<PAGE>

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

                                   FORM  10-Q

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

          FOR THE QUARTERLY PERIOD ENDED     SEPTEMBER  30, 1996
                                         ----------------------------


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

          For the transition period from                  to
                                         ----------------    ----------------

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


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

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

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 re-
quired 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 October 28, 1996
----------------------------------------      ----------------------------------
      Common Stock, $.001 par value                       20,228,637

<PAGE>

                             ULTRATECH STEPPER, INC.

                                      INDEX


                                                                        Page No.
                                                                        --------

PART 1.   FINANCIAL INFORMATION

ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . .

          Condensed Consolidated Balance Sheets as of
          September 30, 1996 and December 31, 1995 . . . . . . . . . . .      3

          Condensed Consolidated Statements of Income for the
          three months ended September 30, 1996 and 1995 and
          the nine months ended September 30, 1996 and 1995. . . . . . .      4

          Condensed Consolidated Statement of Cash Flows for the
          nine months ended September 30, 1996 and 1995. . . . . . . . .      5

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

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . .      7



PART 2.   OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . .     19

ITEM 2.   CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . .     19

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . .     19

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . .     19

ITEM 5.   OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . .     19

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . .     19




SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     20


                                        2

<PAGE>

Part 1. Financial Information

Item 1. Condensed Consolidated Financial Statements

                             ULTRATECH STEPPER, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                      Sept. 30,         Dec. 31,
(In thousands)                                          1996              1995 *
------------------------------------------------------------------------------------
ASSETS                                               (Unaudited)
<S>                                                  <C>                <C>
Current assets:
   Cash, cash equivalents and
     short-term investments                            $158,017         $161,356
   Accounts receivable, net                              47,667           23,917
   Inventories                                           35,708           27,387
   Prepaid expenses and other
     current assets                                       1,931            1,332
   Deferred income taxes                                  9,639            6,883
------------------------------------------------------------------------------------
Total current assets                                    252,962          220,875

Equipment and leasehold
   improvements, net                                     19,197           16,352

Restricted investments                                    5,028            4,996

Other assets                                              4,608            3,205
------------------------------------------------------------------------------------

Total  assets                                          $281,795         $245,428
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------

------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                     $16,483          $12,925
   Other current liabilities                             34,692           31,376
   Current portion of long-term debt                        -                400
------------------------------------------------------------------------------------
Total current liabilities                                51,175           44,701

Other liabilities                                           877            1,069

Stockholders' equity                                    229,743          199,658
------------------------------------------------------------------------------------

Total liabilities and stockholders' equity             $281,795         $245,428
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
* The Balance Sheet as of December 31, 1995 has been derived from the audited
financial statements at that date.


     SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                        3

<PAGE>

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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                  Three Months Ended                  Nine Months Ended
                                              --------------------------        ----------------------------
                                                Sept. 30,      Sept. 30,          Sept. 30,       Sept. 30,
(In thousands, except per share amounts)          1996            1995              1996            1995
------------------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>                <C>             <C>
Net sales                                       $46,502         $42,205           $150,008        $110,535
Cost of sales                                    21,159          20,083             68,909          53,476
------------------------------------------------------------------------------------------------------------
Gross profit                                     25,343          22,122             81,099          57,059
OPERATING EXPENSES:
  Research, development, and
    engineering                                   6,421           6,044             21,121          16,015
  Selling, general, and
    administrative                                7,300           7,385             24,298          19,728
------------------------------------------------------------------------------------------------------------
Operating income                                 11,622           8,693             35,680          21,316
Other income, net                                 1,460           1,478              4,549           2,849
------------------------------------------------------------------------------------------------------------
Income before income taxes                       13,082          10,171             40,229          24,165
Income taxes                                      4,247           3,356             13,477           7,974
------------------------------------------------------------------------------------------------------------
Net income                                       $8,835          $6,815            $26,752         $16,191
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Net income per share                              $0.42           $0.32              $1.26           $0.82
Number of shares used in
  per share computations                         21,204          21,355             21,311          19,757
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
</TABLE>

Note:
All Share and per share data have been retroactively restated to reflect a
two-for-one stock split distributed in the form of a 100-percent dividend on
May 10, 1995.

The Company's third fiscal quarter ended on September 28, 1996 and September 30,
1995.  For convenience of presentation, the Company's financial statements have
been shown as ending on September 30, 1996 and September 30, 1995.





     SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                        4

<PAGE>

                             ULTRATECH STEPPER, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                         Nine Months Ended
                                                                ---------------------------------
(In thousands)                                                  Sept. 30, 1996     Sept. 30, 1995
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                            $26,752           $16,191
Charges to income not affecting cash                                    1,817             1,365
Net effect of changes in operating assets
  and liabilities                                                     (26,044)            5,358
-------------------------------------------------------------------------------------------------
Net cash provided by operating activities                               2,525            22,914

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures                                                   (6,422)           (9,056)
Net reduction (investment) in available-for-sale securities            12,482           (83,518)
Segregation of restricted investments                                     (32)                -
-------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                     6,028           (92,574)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt                                              (400)             (400)
Proceeds from issuance of short-term debt                               7,500             3,000
Repayment of short-term debt                                           (7,500)           (3,000)
Net proceeds from issuance of common stock                              1,994            89,009
-------------------------------------------------------------------------------------------------
Net cash provided by financing activities                               1,594            88,609

Net increase in cash and cash
  equivalents                                                          10,147            18,949

Cash and cash equivalents at beginning
  of period                                                            30,361            14,455
-------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of period                            $40,508           $33,404
-------------------------------------------------------------------------------------------------
</TABLE>


     SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                        5

<PAGE>

                             ULTRATECH STEPPER, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 1996

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

On May 10, 1995, the Company paid a 100 percent stock dividend to holders of
record of the Company's common stock.  All share and per share data have been
retroactively restated to reflect this stock dividend.

The Company's third fiscal quarter ended on September 28, 1996 and  September
30, 1995.  For convenience of presentation, the Company's financial statements
have been shown as ending on September  30, 1996 and September 30, 1995.

Operating results for the three month and nine month periods ended September
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996, or any future period.

USE OF ESTIMATES - The preparation of the accompanying unaudited consolidated
condensed 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.

(2) INVENTORIES:


Inventories consist of the following:

                                                  Sept. 30, 1996  Dec. 31, 1995
                                                  --------------  -------------
(In thousands)                                     (Unaudited)
Raw materials. . . . . . . . . . . . . . . . . .         $17,065        $12,201
Work-in-process. . . . . . . . . . . . . . . . .          14,805         12,426
Finished products. . . . . . . . . . . . . . . .           3,838          2,760
                                                  --------------  -------------
                                                         $35,708        $27,387
                                                  --------------  -------------
                                                  --------------  -------------

(3) OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

                                                  Sept. 30, 1996  Dec. 31, 1995
                                                  --------------  -------------
(In thousands)                                     (Unaudited)
Salaries and benefits. . . . . . . . . . . . . .          $7,393         $6,916
Warranty reserves. . . . . . . . . . . . . . . .          10,462          9,328
Advance billings . . . . . . . . . . . . . . . .             691          4,071
Income taxes payable . . . . . . . . . . . . . .           8,805          4,088
Other. . . . . . . . . . . . . . . . . . . . . .           7,341          6,973
                                                  --------------  -------------
                                                         $34,692        $31,376
                                                  --------------  -------------
                                                  --------------  -------------


                                        6

<PAGE>

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

OVERVIEW

     Ultratech develops, manufactures and markets photolithography equipment
designed to reduce the cost of ownership for manufacturers of integrated
circuits and thin film head magnetic recording devices. The Company supplies
step-and-repeat systems based on one-to-one optical technology to customers
located throughout the United States, Europe, Japan, and the Far East.

     The following Management's Discussion and Analysis of Financial Condition
and Results of Operations may contain forward-looking statements which involve
uncertainties. The Company's actual results could differ materially from those
anticipated in any such forward-looking statements as a result of certain
factors, including those set forth under "Additional Risk Factors," and
elsewhere in this report. Additionally, historical results and percentage
relationships discussed below will not necessarily be indicative of the results
of operations for any future period.

     The following discussion should be read in conjunction with the Company's
1995 Annual Report on Form 10-K, available upon request.

RESULTS OF OPERATIONS

     The Company's operating results have fluctuated significantly in the past
and will fluctuate significantly in the future depending upon a variety of
factors, including cyclicality in the Company's target markets; the mix of
products sold; the timing of new product announcements and releases by the
Company or its competitors; market acceptance of new products and enhanced
versions of the Company's products; the timing of significant orders;
manufacturing inefficiencies associated with the start up of new product
introductions; lengthy sales cycles for the Company's systems; customer
concentration; ability to volume produce systems and meet customer requirements;
patterns of capital spending by customers; product discounts; changes in pricing
by the Company, its competitors, customers or suppliers; political and economic
instability; natural disasters; regulatory changes; business interruptions
related to the Company's occupation of its facilities; and various competitive
factors including price-based competition and competition from vendors employing
other technologies. The Company's gross profit as a percentage of sales has been
and will continue to be significantly affected by a variety of factors,
including the percentage of international sales, which typically have lower
gross margins than domestic sales principally due to higher field service and
support costs; the introduction of new products, which typically have higher
manufacturing costs until manufacturing efficiencies are realized and are
discounted more than existing products until the products gain market
acceptance; non-linearity of shipments during the quarter; increased competition
in the Company's targeted markets; the mix of products sold; the rate of
capacity utilization; and the implementation of subcontracting arrangements. As
a result of its distribution agreement with Innotech Corporation, its Japanese
distributor, gross profit as a percentage of total net sales may be adversely
impacted in any particular period by significant system shipments to the
Japanese market.

     The Company derives a substantial portion of its total net sales from the
sale of a relatively small number of new systems which typically range in price
from $800,000 to $2.1 million. As a result, the timing of recognition of revenue
from a single transaction could have a significant impact on the Company's net
sales and operating results. The Company's backlog at the beginning of a period
may not include all of the stepper sales needed to achieve the Company's
objectives for that period. In addition, orders in backlog are subject to
cancellation, delay, deferral or rescheduling by a customer with limited or no
penalties. Consequently, the Company's net sales and operating results for a
period have been and continue to depend upon the Company obtaining orders for
systems to be shipped in the same period in which the order is received. The
Company's business and financial results for a particular period could be
materially adversely affected if an anticipated order for even one system is not
received in time to permit shipment during the particular period. Furthermore, a
substantial portion of the Company's net sales has historically been realized
near the end of


                                        7

<PAGE>

each quarter. Accordingly, the failure to receive anticipated orders or delays
in shipments near the end of a particular quarter, due, for example, to
unanticipated shipment reschedulings, cancellations, delays or deferrals by
customers or to unexpected manufacturing difficulties or delays in deliveries by
suppliers due to their long production lead times or otherwise, may cause net
sales in a particular quarter to fall significantly below the Company's
expectations, which would materially adversely affect the Company's operating
results for such quarter. In particular, the significantly long manufacturing
cycles of the Company's linear motor-based steppers, which include the Model
2244i stepper, Model 4700 stepper, Titan Wafer Stepper-TM- and Saturn Wafer
Stepper-TM-, 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. Furthermore, announcements by the
Company or its competitors of new products and technologies could cause
customers to defer or cancel purchases of the Company's existing systems, which
would also materially adversely affect the Company's business, financial
condition and results of operations.

     The impact of these and other factors on the Company's sales and operating
results in any future period cannot be forecast with certainty. The Company's
business has in prior years been subject to seasonality, although the Company
believes such seasonality has been masked in recent years by its growth. In
addition, the need for continued expenditures for research and development,
capital equipment purchases, and ongoing training and customer service and
support worldwide, among other factors, will make it difficult for the Company
to reduce its significant operating expenses in a particular period if the
Company's net sales goals for the period are not met. The Company has
significantly increased its expense levels to support its recent growth, and
there can be no assurance that the Company will maintain or exceed its current
level of net sales or rate of growth for any period in the future. Accordingly,
there can be no assurance that the Company will be able to remain profitable or
that it will not sustain losses in future periods.

NET SALES

     Net sales consist of revenue from system sales, spare parts sales, and
service. Net sales for the quarter ended September 30, 1996 were $46.5 million,
an increase of 10% as compared with net sales of $42.2 million for the
comparable period in 1995. This increase in net sales, as compared to the year-
ago quarter, was primarily attributed to higher unit volumes, custom features
and average selling prices for the Model 1700 series steppers, which address the
market for back-end processing of thin film heads; and higher average selling
prices of certain of the Company's mix-and-match systems, partially offset by
lower net sales of the Model 1500 series steppers, which address the markets for
scanner replacement and high volume/low cost semiconductor fabrication; and
lower net sales of the Company's Model 2244i stepper, which addresses the mix-
and-match market. Net sales for the nine months ended September 30, 1996 were
$150.0 million, an increase of  36% as compared with net sales of $110.5 million
for the comparable period in 1995. This increase, relative to the comparable
nine month period in 1995, was primarily attributed to higher unit sales, custom
features and average selling prices of the Model 1700 series steppers; higher
average selling prices of the Company's Model 1500 series steppers; commencement
of shipment of the Company's Model 4700 stepper, which is designed to meet the
needs of leading-edge thin film head manufacturers; higher unit sales of the
Company's Titan Wafer Stepper, which addresses the market for photosensitive
polyimide applications as well as the markets for scanner replacement and high
volume/low cost semiconductor fabrication; and higher net sales from spare parts
and service; partially offset by lower unit shipments of the Company's Model
2700 and Model 2244i steppers. Overall, the Company's system shipments for the
quarter remained constant, relative to the comparable period in 1995, while the
weighted average selling price of all systems sold increased 9%. For the nine
months ended September 30, 1996, the Company's system shipments increased 21%,
relative to the comparable period in 1995, while the weighted average selling
price of all systems sold increased 11%. Net sales from spare parts and service
in the third quarter of 1996 increased 4% over the comparable period in 1995.
For the nine months ended September 30, 1996, net sales from spare parts and
service increased 45% over the comparable period in 1995. Both the current
quarter and year-to-date increases are primarily attributed to system upgrades
and higher service and spares sales resulting from a larger installed base of
the Company's systems.


                                        8

<PAGE>

     International net sales for the quarter ended September 30, 1996 were $27.4
million, as compared with $19.0 million for the comparable period in 1995.
International net sales represented 59% of total net sales for the quarter ended
September 30, 1996, as compared with 45% for the comparable period in 1995. For
the nine months ended September 30, 1996, international net sales were $75.9
million, as compared with $57.5 million for the comparable period in 1995.
International net sales represented 51% of total net sales for the nine month
period ended September 30, 1996, as compared with 52% for the comparable period
in 1995. Both the current quarter and year-to-date increases, in absolute
dollars, were primarily attributed to increased system sales of the Company's
Model 1700 series steppers to thin film head manufacturers in Southeast Asia.
The Company's operations in foreign countries are not currently subject to
significant exchange rate fluctuations, principally because sales contracts for
the Company's systems are generally denominated in U.S. dollars. However,
international sales expose the Company to a number of additional risk factors,
including fluctuations in the value of local currencies relative to the U.S.
dollar, which, in turn, impact the relative cost of ownership of the Company's
products. See "Additional Risk Factors: International Sales; Japanese Market;
Dependence on Local Distributor."

     Although the thin film head segment of the magnetic recording head 
industry has recently experienced significant growth, the Company expects 
that this industry may not sustain such a growth rate in the future. 
Additionally, the semiconductor industry has experienced a cyclical downturn, 
as evidenced by recent results of the industry's book-to-bill ratio as 
published by the Semiconductor Industry Association. More recently, the 
semiconductor equipment industry's book-to-bill ratio, as published by 
Semiconductor Equipment and Materials International (an industry 
association), has shown a dramatic decline in new equipment orders for the 
capital equipment industry relative to current sales levels, indicating a 
pronounced cyclical downturn. Additional evidence of an existing industry 
downturn is exhibited by recent announcements by several semiconductor 
manufacturers of delays or cancellations of previously planned capacity 
additions. The Company has recently experienced cancellation of purchase 
orders, shipment delays and purchase order restructurings by several of its 
customers and anticipates that this trend will continue for some time. 
Accordingly, the Company can give no assurance that it will be able to 
achieve or maintain its current level of sales. Additionally, based on 
present market conditions, the Company presently expects that future 
quarterly comparisons, through at least the second quarter of 1997, will 
indicate a period-over-comparable period decline in the Company's net sales.

GROSS PROFIT

     Gross profit margin for the quarter ended September 30, 1996 was 54.5%, as
compared with 52.4% for the comparable period in 1995. The improvement in gross
margins can be primarily attributed to a favorable product mix, higher weighted
average selling prices for the Company's systems, increased after-sales
efficiencies, and lower required provisions for the Company's profit sharing and
executive incentive plans. There can be no assurance that these positive factors
will continue. These positive factors were partially offset by the impact of
manufacturing inefficiencies caused by changes in the Company's shipment
schedule, under-utilization of manufacturing capacity, and an unusually high
degree of non-linearity of shipments during the quarter, which resulted in a
significant portion of the Company's shipments for the quarter occurring during
the final month. For the nine months ended September 30, 1996, gross margin was
54.1%, as compared with 51.6% for the comparable period in 1995. The year-to-
date improvement in gross margins can be primarily attributed to a favorable
product mix, higher weighted average selling prices for the Company's systems,
improved gross margins from spare parts and service, and increased after-sales
efficiencies.  These positive factors were partially offset by the impact of
manufacturing inefficiencies experienced in the quarters ended September 30,
1996 and June 30, 1996, primarily as a result of changes in the Company's
shipment schedule, under-utilization of manufacturing capacity, and an unusually
high degree of non-linearity of shipments during those quarters.


RESEARCH, DEVELOPMENT, AND ENGINEERING

     The Company's research, development, and engineering expenses, net of third
party funding, were $6.4 million for the quarter ended September 30, 1996, an
increase of  6% as compared with $6.0 million for the comparable period in 1995.
For the nine months ended September 30, 1996, research, development, and
engineering expenses, net of third party funding, were $21.1 million, an
increase of 32% as compared with


                                        9

<PAGE>

$16.0 million for the comparable period in 1995. There can be no assurance that
future research, development, and engineering expenses will not increase
significantly in the future. Both the current quarter and year-to-date increases
were primarily attributed to the continued development, enhancement,
manufacturing support and sales demonstration support of the Company's Model
2244i stepper, Model 4700 stepper, Titan Wafer Stepper and Saturn Wafer Stepper,
expenditures related to the enhancement of features and functionality of the
Company's Model 1500 and Model 1700 series steppers, and certain advanced
research projects. These factors were partially offset by lower required
provisions for the Company's profit sharing and executive incentive plans. The
Company intends to continue to invest significant resources in the development
of new products and enhancements of existing semiconductor and thin film head
lithography systems. Due to these and other factors, research, development and
engineering expenses may increase significantly in the future. Additionally, the
Company intends to expand its development and application capabilities to
certain foreign locations. The Company currently anticipates that a significant
portion of these expenditures may take place during 1997.


SELLING, GENERAL, AND ADMINISTRATIVE

     The Company's selling, general, and administrative expenses were $7.3 
million for the quarter ended September 30, 1996, a decline of 1% as compared 
with $7.4 million for the comparable period in 1995. As a percentage of net 
sales, selling, general, and administrative expenses declined to 15.7% for 
the quarter ended September 30, 1996, as compared with 17.5% for the 
comparable period in 1995. The significant reduction in selling, general, and 
administrative expenses, as a percentage of net sales, can be primarily 
attributed to cost containment measures implemented earlier in the year, 
lower required provisions for the Company's profit sharing and executive 
incentive plans, and lower commission expense resulting from higher direct 
sales relative to total net sales for the quarter. These factors were 
partially offset by expenses associated with the Company's estimated future 
non-utilization of certain of its leased properties. For the nine months 
ended September 30, 1996, selling, general, and administrative expenses were 
$24.3 million, as compared with $19.7 million for the comparable period in 
1995. As a percentage of net sales, selling, general, and administrative 
expenses declined to 16.2% for the nine months ended September 30, 1996, as 
compared with 17.8% for the comparable period in 1995. The significant dollar 
increase in the first nine months of 1996, relative to the comparable period 
in 1995, reflects the Company's increases in sales, service and support 
expenses typically associated with an increase in sales and provisions taken 
during the quarter ended September 30, 1996 for the estimated future 
non-utilization of leased properties. The significant reduction in selling, 
general and administrative expenses for the first nine months of 1996, as a 
percentage of net sales, can be primarily attributed to cost containment 
measures implemented earlier in the year, lower commission expense resulting 
from higher direct sales relative to total net sales, and lower required 
provisions for the Company's profit sharing and executive incentive plans. 
The Company currently anticipates that it will add several additional service 
centers in the Far East during the remainder of 1996 and the first half of 
1997 as a result of recent sales activity and in an attempt to expand market 
opportunities in that region. Due to these and other factors, selling, 
general, and administrative expenses may increase significantly in the future.

OTHER INCOME, NET

     Other income, net, which consists primarily of interest income, was $1.5
million for the quarter ended September 30, 1996, as compared with $1.5 million
for the comparable period in 1995. For the nine months ended September 30, 1996,
other income, net, was $4.5 million, as compared with $2.8 million for the
comparable period in 1995. The improvement in the year-to-date total, relative
to the comparable period in 1995, was attributed to income generated from
increased investments in cash equivalents and short-term investments.


INCOME TAXES

     Income taxes represented 32.5% of income before income taxes for the
quarter ended September 30, 1996, as compared to 33% for the comparable period
in 1995. For the nine month period ended September 30,


                                       10

<PAGE>

1996, income taxes represented 33.5% of income before income taxes, as compared
to 33% for the comparable period in 1995. The current quarter's effective tax
rate reflects the accounting for various tax benefits, including benefits
related to state and Federal investment tax credits. The Company presently
anticipates that its effective tax rate for the remainder of the year will not
exceed the year-to-date effective tax rate of 33.5%. However, this rate may be
impacted further by tax legislation and other factors.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating activities was $2.5 million for the nine
month period ended September 30, 1996, as compared with net cash generated by
operating activities of $22.9 million for the comparable period in 1995.
Positive cash flows from operating activities during the first nine months of
1996 were primarily attributed to net income of $26.8 million, charges to income
not affecting cash of $1.8 million, and a $6.9 million increase in accounts
payable and other current liabilities, partially offset by a $23.8 million
increase in accounts receivable and a $8.3 million increase in inventory. The
increase in accounts receivable was primarily attributed to a significant
percentage of sales recognized near the end of the quarter and longer customer
payment cycles. The increase in inventories was primarily attributed to a shift
in product mix and the sequential decline in the Company's net sales from the
levels achieved during the June 30, 1996 quarter. The Company believes that
because of the relatively long manufacturing cycle of certain of its systems,
particularly newer products, and the current uncertainty in the semiconductor
industry, the Company's investment in inventories will continue to represent a
significant portion of working capital. Additionally, a significant portion of
inventories consist of materials and subassemblies for the Company's mix-and-
match family of steppers. The Company has recently experienced a downturn in
orders for its mix-and-match products. See "Additional Risk Factors: Importance
of Mix-and-Match Strategy." As a result of such investment in inventories, the
Company may be subject to an increased risk of inventory obsolescence and other
factors, which could materially adversely affect the Company's operating
results.

     At September 30, 1996, the Company had working capital of $201.6 million.
The Company's principal sources of liquidity at September 30, 1996 consisted of
$158.0 million in cash, cash equivalents and short-term investments and a $25
million unsecured line of credit, which expires in June 1999. As of September
30, 1996, no amounts were outstanding under such facility. The Company's $25
million unsecured credit facility provides for borrowings at contractual rates
including, but not limited to, the Wells Fargo Bank's prime reference rate and
requires compliance with many covenants, including covenants relating to
profitability on a calendar year basis, minimum levels of tangible net worth,
limitations on additional debt and liens and various financial ratios. At
September 30, 1996, the Company was in compliance with each of its debt
instruments.

     Net cash provided by financing activities was $1.6 million for the nine
months ended September 30, 1996, principally as a result of the issuance of
common stock pursuant to the exercise of employee stock options and the
Company's Employee Stock Purchase Plan, partially offset by the repayment of the
Company's outstanding note payable. Net investment activities provided a net
$6.0 million in cash, as capital expenditures of $6.4 million were offset by a
net  $12.5 million reduction in the Company's available-for-sale securities.

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


                                       11

<PAGE>

materially adversely affect any Company profitability. In addition, acquisitions
involve numerous risks, including difficulties in the assimilation of the
operations, technologies and products of the acquired companies; the diversion
of management's attention from other business concerns; risks of entering
markets in which the Company has no or limited direct prior experience; and the
potential loss of key employees of the acquired company. In the event that such
an acquisition does occur, there can be no assurance as to the effect thereof on
the Company's business or operating results. Additionally, in 1996, the Company
formed a wholly-owned subsidiary for the purpose of financing customer
purchases. If successful, this strategy may result in the formation of
significant long-term receivables and would require the use of substantial
amounts of working capital. To the extent that the Company's financial resources
are insufficient to fund the Company's activities, additional funds will be
required. There can be no assurance that additional financing will be available
on reasonable terms or at all.

ADDITIONAL RISK FACTORS

CYCLICALITY OF SEMICONDUCTOR AND MAGNETIC RECORDING HEAD INDUSTRIES

     The Company's business depends in significant part upon capital 
expenditures by manufacturers of semiconductors and thin film head magnetic 
recording devices, which in turn depend upon the current and anticipated 
market demand for such devices and products utilizing such devices. The 
semiconductor industry is highly cyclical and historically has experienced 
recurring periods of oversupply, resulting in significantly reduced demand 
for capital equipment including the systems manufactured and marketed by the 
Company. The Company believes that markets for new generations of 
semiconductors will also be subject to similar fluctuations. In recent years, 
the semiconductor industry has experienced significant growth which, in turn, 
has caused significant growth in the capital equipment industry. However, the 
semiconductor industry is currently experiencing a cyclical downturn, as 
evidenced by recent results of the industry's book-to-bill ratio as published 
by the Semiconductor Industry Association. More recently, the semiconductor 
equipment industry's book-to-bill ratio, as published by Semiconductor 
Equipment and Materials International (an industry association) has shown a 
dramatic decline in new equipment orders for the capital equipment industry 
relative to current sales levels, indicating a pronounced cyclical downturn. 
Additional evidence of an existing industry downturn is exhibited by recent 
announcements by several semiconductor manufacturers of delays or 
cancellations of previously planned capacity additions. The Company has 
recently experienced cancellation of purchase orders, shipment delays and 
purchase order restructurings by several of its customers and anticipates 
that this trend will continue for some time. Accordingly, the Company can 
give no assurance that it will be able to achieve or maintain its current 
level of sales. Additionally, based on present market conditions, the Company 
presently expects that future quarterly comparisons, through at least the 
second quarter of 1997, will indicate a period-over-comparable period decline 
in the Company's net sales.

During 1994, 1995, and the first nine months of 1996, approximately 35%, 25% and
40%, respectively, of the Company's net sales were derived from sales to thin
film head manufacturers and related applications. Although the thin film head
segment of the magnetic recording head industry has recently experienced
significant growth, the Company expects that the thin film head market segment
may not sustain such a growth rate in the future. Accordingly, sales of its
steppers to thin film head manufacturers may decrease in the future. The
Company's business and operating results would be materially adversely affected
by downturns or slowdowns in the semiconductor or thin film head market.  The
Company attempts to mitigate the risk of cyclicality by participating in both
the semiconductor and magnetic recording head markets. Nevertheless, there can
be no assurance that the Company's net sales and operating results will not be
materially adversely affected if downturns or slowdowns in either market occur
in the future. Such effects are likely to be particularly severe if both markets
experience a downturn or slowdown at the same time.

IMPORTANCE OF MIX-AND-MATCH STRATEGY

     A principal element of the Company's strategy is to sell its systems to
advanced semiconductor fabrication facilities for mix-and-match applications.
This strategy depends, in significant part, upon the recognition by
semiconductor manufacturers that costs can be reduced by using the Company's
systems to perform exposure


                                       12

<PAGE>

on semiconductor process layers requiring feature sizes of 0.65 microns or 
greater and the willingness of such manufacturers to implement processes to 
lower manufacturing costs. Many semiconductor fabrication facilities have 
limited or no experience with integrating lithography tools in the manner 
necessary for full implementation and acceptance of a mix-and-match 
manufacturing strategy, and there can be no assurance that semiconductor 
manufacturers will adopt such a strategy. The Company has designed certain of 
its systems to operate in a compatible manner with its competitors' reduction 
steppers, which are used to process layers with feature sizes below 0.65 
microns. The successful implementation of the Company's strategy, however, 
will result in a loss of sales by manufacturers of reduction steppers and 
will cause these competitors to respond with lower prices, productivity 
improvements or new technical designs for their systems that eliminate the 
need for the Company's steppers or make it difficult for Ultratech's systems 
to attain compatibility with such systems. Also, certain of the Company's 
competitors which also manufacture widefield systems, including Nikon, Inc. 
("Nikon") and Canon, Inc. ("Canon") are shipping their own widefield 
mix-and-match lithography systems. The introduction, development and sales of 
such competitive systems could materially adversely affect the Company's 
business, financial condition and results of operations.

     To facilitate its mix-and-match strategy, the Company has developed and 
is continuing to develop a family of products. The Company shipped its first 
Model 2244i stepper during 1993, and commenced volume production in 1994. In 
1995, the Company commenced shipment and volume production of the Titan Wafer 
Stepper and commenced shipment of the Saturn Wafer Stepper. As is typical 
with newly introduced systems in the capital equipment industry, the Company 
has experienced and may continue to experience technical or other 
difficulties with its mix-and-match family of products. The Company believes 
that the market acceptance and process verification combined with volume 
production of the mix-and-match family of products is of critical importance 
to the successful implementation of its mix-and-match strategy and its future 
financial results. Recently, this market segment of the Company's business 
has experienced a pronounced downturn due, in part, to the recent cyclical 
downturn in the semiconductor industry. To the extent that the mix-and-match 
family of products does not achieve or maintain significant sales due to a 
cyclical downturn in the semiconductor industry; technical, manufacturing or 
other difficulties associated with these products; lack of customer 
acceptance; an inability to reduce the significantly long manufacturing cycle 
of these products; an inability to increase capacity for the production of 
the mix-and-match family of products; direct competition from other widefield 
mix-and-match systems from Nikon and Canon; or any other reason, the 
Company's business, financial condition and results of operations would be 
materially adversely affected. In addition, the increase in mix-and-match 
stepper production has resulted and will continue to result in higher 
inventory levels and operating expenses. Failure to achieve or maintain 
significant sales of these steppers could lead, among other things, to an 
increase in inventory obsolescence and an increase in expenses without 
corresponding sales, either of which could materially adversely affect the 
Company's business, financial condition and results of operations.

EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH

     In recent years, the Company has significantly increased the scale of its
operations to support increased levels of net sales. The increase has included
the hiring of additional personnel, increasing the number of steppers scheduled
for production, and commencing independent operations in Japan. This increase
has resulted in higher inventory levels and higher expenses and has required the
Company to implement a variety of systems, procedures and controls. If the
Company is unable to achieve significantly increased net sales or its sales fall
below expectations, the Company's operating results will be materially adversely
affected until, among other factors, inventory levels and expenses can be
reduced. The Company's expansion has caused and may continue to cause a
significant strain on the Company's management, financial and other resources.
There can be no assurance that net sales will increase or remain at recent
levels or that the Company's systems, procedures and controls will be adequate
to support the Company's operations. The Company's financial results depend in
significant part on its ability to continue to implement, improve and expand its
systems, procedures and controls. Any failure to implement, improve and expand
such systems, procedures and controls in an efficient manner at a pace
consistent with the Company's business could have a material adverse effect on
the Company's business, financial condition and results of operations.


                                       13

<PAGE>

CUSTOMER CONCENTRATION; LENGTHY SALES CYCLE

     Historically, Ultratech has sold a substantial portion of its systems to a
limited number of customers. In 1995, sales to Motorola, Inc. ("Motorola")
accounted for approximately 12% of the Company's net sales. In 1994, sales to
Motorola accounted for approximately 20% of the Company's net sales. In 1993,
sales to Motorola and Seagate Technology, Inc. ("Seagate") accounted for
approximately 17% and 12%, respectively, of the Company's net sales. The Company
expects that sales to relatively few customers, particularly Read-Rite
Corporation, Seagate, and International Business Machines Corporation, 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 companies. The Company's business in 1996 has
been adversely impacted by a decline in orders from Motorola. Recent public 
announcements by Motorola have indicated that they are currently taking a
conservative approach toward their capital expenditures. The Company's six-month
backlog at September 30, 1996 contained a significant concentration of system
orders from several thin film head manufacturers for a relatively new
application. See "Additional Risk Factors: Rapid Technological Change;
Importance of Timely Product Introduction." Although the composition of the
group comprising the Company's largest customers may vary from period to period,
the loss of a significant customer or any reduction in orders by any significant
customer, including reductions due to market, economic or competitive conditions
in the semiconductor or magnetic recording head industries or in the industries
that manufacture products utilizing integrated circuits or thin film heads, may
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's ability to maintain or increase its
sales in the future will depend in part upon its ability to obtain orders from
new customers as well as the financial condition and success of its customers
and the general economy, of which there can be no assurance.

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

HIGHLY COMPETITIVE INDUSTRY

     The capital equipment industry in which the Company competes is 
intensely competitive. A substantial investment is required to install and 
integrate capital equipment into a semiconductor or thin film head production 
line. The Company believes that once a device manufacturer has selected a 
particular vendor's capital equipment, the manufacturer generally relies upon 
that equipment for the specific production line application and, to the 
extent possible, subsequent generations of similar products. Accordingly, it 
is difficult to achieve significant sales to a particular customer once 
another vendor's capital equipment has been selected. The Company experiences 
intense competition worldwide from a number of leading foreign and domestic 
manufacturers, such as Nikon, Canon, ASM Lithography, Ltd. ("ASML"), and 
Silicon Valley Group, Inc., all of which have substantially greater 
financial, marketing, technical and other resources than the Company. Nikon 
supplies a 1X stepper for use in the manufacture of liquid crystal displays 
and offers a reduction stepper for thin film head fabrication. In addition, 
Nikon and Canon are shipping their own widefield mix-and-match lithography 
systems. The Company believes that the high cost of developing new 
lithography tools has caused its competitors to collaborate with customers 
and other parties in various areas such as research and development, 
manufacturing and marketing. Many companies in the semiconductor capital 
equipment market, including photolithography equipment companies such as GCA, 
formerly a reduction stepper division of General Signal Corporation, whose 
assets were purchased by Integrated Solutions, Inc. ("ISI"), had 
experienced significant declines or had withdrawn from this market. ISI now 
supplies the former GCA products, and enhancements, to the semiconductor 
industry. Although the systems offered by the Company do not address the 
technical requirements of semiconductor manufacturers in the most advanced 
applications, the Company believes that it currently competes favorably with 
its competitors in the markets it addresses based on the cost of ownership 
advantages offered by its 1X steppers. However, Ultratech expects its 
competitors to continue to improve the performance of their current products. 
In addition, these competitors have stated that they will introduce new 
products

                                       14

<PAGE>

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 future financial performance. There can be no assurance
that enhancements to, or future generations of, competitive 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 will also face competition
from vendors employing other technologies, such as excimer lasers and phase-
shift mask technology, which may extend the capabilities of competitive products
beyond their current limits or increase their productivity. In addition,
increased competitive pressure could lead to intensified price-based
competition, resulting in lower prices and margins, which would materially
adversely affect the Company's business, financial condition and operating
results. There can be no assurance that the Company will be able to compete
successfully in the future.

RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION

     The semiconductor and magnetic recording head manufacturing industries are
subject to rapid technological change and new product introductions and
enhancements. The Company's ability to be competitive in these and other markets
will depend in part upon its ability to develop new and enhanced systems and
related software tools and to introduce these systems and related software tools
at competitive prices and on a timely and cost-effective basis to enable
customers to integrate them into their operations either prior to or as they
begin volume product manufacturing. The Company will also be required to enhance
the performance of its existing systems and related software tools. Any success
of the Company in developing new and enhanced systems and related software tools
depends upon a variety of factors, including product selection, timely and
efficient completion of product design, timely and efficient implementation of
manufacturing and assembly processes, product performance in the field and
effective sales and marketing. In particular, the Company has not yet fully
defined the markets and applications for the Titan Wafer Stepper and the Saturn
Wafer Stepper. Additionally, the Company has recently commenced shipment, and
has a significant customer backlog, of the Model 1700 stepper for back-end thin
film head processing. See "Additional Risk Factors: Customer Concentration;
Lengthy Sales Cycle." This is a relatively new application for the Company's
systems. Should the Company experience difficulty with this new process, due to
product limitations or the inability of customers to fully implement this new
technology, among other factors, the Company's financial condition and results
of operations would be materially adversely impacted, especially in light of the
current downturn in the semiconductor industry. Because new product development
commitments must be made well in advance of sales, new product decisions must
anticipate both future demand and the technology that will be available to
supply that demand. There can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products
and related software tools or enhancing its existing products and related
software tools. Any such failure would materially adversely affect the Company's
business, financial condition and results of operations.

     Because of the large number of components in the Company's systems,
significant delays can occur between a system's introduction and the
commencement by the Company of volume production of such systems. Ultratech 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 technical, manufacturing or other difficulties that
could delay future introductions or volume production of systems or
enhancements. The Company's inability to complete the development or meet the
technical specifications of any of its systems or enhancements and related
software tools or to manufacture and ship these systems or enhancements and
related software tools, such as the Model 4700 stepper, the Titan Wafer Stepper
and the Saturn Wafer Stepper, 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 steppers
early in the products' life cycles. If new products have reliability or quality
problems, reduced orders or higher

                                       15

<PAGE>

manufacturing costs, delays in collecting accounts receivable and additional
service and warranty expenses may result. Any of such events may materially
adversely affect the Company's business, financial condition and results of
operations.

DEPENDENCE ON KEY PERSONNEL

     The Company's future operating results depend in significant part upon 
the continued contributions of its Chairman and Chief Executive Officer, 
Arthur W. Zafiropoulo, as well as other members of the Board of Directors, 
officers and other key personnel, many of whom would be difficult to replace. 
None of such persons has an employment or noncompetition agreement with the 
Company. The Company does not maintain any life insurance on any of its key 
persons. Additionally, if Proposition 211 in California is passed in the 
November, 1996 election, it may make it more difficult to retain current 
officers and directors of the Company and may make it more difficult to 
attract new officers and directors. Accordingly, there is an increased risk 
to the Company that the composition of its officers and/or Board of Directors 
may change. Any failure to maintain a sufficient number of disinterested 
directors could cause the Company to be dislisted from the Nasdaq National 
Market, which could prevent the Company's Common Stock from being traded on 
such Exchange. The loss of Mr. Zafiropoulo or other key personnel would have 
a material adverse effect on the business, financial condition and results of 
operations of the Company. In addition, the Company's future operating 
results depend in significant part upon its ability to attract and retain 
other qualified management, manufacturing, technical, sales and support 
personnel for its operations. There may be only a limited number of persons 
with the requisite skills to serve in these positions and it may become 
increasingly difficult for the Company to hire such personnel over time. 
Competition for such personnel is intense, and there can be no assurance that 
the Company will be successful in attracting or retaining such personnel. The 
failure to attract or retain such persons would materially adversely affect 
the Company's business, financial condition and results of operations.

INTERNATIONAL SALES; JAPANESE MARKET; DEPENDENCE ON LOCAL DISTRIBUTOR

     International sales accounted for approximately 56%, 52% and 51% of total
net sales in 1994, 1995 and during the first nine months of 1996, respectively.
The Company anticipates that international sales, which typically have lower
gross margins than domestic sales, principally due to higher field service and
support costs, will continue to account for a majority of total net sales.  As a
result, a significant portion of the Company's sales will be subject to certain
risks, including unexpected changes in regulatory requirements, difficulty in
satisfying existing regulatory requirements, exchange rates, 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.  The Company is also subject to the risks associated with the
imposition of legislation and regulations relating to the import or export of
semiconductors and magnetic recording head products.  The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions will be
implemented by the United States, Japan or any other country upon the
importation or exportation of the Company's products in the future.  There can
be no assurance that any of these factors or the adoption of restrictive
policies will not have a material adverse effect on the Company's business,
financial condition and results of operations.

     Although the Company has sold a number of its systems to Japanese thin film
head manufacturers, to date, the Company has made limited sales of its systems
to Japanese semiconductor manufacturers.  The Japanese semiconductor market
segment is large, represents a substantial percentage of the worldwide
semiconductor manufacturing capacity, and is difficult for foreign companies to
penetrate. The Company is at a competitive disadvantage with respect to Japanese
semiconductor capital equipment suppliers that have been engaged for some time
in collaborative efforts with Japanese semiconductor manufacturers.  The Company
believes that the Japanese companies with which it competes have a competitive
advantage because of their dominance of the Japanese market segment. The Company
believes that increased penetration of the Japanese market is critical to its
financial results and intends to continue to invest significant resources in
Japan in order to meet this objective.  As part of its strategy to penetrate the
Japanese market, in 1993, the Company entered into a distribution agreement with
Innotech Corporation, a local distributor of products.  The Company believes
that Innotech is an important element of its strategy to increase its presence
in Japan.  Such agreement can be terminated upon notice of termination by either
party. If Innotech is not successful in selling such systems or such agreement
is terminated, the Company's strategy to increase product sales into the
Japanese market would be adversely affected. In addition, recently, Japanese
semiconductor manufacturers substantially reduced their levels of capital
spending on new fabrication facilities and equipment, thereby increasing
competitive pressures in the Japanese market segment.  There can be no
assurance, however, that the Company will be able to achieve significant sales
to, or will be able to compete successfully in, the Japanese semiconductor
market segment.


                                       16

<PAGE>

SOLE OR LIMITED SOURCES OF SUPPLY

     The Company is relying increasingly on outside vendors to manufacture
certain components. In addition, certain critical components, subassemblies and
services necessary for the manufacture of the Company's steppers are obtained
from a single supplier or a limited group of suppliers in order to ensure
overall quality and timeliness of delivery.  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 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 therefore would have a
material adverse effect on the Company's business, financial condition and
results of operations.

INTELLECTUAL PROPERTY MATTERS

     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 also relies
upon trade secret protection for its confidentiality 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 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.

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

ENVIRONMENTAL REGULATIONS


                                       17

<PAGE>

     The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture or
disposal of toxic or other hazardous substances used to manufacture the
Company's systems.  The Company believes that it is currently in compliance in
all material respects with such regulations and that it has obtained all
necessary environmental permits to conduct its business. Nevertheless, the
failure to comply with current or future regulations could result in substantial
fines being imposed on the Company, suspension of production, alteration of the
manufacturing process or cessation of operations.  Such regulations could
require the Company to acquire expensive remediation equipment or to incur
substantial expenses to comply with environmental regulations.  Any failure by
the Company to control the use, disposal or storage of, or adequately restrict
the discharge of, hazardous or toxic substances could subject the Company to
significant liabilities.

EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS

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

VOLATILITY OF STOCK PRICE

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


                                       18

<PAGE>

PART 2:   OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS.                                               None.

ITEM 2.   CHANGES IN SECURITIES.                                           None.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES.                                 None.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.             None

ITEM 5.   OTHER INFORMATION.                                               None.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (A)  EXHIBITS

               Exhibit 10.11     1993 Stock Option/Stock Issuance Plan, as
                                 Amended and Restated March 21, 1996

               Exhibit 11.1      Statement of Computation of Net Income Per
                                 Share.

               Exhibit 27        Financial Data Schedule

          (B)  REPORTS ON FORM 8-K

               The Company did not file any reports on Form 8-K during the three
               months ended September 30, 1996.


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<PAGE>

                                   SIGNATURES

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



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




Date:     October 31, 1996              By:  /s/William G. Leunis, III
      -------------------------             -------------------------------
                                             William G. Leunis, III
                                             Vice President Finance and Chief
                                             Financial Officer
                                             (Duly Authorized Officer and
                                                Principal Financial and
                                                  Accounting Officer)


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