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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-QQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the Quarterly period ended March 31, 2001

|/ / | 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

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

DELAWARE

94-3169580(State or other jurisdiction of
incorporation or organization)

(I.R.S. employer
identification number)


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

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

(Former name, former address and former fiscal year, if changed since last report.)

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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 May 9, 2001
|----------------------------- |  | -----------------------------
|common stock, $.001 par value |  | 22,114,386                   

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ULTRATECH STEPPER, INC.        INDEX

|           |  |                                                                                                    |  | Page No.
|---------- |  | -------------------------------------------------------------------------------------------------- |  | --------
|PART 1.    |  | FINANCIAL INFORMATION                                                                              |  |         
|Item 1.    |  | Condensed Consolidated Financial Statements                                                        |  |         
|           |  | Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000                   |  | 3       
|           |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 |  | 4       
|           |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 |  | 5       
|           |  | Notes to Condensed Consolidated Financial Statements                                               |  | 6       
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations              |  | 10      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 25      
|PART 2.    |  | OTHER INFORMATION                                                                                  |  |         
|Item 1.    |  | Legal Proceedings                                                                                  |  | 26      
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                          |  | 26      
|Item 3.    |  | Defaults upon Senior Securities                                                                    |  | 26      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                |  | 26      
|Item 5.    |  | Other Information                                                                                  |  | 26      
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                   |  | 26      
|SIGNATURES |  | 27                                                                                                

2

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PART 1. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

ULTRATECH STEPPER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

|(In thousands)                             |                                                   | Mar. 31, 2001 |         | Dec. 31, 2000* |  
|------------------------------------------ | ------------------------------------------------- | ------------- | ------- | -------------- | -
|
|ASSETS                                     |                                                   |               |         |                |  
|Current assets:                            |                                                   |               |         |                |  
|                                           | Cash, cash equivalents and short-term investments |               | $       | 171,058        |  
|                                           | Accounts receivable, net                          |               |         | 17,048         |  
|                                           | Inventories                                       |               |         | 36,098         |  
|                                           | Prepaid expenses and other current assets         |               |         | 4,059          |  
|                                           |                                                   |               |         |                |  
|Total current assets                       |                                                   |               | 228,263 |                |  
|Equipment and leasehold improvements, net  |                                                   |               | 29,226  |                |  
|Demonstration inventories, net             |                                                   |               | 6,869   |                |  
|Intangible assets, net                     |                                                   |               | 6,384   |                |  
|Other assets                               |                                                   |               | 1,319   |                |  
|                                           |                                                   |               |         |                |  
|Total assets                               |                                                   | $             | 272,061 |                | $
|                                           |                                                   |               |         |                |  
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                   |               |         |                |  
|Current liabilities:                       |                                                   |               |         |                |  
|                                           | Notes payable                                     |               | $       | 404            |  
|                                           | Accounts payable                                  |               |         | 10,664         |  
|                                           | Deferred product and service income               |               |         | 4,031          |  
|                                           | Deferred license income                           |               |         | 19,391         |  
|                                           | Other current liabilities                         |               |         | 25,992         |  
|                                           |                                                   |               |         |                |  
|Total current liabilities                  |                                                   |               | 60,482  |                |  
|Other liabilities                          |                                                   |               | 215     |                |  
|Stockholders' equity:                      |                                                   |               |         |                |  
|                                           | Common stock                                      |               |         | 22             |  
|                                           | Additional paid-in capital                        |               |         | 189,683        |  
|                                           | Accumulated other comprehensive gain (loss), net  |               |         | 1,011          |  
|                                           | Treasury stock                                    |               |         | (6,867         | )
|                                           | Retained earnings                                 |               |         | 27,515         |  
|                                           |                                                   |               |         |                |  
|Total stockholders' equity                 |                                                   |               | 211,364 |                |  
|                                           |                                                   |               |         |                |  
|Total liabilities and stockholders' equity |                                                   | $             | 272,061 |                | $
|                                           |                                                   |               |         |                |  

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*The
Balance Sheet as of December 31, 2000 has been derived from the audited financial statements at that date.

See accompanying notes to condensed consolidated financial statements

3

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ULTRATECH STEPPER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                                                                             |                                                                                                              | Three Months Ended |       
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------ | ------------------ | ------
|
|Net sales:                                                                                                   |                                                                                                              |                    |       
|                                                                                                             | Products                                                                                                     |                    | $     
|                                                                                                             | Services                                                                                                     |                    |       
|                                                                                                             | Licenses                                                                                                     |                    |       
|                                                                                                             |                                                                                                              |                    |       
|Total net sales                                                                                              |                                                                                                              |                    | 44,165
|Cost of sales:                                                                                               |                                                                                                              |                    |       
|                                                                                                             | Cost of products sold                                                                                        |                    |       
|                                                                                                             | Cost of services                                                                                             |                    |       
|                                                                                                             |                                                                                                              |                    |       
|Total cost of sales                                                                                          |                                                                                                              |                    | 22,992
|                                                                                                             |                                                                                                              |                    |       
|Gross profit                                                                                                 |                                                                                                              |                    | 21,173
|Operating expenses:                                                                                          |                                                                                                              |                    |       
|                                                                                                             | Research, development, and engineering                                                                       |                    |       
|                                                                                                             | Amortization of goodwill                                                                                     |                    |       
|                                                                                                             | Selling, general, and administrative                                                                         |                    |       
|                                                                                                             |                                                                                                              |                    |       
|Operating income (loss)                                                                                      |                                                                                                              |                    | 4,146 
|Interest expense                                                                                             |                                                                                                              |                    | (60   
|Interest and other income, net                                                                               |                                                                                                              |                    | 2,186 
|                                                                                                             |                                                                                                              |                    |       
|Income (loss) before tax and cumulative effect of a change in accounting principle                           |                                                                                                              |                    | 6,272 
|Income taxes                                                                                                 |                                                                                                              |                    | 628   
|                                                                                                             |                                                                                                              |                    |       
|Income (loss) before cumulative effect of a change in accounting principle                                   |                                                                                                              |                    | 5,644 
|Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                                                                                                              |                    |      
|                                                                                                             |                                                                                                              |                    |       
|Net income (loss)                                                                                            |                                                                                                              | $                  | 5,644 
|                                                                                                             |                                                                                                              |                    |       
|Earnings per sharebasic:                                                                                    |                                                                                                              |                    |       
|                                                                                                             | Income (loss) before cumulative effect of a change in accounting principle                                   |                    | $     
|                                                                                                             | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                    |       
|                                                                                                             | Net income (loss)                                                                                            |                    | $     
|                                                                                                             | Number of shares used in per share computationsbasic                                                        |                    |       
|Earnings per sharediluted:                                                                                  |                                                                                                              |                    |       
|                                                                                                             | Income (loss) before cumulative effect of a change in accounting principle                                   |                    | $     
|                                                                                                             | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                    |       
|                                                                                                             | Net income (loss)                                                                                            |                    | $     
|                                                                                                             | Number of shares used in per share computationsdiluted                                                      |                    |       

See accompanying notes to condensed consolidated financial statements

4

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

|                                                                                     |  | Three Months Ended |       
|------------------------------------------------------------------------------------ |  | ------------------ | ------
|
|Cash flows from operating activities:                                                |  |                    |       
|Net income (loss)                                                                    |  | $                  | 5,644 
|Change in accounting principleSAB 101 "Revenue Recognition in Financial Statements" |  |                    |      
|Charges to income not affecting cash                                                 |  |                    | 2,608 
|Net effect of changes in operating assets and liabilities                            |  |                    | (9,195
|                                                                                     |  |                    |       
|Net cash used in operating activities                                                |  |                    | (943  
|Cash flows from investing activities:                                                |  |                    |       
|Capital expenditures                                                                 |  |                    | (2,358
|Segregation of (net reduction in) available-for-sale securities                      |  |                    | (3,578
|Segregation of restricted long-term investments                                      |  |                    |      
|                                                                                     |  |                    |       
|Net cash provided by (used in) investing activities                                  |  |                    | (5,936
|Cash flows from financing activities:                                                |  |                    |       
|Net proceeds (repayment) from issuance of notes payable                              |  |                    | (748  
|Net proceeds from issuance of common stock pursuant to employee stock plans          |  |                    | 10,153
|                                                                                     |  |                    |       
|Net cash provided by financing activities                                            |  |                    | 9,405 
|Net effect of exchange rate changes on cash                                          |  |                    | (239  
|Net increase (decrease) in cash and cash equivalents                                 |  |                    | 2,287 
|Cash and cash equivalents at beginning of period                                     |  |                    | 55,346
|                                                                                     |  |                    |       
|Cash and cash equivalents at end of period                                           |  | $                  | 57,633
|                                                                                     |  |                    |       

See accompanying notes to condensed consolidated financial statements

5

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Ultratech Stepper, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2001

(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 considered necessary for fair presentation have been included.

COMPANY
AND INDUSTRY INFORMATIONThe Company operates in one business segment, which is the manufacture and distribution of photolithography equipment to manufacturers of
integrated circuits, thin film heads and micromachined components.

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.

REVENUE
RECOGNITIONSales of the Company's products are recorded after the contractual obligation for installation has been satisfied and customer acceptance provisions
have lapsed, provided collections of the related accounts receivable are probable. The Company also sells service contracts for which revenue is recognized ratably over the contract period.

Effective
January 1, 2000, the Company changed its method of accounting for product sales to recognize such revenues when the contractual obligation for installation has been
satisfied, or when installation is
substantially complete, and customer acceptance provisions have lapsed, provided collections of the related receivable are probable.

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

FISCAL
PERIODS: The Company's first fiscal quarter in 2001 and 2000 ended on March 31, 2001 and April 1, 2000, respectively. For convenience of presentation, the
Company's financial statements have been shown as having ended on March 31, 2001 and March 31, 2000.

Operating
results for the three month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31,
2001, or any future period.

(2) Inventories

Inventories consist of the following:

(In thousands)

Mar. 31, 2001

Dec. 31, 2000(Unaudited)Raw materials

$
14,806

$
14,309Work-in-process


14,539


11,088Finished products


6,753


4,865$
36,098

$
30,262


6

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(3) Other Current Liabilities

Other current liabilities consist of the following:

(In thousands)

Mar. 31, 2001

Dec. 31, 2000(Unaudited)Salaries and benefits

$
5,598

$
4,551Warranty reserves


3,309


3,776Advance billings


7,023


7,470Income taxes payable


4,796


5,190Reserve for losses on purchase order commitments


2,530


3,203Other


2,736


2,913$
25,992

$
27,103


(4) Computation of Net Income (Loss) per Share

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

|                            |                                                                                                              | Three Months Ended |  
|--------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------ | -
|
|Numerator:                  |                                                                                                              |                    |  
|                            | Income (loss) before cumulative effect of a change in accounting principle                                   |                    | $
|                            | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                    |  
|                            |                                                                                                              |                    |  
|                            | Net income (loss)                                                                                            |                    | $
|                            |                                                                                                              |                    |  
|Denominator:                |                                                                                                              |                    |  
|                            | Denominator for basic net income (loss) per share                                                            |                    |  
|                            | Effect of dilutive employee stock options                                                                    |                    |  
|                            |                                                                                                              |                    |  
|                            | Denominator for diluted net income (loss) per share                                                          |                    |  
|                            |                                                                                                              |                    |  
|Earnings per sharebasic:   |                                                                                                              |                    |  
|                            | Income (loss) before cummulative effect of a change in accounting principle                                  |                    | $
|                            |                                                                                                              |                    |  
|                            | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                    |  
|                            |                                                                                                              |                    |  
|                            | Net income (loss)                                                                                            |                    | $
|                            |                                                                                                              |                    |  
|Earnings per sharediluted: |                                                                                                              |                    |  
|                            | Income (loss) before cummulative effect of a change in accounting principle                                  |                    | $
|                            |                                                                                                              |                    |  
|                            | Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements" |                    |  
|                            |                                                                                                              |                    |  
|                            | Net income (loss)                                                                                            |                    | $
|                            |                                                                                                              |                    |  

For
the quarter ended March 31, 2001, options to purchase 220,000 shares of Common Stock at an average exercise price of $31.73 were excluded from the computation of diluted
net income (loss) per share as the effect would have been anti-dilutive. This compares to the exclusion of 3,251,000 options at an average exercise price of $16.26 for the quarter ended
March 31, 2000. Options are anti-dilutive when the Company has a net loss or when the exercise price of the stock option is greater than the average market price of the Company's Common Stock.

7

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(5) Comprehensive Income (Loss)

The components of comprehensive income (loss) are as follows:

Three Months Ended(Unaudited, in thousands)

Mar. 31, 2001

Mar. 31, 2000Net income (loss)

$
5,644

$
(21,906
)Accumulated other comprehensive income (loss):Unrealized holding gain (loss) on available-for-sale securities


1,549


(231
)Unrealized holding loss on foreign exchange forward contracts


(239
)

Tax effect





Comprehensive income (loss)

$
6,954

$
(22,137
)


Accumulated
other comprehensive income (loss) presented in the accompanying condensed consolidated balance sheets consists entirely of accumulated unrealized holding gain (loss) on
available-for-sale securities and effect of exchange rate changes on foreign exchange forward contracts, as a result of adopting FAS 133 (also see footnote 6accounting for
derivative instruments and hedging activities). The unrealized holding gain (loss) on available-for-sale securities is not currently adjusted for income taxes as a result of the Company's operating
losses.

The
components of accumulated derivative loss as a result of adopting FAS 133 are as follows:

Three months ended(Unaudited, in thousands)

Mar. 31, 2001Cumulative adjustmentunrealized gain, net, on adoption of FAS 133 as of January 1, 2001

$
319Gains reclassified into "interest and other income, net" from other comprehensive income, net


(1,029
)Change in fair value of derivatives, net


471Accumulated derivative loss included in other comprehensive income, net, as of March 31, 2001

$
(239
)


(6) Accounting for Derivative Instruments and Hedging Activities.

Effective January 1, 2001, the Company adopted the Financial Accounting Standards Board (FASB) Statement No. 133 (FAS 133), "Accounting
for Derivative Instruments and Hedging Activities", FAS 137, "Accounting for Derivative Instruments and Hedging ActivitiesDeferral of the Effective Date of FASB Statement
No. 133" and FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activitiesan Amendment of FAS 133." These FASB statements require that all
derivative financial instruments, such as foreign exchange contracts, be recognized in the financial statements and be measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders' equity (as a component of comprehensive income), depending on whether the
derivative is being used to hedge changes in fair value or cash flows. The adoption of these statements did not have a material effect on the Company's financial statements.

The
carrying value of the Company's financial instruments approximates fair value. The fair value of financial instruments is generally determined by reference to market values
resulting from trading on a national securities exchange or in an over-the-counter market.

8

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(7) Foreign Currency Risk Management

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

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

At
March 31, 2001, the Company had contracts for the sale of $9.3 million and the purchase of $2.7 million of foreign currencies at fixed rates. The Company had deferred
approximately $0.3 million of net losses on foreign exchange contracts at March 31, 2001, which are all expected to be recognized in income over the next twelve months.

9

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

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

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

Ultratech
develops, manufactures and markets photolithography equipment (steppers) designed to reduce the cost of manufacturing integrated circuits (ICs), including advanced packaging
processes, 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 North America, Europe, Japan and the rest of Asia. 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.

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

In
April 2000, the Company settled litigation it had initiated against Nikon Inc. ("Nikon"). The Company is presently proceeding with related actions against Canon Inc.
("Canon") and ASM Lithography, Ltd. ("ASML"). There can be no assurance that the Company will prevail in those actions.

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

Effective
January 1, 2000, the Company changed its method of accounting for system sales to recognize such revenues when the contractual obligations for installation and
customer acceptance have been satisfied, provided collections of the related receivable are probable. The following discussion should be read in conjunction with the Company's 2000 Annual Report on
Form 10-K, which is available from the Company upon request.

10

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RESULTS OF OPERATIONS

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

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

The
Company derives a substantial portion of its total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $900,000 to
$3.4 million for the Company's 1X steppers, and $1.5 million to more than $6.0 million for the Company's reduction steppers. As a result of these high sale prices, the timing of recognition of revenue
from a single transaction has had and most likely will continue to have a significant impact on the Company's net sales and operating results for any particular period.

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

11

---

their long production lead times or otherwise, have caused and may continue to cause net sales in a particular period to fall significantly below the Company's expectations, which has and could
continue to materially adversely affect the Company's operating results for such period. In particular, the long manufacturing cycles of the Company's Saturn Wafer Stepper®, and the
Company's reduction stepper product offerings, and the long lead time for lenses and other materials, could cause shipments of such products to be delayed from one quarter to the next, which could
materially adversely affect the Company's financial condition and results of operations for a particular quarter.

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

Net sales

Net sales consist of revenues from system sales, spare parts sales, service and licensing of technologies. For the quarter ended March 31, 2001, net
sales were $44.2 million, an increase of 48% as compared with net sales of $29.9 million for the comparable period in 2000. System sales increased 45%, to $32.5 million, as a result of a 14% increase
in unit acceptances, a product mix shift toward higher-priced systems and an increase in weighted-average selling prices. The year-over-year improvement in system sales was primarily attributable to
improved conditions within the semiconductor industry, which led to higher sales of the Company's systems to semiconductor packaging customers in the Japan and Asia, excluding Japan, territories.
Revenues from services increased 7.5%, to $4.5 million, primarily as a result of the Company's larger base of installed systems. Revenues from licensing and licensing support increased to $3.0
million, from $0 in the comparable period in 2000, as a result of licensing agreements entered into in 2000. Spare part sales increased 24%, to $4.2 million, primarily as a result of the increased
number of system upgrades in the current quarter.

At
March 31, 2001, the Company had approximately $9.5 million of deferred revenue resulting from systems shipped but not yet installed and accepted, as compared with $15.7
million at December 31, 2000. The net result of shipments and acceptances during the quarter ended March 31, 2001 was a net reduction in deferred product and service income of
approximately $2.7 million. During the quarter ended March 31, 2001, deferred license income decreased by $3.0 million as a result of amortization of proceeds received pursuant to licensing
support and licensing agreements entered in 2000. Deferred income related to the Company's products is recognized upon installation and customer acceptance of the systems. Deferred income related to
service revenue is recognized over the life of the related service contract. Deferred income relative to the Company's licensing activities is recognized over the estimated useful life of the licensed
technologies, or the period of any technology transfer support arrangements.

On
a market application basis, system sales to the semiconductor industry were $26.4 million for the quarter ended March 31, 2001, an increase of 29% as compared with system
sales of $20.6 million in the comparable period in 2000. This increase was primarily attributable to increased sales of the Company's Saturn Spectrum 3e Wafer Stepper to semiconductor packaging
customers in the Japan and Asia, excluding Japan territories. Sales to the microsystems market, which includes sales to thin film head manufacturers, were $6.1 million, an increase of 243% as compared
with sales of $1.8 million in the comparable period in 2000. This increase was primarily attributable to the sale of the Company's systems to micro-machining and optical networking device customers.

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For the quarter ended March 31, 2001, international net sales were $28.4 million, or 64% of total net sales, as compared with $14.4 million, or 48% of total net sales for the
comparable period in 2000. The increase in international sales, in terms of absolute dollars, was primarily attributable to increased sales of the Company's Saturn Spectrum 3e Wafer Stepper to
semiconductor packaging companies in the Japan and Asia, excluding Japan, territories. The Company anticipates that a substantial portion of its overall sales will continue to come from semiconductor
packaging manufacturers in the Japan and Asia, excluding Japan, territories. The Company's operations in foreign countries are not generally subject to significant exchange rate fluctuations,
principally because sales contracts for the Company's systems are generally denominated in U.S. dollars. In Japan, however, orders are typically denominated in Japanese yen. This subjects the Company
to a higher degree of risk from currency fluctuations. The Company attempts to mitigate this exposure through the use of foreign exchange contracts; however, this effort can be costly and there can be
no assurance of the success of any such efforts. International sales expose the Company to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S.
dollar, which, in turn, impact the relative cost of ownership of the Company's products. (See "Additional Risk Factors: International Sales; Japanese Market").

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

The
Company presently expects that net sales for the three-month period ending June 30, 2001 may be substantially higher than net sales in the comparable period in 2000.
However, due to current order trends, production limitations, customer delivery dates and uncertainty as to customer acceptances, the Company can give no assurance that it will be able to achieve or
maintain its current or prior sales levels.

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 or prior level of net sales for any period in the future. Additionally, the Company believes that the market
acceptance and volume production of its Saturn Spectrum 3e, its XLS advanced reduction steppers and its 1000 series family of wafer steppers, are of critical importance to its future financial
results. To the extent that these products do not achieve significant sales due to difficulties involving manufacturing or engineering, the inability to reduce the current long manufacturing cycles
for such products, competition, excess capacity in the semiconductor on thin film industry, customer acceptances, or any other reason, the Company's business, financial condition and results of
operations would be materially adversely affected.

Gross profit

The Company's gross profit as a percentage of net sales, or gross margin, was 47.9% for the quarter ended March 31, 2001, as compared with a gross
margin of 31.5% for the comparable period in 2000. On a comparative basis, gross margins were favorably impacted by higher weighted-average

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selling prices, increased licensing and licensing support revenues and increased manufacturing efficiencies resulting from significantly higher production levels.

The
Company believes that gross margin for the quarter ending June 30, 2001 may be significantly higher than levels achieved during the comparable period a year ago, primarily
as a result of increased licensing income, improved product pricing and higher levels of capacity utilization. However, during the remainder of 2001, year-over year comparisons of gross margin may be
adversely impacted by lower order rates, which would result in significant reductions to production volumes, and intensified price-based competition. Either of these occurrences would result in a
material adverse impact to gross margins.

Intense
competition in the markets the Company serves may make it difficult for the Company to increase or maintain its current gross margin percentages in the near term.
Additionally, the present cyclical downturn in the semiconductor industry may result in a higher risk of inventory obsolescence, which may require substantial inventory write-offs and purchase order
commitment reserves, which would negatively impact gross margins.

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

Research, development and engineering expenses

The Company's research, development and engineering expenses were $7.4 million for the quarter ended March 31, 2001, as compared with $7.1 million for
the comparable period in 2000. This increase in spending was primarily attributable to the Company's Verdant laser thermal processing and 1X and
reduction stepper technologies, partially offset by the shutdown of the Company's UltraBeam operations, which occurred early in the second quarter of 2000.

The
Company continues to invest significant resources in the development and enhancement of its Verdant laser thermal processing systems and technologies, together with continuing
expenditures for its 1X and reduction optical products and technologies. Although the Company has initiated certain cost reduction measures, the Company presently expects that the absolute dollar
amount of research, development and engineering expenses for the quarter ending June 30, 2001 will be higher than levels incurred in the comparable period in 2000.

Amortization of goodwill

Amortization of goodwill was $0.5 million for the quarter ended March 31, 2001, as compared with $0.5 million for the comparable period in 2000.

Selling, general and administrative expenses

Selling, general and administrative expenses were $9.1 million for the quarter ended March 31, 2001, as compared with $6.6 million for the comparable
period in 2000. As a percentage of net sales, selling, general and administrative expenses declined to 20.7% in the quarter ended March 31, 2001, as compared with 21.9% of net sales for the comparable
period in 2000. The increase, in terms of absolute dollars, is primarily attributable to significant additions to the sales and marketing infrastructure, expenses typically associated with an increase
in sales and provisions for the Company's profit sharing and bonus plans, partially offset by the shutdown of the Company's UltraBeam operations. The Company presently anticipates that selling,
general and administrative expenses for the three-month period ending June 30, 2001 will increase significantly relative to the comparable period in

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2000, due primarily to increased sales and marketing infrastructure, anticipated sales, service and support expenses resulting from an anticipated increase in net sales, higher provisions for the
Company's profit sharing and bonus plans, and higher facilities and personnel costs.

Interest and other income, net

Interest and other income, net, which consists primarily of interest income, was $2.2 million for the quarter ended March 31, 2001, as compared with
$1.8 million for the comparable period in 2000. This
increase was primarily attributable to higher invested balances in the current period. Although the Company anticipates that interest income for the quarter ending June 30, 2001 will increase,
relative to the comparable period in 2000, the Company presently anticipates that year-over-year comparisons during the second half of 2001 will show a decline in interest income due to recent
declines in short-term interest rates.

Income tax expense

The Company recognized income taxes of $0.6 million, or 10% of pre-tax income, during the quarter ended March 31, 2001. There was no income tax benefit
recognized on the Company's pre-tax loss in the comparable period in 2000 due to uncertainty related to the utilization of its net operating loss carry-forward. The difference between the rate
recognized in the current quarter and the statutory rate is primarily attributable to certain deferred tax asset reserves recognized in prior years.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $0.9 million for the quarter ended March 31, 2001, as compared with $8.6 million used in operating activities
during the comparable period in 2000. Cash flow used in operating activities was primarily attributable to a net change in operating assets and liabilities of $9.2 million, partially offset by net
income of $5.6 million and non-cash charges to income of $2.6 million. The reduction in cash attributable to the net change in operating assets and liabilities was primarily attributable to an
increase in inventories of $5.8 million, a reduction in deferred income of $5.7 million and a reduction in accounts payable and other current liabilities of $2.7 million, partially offset by a
decrease in accounts receivable of $6.9 million.

The
Company sells certain of its accounts receivable in order to mitigate its credit risk and to enhance cash flow. Sales of accounts receivable typically precede final customer
acceptance of the system. Among other terms and conditions, the agreements include provisions that require the Company to repurchase receivables if certain conditions are present including, but not
limited to, disputes with the customer regarding suitability of the product, and from time-to-time the Company has repurchased certain accounts and leases receivable in accordance with these terms. At
March 31, 2001, $4.1 million of sold accounts receivable were outstanding to third-party financial institutions. The Company may continue to attempt to mitigate the impact of extended payment
terms and non-linear shipments by selling a substantial portion of its accounts receivable in the future. There can be no assurance that this form of financing will be available on reasonable terms,
or at all.

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

The
Company believes that the semiconductor industry is presently experiencing a severe inventory correction due, in part, to the macro economic conditions facing the U.S. and world
economies. As a

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result, the Company may experience lower order rates for its systems. This, in turn, would place the Company's inventories at a greater risk of obsolescence. Lower demand for the Company's systems may
lead to additional inventory write-offs and purchase commitment reserves, which would materially adversely impact the Company's results of operations.

During
the quarter ended March 31, 2001, net cash used in investing activities was $5.9 million, primarily attributable to a net increase in available-for-sale securities of
$3.6 million and capital expenditures of $2.4 million.

Cash
provided by financing activities was $9.4 million during the quarter ended March 31, 2001, primarily attributable to proceeds of $10.2 million from the issuance of Common
Stock pursuant to the Company's employee stock option plans.

At
March 31, 2001, the Company had working capital of $167.8 million. The Company's principal source of liquidity at March 31, 2001 consisted of $171.1 million in cash,
cash equivalents and short-term investments.

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

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

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

Foreign Currency

The Company uses foreign exchange contracts to hedge the risk that unremitted Japanese yen denominated receipts from customers for actual or forecasted sales
of equipment after receipt of customer purchase orders and the unremitted Japanese yen denominated payments to suppliers for actual or forecasted deliveries of raw material from Japan after issuance
of Company purchase orders may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, the Company attempts to hedge most of these Japanese yen denominated foreign currency exposures

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anticipated over the ensuing twelve-month period. At March 31, 2001, the Company had taken action to hedge approximately 100% of these Japanese yen denominated exposures. To hedge this
exposure, the Company used foreign exchange contracts that generally have maturities of nine months or less, which generally will be rolled over to provide continuing coverage throughout the year. The
Company often closes foreign exchange sale contracts by purchasing an offsetting purchase contract. At March 31, 2001, the Company had contracts for the sale of $9.3 million and the purchase of
$2.7 million of foreign currencies at fixed rates.

Adoption of the Euro

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

ADDITIONAL RISK FACTORS

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

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

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

Highly Competitive IndustryThe capital equipment industry in which the Company operates is intensely competitive. A
substantial investment is required to install and integrate capital equipment into a semiconductor, semiconductor packaging or thin film head production line. The Company

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believes that once a device manufacturer or packaging subcontractor has selected a particular vendor's capital equipment, the manufacturer generally relies upon that equipment for the specific
production line application and, to the extent possible, subsequent generations of similar products. Accordingly, it is difficult to achieve significant sales to a particular customer once another
vendor's capital equipment has been selected. The Company experiences intense competition worldwide from a number of leading 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 and other resources than the Company. Nikon supplies a 1X stepper for use in the
manufacture of liquid crystal displays and Canon, Nikon and ASML offer reduction steppers for thin film head fabrication. Additionally, the Company's XLS reduction stepper product line competes
directly with advanced reduction steppers offered by Canon, Nikon and ASML. With respect to the semiconductor packaging market, the Company receives intense competition from various proximity aligner
companies such as Suss Microtec AG (Karl Suss).

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

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

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Development of New Product Lines; Expansion of OperationsCurrently, the Company is devoting significant resources to
the development, introduction and commercialization of its Verdant laser thermal processing system and its advanced XLS 157nm reduction stepper, and to the volume production of its Saturn Spectrum 3e
wafer stepper. During the remainder of 2001, the Company will continue to develop these products and will continue to incur significant operating expenses in the areas of research, development and
engineering, manufacturing and general and administrative costs in order to further develop, produce and support these new products. Additionally, gross profit margins and inventory levels may be
further adversely impacted in the future by costs associated with the initial production of these new product lines. These costs include, but are not limited to, additional manufacturing overhead,
additional inventory write-offs, costs of demonstration systems and facilities, costs associated with managing multiple sites and the establishment of additional after-sales support organizations.
Additionally, there can be no assurance that operating expenses will not increase, relative to sales, as a result of adding additional marketing and administrative personnel, among other costs, to
support the Company's new products. If the Company is unable to achieve significantly increased net sales or its sales fall below expectations, the Company's operating results will be materially
adversely affected until, among other factors, costs and expenses can be reduced.

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

Customer ConcentrationHistorically, the Company has sold a substantial portion of its systems to a limited number of
customers. In 2000, one customer accounted for approximately 10% of total net sales. In 1999, no single customer accounted for 10% or more of the Company's net sales. For the quarter ended
March 31, 2001, sales to one customer accounted for approximately 11% of total net sales. The Company expects that sales to a relatively few customers will continue to account for a high
percentage of its net sales in the foreseeable future and believes that the Company's financial results depend in significant part upon the success of these major customers and the Company's ability
to
meet their future capital equipment needs. Although the composition of the group comprising the Company's largest customers may vary from period to period, the loss of a significant customer or any
reduction in orders by any significant customer, including reductions due to market, economic or competitive conditions in the semiconductor, semiconductor packaging or 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 existing customers, the semiconductor and thin film head industries and the economy in general, of which there can be no assurance. (See "Additional Risk Factors:
Cyclicality of Semiconductor, Semiconductor Packaging and Thin Film Head Industries").

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

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

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

There
can be no assurance that the Company will not encounter additional technical, manufacturing or other difficulties that could further delay future introductions or volume
production of systems or enhancements. The Company's inability to complete the development or meet the technical specifications of any of its systems or enhancements and related software tools, or its
inability to manufacture and ship these systems or enhancements and related software tools in volume and in time to meet the requirements for manufacturing the future generation of semiconductor or
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.

Intellectual Property Rights

Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, it believes that any
success will depend more upon the innovation, technological expertise and marketing abilities of its employees. Nevertheless, the Company has a policy of seeking patents when appropriate on inventions
resulting from its ongoing research and development and manufacturing activities. The Company owns various United States and foreign patents, which expire on dates ranging from May 2001 to
December 2018, and has various United

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States and foreign patent applications pending. The Company also has various registered trademarks and copyright registrations covering mainly software programs used in the operation of its stepper
systems. The Company also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that the Company will be able to protect its technology
adequately or that competitors will not be able to develop similar technology independently. There can be no assurance that any of the Company's pending patent applications will be issued or that
foreign intellectual property laws will protect the Company's intellectual property rights. In addition, litigation may be necessary to enforce the Company's patents, copyrights or other intellectual
property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could
result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations, regardless of the outcome of
the litigation. There can be no assurance that any patent issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive
advantages to the Company. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate the Company's products or, if patents are issued to the
Company, design around the patents issued to the Company. Additionally, the Company presently has several agreements in force to license certain of its technologies. Challenges or invalidation to
patents relative to those technologies would expose the Company to the risk of forfeiture of revenues and further risk of litigation.

On
February 29, 2000, in the U.S. District Court of Virginia, the Company filed patent infringement lawsuits against Nikon, Canon and ASM Lithography. In April of 2000,
the Company reached a settlement with Nikon Corporation. The litigation against Canon and ASM Lithography is ongoing. In conjunction with this litigation, Canon has filed a counter-claim against the
Company alleging infringement of its technologies.

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

Although
there are no pending lawsuits against the Company regarding infringement claims with respect to any existing patents or any other intellectual property rights (with the
exception of the Canon counter-claim), 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.

Sole or Limited Sources of SupplyThe Company is relying increasingly on outside vendors and subcontractors to
manufacture certain components and subassemblies. This strategy has enabled the

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Company to increase its manufacturing capacity. The Company orders one of the most critical components of its technology, the glass for its 1X lenses, from suppliers on purchase orders. The Company
designs the 1X lenses and provides the lens specifications to other suppliers that grind the lens elements. The Company then assembles and tests the optical 1X lenses in its metrology laboratory. The
Company has recorded the critical parameters of each of its optical lenses sold since 1982, and believes that such information enables it to supply lenses to its customers that match the
characteristics of its customers' existing lenses. Additionally, the Company orders reduction lenses from suppliers on purchase orders. These lenses are designed to the Company's specifications and
tested by the supplier.
Prior to shipment of the Company's systems, the customer's engineers may perform acceptance tests at the Compnay's facility. After passing the acceptance test, the system is packaged in the clean room
environment and prepared for shipment.

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

International Sales; Japanese MarketInternational net sales accounted for approximately 54% and 53% of total net sales
for the years 2000 and 1999, respectively. During the quarter ended March 31, 2001, international net sales accounted for approximately 64% of total net sales, as compared with 48% for the
comparable period in 2000. The Company anticipates that international sales, which typically have lower gross margins than domestic sales, principally due to increased competition and higher field
service and support costs, will continue to account for a significant portion of total net sales and may increase as a percentage of total net sales in the near-term. As a result, a significant and
growing portion of the Company's net sales will continue to be subject to certain risks, including dependence on outside sales representative organizations; transitions to direct sales organizations
from outside sales representative organizations, such as the Company is currently undertaking in Taiwan ); unexpected changes in regulatory requirements; difficulty in satisfying existing regulatory
requirements; exchange rate fluctuations; tariffs and other barriers; political and economic instability; difficulties in accounts receivable collections; natural disasters; difficulties in staffing
and managing foreign subsidiary and branch operations; and potentially adverse tax consequences. Although the Company generally transacts its international sales in U.S. dollars, international sales
expose the Company to a number of additional risk factors, including fluctuations in the value of local currencies relative to the U.S. dollar, which, in turn, impact the relative cost of ownership of
the Company's products and may further impact the purchasing ability of its international customers. In Japan, however, the Company has commenced direct sales operations and orders are often
denominated in Japanese yen. This may subject the Company to a higher degree of risk from currency fluctuations. The

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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 changes to quotas, duties, taxes or other charges or restrictions will be
implemented by the United States, Japan or any other country upon the importation or exportation of the Company's products in the future. 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.

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

California Energy CrisisThe Company's headquarters and principal operations are located in the San Francisco Bay Area
of California. California has recently found itself in a utility crisis caused, in part, by a lack of affordable power sources and the financial instability of several of its primary providers. The
San Francisco Bay Area has undergone several periods of "rolling blackouts", a technique used by the Company's power provider to conserve its resources. The Company's operations have been temporarily
halted on several occasions as a result of these conservation measures. Additionally, the Company has recently been notified of, and is presently experiencing, significantly higher utility rates.
Additional suspensions of the Company's operations or increases in utility rates could result in materially higher costs and lost revenues, either of which would materially adversely impact the
Company's business, financial condition and results of operations.

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

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

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

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

Volatility of Stock PriceThe Company believes that factors such as announcements of developments related to the
Company's business, fluctuations in the Company's operating results, a shortfall in revenue or earnings, changes in analysts' expectations, 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, 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 and semiconductor capital equipment 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 may be unrelated to the Company's performance.

Among
other determinants, the market price of the Company's stock has a major bearing on the number of stock options outstanding that are included in the weighted-average shares used
in determining the Company's net income (loss) per share. During periods of extreme volatility, the impact of higher stock prices can have a material dilutive effect on the Company's net income (loss)
per share (diluted).

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Reference is made to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 and to the subheading "Derivative Instruments and Hedging" in Item 8, "Financial Statements and Supplementary Data", under the heading "Notes to Consolidated Financial
Statement" of the Company's Annual Report on Form 10-K for the year ended December 31, 2000.

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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.

None

Item 5. Other Information.

In February 2001, Mr. Daniel H. Berry was named Senior Vice President, Strategic Planning. Mr. Berry served as President and Chief
Operating Officer of the Company from April 1999 to February 2001. Between June 1998 and April 1999, Mr. Berry was the Chief Operating Officer and Executive Vice President
of the Company. Between March 1993 and June 1998, Mr. Berry served as Senior Vice President, Sales and Service of the Company.

Item 6. Exhibits and Reports on Form 8-K



None



The Company did not file any reports on Form 8-K during the three months ended March 31, 2001.

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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: May 11, 2001 |  | By:                                

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