured lines of credit. As of June 30, 1998, $1.5 million was 
outstanding under such lines of credit. 

For the six month period ended June 30, 1998, cash provided by financing 
activities was $2.7 million, principally as a result of borrowings on the 
Company's lines of credit of $1.4 million and the proceeds of $1.3 million  
from the issuance of Common Stock pursuant to the exercise of employee stock 
options. 

For the six month period ended June 30, 1998, cash provided by investment 
activities was $3.4 million.  Cash generated by a net reduction of $31.2 
million in available-for-sale securities was partially offset by the net cash 
expenditure of $19.4 million for the purchase of certain assets and 
liabilities of ISI and $8.3 million for capital expenditures. The significant 
level of capital expenditures during the quarter was primarily attributed to 
facilities expansions for the manufacture and sales demonstration support of 
the Company's electron beam lithography and rapid thermal annealing/laser 
doping systems, together with fixed assets acquired from ISI. As a result of 
these capital expenditures, the Company's depreciation and amortization costs 
are anticipated to increase significantly and may negatively impact the 
Company's results of operations in the event of a further downturn in the 
Company's business cycles.

Many currently installed computer systems and software products are coded to 
accept only two digit entries in the date code field. Beginning in the year 
2000, these date code fields will need to accept four digit entries to 
distinguish 21st century dates from 20th century dates. As a result, in less 
than two years, computer systems and/or software used by many companies may 
need to be upgraded to comply with such "Year 2000" requirements. The Company 
has commenced, for all of its information systems, key vendors and software 
contained in the products it sells, a year 2000 conversion project to address 
necessary code changes, testing and implementation. The Company expects such 
modifications will be made on a timely basis and does not believe that the 
cost of such modifications will have a material effect on the Company's 
operating results. However, there can be no assurance that the Company, or 
its vendors, will be able to timely and cost-effectively cure its products' 
errors and defects associated with year 2000 date functions, and this may 
result in material costs to the Company, including costs associated with 
detecting and fixing such defects and costs incurred in litigation due to any 
such defects. Many commentators have predicted that a significant amount of 
litigation will arise out of year 2000 compliance issues. The Company is 
aware of several such suits currently pending. Because of the unprecedented 
nature of such litigation and the Company's current lack of knowledge as to 
the extent its products contain defects relating to the year 2000, there can 
be no assurance that the Company will not be materially adversely affected by 
claims related to year 2000 compliance. Additionally, the Company's customers 
may be required to devote substantial financial resources to their own 
internal year 2000 issues. This may result in fewer financial resources 
available to purchase 

                                       14
<PAGE>

the Company's products, which would result in fewer system sales by the 
Company. This, in turn, could have a material adverse impact on the Company's 
business, financial condition and results of operations. Although the Company 
is not aware of any material operational issues or costs associated with 
preparing its internal systems for the year 2000, there can be no assurance 
that the Company will not experience serious unanticipated negative 
consequences and/or material costs caused by undetected errors or defects in 
technology used in its internal operating systems, which are composed 
primarily of third party software and hardware technology.

The development and manufacture of new lithography systems and enhancements 
are highly capital-intensive. In order to be competitive, the Company must 
continue to make significant expenditures for capital equipment, sales, 
service, training and support capabilities; investments in systems, 
procedures and controls; expansion of operations and research and 
development, among many other items. The Company expects that anticipated 
cash flow from operations, its cash, cash equivalents and short-term 
investments and funds available under its lines of credit will be sufficient 
to meet the Company's cash requirements for the next twelve months. Beyond 
the next twelve months, the Company may require additional equity or debt 
financing to address its working capital or capital equipment needs. 
Additionally, the Company may in the future pursue additional acquisitions of 
complementary product lines, technologies or businesses. Future acquisitions 
by the Company may result in potentially dilutive issuances of equity 
securities, the incurrence of debt and contingent liabilities and 
amortization expenses related to goodwill and other intangible assets, which 
could materially adversely affect any Company profitability. In addition, 
acquisitions involve numerous risks, including difficulties in the 
assimilation of the operations, technologies and products of the acquired 
companies; the diversion of management's attention from other business 
concerns; risks of entering markets in which the Company has no or limited 
direct prior experience; and the potential loss of key employees of the 
acquired company. In the event the Company acquires product lines, 
technologies or businesses which do not complement the Company's business, or 
which otherwise do not enhance the Company's sales or operating results, the 
Company may incur substantial write-offs and higher recurring operating 
costs, which could have a material adverse effect on the Company's business, 
financial condition and results of operations. In the event that any such 
acquisition does occur, there can be no assurance as to the effect thereof on 
the Company's business or operating results. Additionally, the Company is 
experiencing continued interest in its equipment leasing program. Continued 
success of this strategy may result in the further formation of significant 
long-term receivables and would require the use of substantial amounts of 
working capital.  The formation of significant long-term receivables and the 
granting of extended customer payment terms exposes the Company to additional 
risks, including potentially higher customer concentration and higher 
potential operating expenses relating to customer defaults. To the extent 
that the Company's financial resources are insufficient to fund the Company's 
activities, additional funds will be required. There can be no assurance that 
additional financing will be available on reasonable terms, or at all.

ADDITIONAL RISK FACTORS

CYCLICALITY OF SEMICONDUCTOR AND MAGNETIC RECORDING HEAD INDUSTRIES     The 
Company's business depends in significant part upon capital expenditures by 
manufacturers of semiconductors, photomasks and thin film head magnetic 
recording devices, which in turn depend upon the current and anticipated 
market demand for such devices and products utilizing such devices. The 
semiconductor industry is highly cyclical and historically has experienced 
recurring periods of oversupply, as evidenced by the current downturn in the 
semiconductor capital equipment industry. This has, from time to time, 
resulted in significantly reduced demand for capital equipment including the 
systems manufactured and marketed by the Company. The Company believes that 
markets for new generations of semiconductors will also be subject to similar 
fluctuations. In the past, the semiconductor industry has experienced 
significant growth, which, in turn, has caused significant growth in the 
capital equipment industry. However, the semiconductor industry has more 
recently experienced a substantial and lengthy cyclical downturn, which has 
resulted in a significant reduction in capital spending. Additionally, the 
Company has recently experienced cancellation of purchase orders, shipment 
delays and purchase order restructurings by several of its customers and 
there can be no assurance that this trend will not continue in the future. 
Accordingly, the Company can give no assurance that it will be able to 
achieve or maintain its current level of sales.

The Company attempts to mitigate the risk of cyclicality by participating in 
both the semiconductor and magnetic recording head markets, as well as 
diversifying into new markets such as photolithography for micromachining and 
the development of photomasks. Despite such efforts, when one or more of such 
markets experiences a downturn or slowdown, such as is currently occurring in 
the semiconductor and thin film head markets, the Company's net sales and 
operating results are materially adversely affected, and may even result in 
net losses for one or more quarters. Accordingly, the Company can give no 
assurance that it will be able to achieve or maintain 

                                       15
<PAGE>

its current level of sales. Based on current market conditions in both the 
semiconductor and thin film head industries and nonlinearity of system 
shipments, the Company presently expects that sales for the quarter ending 
September 30, 1998 will be flat, compared to net sales for the quarter ended 
June 30, 1998. However, due to lack of order visibility and the current trend 
of order delays, deferrals and cancellations, the Company can give no 
assurance that it will be able to achieve or maintain its current sales 
levels. Accordingly, the Company presently expects to recognize an operating 
and net loss for the quarter ending September 30, 1998, exclusive of any 
special charges the Company may take during the period. Should current market 
conditions continue to deteriorate, the Company may incur operating and net 
losses in subsequent periods. Additionally, management continues to evaluate 
market conditions in both the semiconductor and thin film head industries, in 
order to assess the need to take further action to more closely align its 
cost structure with anticipated revenues. Any subsequent actions by the 
Company would result in restructuring charges, inventory write-downs and 
provisions for the impairment of long-lived assets, which would materially 
adversely affect the Company's business, financial condition and results of 
operations.

During 1997 and 1996, approximately 50% and 40%, respectively, of the 
Company's net sales were derived from sales to thin film head manufacturers 
and micromachining customers. During the six month period ended June 30, 
1998, sales to thin film head manufacturers and micromachining customers 
represented approximately 60% of the Company's net sales, as compared with 
65% during the comparable period a year ago. The Company has recently 
experienced a significant decline in orders from customers in the thin film 
head market. Additionally, several companies within the thin film head and 
disk drive industries have announced significantly lower than expected 
earnings and have announced restructuring or other non-recurring charges. The 
Company believes these events indicate that the thin film head and disk drive 
industries have excess capacity in the near-term. This will result in lower 
sales and delays or deferrals of customer orders from these industries, which 
will continue to materially adversely affect the Company's business, 
financial condition and results of operations in the near term. Additionally, 
the Company is experiencing increased competition in this market from Canon, 
Nikon and ASML. The Company's business and operating results would be 
materially adversely affected by downturns or slowdowns in the thin film head 
market or by loss of market share.

HIGHLY COMPETITIVE INDUSTRY     The capital equipment industry in which the 
Company operates is intensely competitive. A substantial investment is 
required to install and integrate capital equipment into a semiconductor or 
thin film head production line. The Company believes that once a device 
manufacturer has selected a particular vendor's capital equipment, the 
manufacturer generally relies upon that equipment for the specific production 
line application and, to the extent possible, subsequent generations of 
similar products. Accordingly, it is difficult to achieve significant sales 
to a particular customer once another vendor's capital equipment has been 
selected. The Company experiences intense competition worldwide from a number 
of leading foreign and domestic stepper manufacturers, such as Nikon, Canon, 
ASML and Silicon Valley Group, Inc.'s Micralign products, all of which have 
substantially greater financial, marketing, technical and other resources 
than the Company. Nikon supplies a 1X stepper for use in the manufacture of 
liquid crystal displays and both Canon and Nikon offer reduction steppers for 
thin film head fabrication. Additionally, the XLS reduction stepper product 
line acquired from ISI competes directly with advanced reduction steppers 
offered by Canon, Nikon and ASML. The Company believes that future thin film 
head production may involve manufacturing steps that require critical feature 
sizes. Although the reduction stepper product lines acquired from ISI address 
critical feature sizes, additional development of these product lines may be 
necessary to fully address the unique requirements of thin film head 
manufacturing. Additionally, in the market for mix-and-match semiconductor 
applications, Nikon and Canon are shipping their own widefield mix-and-match 
lithography systems.  (See: "Additional Risk Factors: Importance of 
Mix-and-Match Strategy"). Additionally, ASML has recently announced its 
intent to compete in the low-cost lithography market. The Company's UltraBeam 
model V2000 electron beam pattern generation system competes against systems 
produced by ETEC Systems, Inc.; Hitachi, Ltd.; Leica Camera AG; and JEOL, 
Ltd. ("Japan Electron Optical Laboratory"). In addition, the Company believes 
that the high cost of developing new lithography tools has caused its 
competitors to collaborate with customers and other parties in various areas 
such as research and development, manufacturing and marketing, thereby 
resulting in a combined competitive threat with significantly enhanced 
financial, technical and other resources. The Company expects its competitors 
to continue to improve the performance of their current products. These 
competitors have stated that they will introduce new products with improved 
price and performance characteristics that will compete directly with the 
Company's products. This could cause a decline in sales or loss of market 
acceptance of the Company's steppers, and thereby materially adversely affect 
the Company's business, financial condition and results of operations. There 
can be no assurance that enhancements to, or future generations of, competing 
products will not be developed that offer superior cost of ownership and 
technical performance features. The Company believes that to be competitive, 
it will require significant financial resources in order to continue to 
invest in new product development, features and enhancements, to introduce 
next generation stepper systems on a timely basis, and to maintain customer 
service 

                                       16
<PAGE>

and support centers worldwide. In marketing its products, the Company may 
also face competition from vendors employing other technologies. In addition, 
increased competitive pressure has led to intensified price-based 
competition, resulting in lower prices and margins. This pressure has been 
caused, in part, from the weakening of the Japanese yen vs. the U.S. dollar 
and the current cyclical downturn in both the semiconductor and thin film 
head industries. Should these competitive trends continue, the Company's 
business, financial condition and operating results would continue to be 
materially adversely impacted. There can be no assurance that the Company 
will be able to compete successfully in the future.

Japanese IC manufacturers have a significant share of the worldwide market 
for certain types of ICs for which the Company's systems are used. However, 
the Japanese stepper manufacturers are well established in the Japanese 
stepper market, and it is extremely difficult for non-Japanese lithography 
equipment companies to penetrate the Japanese stepper market. To date, the 
Company has not established itself as a major competitor in the Japanese IC 
equipment market and there can be no assurance that the Company will be able 
to achieve significant sales to Japanese IC manufacturers in the future. (See 
"International Sales; Japanese Market").

LENGTHY SALES CYCLE     Sales of the Company's systems depend, in significant 
part, upon the decision of a prospective customer to increase manufacturing 
capacity or to restructure current manufacturing facilities, both of which 
typically involve a significant commitment of capital. In view of the 
significant investment involved in a system purchase, the Company has 
experienced and may continue to experience delays following initial 
qualification of the Company's systems as a result of delays in a customer's 
approval process. For this and other reasons, the Company's systems typically 
have a lengthy sales cycle during which the Company may expend substantial 
funds and management effort in securing a sale. Lengthy sales cycles subject 
the Company to a number of significant risks, including inventory 
obsolescence and fluctuations in operating results, over which the Company 
has little or no control.

CUSTOMER CONCENTRATION     Historically, the Company has sold a substantial 
number of its systems to a limited number of customers. In 1997, sales to two 
customers accounted for 14%, and 10% of the Company's net sales. In 1996, 
sales to two customers accounted for approximately 17% and 12% of the 
Company's net sales. For the six-month period ended June 30, 1998, one 
customer accounted for approximately 27% of the Company's net sales. The 
Company expects that sales to relatively few customers will continue to 
account for a high percentage of its net sales in the foreseeable future and 
believes that the Company's financial results depend in significant part upon 
the success of these major customers, and the Company's ability to meet their 
future capital equipment needs. Although the composition of the group 
comprising the Company's largest customers may vary from period to period, 
the loss of a significant customer or any reduction in orders by any 
significant customer, including reductions due to market, economic or 
competitive conditions in the semiconductor or magnetic recording head 
industries or in the industries that manufacture products utilizing 
integrated circuits or thin film heads, may have a material adverse effect on 
the Company's business, financial condition and results of operations. The 
Company's ability to maintain or increase its sales in the future will 
depend, in part, upon its ability to obtain orders from new customers as well 
as the financial condition and success of its customers and the general 
economy, of which there can be no assurance. (See "Cyclicality of 
Semiconductor and Magnetic Recording Head Industries").

In addition to the business risks associated with the dependence on these 
major customers, these significant customer concentrations have in the past 
resulted, and currently result in significant concentrations of accounts 
receivable and leases receivable. In particular, sales to a relatively few 
customers in the thin film head industry currently make up a significant 
portion of the Company's receivables. Recently, the Company has increased its 
level of customer leasing activity and has granted extended payment terms to 
many of its customers. The formation of significant and concentrated 
long-term receivables and the granting of extended payment terms exposes the 
Company to additional risks, including the risk of default by one or more 
customers representing a significant portion of the Company's total 
receivables. If such default were to occur, the Company's business, financial 
condition and results of operations would be materially adversely affected. 

DEVELOPMENT OF NEW PRODUCT LINES; EXPANSION OF OPERATIONS; ASSIMILATION OF 
ACQUIRED PRODUCT LINES     Currently, the Company is devoting significant 
resources to the development, introduction and commercialization of new 
products and technologies that are outside of the Company's core reflective 
and refractive optical businesses (see "Research, Development and 
Engineering"). During 1998, the Company has continued to develop these 
products and will continue to incur significant operating expenses in the 
areas of research, development and engineering and general and administrative 
in order to further develop and support these new products. Additionally, 
gross profit margins and inventory levels may be further adversely impacted 
in the future by start-up costs associated with the initial production of 
these new product lines. These start-up costs include, but are not limited 
to, additional manufacturing overhead, additional inventory reserve 
requirements and the establishment of 

                                       17
<PAGE>

after-sales support organizations. Additionally, there can be no assurance 
that operating expenses will not increase, relative to sales, as a result of 
adding additional marketing and administrative personnel, among other costs, 
to support the Company's new products. If the Company is unable to achieve 
significantly increased net sales or its sales fall below expectations, the 
Company's operating results will be materially adversely affected until, 
among other factors, inventory levels and expenses can be reduced.

On June 11, 1998, the Company completed the acquisition of substantially all 
of the assets and the assumption of certain liabilities of ISI, a privately 
held manufacturer of i-line and deep ultra-violet (DUV) reduction lithography 
systems (the "Acquisition"). Acquisitions involve numerous risks, including 
difficulties in the assimilation of the operations, technologies and products 
of the acquired companies; the diversion of management's attention from other 
business concerns; risks of entering markets in which the Company has no or 
limited direct prior experience; and the potential loss of key employees of 
the acquired company. In the event the Company acquires product lines, 
technologies or businesses which do not complement the Company's business, or 
which otherwise do not enhance the Company's sales or operating results, the 
Company may incur substantial write-offs and higher recurring operating 
costs, which could have a material adverse effect on the Company's business, 
financial condition and results of operations. Accordingly, there can be no 
assurance as to the effect of the Acquisition on the Company's business, 
financial condition or operating results. Among other factors that may affect 
future operations, the Company is in the process of disposing of certain 
non-stepper related product lines acquired from ISI, and there can be no 
assurance that such businesses can be sold on favorable terms, or at all. 
Additionally, ISI had recently completed several significant restructurings 
of its businesses and organization and had incurred substantial operating 
losses prior to the Acquisition, and the Company is presently in the process 
of consolidating certain acquired facilities and evaluating the requirements 
for additional restructuring. 

In December 1997, the Company terminated its distributor relationship with 
Innotech, its Japan distributor. The Company has recently expanded its 
operations in Japan by establishing a direct sales force and has leased 
additional facilities and has made significant capital expenditures for sales 
and applications support. Should additional gross profit on sales to the 
Japan marketplace not be sufficient to fund these expanded operations, the 
Company's business, financial condition and results of operations would be 
materially adversely affected. 

IMPORTANCE OF MIX-AND-MATCH STRATEGY     A principal element of the Company's 
strategy is to sell its 1X lithography systems to advanced semiconductor 
fabrication facilities for mix-and-match applications. This strategy depends, 
in significant part, upon the recognition by semiconductor manufacturers that 
costs can be reduced by using the Company's systems to perform exposure on 
semiconductor process layers requiring feature sizes of 0.65 microns or 
greater and the willingness of such manufacturers to implement processes to 
lower manufacturing costs. Many semiconductor fabrication facilities have 
limited or no experience with integrating lithography tools in the manner 
necessary for full implementation and acceptance of a mix-and-match 
manufacturing strategy, and there can be no assurance that semiconductor 
manufacturers will adopt such a strategy. The Company has designed certain of 
its systems to operate in a compatible manner with its newly acquired i-line 
and DUV reduction steppers and its competitors' reduction steppers and 
step-and-scan systems, which are used to process layers with feature sizes 
below 0.65 microns. The successful implementation of the Company's strategy, 
however, will result in a loss of sales by manufacturers of reduction 
steppers and will cause these competitors to respond with lower prices, 
productivity improvements or new technical designs for their systems that may 
eliminate the need for the Company's steppers or make it difficult for the 
Company's systems to attain compatibility with such systems. Also, certain of 
the Company's competitors, which also manufacture widefield systems, 
including Nikon and Canon, are shipping their own widefield mix-and-match 
lithography systems. The introduction, development and sales of such 
competitive systems could materially adversely affect the Company's business, 
financial condition and results of operations.

To facilitate its mix-and-match strategy, the Company has developed and is 
continuing to develop a family of products. In 1995, the Company commenced 
shipment and volume production of the Titan Wafer Stepper and commenced 
shipment of the Saturn Wafer Stepper. Additionally, during 1997 the Company 
added multiple versions of its Titan and Saturn wafer steppers in order to 
more fully address the needs of the mix-and-match market. As is typical with 
newly introduced systems in the capital equipment industry, the Company has 
experienced and may continue to experience technical or other difficulties 
with its mix-and-match family of products. The Company believes that the 
market acceptance and process verification combined with volume production of 
the mix-and-match family of products is of critical importance to the 
successful implementation of its mix-and-match strategy and its future 
financial results. Recently, this market segment of the Company's business 
has experienced a pronounced downturn due, in part, to the recent cyclical 
downturn in the semiconductor industry and the strength of the U.S. dollar in 
relationship to the Japanese yen.  Additionally, the Company believes that 
existing capital budgets of semiconductor manufacturers are currently 
focusing on technology buys, and not capacity additions. This places the 
Company at a disadvantage, since its steppers address 

                                       18
<PAGE>

non-critical geometries. To the extent that the mix-and-match family of 
products does not achieve or maintain significant sales due to a cyclical 
downturn in the semiconductor industry; technical, manufacturing or other 
difficulties associated with these products; lack of customer acceptance; an 
inability to reduce the significantly long manufacturing cycle of these 
products; an inability to increase capacity for the production of the 
mix-and-match family of products; direct competition from other widefield 
mix-and-match systems from Nikon and Canon, among others; or any other 
reason, the Company's business, financial condition and results of operations 
would be materially adversely affected. In addition, the increase in 
mix-and-match stepper production has resulted and will continue to result in 
higher inventory levels and operating expenses. Failure to achieve or 
maintain significant sales of these steppers has led and could continue to 
lead, among other things, to an increase in inventory obsolescence and an 
increase in expenses without corresponding sales, both of which have and 
could continue to have a material adverse affect on the Company's business, 
financial condition and results of operations.

RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION     The 
semiconductor and magnetic recording head manufacturing industries are 
subject to rapid technological change and new product introductions and 
enhancements. The Company's ability to be competitive in these and other 
markets will depend, in part, upon its ability to develop new and enhanced 
systems and related software tools, and to introduce these systems and 
related software tools at competitive prices and on a timely and 
cost-effective basis to enable customers to integrate them into their 
operations either prior to or as they begin volume product manufacturing. The 
Company will also be required to enhance the performance of its existing 
systems and related software tools. Any success of the Company in developing 
new and enhanced systems and related software tools depends upon a variety of 
factors, including product selection, timely and efficient completion of 
product design, timely and efficient implementation of manufacturing and 
assembly processes, product performance in the field and effective sales and 
marketing. In particular, the Company has not yet fully defined the markets 
and applications for the Titan Wafer Stepper Family and the Saturn Wafer 
Stepper Family and is in the process of assimilating the product lines 
acquired from ISI. Because new product development commitments must be made 
well in advance of sales, new product decisions must anticipate both future 
demand and the technology that will be available to supply that demand. There 
can be no assurance that the Company will be successful in selecting, 
developing, manufacturing and marketing new products and related software 
tools or enhancing its existing products and related software tools. Any such 
failure would materially adversely affect the Company's business, financial 
condition and results of operations.

Because of the large number of components in the Company's systems, 
significant delays can occur between a system's introduction and the 
commencement by the Company of volume production of such systems. The Company 
has experienced delays from time to time in the introduction of, and 
technical and manufacturing difficulties with, certain of its systems and 
enhancements and related software tools and may experience delays and 
technical and manufacturing difficulties in future introductions or volume 
production of new systems or enhancements and related software tools. In 
particular, the Company has very little experience in manufacturing its 
UltraBeam V2000 electron beam lithography system. Due to the significant 
manufacturing cycle time required for the production of this system, its 
lengthy sales cycle, lack of adequate documentation for the product and the 
complex nature of this system, delays in production and/or shipment will 
result from time to time. This system presently has an approximate price 
range of $6 million to $9 million. Due to the high selling price of this 
system, delays in shipments from one quarter to the next would have a 
material adverse effect on the results of operations for that quarter. 
Additionally, the Company is in the process of assimilating the operations 
acquired in the Acquisition. (See "Development of New Product Lines; 
Expansion of Operations; Assimilation of Acquired Product Lines").

There can be no assurance that the Company will not encounter technical, 
manufacturing or other difficulties that could delay future introductions or 
volume production of systems or enhancements. The Company's inability to 
complete the development or meet the technical specifications of any of its 
systems or enhancements and related software tools, or its inability to 
manufacture and ship these systems or enhancements and related software tools 
in volume and in time to meet the requirements for manufacturing the future 
generation of semiconductor or thin film head devices would materially 
adversely affect the Company's business, financial condition and results of 
operations. In addition, the Company may incur substantial unanticipated 
costs to ensure the functionality and reliability of its products early in 
the products' life cycles. If new products have reliability or quality 
problems, reduced orders or higher manufacturing costs, delays in collecting 
accounts receivable and additional service and warranty expenses may result. 
Any of such events may materially adversely affect the Company's business, 
financial condition and results of operations.

DEPENDENCE ON KEY PERSONNEL     The Company's future operating results 
depend, in significant part, upon the continued contributions of its 
executive officers and other key personnel, many of whom would be difficult 
to replace. None of such persons has an employment or noncompetition 
agreement with the Company. The Company 

                                       19
<PAGE>

does not maintain any life insurance on any of its key persons. The loss of 
key personnel would have a material adverse effect on the business, financial 
condition and results of operations of the Company.  In addition, the 
Company's future operating results depend in significant part upon its 
ability to attract and retain other qualified management, manufacturing, and 
technical, sales and support personnel for its operations. There are only a 
limited number of persons with the requisite skills to serve in these 
positions and it may become increasingly difficult for the Company to hire 
such personnel over time. Competition for such personnel is intense, and 
there can be no assurance that the Company will be successful in attracting 
or retaining such personnel. The failure to attract or retain such persons 
would materially adversely affect the Company's business, financial condition 
and results of operations. 

During the last several years, the Company has experienced an increased level 
of employee turnover. The Company believes that this increase has been due to 
several factors, including: the recent semiconductor industry slowdown, which 
resulted in a planned reduction in the Company's workforce during the fourth 
fiscal quarter of 1996, and which has further resulted in an increased level 
of uncertainty within the workforce; an expanding economy within the 
geographic area that the Company maintains its principal business offices, 
making it more difficult for the Company to retain its employees; and the 
declining value of stock options granted to employees, relative to their 
total compensation, as a result of the full vesting of options granted prior 
to the Company's initial public offering and significant numbers of options 
granted at prices well in excess of the current market value of the Company's 
stock. Due to these and other factors, the Company may continue to experience 
high levels of employee turnover, which could adversely impact the Company's 
business, financial condition and results of operations.

INTERNATIONAL SALES; JAPANESE MARKET     International sales accounted for 
approximately 33% and 53% of total net sales for the years 1997 and 1996, 
respectively. For the first six months of 1998, international sales accounted 
for 44% of total net sales, as compared with 36% during the comparable period 
a year ago. The Company anticipates that international sales, which typically 
have lower gross margins than domestic sales, principally due to higher field 
service and support costs, will continue to account for a significant portion 
of total net sales. As a result, a significant portion of the Company's sales 
will be subject to certain risks, including unexpected changes in regulatory 
requirements, difficulty in satisfying existing regulatory requirements, 
exchange rate fluctuations, tariffs and other barriers, political and 
economic instability, difficulties in accounts receivable collections, 
natural disasters, difficulties in staffing and managing foreign subsidiary 
and branch operations and potentially adverse tax consequences. Although the 
Company generally transacts its international sales in U.S. dollars, 
international sales expose the Company to a number of additional risk 
factors, including fluctuations in the value of local currencies relative to 
the U.S. dollar, which, in turn, impact the relative cost of ownership of the 
Company's products and may further impact the purchasing ability of its 
international customers. In Japan, however, the Company has recently 
commenced direct sales operations and orders are typically denominated in 
Japanese yen. This may subject the Company to a higher degree of risk from 
currency fluctuations. The Company attempts to mitigate this exposure through 
the use of foreign exchange contracts.  The Company is also subject to the 
risks associated with the imposition of legislation and regulations relating 
to the import or export of semiconductors and magnetic recording head 
products.  The Company cannot predict whether quotas, duties, taxes or other 
charges or restrictions will be implemented by the United States, Japan or 
any other country upon the importation or exportation of the Company's 
products in the future.  There can be no assurance that any of these factors 
or the adoption of restrictive policies will not have a material adverse 
effect on the Company's business, financial condition and results of 
operations. Additionally, the Company believes that the severe currency and 
equity market fluctuations that have been experienced recently by many of the 
Asian markets have caused and may continue to cause a further reduction in 
orders of the Company's products, particularly in the short-term, which will 
have a material adverse effect on the Company's business, financial condition 
and results of operations.

Although the Company has sold a number of its systems to Japanese thin film 
head manufacturers, to date, the Company has made limited sales of its 
systems to Japanese semiconductor manufacturers.  The Japanese semiconductor 
market segment is large, represents a substantial percentage of the worldwide 
semiconductor manufacturing capacity, and is difficult for foreign companies 
to penetrate. The Company is at a competitive disadvantage with respect to 
Japanese semiconductor capital equipment suppliers that have been engaged for 
some time in collaborative efforts with Japanese semiconductor manufacturers, 
and currently dominate the Japanese stepper market. The Company believes that 
increased penetration of the Japanese market is critical to its financial 
results and intends to continue to invest significant resources in Japan in 
order to meet this objective.  As part of its strategy to penetrate the 
Japanese market, in 1993, the Company entered into a distribution agreement 
with Innotech Corporation, a local distributor of products. This agreement 
was terminated in December 1997, and the Company has recently expanded its 
operations in Japan by establishing a direct sales force and creating sales 
and 

                                       20
<PAGE>

applications support organizations. (See "Additional Risk Factors: 
Development of New Product Lines; Expansion of Operations; Assimilation of 
Acquired Product Lines").

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

Although there are no pending lawsuits against the Company regarding 
infringement claims with respect to any existing patents or any other 
intellectual property rights, there can be no assurance that infringement 
claims by third parties or claims for indemnification resulting from 
infringement claims in the future will not be asserted, or that such 
assertions, if proven to be true, will not materially adversely affect the 
Company's business, financial condition and results of operations, regardless 
of the outcome of any litigation. With respect to any such future claims, the 
Company may seek to obtain a license under the third party's intellectual 
property rights. There can be no assurance, however, that a license will be 
available on reasonable terms or at all. The Company could decide, in the 
alternative, to resort to litigation to challenge such claims. Such 
challenges could be extremely expensive and time consuming and could 
materially adversely affect the Company's business, financial condition and 
results of operations, regardless of the outcome of any litigation. 

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

VOLATILITY OF STOCK PRICE     The Company believes that factors such as 
announcements of developments related to the Company's business, fluctuations 
in the Company's operating results, sales of securities of the Company into 
the marketplace, general conditions in the semiconductor and magnetic 
recording head industries or the worldwide or regional economies, an outbreak 
of hostilities, a shortfall in revenue or earnings from, or changes, in 
analysts' expectations, announcements of technological innovations or new 
products or enhancements by the Company or its competitors, developments in 
patents or other intellectual property rights and developments in the 
Company's relationships with its customers and suppliers could cause the 
price of the Company's Common Stock to fluctuate, perhaps substantially. In 
addition, in recent years the stock market in general, and the market for 
shares of small capitalization stocks in particular, including the Company's, 
have experienced extreme price fluctuations, which have often been unrelated 
to the operating performance of affected companies.  There can be no 
assurance that the market price of the Company's Common Stock will not 
continue to experience significant fluctuations in the future, including 
fluctuations that are unrelated to the Company's performance.

                                       21
<PAGE>

PART 2:  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.                                                None.
                                                              
ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.                        None.
                                                              
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.                                  None.
                                                              
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 

The following proposals were voted upon by the Company's stockholders at the 
Annual Stockholders' Meeting held on June 3, 1998.

1.  The following persons were elected as directors of the Company to serve 
    for a term ending upon the Annual Stockholders' Meeting indicated beside 
    their respective names and until their successors are elected and qualified:

<TABLE>
<CAPTION>
           For All Nominees       Instructed       Withheld From All
           ----------------       ----------       -----------------
           <S>                    <C>              <C>
             19,629,745             12,753              113,556
</TABLE>

    Schedule of votes cast for each director:

<TABLE>
<CAPTION>
                            Term Ending Upon the Annual
                               Stockholders' Meeting        Votes for      Votes Withheld
                            -------------------------------------------------------------
     <S>                    <C>                             <C>            <C>
     Arthur W. Zafiropoulo               2000               19,642,498         113,556
     Larry R. Carter                     2000               19,639,905         116,149
     Joel F. Gemunder                    2000               19,629,745         126,309
     Tommy D. George                     1999               19,635,845         120,209
</TABLE>

2.  A proposal to approve and amend the Company's Amended and Restated 
    Certificate of Incorporation to increase the number of authorized shares of 
    common stock thereunder from 30,000,000 shares to 40,000,000 shares was 
    approved by the vote of 18,706,830 shares for; 936,325 shares withheld or 
    voted against the proposal and 112,899 shares abstained.

3.  A proposal to ratify the appointment of Ernst & Young LLP as the 
    Company's independent auditors for the fiscal year ending December 31, 1998 
    was approved by the vote of 19,629,936 shares for; 55,185 shares withheld 
    or voted against the proposal and 70,931 shares abstained.

ITEM 5.  OTHER INFORMATION.

On June 9, 1998, Mr. Daniel H. Berry was promoted to the position of 
Executive Vice President and Chief Operating Officer. Mr. Berry joined the 
Company in 1990, and was promoted to Senior Vice President responsible for 
all sales, service, marketing and technical support in March 1993. His 
extensive experience includes thirteen years with the Perkin-Elmer 
Corporation's optical lithography operations, and nine years with Bell Labs, 
where he was involved in the development of the Company's advanced 
photolithography systems.  Prior to joining the Company, he was Director of 
International Operations for General Signal Corporation.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) EXHIBITS

         Exhibit 3.1.1   Amended and Restated Certificate of Incorporation of 
                         the Registrant, filed June 17, 1998

                                       22
<PAGE>

         Exhibit 11.1(1) Asset Purchase Agreement, dated May 19, 1998, by and 
                         among the Registrant, Ultratech Stepper East, Inc. 
                         (formerly known as Ultratech Acquisition Sub, Inc., 
                         formerly known as Ultratech Capital, Inc.), Integrated 
                         Solutions, Inc., and Integrated Acquisition Corp.

         Exhibit 21.1    Subsidiaries of Registrant

         Exhibit 27      Financial Data Schedule

         -----------------------------------------------------------------------

         (1) previously filed with the Company's Current Report on Form 8-K 
             dated June 11, 1998 (Commission File No. 0-22248).

         (b) REPORTS ON FORM 8-K

         The Company filed one report on Form 8-K during the quarter ended 
         June 30, 1998. The report was filed on June 26, 1998 and reported 
         the June 1998 acquisition of certain of the assets and liabilities 
         of Integrated Solutions, Inc.


                                       23
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the 
Registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.

                            ULTRATECH STEPPER, INC.
--------------------------------------------------------------------------------
                                 (Registrant)



Date:     August 13, 1998              By:  /s/William G. Leunis, III
      -----------------------              -------------------------------------
                                            William G. Leunis, III
                                            Senior Vice President Finance and 
                                            Chief Financial Officer (Duly 
                                            Authorized Officer and Principal 
                                            Financial and Accounting Officer)





                                       24