**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 
| **(Mark One)** | ** ** | ** **                                                                                               |
|----------------|------------|----------------------------------------------------------------------------------------------------------|
| **ý**     | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF  1934**       |
|           |       |                                                                                                     |
| ** **     | ** ** | **For the quarterly period  ended         October 1, 2005** |
|           |       |                                                                                                     |
| **o**          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF  1934**      |

 

**For the transition periodfrom         to         **

 

**Commission FileNumber      0-22248**

 

**ULTRATECH,INC.**

(Exact name of registrant as specified in its charter)

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

 

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

 

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 
| Yes       ý |   | No       o |
|-----------------------------------------------------|--------|-----------------------------------------------|

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

 
| Yes       ý |   | No       o |
|-----------------------------------------------------|--------|-----------------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

 
| Yes       o |   | No       ý |
|------------------------------------------------|--------|----------------------------------------------------|

 

Indicatethe number of shares outstanding of each of the issuer’s classes of CommonStock, as of the latest practical date:

 
| **Class**                     | ** ** | **Outstanding  as of October 28, 2005** |
|-------------------------------|------------|-----------------------------------------|
| common stock, $.001 par value |       | 24,147,107                              |

 

 

----

 

**ULTRATECH, INC.**

 

**INDEX**

 
| **PART I.**                        | **FINANCIAL  INFORMATION**                                                                                                |   |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|
|                               |                                                                                                                      |   |
| **Item 1.**                        | **Financial  Statements**                                                                                                 |   |
|                               |                                                                                                                      |   |
|                               | Condensed Consolidated  Balance Sheets as of October 1, 2005 and December 31, 2004                                   |   |
|                               |                                                                                                                      |   |
|                               | Condensed Consolidated  Statements of Operations for the three and nine months ended October 1, 2005  and October 2, 2004 |   |
|                               |                                                                                                                      |   |
|                               | Condensed Consolidated  Statements of Cash Flows for the nine months ended October 1, 2005 and  October 2, 2004           |   |
|                               |                                                                                                                      |   |
|                               | Notes to Condensed Consolidated  Financial Statements                                                                     |   |
|                               |                                                                                                                      |   |
| **Item 2.**                        | **Management’s Discussion and  Analysis of Financial Condition and Results of Operations**                           |   |
|                               |                                                                                                                      |   |
| **Item 3.**                        | **Quantitative and Qualitative  Disclosures About Market Risk**                                                           |   |
|                               |                                                                                                                      |   |
| **Item 4.**                        | **Controls and Procedures**                                                                                               |   |
|                               |                                                                                                                      |   |
| **PART II.**                       | **OTHER INFORMATION**                                                                                                     |   |
|                               |                                                                                                                      |   |
| **Item 1.**                        | **Legal Proceedings**                                                                                                     |   |
|                               |                                                                                                                      |   |
| **Item 2.**                        | **Unregistered Sales of Equity  Securities and Use of Proceeds**                                                          |   |
|                               |                                                                                                                      |   |
| **Item 3.**                        | **Defaults upon Senior Securities**                                                                                       |   |
|                               |                                                                                                                      |   |
| **Item 4.**                        | **Submission of Matters to a Vote of  Security Holders**                                                                  |   |
|                               |                                                                                                                      |   |
| **Item 5.**                        | **Other Information**                                                                                                     |   |
|                               |                                                                                                                      |   |
| **Item 6.**                        | **Exhibits**                                                                                                              |   |
|                               |                                                                                                                      |   |
| **SIGNATURES AND  CERTIFICATIONS** |                                                                                                                      |

 

2

----

 

**PART I.****                                                    FINANCIALINFORMATION**

**Item 1.****   ****Financial Statements**

 

**ULTRATECH, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                          | ** ** | **Oct. 1,**     | ** ** | **Dec. 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------|------------|--------------|------------|
| **(In thousands)**                                  | ** ** | **2005**        | ** ** | **2004***    | ** ** |
| ** **                                          | ** ** | **(Unaudited)** | ** ** | ** **   | ** ** |
| ***ASSETS***                                        |       |            |       |         |       |
| Current  assets:                                    |       |            |       |         |       |
| Cash, cash equivalents, and short-term  investments |       | $               | 152,303    |         | $          | 151,627 |   |
| Accounts receivable, net                            |       | 12,263          |       | 19,907       |       |
| Inventories                                         |       | 33,344          |       | 27,842       |       |
| Taxes receivable                                    |       | 33              |       | 509          |       |
| Prepaid expenses and other current assets           |       | 2,016           |       | 1,654        |       |
| Total  current assets                               |       | 199,959         |       | 201,539      |       |
|                                                |       |            |       |         |       |
| Equipment  and leasehold improvements, net          |       | 22,074          |       | 21,992       |       |
|                                                |       |            |       |         |       |
| Intangible  assets, net                             |       | —          |       | 95           |       |
|                                                |       |            |       |         |       |
| Demonstration  inventories, net                     |       | 3,463           |       | 4,223        |       |
|                                                |       |            |       |         |       |
| Other assets                                        |       | 3,046           |       | 2,697        |       |
|                                                |       |            |       |         |       |
| Total assets                                        |       | $               | 228,542    |         | $          | 230,546 |   |
|                                                |       |            |       |         |       |
| ***LIABILITIES AND STOCKHOLDERS’ EQUITY***     |       |            |       |         |       |
| Current  liabilities:                               |       |            |       |         |       |
| Notes payable                                       |       | $               | 3,861      |         | $          | 7,900 |   |
| Accounts payable                                    |       | 13,231          |       | 13,587       |       |
| Deferred product and services income                |       | 1,429           |       | 1,244        |       |
| Deferred license income                             |       | —          |       | 1,041        |       |
| Other current liabilities                           |       | 10,190          |       | 8,146        |       |
| Total  current liabilities                          |       | 28,711          |       | 31,918       |       |
|                                                |       |            |       |         |       |
| Other  liabilities                                  |       | 5,641           |       | 5,338        |       |
|                                                |       |            |       |         |       |
| Stockholders’  equity                          |       | 194,190         |       | 193,290      |       |
|                                                |       |            |       |         |       |
| Total  liabilities and stockholders’ equity    |       | $               | 228,542    |         | $          | 230,546 |   |

 

----

* The Balance Sheet as of December 31,2004 has been derived from the audited financial statements at that date.

 

*See accompanying notes to unaudited condensedconsolidated financial statements*

 

3

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**ULTRATECH, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **Oct. 1**             | ** ** | **Oct. 2**            | ** ** | **Oct. 1** | ** ** | **Oct. 2** | ** ** |
| **(In thousands, except per share  amounts)**              | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales:                                                 |       |                   |       |                  |       |   |   |   |   |
| Products                                                   |       | $                      | 26,782     |                  | $          | 28,295 |   | $ | 76,216 |   | $ | 69,775 |   |
| Services                                                   |       | 3,567                  |       | 3,171                 |       | 9,504 |   | 8,943 |   |
| Licenses                                                   |       | —                 |       | 927                   |       | 1,417 |   | 2,783 |   |
| Total net  sales                                           |       | 30,349                 |       | 32,393                |       | 87,137 |   | 81,501 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Cost of  sales:                                            |       |                   |       |                  |       |   |   |   |   |
| Cost of products sold                                      |       | 15,083                 |       | 13,889                |       | 43,227 |   | 35,733 |   |
| Cost of services                                           |       | 2,252                  |       | 2,294                 |       | 6,929 |   | 6,325 |   |
| Total cost  of sales                                       |       | 17,335                 |       | 16,183                |       | 50,156 |   | 42,058 |   |
| Gross profit                                               |       | 13,014                 |       | 16,210                |       | 36,981 |   | 39,443 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Operating  expenses:                                       |       |                   |       |                  |       |   |   |   |   |
| Research, development, and engineering                     |       | 5,956                  |       | 6,478                 |       | 20,292 |   | 18,936 |   |
| Selling, general, and administrative                       |       | 7,272                  |       | 7,433                 |       | 23,003 |   | 21,680 |   |
| Amortization of intangible assets                          |       | —                 |       | 96                    |       | 95 |   | 286 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Operating income (loss)                                    |       | (214                   | )          | 2,203                 |       | (6,409 | ) | (1,459 | ) |
| Interest expense                                           |       | (117                   | )          | (36                   | )          | (307 | ) | (91 | ) |
| Interest and other income, net                             |       | 1,364                  |       | 864                   |       | 3,427 |   | 2,680 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Income (loss) before income tax                            |       | 1,033                  |       | 3,031                 |       | (3,289 | ) | 1,130 |   |
| Income tax provision                                       |       | 838                    |       | 186                   |       | 406 |   | 24 |   |
| Net income (loss)                                          |       | $                      | 195        |                  | $          | 2,845 |   | $ | (3,695 | ) | $ | 1,106 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Net income (loss) per share - basic:                       |       | $                      | 0.01       |                  | $          | 0.12 |   | $ | (0.15 | ) | $ | 0.05 |   |
| Number of shares used in per share  computations - basic   |       | 24,129                 |       | 23,764                |       | 23,985 |   | 23,704 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Net income (loss) per share - diluted:                     |       | $                      | 0.01       |                  | $          | 0.12 |   | $ | (0.15 | ) | $ | 0.04 |   |
| Number of shares used in per share  computations - diluted |       | 25,067                 |       | 24,044                |       | 23,985 |   | 24,769 |   |

 

*See accompanying notes to unaudited condensed consolidatedfinancial statements*

 

4

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ULTRATECH, INCCONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(Unaudited)

 
| ** **                                                                                          | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **Oct. 1,**           | ** ** | **Oct. 2,** | ** ** |
| **(In thousands)**                                                                                  | ** ** | **2005**              | ** ** | **2004** | ** ** |
| *Cash  flows from operating activities:*                                                            |       |                  |       |   |   |
| Net income  (loss)                                                                                  |       | $                     | (3,695     | ) | $ | 1,106 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       |                  |       |   |   |
| Depreciation                                                                                        |       | 4,949                 |       | 4,756 |   |
| Amortization                                                                                        |       | 916                   |       | 1,802 |   |
| (Gain) loss on disposal of equipment                                                                |       | (7                    | )          | 9 |   |
| Loss on sale of short-term investments                                                              |       | 8                     |       | — |   |
| Deferred compensation                                                                               |       | 68                    |       | 162 |   |
| Deferred income taxes                                                                               |       | 52                    |       | 177 |   |
| Changes in operating assets and  liabilities:                                                       |       |                  |       |   |   |
| Accounts receivable                                                                                 |       | 7,644                 |       | (10,886 | ) |
| Inventories                                                                                         |       | (5,502                | )          | (3,745 | ) |
| Taxes receivable                                                                                    |       | 476                   |       | 349 |   |
| Prepaid expenses and other current assets                                                           |       | (362                  | )          | (66 | ) |
| Demonstration inventory                                                                             |       | 221                   |       | (2,810 | ) |
| Other assets                                                                                        |       | (389                  | )          | (564 | ) |
| Accounts payable                                                                                    |       | (356                  | )          | 5,100 |   |
| Deferred product and services income                                                                |       | 185                   |       | 3,229 |   |
| Deferred license income                                                                             |       | (1,041                | )          | (2,783 | ) |
| Other current liabilities                                                                           |       | 2,032                 |       | (2,329 | ) |
| Other liabilities                                                                                   |       | 303                   |       | 1,116 |   |
| Net cash  provided by (used in) operating activities                                                |       | 5,502                 |       | (5,377 | ) |
|                                                                                                |       |                  |       |   |   |
| *Cash  flows from investing activities:*                                                            |       |                  |       |   |   |
| Capital  expenditures                                                                               |       | (5,024                | )          | (5,197 | ) |
| Purchase of  short-term investments                                                                 |       | (89,338               | )          | (89,472 | ) |
| Proceeds  from sales and maturities of short-term investments                                       |       | 78,990                |       | 108,782 |   |
| Net cash  provided by (used in) investing activities                                                |       | (15,372               | )          | 14,113 |   |
|                                                                                                |       |                  |       |   |   |
| *Cash  flows from financing activities:*                                                            |       |                  |       |   |   |
| Proceeds  from notes payable                                                                        |       | 79,119                |       | 25,987 |   |
| Repayment of  notes payable                                                                         |       | (83,158               | )          | (20,651 | ) |
| Proceeds  from issuance of common stock                                                             |       | 4,848                 |       | 2,415 |   |
| Net cash  provided by financing activities                                                          |       | 809                   |       | 7,751 |   |
|                                                                                                |       |                  |       |   |   |
| Net effect  of exchange rate changes on cash                                                        |       | 448                   |       | 321 |   |
|                                                                                                |       |                  |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                               |       | (8,613                | )          | 16,808 |   |
|                                                                                                |       |                  |       |   |   |
| Cash and  cash equivalents at beginning of period                                                   |       | 47,985                |       | 25,149 |   |
|                                                                                                |       |                  |       |   |   |
| Cash and  cash equivalents at end of period                                                         |       | $                     | 39,372     |   | $ | 41,957 |   |
|                                                                                                |       |                  |       |   |   |
| Supplemental  disclosures of cash flow information:                                                 |       |                  |       |   |   |
| Other  non-cash change:                                                                             |       |                  |       |   |   |
| Systems transferred from (to) inventory to  (from) equipment and other assets                       |       | $                     | 1,777      |   | $ | 4,226 |   |

 

*See accompanying notes to unaudited condensed consolidatedfinancial statements.*

 

5

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**Ultratech, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**(Unaudited)**

**October 1, 2005**

 

**(1) Description of Business**

 

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

 

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

 

In evaluating its business segments, we gaveconsideration to the Chief Executive Officer’s review of financial informationand the organizational structure of our management. Based on this review, weconcluded that, at the present time, resources are allocated and otherfinancial decisions are made based on consolidated financial information.Accordingly, we have determined that we operate in one business segment, whichis the manufacture and distribution of capital equipment to manufacturers ofintegrated circuits and nanotechnology components.

 

**(2) Basisof Presentation**

 

We have prepared the unaudited condensedconsolidated financial statements in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,they do not include all of the information and footnotes required by U.S.generally accepted accounting principles for complete financial statements. Inthe opinion of management, all adjustments, consisting of only normal recurringadjustments considered necessary for fair presentation, have been included.

 

Operating results for the three and ninemonth periods ended October 1, 2005 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2005, or anyfuture period.

 

**USE OFESTIMATES** — Thepreparation of the financial statements and related disclosures in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements. By their nature, these estimates and judgments are subject to aninherent degree of uncertainty. On an ongoing basis, management evaluates itsestimates, including those related to inventories, warranty obligations,purchase order commitments, bad debts, estimated useful lives of fixed assets,asset impairment, income taxes, intangible assets, and contingencies and litigation.Management bases its estimates on historical experience and on various otheranalyses and assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates.

 

**IMPACT OFRECENTLY ISSUED ACCOUNTING STANDARDS** — In June 2005, the FASB issued Statement No. 154, “Accounting Changesand Error Corrections” (SFAS 154), a replacement of APB Opinion No. 20, “AccountingChanges”, and Statement No. 3, “Reporting Accounting Changes in InterimFinancial Statements.” SFAS 154 changes the requirements for the accounting forand the reporting of a change in accounting principle. Previously, mostvoluntary changes in accounting principles required recognition by recording acumulative effect adjustment within net income in the period of change. SFAS154 requires retrospective application to prior periods’ financial statements,unless it is impracticable to determine either the specific period effects orthe cumulative effect of the change. SFAS 154 is effective for accountingchanges made in fiscal years beginning after December 15, 2005. The Companydoes not believe SFAS 154 will have a material effect on its consolidatedfinancial position, results of operations and cash flows.

 

In March 2005, the FASB issued InterpretationNo. 47, “Accounting for Conditional Asset Retirement Obligations.”Interpretation No. 47 clarifies that an entity must record a liability for a “conditional”asset retirement obligation if the fair value of the obligation can bereasonably estimated. Interpretation No. 47 also clarifies when an entity wouldhave sufficient information to reasonably estimate the fair value of an assetretirement obligation. Interpretation No. 47 is effective no later than the endof the fiscal year ending after December 15, 2005. The Company does not expectthe adoption of Interpretation No. 47 to have a material impact on itsconsolidated financial position, results of operations and cash flows.

 

6

----

 

On December 16, 2004, the FinancialAccounting Standards Board (FASB) issued FASB Statement No. 123 (revised2004), Share-Based Payment, which is a revision of FASB Statement No. 123,Accounting for Stock-Based Compensation. Statement 123(R) supersedes APBOpinion No. 25, Accounting for Stock Issued to Employees, and amends FASBStatement No. 95, Statement of Cash Flows. Generally, the approach inStatement 123(R) is similar to the approach described in Statement 123.However, Statement 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure will nolonger be an alternative. In April 2005, the Securities and Exchange Commissionannounced the adoption of a new rule that amends the effective date of FAS123(R). The effective date of the new standard under these new rules for ourconsolidated financial statements is January 1, 2006.

 

As permitted by Statement 123, we currentlyaccount for share-based payments to employees using the intrinsic value methodand, as such, generally recognize no compensation cost for employee stockoptions. Accordingly, the adoption of Statement 123(R)’s fair value method willhave a material impact on our results of operations. The actual impact willdepend on levels and terms of future share-based payments granted, as well asother variables. The adoption of Statement 123(R)’s fair value method will haveno impact on our overall financial position. However, had we adopted Statement123(R) in prior periods, the impact of that standard would haveapproximated the impact of Statement 123 as described in the disclosure of proforma net income (loss) and net income (loss) per share in Note 3 to ourcondensed consolidated financial statements.

 

**(3) Stock-Based Compensation**

 

Weaccount for compensation expense related to our stock-based employeecompensation plans under the intrinsic value method. Accordingly, nostock-based employee compensation cost is recorded in the condensedconsolidated statements of operations, as all options granted under these planshad an exercise price equal to the market value of the underlying common stockon the date of grant.

 

Thefollowing table illustrates the effect on net income (loss) and net income(loss) per share, had we applied the fair value recognition method to accountfor stock-based employee compensation.

 
| ** **                                                                                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                             | ** ** | **Oct. 1,**            | ** ** | **Oct. 2,**           | ** ** | **Oct. 1,** | ** ** | **Oct. 2,** | ** ** |
| **(In thousands, except per share  amounts)**                                                                                          | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss) as reported                                                                                                         |       | $                      | 195        |                  | $          | 2,845 |   | $ | (3,695 | ) | $ | 1,106 |   |
| Total stock-based employee compensation  expense, determined under fair value based method for all awards, net of  related tax effects |       | (2,941                 | )          | (3,407                | )          | (6,060 | ) | (23,320 | ) |
| Pro forma  net loss                                                                                                                    |       | $                      | (2,746     | )                     | $          | (562 | ) | $ | (9,755 | ) | $ | (22,214 | ) |
|                                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| Net income  (loss) per share - basic, as reported                                                                                      |       | $                      | 0.01       |                  | $          | 0.12 |   | $ | (0.15 | ) | $ | 0.05 |   |
| Pro forma  net loss per share - basic                                                                                                  |       | $                      | (0.11      | )                     | $          | (0.02 | ) | $ | (0.41 | ) | $ | (0.96 | ) |
|                                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| Net income  (loss) per share - diluted, as reported                                                                                    |       | $                      | 0.01       |                  | $          | 0.12 |   | $ | (0.15 | ) | $ | 0.04 |   |
| Pro forma  net loss per share - diluted                                                                                                |       | $                      | (0.11      | )                     | $          | (0.02 | ) | $ | (0.41 | ) | $ | (0.96 | ) |

 

Thetable above used the following weighted-average assumptions to estimate thefair value of stock options at the date of grant using the Black-Scholesoption-pricing model.

 

7

----

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **Oct. 1,**            | ** ** | **Oct. 2,**           | ** ** | **Oct. 1,** | ** ** | **Oct. 2,** | ** ** |
| ** **                                              | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                    |       |                   |       |                  |       |   |   |   |   |
| Expected  life (in years): stock options                |       | 3.9                    |       | 1.1                   |       | 3.7 |   | 2.1 |   |
|                                                    |       |                   |       |                  |       |   |   |   |   |
| Expected life (in years): Employee Stock  Purchase Plan |       | NA                     |       | NA                    |       | NA |   | 0.5 |   |
|                                                    |       |                   |       |                  |       |   |   |   |   |
| Risk-free  interest rate                                |       | 3.92                   | %          | 2.05                  | %          | 3.67 | % | 2.52 | % |
|                                                    |       |                   |       |                  |       |   |   |   |   |
| Volatility  factor                                      |       | 0.45                   |       | 0.48                  |       | 0.48 |   | 0.60 |   |
|                                                    |       |                   |       |                  |       |   |   |   |   |
| Dividend  yield                                         |       | 0.00                   | %          | 0.00                  | %          | 0.00 | % | 0.00 | % |

 

Reflected in the table above is thetermination of our Employee Stock Purchase Plan in July 2004.

 

**(4) NetIncome (Loss) Per Share**

 

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

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **Oct. 1,**            | ** ** | **Oct. 2,**           | ** ** | **Oct. 1,** | ** ** | **Oct. 2,** | ** ** |
| **(In thousands, except per share  amounts)**        | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Numerator:                                           |       |                   |       |                  |       |   |   |   |   |
| Net income (loss)                                    |       | $                      | 195        |                  | $          | 2,845 |   | $ | (3,695 | ) | $ | 1,106 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Denominator:                                         |       |                   |       |                  |       |   |   |   |   |
| Denominator for basic net income (loss) per  share   |       | 24,129                 |       | 23,764                |       | 23,985 |   | 23,704 |   |
| Effect of dilutive employee stock options            |       | 938                    |       | 280                   |       | — |   | 1,065 |   |
| Denominator for diluted net income (loss)  per share |       | 25,067                 |       | 24,044                |       | 23,985 |   | 24,769 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Loss per  share - basic:                             |       |                   |       |                  |       |   |   |   |   |
| Net income (loss)                                    |       | $                      | 0.01       |                  | $          | 0.12 |   | $ | (0.15 | ) | $ | 0.05 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Loss per  share - diluted:                           |       |                   |       |                  |       |   |   |   |   |
| Net income (loss)                                    |       | $                      | 0.01       |                  | $          | 0.12 |   | $ | (0.15 | ) | $ | 0.04 |   |

 

For the three and nine-month periods endedOctober 1, 2005, options to purchase 2,494,092 shares and 6,390,646 shares ofcommon stock at an average exercise price of $24.22 and $17.96 were excludedfrom the computation of diluted net loss per share, as the effect would havebeen anti-dilutive. For the three and nine-month periods ended October 2, 2004,options to purchase 3,418,000 and 2,158,000 shares of common stock at anaverage exercise price of $22.35 and $25.43 were excluded from the computationof diluted net loss per share, as the effect would have been anti-dilutive.Options are anti-dilutive when we have a net loss or when the exercise price ofthe stock option is greater than the average market price of our common stockduring the period.

 

**(5) Inventories**

 

Inventories consist of the following:

 
| **(In thousands)** | ** ** | **Oct. 1,  2005** | ** ** | **Dec. 31,  2004** | ** ** |
|--------------------|------------|-------------------|------------|--------------------|------------|
| Raw  materials     |       | $                 | 11,330     |               | $          | 11,362 |   |
| Work-in-process    |       | 13,803            |       | 13,347             |       |
| Finished  products |       | 8,211             |       | 3,133              |       |
|               |       | $                 | 33,344     |               | $          | 27,842 |   |

 

8

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**(6) Other Assets**

 

Otherassets consist of the following:

 
| **(In thousands)**                 | ** ** | **Oct. 1,  2005** | ** ** | **Dec. 31,  2004** | ** ** |
|------------------------------------|------------|-------------------|------------|--------------------|------------|
| Deferred  compensation plan assets |       | $                 | 1,877      |               | $          | 1,401 |   |
| Deferred  income taxes             |       | 280               |       | 320                |       |
| Other                              |       | 889               |       | 976                |       |
|                               |       | $                 | 3,046      |               | $          | 2,697 |   |

 

**(7) Line of Credit**

 

In December 2004, we entered into a lineof credit agreement with a brokerage firm. Under the terms of this agreement,we may borrow funds at a cost equal to the current Federal funds open rate plus100 basis points (approximately 4.75% as of October 1, 2005). Certain of ourcash, cash equivalents and short-term investments secure borrowings outstandingunder this facility. Funds are advanced to us under this facility based onpre-determined advance rates on the cash and securities held by us in thisbrokerage account. This agreement has no set expiration date and there are noloan covenants, other than the aforementioned collateral requirement. As ofOctober 1, 2005, $3.9 million was outstanding under this facility, with arelated collateral requirement of approximately $5.1 million of our cash, cashequivalents and short-term investments.

 

**(8) Other Current Liabilities**

 

Othercurrent liabilities consist of the following:

 
| **(In thousands)**                                | ** ** | **Oct. 1,  2005** | ** ** | **Dec. 31,  2004** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| Salaries and  benefits                            |       | $                 | 3,637      |               | $          | 2,360 |   |
| Warranty  accrual                                 |       | 1,636             |       | 2,013              |       |
| Advance  billings                                 |       | 997               |       | 415                |       |
| Income taxes  payable                             |       | 584               |       | 31                 |       |
| Reserve for  losses on purchase order commitments |       | 769               |       | 1,090              |       |
| Other                                             |       | 2,567             |       | 2,237              |       |
|                                              |       | $                 | 10,190     |               | $          | 8,146 |   |

 

**Warranty Accrual**

 

We generally warrant our products for aperiod of 12 months for new products, or 3 months for refurbished products,from the date of customer acceptance for material and labor to repair theproduct; accordingly, an accrual for the estimated cost of the warranty isrecorded at the time the product is shipped. Recognition of the relatedwarranty cost is deferred until product revenue is recognized. Factors thataffect our warranty liability include the number of installed units, historicaland anticipated rates of warranty claims, and cost per claim. We periodicallyassess the adequacy of our recorded warranty liabilities and adjust the amountsas necessary.

 

Changes in our warranty accrual are asfollows:

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **Oct. 1,**            | ** ** | **Oct. 2,**           | ** ** | **Oct. 1,** | ** ** | **Oct. 2,** | ** ** |
| **(In thousands)**                                | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance,  beginning of the period                 |       | $                      | 1,911      |                  | $          | 1,498 |   | $ | 2,013 |   | $ | 1,257 |   |
| Warranties  issued during the period              |       | 473                    |       | 1,088                 |       | 2,168 |   | 3,059 |   |
| Settlements  made during the period               |       | (827                   | )          | (892                  | )          | (2,905 | ) | (2,233 | ) |
| Changes in  liability for pre-existing warranties |       | 79                     |       | 96                    |       | 360 |   | (293 | ) |
| Balance, end  of the period                       |       | $                      | 1,636      |                  | $          | 1,790 |   | $ | 1,636 |   | $ | 1,790 |   |

 

9

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**Deferred Services Revenue**

 

Deferredservices revenue is included in the deferred product and services income lineon the condensed consolidated balance sheets. We sell service contracts forwhich revenue is deferred and recognized ratably over the contract period, fortime based service contracts, or as service hours are delivered, for contractsbased on a purchased quantity of hours.

 

Changesin our deferred services revenue are as follows:

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **Oct. 1,**            | ** ** | **Oct. 2,**           | ** ** | **Oct. 1,** | ** ** | **Oct. 2,** | ** ** |
| **(In thousands)**                                     | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance,  beginning of the period                      |       | $                      | 1,560      |                  | $          | 977 |   | $ | 1,332 |   | $ | 821 |   |
| Service  contracts sold during the period              |       | 2,162                  |       | 2,483                 |       | 6,278 |   | 6,427 |   |
| Service  contract revenue recognized during the period |       | (2,293                 | )          | (2,106                | )          | (6,181 | ) | (5,894 | ) |
| Balance, end  of the period                            |       | $                      | 1,429      |                  | $          | 1,354 |   | $ | 1,429 |   | $ | 1,354 |   |

 

**(9) Other Liabilities**

 

Otherliabilities consist of the following:

 
| **(In thousands)**                    | ** ** | **Oct. 1,  2005** | ** ** | **Dec. 31,  2004** | ** ** |
|---------------------------------------|------------|-------------------|------------|--------------------|------------|
| Deferred  rent                        |       | $                 | 3,242      |               | $          | 3,294 |   |
| Deferred  compensation plan liability |       | 1,750             |       | 1,572              |       |
| Other                                 |       | 649               |       | 472                |       |
|                                  |       | $                 | 5,641      |               | $          | 5,338 |   |

 

**(10) Comprehensive Income (Loss)**

 

Thecomponents of comprehensive income (loss) are as follows:

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **Oct. 1,**            | ** ** | **Oct. 2,**           | ** ** | **Oct. 1,** | ** ** | **Oct. 2,** | ** ** |
| **(In thousands)**                                     | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss)                                     |       | $                      | 195        |                  | $          | 2,845 |   | $ | (3,695 | ) | $ | 1,106 |   |
| Accumulated  other comprehensive income (loss):        |       |                   |       |                  |       |   |   |   |   |
| Unrealized loss on available-for-sale  investments     |       | (609                   | )          | (117                  | )          | (769 | ) | (1,088 | ) |
| Unrealized gain on foreign exchange forward  contracts |       | 81                     |       | 9                     |       | 448 |   | 321 |   |
| Comprehensive  income (loss)                           |       | $                      | (333       | )                     | $          | 2,737 |   | $ | (4,016 | ) | $ | 339 |   |

 

Accumulatedother comprehensive loss presented in the condensed consolidated balance sheetsis comprised of changes in unrealized gains or losses on available-for-salesecurities and the effect of exchange rate changes on foreign exchange forwardcontracts, net of tax.

 
| ** **                                             | ** ** | **Oct. 1,** | ** ** | **Dec. 31,** | ** ** |
|--------------------------------------------------------|------------|-------------|------------|--------------|------------|
| **(In thousands)**                                     | ** ** | **2005**    | ** ** | **2004**     | ** ** |
| ** **                                             | ** ** | ** **  | ** ** | ** **   | ** ** |
| Unrealized  gains (losses) on:                         |       |        |       |         |       |
| Available-for-sale investments                         |       | $           | (963       | )            | $          | (194 | ) |
| Foreign exchange forward contracts                     |       | 153         |       | (295         | )          |
| Accumulated  other comprehensive loss at end of period |       | $           | (810       | )            | $          | (489 | ) |

 

10

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**(11) StockRepurchase Program**

 

On September 19, 2005, the Company’s Board ofDirectors authorized the repurchase of up to $30 million of its Common Stock inthe open market at the then prevailing market prices during the periodcommencing September 19, 2005 through September 30, 2007.

 

**(12)Contingencies**

 

**Legal Proceedings**

 

On February 29, 2000, we filed lawsuitsasserting patent infringement and related claims against Nikon, Canon, and ASMLin the U.S. District Court for the Eastern District of Virginia. InApril 2000, we reached a settlement with Nikon, and in September 2001,we reached a settlement with Canon. In the patent litigation against ASML, ajury trial was conducted during the three-month period ended July 2, 2005. Thejury reached a verdict that the patent was infringed, but that the assertedclaims of the patent were invalid. We have filed a post-trial motion for a newtrial and for judgment as a matter of law in our favor. ASML has also filed amotion for judgment as a matter of law. In addition, ASML has requested thatthe court award costs in the amount of $450,000 and has reserved the right toseek attorneys’ fees. We have recorded an amount for court costs in ourfinancial statements, but we believe the possible claim for attorneys’ feeswould be without merit and we plan to vigorously defend ourselves against sucha claim.

 

On July 11, 2003, we filed a lawsuitasserting infringement of certain claims related to U.S. patent No. 5,621,813in the U.S. District Court in and for the Northern District of California. OnMay 17, 2005, the court found the subject “patent-in-suit” to be invalid. Wehave appealed this decision and that appeal is pending. The defendantsubsequently brought a motion for reimbursement of its attorneys’ fees andcosts in a total asserted amount of approximately $2 million. We opposed thismotion, and on October 12, 2005, the District Court denied the defendant’srequest for attorneys’ fees in its entirety. On November 3, 2005, the defendantfiled a notice of appeal with respect to the court’s ruling on its motion for attorneys’fees.

 

11

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**Item 2.****   ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

Certain of the statements contained herein,which are not historical facts and which can generally be identified by wordssuch as “anticipates”, “expects”, “intends”, “will”, “could”, “believes”, “estimates”,“continue”, and similar expressions, are forward-looking statements underSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, thatinvolve risks and uncertainties, such as risks related to our dependence on newproduct introductions and market acceptance of new products and enhancedversions of our existing products; lengthy sales cycles, including the timingof system installations and acceptances; lengthy and costly development cyclesfor laser-processing and lithography technologies and applications;integration, development and associated expenses of the laser processingoperation; delays, deferrals and cancellations of orders by customers;cyclicality in the semiconductor and nanotechnology industries; pricingpressures and product discounts; high degree of industry competition;intellectual property matters; expiration of licensing arrangements, and the resultingadverse impact on our licensing revenues; changes to financial accountingstandards; changes in pricing by us, our competitors or suppliers; customerconcentration; international sales; timing of new product announcements andreleases by us or our competitors; ability to volume produce systems and meetcustomer requirements; sole or limited sources of supply; ability and resultingcosts to attract or retain sufficient personnel to achieve our targets for aparticular period; dilutive effect of employee stock option grants on netincome per share, which is largely dependent upon us achieving and maintainingprofitability and the market price of our stock; mix of products sold; rapidtechnological change and the importance of timely product introductions;outcome of litigation; manufacturing variances and production levels; timingand degree of success of technologies licensed to outside parties; productconcentration and lack of product revenue diversification; inventoryobsolescence; asset impairment; effects of certain anti-takeover provisions;future acquisitions; volatility of stock price; foreign government regulationsand restrictions, the political restrictions in Taiwan regarding offshoreinvestments and the exporting of sensitive technologies and jobs to certaincountries;  business interruptions due tonatural disasters or utility failures; environmental regulations; and anyadverse effects of terrorist attacks in the United States or elsewhere, orgovernment responses thereto, or military actions in Iraq, Afghanistan andelsewhere, on the economy in general, or on our business in particular. Due tothese and additional factors, the statements, historical results and percentagerelationships set forth below are not necessarily indicative of the results ofoperations for any future period. These forward-looking statements are based onmanagement’s current beliefs and expectations, some or all of which may proveto be inaccurate, and which may change. We undertake no obligation to revise orupdate any forward-looking statements to reflect any event or circumstance thatmay arise after the date of this report.

 

**OVERVIEW**

 

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

 

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

 

**RESULTS OF OPERATIONS**

 

We derive a substantial portion of our totalnet sales from sales of a relatively small number of newly manufacturedsystems, which typically range in price from $1.2 million to $4.0 million. As aresult of a shift in product mix toward our advanced packaging systems, and300mm systems in particular, the weighted-average selling price of our systemshas increased approximately 20% in 2005, and this trend of higherweighted-average selling prices is expected to continue into 2006.  As a result of these high sale prices, thetiming and recognition of revenue from a single transaction has had and mostlikely will continue to have a significant impact on our net sales andoperating results for any particular period.

 

Our backlog at the beginning of a periodtypically does not include all of the sales needed to achieve our salesobjectives for that period. In addition, orders in backlog are subject to ahigh risk of cancellation, shipment or customer acceptance delays, and deferralor rescheduling by a customer with limited or no penalties. Consequently, ournet sales and operating results for a period have been and will continue to bedependent upon our obtaining orders for systems to be shipped and accepted inthe same period in which the order is received. Our business and financialresults for a particular period could be materially adversely affected if an anticipatedorder for even one system is not received in time to permit shipment andcustomer acceptance during that period. Furthermore, a substantial number ofour shipments have historically occurred near the end of each quarter. Delaysin installation and customer acceptance due, for example, to our inability tosuccessfully demonstrate the agreed-upon specifications or criteria at thecustomer’s facility, or to the failure of the customer to permit installationof the system in the agreed upon time, may cause net sales in a particularperiod to fall significantly below our expectations, which 

 

12

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may materially adversely affect our operatingresults for that period. This risk is especially applicable in connection withthe introduction and initial sales of a new product line. Additionally, certainorders in backlog contain product evaluation terms, which could result inextended product acceptance cycles and delay recognition of revenue, or resultin the return of product.

 

The failure to receive anticipated orders ordelays in shipments and customer acceptances due, for example, to customerevaluation or demonstration criteria, rescheduling, delays, deferrals orcancellations by customers, additional customer configuration requirements, orto unexpected manufacturing difficulties or delays in deliveries by suppliersdue to their long production lead times or otherwise, have caused and maycontinue to cause net sales in a particular period to fall significantly belowour expectations, materially adversely affecting our operating results for thatperiod. In particular, the long manufacturing and acceptance cycles of ourlaser thermal processing systems and advanced packaging wafer steppers and thelong lead time for lenses and other materials, could cause shipments andacceptances of such products to be delayed from one quarter to the next, whichcould materially adversely affect our financial condition and results ofoperations for a particular quarter.

 

# **Net sales**

 

**ThirdQuarter**

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | ** **  | ** ** |
|------------------------------------|------------|------------------------|------------|-------------|------------|
| ** **                         | ** ** | **Oct. 1,**            | ** ** | **Oct. 2,** | ** ** | **Percentage** | ** ** |
| **(In millions)**                  | ** ** | **2005**               | ** ** | **2004**    | ** ** | **Change** | ** ** |
| Sales of:                          | ** ** | ** **             | ** ** | ** **  | ** ** | ** ** | ** ** |
| Products: Systems                  |       | $                      | 23.5       |        | $          | 24.9 |   | -6 | % |
| Products: Spare parts and upgrades |       |                   | 3.3        |        |       | 3.4 |   | -2 | % |
| Services                           |       |                   | 3.5        |        |       | 3.2 |   | 12 | % |
| Licenses                           |       | —                 |       | 0.9         |       | -100 | % |
| Total net sales                    |       | $                      | 30.3       |        | $          | 32.4 |   | -6 | % |

 

Netsales consist of revenues from system sales, spare parts sales, services andlicensing of technologies. System sales in the current quarter decreased 6%, to$23.5 million, on a unit volume decrease of 29%, as compared to the thirdquarter of 2004. Weighted-average selling prices increased 32%, as compared tothe comparable year-ago period, primarily due to a product mix shift toward theCompany’s advanced packaging platforms, which typically have higher averageselling prices than our nanotechnology platforms, and a higher proportion ofnew system sales to total sales, which includes lower priced refurbished systemsales as well as new system sales. Average selling prices for newlymanufactured systems are typically substantially higher than those forrefurbished systems.

 

Ona product market application basis, system sales to the semiconductor industry,primarily for advanced packaging applications, were $21.5 million for thequarter ended October 1, 2005, an increase of 15% when compared with systemsales to this market in the third quarter of 2004. This increase was primarilydue to a 13% increase in the number of units sold. System sales to thenanotechnology market were $1.9 million for the quarter ended October 1, 2005,a decrease of 69% as compared with system sales to this market in the thirdquarter of 2004. System sales to the nanotechnology market are highly dependenton customer capacity demand in the thin film head industry. A relative declinein such capacity demand compared to the third quarter of 2004 was the primaryreason for an 83% decrease in the number of units sold for the quarter endedOctober 1, 2005.

 

Spareparts and upgrades sales for the third quarter of 2005 were essentiallyunchanged, as compared to the same period a year ago. Revenues from servicesfor the third quarter of 2005 were $3.5 million, an increase of 12% over lastyear’s third quarter, primarily as a result of increases in time and materialservice jobs and application support services in North America and Europe.

 

There was no revenue from licenses in thequarter ended October 1, 2005, as compared with $0.9 million in the comparableperiod a year ago. This decrease was a result of the completion of theamortization period of prior-period proceeds from licensing agreements. Futurerevenues from licensing activities, if any, will be contingent upon the outcomeof current litigation (see “Legal Proceedings”), and upon existing and futurelicensing and royalty arrangements. The Company may not be successful ingenerating licensing revenues in the future and does not anticipate therecognition of additional licensing income during the remainder of 2005.

 

At October 1, 2005, we had approximately $1.4million of deferred product and services income resulting from deferred servicerevenue, as compared to $1.2 million at December 31, 2004. Deferred incomerelated to our products is recognized upon satisfying the contractualobligations for installation and/or customer acceptance. Deferred servicerevenue is recognized ratably over the contract period, or as purchasedservices are rendered.

 

13

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For the quarter ended October 1, 2005,international net sales were $20.4 million, or 67% of total net sales, ascompared with $18.6 million, or 57% of total net sales for the third quarter of2004. We expect sales to international customers to represent a significantmajority of our revenues during the remainder of 2005. Our revenue derived fromsales in foreign countries is not generally subject to significant exchangerate fluctuations, principally because sales contracts for our systems aregenerally denominated in U.S. dollars. In Japan, however, orders are oftendenominated in Japanese yen. This subjects us to the risk of currencyfluctuations. We attempt to mitigate this risk by entering into foreigncurrency forward exchange contracts for the period between when an order isreceived and when it is recorded as revenue. After recording revenue, we usevarious mechanisms, such as foreign currency forward exchange contracts andnatural hedges, to offset substantial portions of the gains or lossesassociated with our Japanese yen denominated receivables due to exchange ratefluctuations. We had approximately $0.5 million of Japanese yen denominatedreceivables at October 1, 2005. International sales expose us to a number ofadditional risks, including fluctuations in the value of local currenciesrelative to the U.S. dollar, which impact the relative cost of ownership of ourproducts and, thus, the customer’s willingness to purchase our product. (See “AdditionalRisk Factors: International Sales”).

 

**Year-To-Date:**

 
| ** **                         | ** ** | **Nine Months Ended** | ** ** | ** **  | ** ** |
|------------------------------------|------------|-----------------------|------------|-------------|------------|
| ** **                         | ** ** | **Oct. 1,**           | ** ** | **Oct. 2,** | ** ** | **Percentage** | ** ** |
| **(In millions)**                  | ** ** | **2005**              | ** ** | **2004**    | ** ** | **Change** | ** ** |
| Sales of:                          |       |                  |       |        |       |   |   |
| Products: Systems                  |       | $                     | 65.0       |        | $          | 61.4 |   | 6 | % |
| Products: Spare parts and upgrades |       | 11.2                  |       | 8.4         |       | 33 | % |
| Services                           |       | 9.5                   |       | 8.9         |       | 6 | % |
| Licenses                           |       | 1.4                   |       | 2.8         |       | -49 | % |
| Total net sales                    |       | $                     | 87.1       |        | $          | 81.5 |   | 7 | % |

 

Systemsales in the current year increased 6% to $65.0 million, as compared to thefirst nine months of last year. The increase was primarily a result of a 22%increase in weighted-average selling prices of systems sold, partially offsetby a unit volume decrease of 13%. The increase in average selling prices wasprimarily the result of a higher proportion of 300mm system sales to 200mmsystem sales, a higher proportion of newly manufactured systems to refurbishedsystems, and higher average selling prices for our new “Unity” lithographyplatform for advanced packaging as compared with our legacy advanced packagingplatform. On a market segment basis, the year-over-year increase in systemssales was primarily a result of 33% higher sales to the advanced packagingmarket, partially offset by 22% lower sales to the nanotechnology market.Geographically, the year-over-year increase in systems sales was primarily aresult of a 421% sales increase in Europe and a 46% sales increase in Asia,excluding Japan and Taiwan, as compared to the nine months ended October 1,2004, partially offset by a 48% sales decrease in Japan and an 18% salesdecline in North America.

 

Spareparts and upgrades sales for the first three quarters of 2005 were $11.2million, an increase of 33% when compared to the same period in 2004, primarilyas a result of higher levels of system upgrades. Revenues from servicesincreased 6% from 2004 levels, primarily as a result of increases in time andmaterial service jobs and application support services in North America andEurope in current year.

 

Revenuesfrom licenses decreased 49% in the first three quarters of 2005, as compared tothe same period of 2004. This decrease was a result of the completion of theamortization period of prior-period proceeds from licensing agreements. Futurerevenues from licensing activities, if any, will be contingent upon the outcomeof current litigation (see “Legal Proceedings”), and upon existing and futurelicensing and royalty arrangements. The Company may not be successful ingenerating licensing revenues in the future and does not anticipate therecognition of additional licensing income during the remainder of 2005.

 

For the first three quarters of 2005,international net sales were $63.3 million, or 73% of total net sales, ascompared with $52.5 million, or 64% of total net sales for the comparableperiod in 2004.

 

14

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**Gross profit**

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **Oct. 1,**            | ** ** | **Oct. 2,**           | ** ** | **Oct. 1,** | ** ** | **Oct. 2,** | ** ** |
| **Expressed as a % of total net  sales** | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                     |       |                   |       |                  |       |   |   |   |   |
| Total net  sales                         |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |
|                                     |       |                   |       |                  |       |   |   |   |   |
| Cost of  products and services sold      |       | 57.1                   | %          | 50.0                  | %          | 57.6 | % | 51.6 | % |
| Gross margin                             |       | 42.9                   | %          | 50.0                  | %          | 42.4 | % | 48.4 | % |

 

Ona comparative basis, the decline in gross margin in the three months endedOctober 1, 2005, as compared with the comparable period a year ago, wasprimarily due to a less favorable mix of products sold (3.1 percentage points),higher service costs resulting primarily from initial installations of our newlaser spike annealing systems (2.0 percentage points), the absence of licensingrevenues resulting from the completion of the amortization period of licensingpayments received in prior periods (1.4 percentage points), recent facilityenhancements amortization expense (1.0 percentage point), higher rework (0.5percentage points), and employee related costs (0.5 percentage points), offsetpartially by improved service margins (1.0 percentage point) and higher absorptionof manufacturing overhead (0.5 percentage points).

 

Thedecline in gross margin in the nine-month period ended October 1, 2005, ascompared with the comparable period in 2004, was primarily a result of higherservice costs resulting primarily from initial installations of our new laserspike annealing systems (2.2 percentage points), the absence of licensingrevenues resulting from the completion of the amortization period of licensingpayments received in prior periods (1.5 percentage points), higher reworkexpenses associated with the ramp-up of our new laser spike annealing systems(1.6 percentage points), and unfavorable manufacturing variances (0.7percentage points).

 

Exclusive of licensing revenues, gross marginwas 42.9% for the quarter ended October 1, 2005 as compared with 48.6% for thesame period in 2004. For the first three quarters of 2005, gross margin,exclusive of licensing revenue, was 41.5% as compared with 46.6% for the sameperiod in 2004. We believe disclosure of gross margins without reference tolicensing revenues provides additional appropriate disclosure to allowcomparison of our product and service gross margins over time because there islittle, if any, cost of sales associated with our licensing revenues. Futurerevenues from licensing activities, if any, will be contingent upon the outcomeof current litigation (see “Legal Proceedings”), and upon existing and futurelicensing and royalty arrangements. The Company may not be successful ingenerating licensing revenues in the future and does not anticipate therecognition of additional licensing income during the remainder of 2005. Grossmargins have been, and will continue to be, negatively impacted by thediscontinuance of license revenue.

 

Our gross profit as a percentage of sales hasbeen and most likely will continue to be significantly affected by a variety offactors, including the introduction of new products, which typically havehigher manufacturing costs until manufacturing efficiencies are realized andwhich are typically discounted more than existing products until the productsgain market acceptance; the mix of products sold; the rate of capacityutilization; writedown of inventory and open purchase commitments; technologysupport and licensing revenues, which have little or no associated cost ofsales; product discounts, pricing and competition in our targeted markets;non-linearity of shipments during the quarter which can result in manufacturinginefficiencies; the percentage of international sales, which typically havelower gross margins than domestic sales principally due to higher field serviceand support costs; and start-up costs and inefficiencies associated with theimplementation of subcontracting arrangements.

 

**Operatingexpenses**

 

Research,development and engineering expenses were $6.0 million for the quarter endedOctober 1, 2005, as compared with $6.5 million for the comparable period in2004. The decrease was primarily due to reduced expenses associated with thedevelopment of our laser processing technologies. On a year-to-date basis,research, development and engineering expenses were $20.3 million, as comparedwith $18.9 million for the comparable period in 2004. This year-over-yearincrease in spending was primarily due to increased investment in thedevelopment of our laser processing technologies during the first half of 2005.

 

Selling, general, and administrative expenseswere $7.3 million for the quarter ended October 1, 2005, as compared with $7.4million for the comparable period in 2004. As a percentage of net sales,selling, general, and administrative expenses increased to 24.0% in the quarterended October 1, 2005 as compared to 22.9% in the third quarter of 2004,primarily as a result of a 6% decrease in revenue. The current quarter expensesincluded the impact of bad debt expense associated with a 

 

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customer bankruptcy filling ($0.3 million).On a year-to-date basis, selling, general, and administrative expenses were$23.0 million, as compared with $21.7 million for the comparable period in2004. For the first three quarters of 2005, selling, general, andadministrative expenses as a percentage of net sales was 26.4%, as comparedwith 26.6% for the same period in 2004. This increase, in terms of dollars, wasprimarily due to significantly increased legal costs related to our being aplaintiff in several patent infringement lawsuits in trial during 2005.

 

# **Interest and other income, net**

 

Interestand other income, net, which consists primarily of interest income, was $1.4million and $3.4 million for the third quarter and first nine months of 2005,respectively, as compared with $0.9 million and $2.7 million for the comparableperiods in 2004. The year-over-year increases were primarily attributable tohigher interest rates on our investments. We presently maintain an investmentportfolio with a weighted-average maturity of approximately 1.3 years. As aresult, changes in short-term interest rates have had, and will continue tohave, a significant impact on our interest income.

 

**Income taxexpenses**

 

For the three and nine months ended October1, 2005, we recorded an income tax expense of $0.8 million and $0.4 million,respectively, as compared to an income tax expense of $0.2 million and $0.0million for the comparable periods in 2004. The tax expense recognized in thecurrent period resulted from our full-year forecast of foreign income taxes andcertain federal and state taxes. The year-ago tax provision resulted from ourthen-forecasted effective tax rate of approximately 10% to 15% of pre-taxincome for the year ended December 31, 2004. In October 2004, the UnitedStates enacted The American Jobs Creation Act of 2004 (“the Act”). The Actprovides for a three year phase-out of current extraterritorial income tax (“ETI”)benefits and replaces ETI with a phased-in 9% domestic production activitydeduction that will not be fully effective until 2010. We do not currentlyrealize ETI tax benefits. This provision of the Act is not expected to have amaterial effect on our results of operations or financial position in the nearfuture. The Act also includes a deduction of 85% for certain foreign earningsthat are repatriated, as defined in the Act. We do not intend to repatriate anyof our foreign earnings during the effective period of this deduction under theAct.

 

Income tax estimates can be affected bywhether or not, and within which jurisdictions, future earnings will occur andhow and when cash is repatriated to the United States, combined with otheraspects of an overall income tax strategy. Additionally, taxing jurisdictionscould retroactively disagree with our tax treatment of certain items, and somehistorical transactions have income tax effects going forward. Accountingrules require these future effects to be evaluated using current laws,rules and regulations, each of which can change at any time and in anunpredictable manner. We believe we have adequately provided for any reasonablyforeseeable outcome related to these matters, and we do not anticipate anymaterial earnings impact from their ultimate resolutions.

 

**Outlook**

 

Although we believe that our served marketshave generally strengthened during the last twelve months, the anticipatedtiming of orders, shipments and customer acceptances usually requires us tofill a number of production slots in any given quarter in order to meet oursales targets. If we are unsuccessful in our efforts to secure those productionorders, or if existing production orders are delayed or cancelled, our resultsof operations will be materially adversely impacted. Accordingly, we may not beable to achieve or maintain our current or prior level of sales. We presentlyexpect that net sales for the quarter ending December 31, 2005 may be in arange of $30 million to $32 million. Because our net sales are subject to anumber of risks, including: risks associated with the introduction of our newlaser processing product line; delays in customer acceptances; intensecompetition in the capital equipment industry; uncertainty relating to thetiming and market acceptance of our products; and the condition of themacro-economy and the semiconductor industry, we may not exceed or maintain ourcurrent or prior level of net sales for any period in the future or meet ourcurrent expectation for the quarter ending December 31, 2005. Additionally, webelieve that the market acceptance and volume production of our advancedpackaging systems, laser processing systems, and our 100/1000 series family ofwafer steppers are of critical importance to our future financial results. AtOctober 1, 2005, these critical systems represented 90% of our backlog. To theextent that these products do not achieve or maintain significant sales due todifficulties involving manufacturing or engineering, the inability to reducethe current long manufacturing and customer acceptance cycles for theseproducts, competition, excess capacity in the semiconductor or nanotechnologydevice industries, or any other reason, our business, financial condition andresults of operations would be materially adversely affected.

 

We believe that gross margin for the fourthquarter of 2005 will be between 42% and 43%. The final gross margin achievedwill depend heavily upon sales volumes and the resulting product mix. Shouldour sales not reach the level expected, we may incur a higher risk of inventoryobsolescence and excess purchase commitments and lower utilization of ourmanufacturing infrastructure, which would materially adversely impact ourresults of operations. New products generally have lower gross 

 

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margins until there is widespread marketacceptance and until production and after-sales efficiencies can be achieved.Should significant market demand fail to develop for our laser processingsystems and our new advanced packaging offerings, our business, financialcondition and results of operations would be materially adversely affected. Inaddition, higher costs associated with extended manufacturing and customeracceptance periods on shipments of our new laser processing products have had,and will continue to have, an adverse impact on our gross margins.

 

We believe operating margin for the fourthquarter of 2005 may be in a range of breakeven to 2%. Finally, net income pershare may be in the range of $0.03 to $0.05 for the fourth quarter of 2005.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Netcash generated by operating activities was $5.5 million for the first ninemonths of 2005, as compared with net cash used in operating activities of $5.4million for the comparable period in 2004. Net cash generated by operatingactivities during the first nine months of 2005 was primarily attributable to adecrease in accounts receivable of $7.6 million, non-cash charges to income fordepreciation and amortization of $5.9 million and an increase in other currentliabilities of $2.0 million, partially offset by an increase in inventories of$5.5 million, the net loss of $3.7 million and a decrease of deferred licenseincome of $1.0 million. The increase in inventories during the first ninemonths of 2005 resulted primarily from laser processing systems shipped tocustomers pursuant to purchase orders containing product evaluation provisions.

 

We believe that because of the relativelylong manufacturing cycle of certain of our systems, particularly newerproducts, our inventories will continue to represent a significant portion ofworking capital. Currently, we are devoting significant resources to thedevelopment, introduction and commercialization of our laser processing systemand to the development of our next generation 1X lithography technologies.Additionally, we have purchased significant levels of inventories, and havemade commitments to purchase additional inventories, to support the currentproduction plan for our laser processing and next-generation lithographysystems. We currently intend to continue to incur significant operatingexpenses in the areas of research, development and engineering, manufacturingand selling, general and administrative costs in order to further develop,produce and support these new products. Additionally, gross profit margins,inventory and capital equipment levels will be adversely impacted in the futureby costs associated with the initial production of our laser processing systemand by our next-generation 1X wafer stepper platform. These costs include, butare not limited to: additional manufacturing overhead; cost of demonstrationand customer evaluation systems; ongoing research, development and engineeringcosts; additional technical, marketing and administrative personnel; and theestablishment of additional after-sales support organizations. If we are unableto achieve significantly increased net sales, or if our sales fall below expectations,our cash flow and operating results will be materially adversely affecteduntil, among other factors, costs and expenses can be reduced. Our failure toachieve our sales targets for these new products could result in significantadditional inventory write-offs and asset impairment charges, either of whichwould materially adversely impact our results of operations.

 

Duringthe first nine months of 2005, net cash used in investing activities was $15.4million, attributable to net purchases of short-term marketable securities of$10.3 million and capital expenditures of $5.0 million.

 

Netcash provided by financing activities was $0.8 million during the first ninemonths of 2005, attributable to $4.8 million of proceeds received from theissuance of common stock under our employee stock option plans, partiallyoffset by a net repayment of our notes payable of $4.0 million.

 

AtOctober 1, 2005, we had working capital of $171.2 million. Our principal sourceof liquidity at October 1, 2005 consisted of $148.4 million in cash, cashequivalents and short-term investments, net of outstanding borrowings under ourline of credit. In December 2004, we entered into a line of creditagreement with a brokerage firm replacing a similar arrangement that we hadwith a different firm. Under the terms of this agreement, we may borrow fundsat a cost equal to the current Federal funds open rate plus 100 basis points(approximately 4.75% as of October 1, 2005). Certain of our cash, cashequivalents and short-term investments secure borrowings outstanding under thisfacility. Funds are advanced to us under this facility in accordance withpre-determined advance rates based on the cash and securities held by us inthis brokerage account. This agreement has no set expiration date and there areno loan covenants. As of October 1, 2005, $3.9 million was outstanding underthis facility, with a related collateral requirement of approximately $5.1million of our cash, cash equivalents and short-term investments.

 

The development and manufacture of laserprocessing and new lithography systems and enhancements are highlycapital-intensive. In order to be competitive, we believe we must continue tomake significant expenditures for: inventories; facilities; capital equipment;sales, service, training and support capabilities; systems, procedures andcontrols; and expansion of operations and research and development, among manyother items. We expect that cash generated from operations and our cash, cashequivalents and short-term investments will be sufficient to meet our cashrequirements for at least the next twelve months. However, in the near-term, wemay continue to utilize existing and future lines of credit, and other sourcesof financing, in order to maintain our present levels of cash, cash equivalentsand short-term investments. Beyond the next twelve months, we may requireadditional equity or debt financing to address our working capital or capitalequipment needs.

 

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In addition, we may seek to raise equity ordebt capital at any time that we deem market conditions to be favorable.Additional financing, if needed, may not be available on reasonable terms, orat all.

 

On September 19, 2005, the Company’s Board ofDirectors authorized the repurchase of up to $30 million of its Common Stock inthe open market at then prevailing market prices during the period commencingSeptember 19, 2005 through September 30, 2007. The repurchase of stock couldhave a significant impact on the Company’s cash position.

 

We may in the future pursue additionalacquisitions of complementary product lines, technologies or businesses. Futureacquisitions may result in potentially dilutive issuances of equity securities,the incurrence of debt and contingent liabilities and amortization expenses andimpairment charges related to goodwill and other intangible assets, which couldmaterially adversely affect our financial condition and results of operations.In addition, acquisitions involve numerous risks, including difficulties in theassimilation of the operations, technologies, personnel and products of theacquired companies; the diversion of management’s attention from other businessconcerns; risks of entering markets in which we have limited or no directexperience; and the potential loss of key employees of the acquired company. Inthe event we acquire product lines, technologies or businesses which do notcomplement our business, or which otherwise do not enhance our sales oroperating results, we may incur substantial write-offs and higher recurringoperating costs, which could have a material adverse effect on our business,financial condition and results of operations. In the event that any suchacquisition does occur, there can be no assurance as to the effect thereof onour business or operating results.

 

**Foreign Currency**

 

As part of our overall strategy to manage thelevel of exposure to the risk of foreign currency exchange rate fluctuations,we attempt to hedge most of our Japanese yen denominated foreign currencyexposures. We use foreign currency forward contracts to hedge the risk thatunremitted Japanese yen denominated receipts from customers, for actual orforecasted sales of equipment after receipt of customer orders, may beadversely affected by changes in foreign currency exchange rates. Afterrecording revenue, we use various mechanisms, such as foreign currency forwardexchange contracts and natural hedges, to offset substantial portions of thepotential gains or losses associated with our Japanese yen denominated assetsand liabilities due to exchange rate fluctuations. At October 1, 2005, we hadtaken action to hedge approximately 100% of these Japanese yen denominatedexposures. In addition to natural hedges resulting from having both assets andliabilities denominated in Japanese yen, we enter into foreign currency forwardcontracts that generally have maturities of nine months or less. We often closeforeign currency forward contracts by entering into an offsetting contract. AtOctober 1, 2005, we had contracts for the sale of $8.2 million of foreigncurrencies at fixed rates of exchange.

 

**ADDITIONAL RISK FACTORS**

 

*Inaddition to risks described in the foregoing discussions, the following risksapply to our business and us:*

 

**Developmentof New Product Lines; Expansion of Operations  **Currently, weare devoting significant resources to the development, introduction andcommercialization of our laser processing systems and our next-generation 1Xlithography platform. We intend to continue these efforts during 2005 and 2006,and will continue to incur significant operating expenses in the areas of:research, development and engineering; manufacturing; and selling, general andadministrative costs in order to further develop, produce and support these newproducts. Additionally, gross profit and operating margins may be furtheradversely impacted in the future by costs associated with the initialproduction of our laser processing systems and by our next-generation platformfor our 1X-lithography systems. Introduction of new products generally involveshigher installation costs and product performance uncertainties that coulddelay customer acceptance of our systems, resulting in a delay in recognizingrevenue associated with those systems and a reduction in gross margins. Thesecosts include, but are not limited to, additional manufacturing overhead,additional inventory write-offs, costs of demonstration systems and facilities,and costs associated with the establishment of additional after-sales supportorganizations. Additionally, operating expenses may increase, relative tosales, as a result of adding additional marketing and administrative personnel,among other costs, to support our new products. If we are unable to achievesignificantly increased net sales or if our sales fall below expectations, ouroperating results will be materially adversely affected.

 

Our ability to develop and commercialize ourlaser processing technologies is highly dependent on partnering withsemiconductor companies to develop the anneal process. Our ability to delivertimely solutions is also limited by wafer turnaround at potential customers’fabrication facilities.

 

**LengthySales Cycles  **Sales of our systems depend, in significantpart, upon the decision of a prospective customer to increase manufacturingcapacity or to restructure current manufacturing facilities, either of whichtypically involves a significant commitment of capital. Many of our customersin the past have cancelled the development of new manufacturing facilities andhave substantially reduced their capital equipment budgets. In view of thesignificant investment involved in a system purchase, we have experienced andmay continue to experience delays following initial qualification of our systemsas a result of delays in a customer’s approval process. Additionally, we arepresently receiving orders for systems that have 

 

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lengthy delivery schedules, which may be dueto longer production lead times or a result of customers’ capacity schedulingrequirements. For these and other reasons, our systems typically have a lengthysales cycle during which we may expend substantial funds and management effortin securing a sale. Lengthy sales cycles subject us to a number of significantrisks, including inventory obsolescence and fluctuations in operating results,over which we have little or no control. In order to maintain or exceed ourpresent level of net sales, we are dependent upon obtaining orders for systemsthat will ship and be accepted in the current period. We may not be able toobtain those orders.

 

**IntellectualProperty Rights  **Although we attempt to protect ourintellectual property rights through patents, copyrights, trade secrets and othermeasures, we believe that our success will depend more upon the innovation,technological expertise and marketing abilities of our employees. Nevertheless,we have a policy of seeking patents when appropriate on inventions resultingfrom our ongoing research and development and manufacturing activities. We own103 United States and foreign patents, which expire on dates ranging fromApril 2006 to April 2023 and have 105 United States and foreignpatent applications pending. In addition, we have various registered trademarksand copyright registrations covering mainly software programs used in theoperation of our systems. We also rely upon trade secret protection for ourconfidential and proprietary information. We may not be able to protect ourtechnology adequately and competitors may be able to develop similar technologyindependently. Our pending patent applications may not be issued or U.S. orforeign intellectual property laws may not protect our intellectual propertyrights. In addition, litigation may be necessary to enforce our patents,copyrights or other intellectual property rights, to protect our trade secrets,to determine the validity and scope of the proprietary rights of others or todefend against claims of infringement. Such litigation has resulted in, and inthe future could result in, substantial costs and diversion of resources andcould have a material adverse effect on our business, financial condition andresults of operations, regardless of the outcome of the litigation. Patents issuedto us may be challenged, invalidated or circumvented and the rights grantedthereunder may not provide competitive advantages to us. Furthermore, othersmay independently develop similar technology or products, or, if patents areissued to us, design around the patents issued to us. Invalidation of ourpatents related to those technologies could allow our competitors to moreeffectively compete against us, which could result in less revenue for us.

 

On February 29, 2000, we filed lawsuitsasserting patent infringement and related claims against Nikon, Canon, and ASMLin the U.S. District Court for the Eastern District of Virginia. InApril 2000, we reached a settlement with Nikon, and inSeptember 2001, we reached a settlement with Canon. In the patent litigationagainst ASML, a jury trial was conducted during the three-month period endedJuly 2, 2005. The jury reached a verdict that the patent was infringed, butthat the asserted claims of the patent were invalid. We have filed a post-trialmotion for a new trial and for judgment as a matter of law in our favor. ASMLhas also filed a motion for judgment as a matter of law. In addition, ASML hasrequested that the court award costs in the amount of $450,000 and has reservedthe right to seek attorneys’ fees. We have recorded an amount for court costsin our financial statements, but we believe the possible claim for attorneys’fees would be without merit and we plan to vigorously defend ourselves againstsuch a claim.

 

On July 11, 2003, we filed a lawsuit assertinginfringement of certain claims related to U.S. patent No. 5,621,813 in the U.S.District Court in and for the Northern District of California. On May 17, 2005,the court found the subject “patent-in-suit” to be invalid. We have appealedthis decision and that appeal is pending. The defendant subsequently brought amotion for reimbursement of its attorneys’ fees and costs in a total assertedamount of approximately $2 million. We opposed this motion, and on October 12,2005, the District Court denied the defendant’s request for attorneys’ fees inits entirety. On November 3, 2005, the defendant filed a notice of appeal withrespect to the court’s ruling on its motion for attorneys’ fees.

 

We are involved in other lawsuits and legalactions regarding infringement claims, and we have from time to time beennotified of claims that we may be infringing intellectual property rightspossessed by third parties. We believe that the outcome of these matters willnot be material to our business or financial condition, though currently we arespending significant resources on litigation matters, in particular inconnection with the patent infringement lawsuits described above. Some of ourcustomers have received notices of infringement from Technivision Corporationand the Lemelson Medical, Education and Research Foundation, LimitedPartnership (“Lemelson”) alleging that the manufacture of certain semiconductorproducts and/or the equipment used to manufacture those semiconductor productsinfringes certain issued patents regarding machine vision technology. We havebeen notified by certain of these customers that we may be obligated to defendor settle claims if our products infringe any such patents and, in the event itis subsequently determined that the customer infringes any of such patents,they intend to seek reimbursement from us for damages and other expensesresulting from this matter. We believe that our machine vision technology doesnot infringe the patent rights of other parties.

 

Infringement claims by third parties orclaims for indemnification resulting from infringement claims may be assertedin the future and such assertions could materially adversely affect ourbusiness, financial condition and results of operations, regardless of theoutcome of any litigation. With respect to any such future claims, we may seekto obtain a license under the third party’s intellectual property rights.However, a license may not be available on reasonable terms or at all. We could

 

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decide, in the alternative, to resort tolitigation to challenge such claims. Such challenges could be expensive andtime consuming and could materially adversely affect our business, financialcondition and results of operations, regardless of the outcome of anylitigation.

 

**Cyclicalityof Semiconductor, Semiconductor Packaging and Nanotechnology Industries  **Our business depends in significant part upon capital expenditures by******manufacturers ofsemiconductors, bumped semiconductors and nanotechnology components, includingthin film head magnetic recording devices, which in turn depend upon thecurrent and anticipated market demand for such devices and products utilizingsuch devices. The semiconductor industry historically has been highly cyclicaland has experienced recurring periods of oversupply. This has, from time totime, resulted in significantly reduced demand for capital equipment includingthe systems manufactured and marketed by us. We believe that markets for newgenerations of semiconductors and semiconductor packaging will also be subjectto similar fluctuations. Our business and operating results would be materiallyadversely affected by downturns or slowdowns in the semiconductor packagingmarket or by loss of market share. Accordingly, we may not be able to achieveor maintain our current or prior level of sales. We attempt to mitigate therisk of cyclicality by participating in multiple markets includingsemiconductor, semiconductor packaging, thin film head and other nanotechnologysectors, as well as diversifying into new markets such as laser-based annealingfor implant activation and other applications. Despite such efforts, when oneor more of such markets experiences a downturn or a situation of excesscapacity, our net sales and operating results are materially adverselyaffected.

 

**HighlyCompetitive Industry**   The capital equipment industry in which weoperate is intensely competitive. A substantial investment is required toinstall and integrate capital equipment into a semiconductor, semiconductorpackaging or nanotechnology device production line. We believe that once adevice manufacturer or packaging subcontractor has selected a particular vendor’scapital equipment, the manufacturer generally relies upon that equipment forthe specific production line application and, to the extent possible,subsequent generations of similar products. Accordingly, it is difficult toachieve significant sales to a particular customer once another vendor’scapital equipment has been selected.

 

We experience competition in advancedpackaging from various proximity aligner companies such as Suss Microtec AG(Suss Microtec) and projection companies such as Ushio, Inc. (Ushio) andTamarack Scientific Co., Inc. (Tamarack). In nanotechnology, we experiencecompetition from proximity aligner companies, such as Suss Microtec, as well asother stepper manufacturers who have developed or are developing toolsspecifically designed for nanotechnology applications. We expect ourcompetitors to continue to improve the performance of their current productsand to introduce new products with improved price and performancecharacteristics. This could cause a decline in sales or loss of marketacceptance of our steppers in our served markets, and thereby materiallyadversely affect our business, financial condition and results of operations.Enhancements to, or future generations of, competing products may be developedthat offer superior cost of ownership and technical performance features.

 

With respect to our laser annealingtechnologies, marketed under the LSA100 product name, the primary competitioncomes from companies such as Applied Materials, Inc., MattsonTechnology, Inc., and Axcelis Technologies, Inc. that offer productsutilizing rapid thermal processing, or RTP, which is the current prevailingmanufacturing technology. RTP does not prevent semiconductor devicemanufacturers from scaling the lateral dimensions of their transistors toobtain improved performance, but diffusion resulting from the time scalesassociated with RTP limits the vertical dimension of the junctions. Fasterannealing times result in shallower and more abrupt junctions and fastertransistors. We believe our annealing technology results in faster transistorsfor a given size. We believe that RTP manufacturers recognize the need toreduce thermal cycle times and are working toward this goal. In July 2000,we licensed certain rights to our then existing laser processing technology,with reservations, to a competing manufacturer of semiconductor equipment. Wepresently anticipate that this company will offer laser-annealing tools to thesemiconductor industry that will compete with our offerings.

 

Another potential advanced annealing solutionutilizes flash lamp annealing technology, or FLA. Several companies havepublished papers on annealing tools that incorporate flash lamp technology inorder to reduce annealing times and increase anneal temperatures. Developers ofFLA technology claim to have overcome annealing difficulties at the 65nm node.This technique, which employs xenon flash lamps, has shown improvements overRTP in junction depth and sheet resistance, but we believe FLA will suffer frompattern-related non-uniformities. Our proprietary laser processing solution hasbeen specifically developed to provide junction annealing on near-instantaneoustime-scales, while maintaining low sheet resistance. Laser spike annealing, thefirst implementation of laser processing, activates dopants in themicrosecond-to-millisecond time frame without melting. Research indicates that,at temperatures just below the melting point of silicon, time durations in themicrosecond to millisecond range, are required to achieve full activation, anddopant diffusion is minimal.

 

Additionally, competition to our laserprocessing products may come from other laser annealing tools, including thosepresently being used by the flat panel display industry to re-crystallizesilicon. Manufacturers of these tools may try to extend the use of theirtechnologies to semiconductor device applications.

 

We believe that in order to be competitive,we will need to continue to invest significant financial resources in newproduct development, new features and enhancements to existing products, theintroduction of new generation stepper systems in our 

 

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served markets on a timely basis, andmaintaining customer service and support centers worldwide. In marketing ourproducts, we may also face competition from vendors employing othertechnologies. In addition, increased competitive pressure has led tointensified price-based competition in certain of our markets, resulting inlower prices and margins. Should these competitive trends continue, ourbusiness, financial condition and operating results may be materially adverselyaffected.

 

**Customer and Market Concentrations  **Historically, we have sold a substantial portion of our systems to alimited number of customers. In the third quarter and first three quarters of2005, our top five customers accounted for 67% and 51% of our total systemssales, respectively. In 2004, Intel Corporation accounted for 10% of our netsales. We expect that sales to a relatively few customers will continue toaccount for a high percentage of our net sales in the foreseeable future andbelieve that our financial results depend in significant part upon the successof these major customers and our ability to meet their future capital equipmentneeds. Although the composition of the group comprising our largest customersmay vary from period to period, the loss of a significant customer or anyreduction in orders by a significant customer, including reductions due tomarket, economic or competitive conditions in the semiconductor, semiconductor packagingor nanotechnology industries or in the industries that manufacture productsutilizing integrated circuits, thin film heads or other nanotechnologycomponents, would likely have a material adverse effect on our business,financial condition and results of operations. Our ability to maintain orincrease our sales in the future depends, in part, on our ability to obtainorders from new customers as well as the financial condition and success of ourexisting customers, the semiconductor and nanotechnology industries and theeconomy in general.

 

In addition to the business risks associatedwith dependence on a few major customers, these significant customerconcentrations have in the past resulted in significant concentrations ofaccounts receivable. These significant and concentrated receivables expose usto additional risks, including the risk of default by one or more customersrepresenting a significant portion of our total receivables. If we wererequired to take additional accounts receivable reserves, our business,financial condition and results of operations would be materially adverselyaffected.

 

Ona market application basis, sales to the semiconductor industry, primarily foradvanced packaging applications, accounted for approximately 76% and 68% ofsystem revenue for the first three quarters of 2005 and 2004, respectively.During the first three quarters of 2005 and 2004, approximately 24% and 32%,respectively, of our systems revenue was derived from sales to nanotechnologymanufacturers, including micro systems, thin film head and optical devicemanufacturers. Our future operating results and financial condition would bematerially adversely impacted by a downturn in any of these market segments, orby loss of market share in any of these segments.

 

Agrowing portion of our backlog of system orders is comprised of laser spikeannealing tools. To date, we have limited experience with this technology andwe are presently in the installation and customer acceptance cycles for severalbeta systems. Should significant demand not materialize, due to technical,production, market, or other factors, the Company’s business, financialposition and results of operations would be materially adversely impacted.

 

**RapidTechnological Change; Importance of Timely Product Introduction  **The semiconductor and nanotechnology manufacturing industries aresubject to rapid technological change and new product introductions andenhancements. Our ability to be competitive in these and other markets willdepend, in part, upon our ability to develop new and enhanced systems andrelated software tools, and to introduce these systems and related softwaretools at competitive prices and on a timely and cost-effective basis to enablecustomers to integrate them into their operations either prior to or as theybegin volume product manufacturing. We will also be required to enhance theperformance of our existing systems and related software tools. Our success indeveloping new and enhanced systems and related software tools depends upon avariety of factors, including product selection, timely and efficientcompletion of product design, timely and efficient implementation ofmanufacturing and assembly processes, product performance in the field andeffective sales and marketing. Because new product development commitments mustbe made well in advance of sales, new product decisions must anticipate bothfuture demand and the technology that will be available to supply that demand.We may not be successful in selecting, developing, manufacturing or marketingnew products and related software tools or enhancing our existing products andrelated software tools. Any such failure would materially adversely affect ourbusiness, financial condition and results of operations.

 

Because of the large number of components inour systems, significant delays can occur between a system’s introduction andthe commencement by Ultratech of volume production of such systems. We haveexperienced delays from time to time in the introduction of and technical andmanufacturing difficulties with, certain of our systems and enhancements andrelated software features and options, and may experience delays and technicaland manufacturing difficulties in future introductions or volume production ofnew systems or enhancements and related software features and options.

 

We may encounter additional technical,manufacturing or other difficulties that could further delay futureintroductions or volume production of systems or enhancements. Our inability tocomplete the development or meet the technical specifications of any of oursystems or enhancements and related software tools, or our inability tomanufacture and ship these systems or enhancements and related software toolsin volume and in time to meet the requirements for manufacturing 

 

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the future generation of semiconductor ornanotechnology devices, would materially adversely affect our business,financial condition and results of operations. In addition, we may incursubstantial unanticipated costs to ensure the functionality and reliability ofour products early in the products’ life cycles. If new products havereliability or quality problems, reduced orders or higher manufacturing costs,delays in customer acceptance, revenue recognition and collecting accountsreceivable and additional service and warranty expenses may result. Any of suchevents may materially adversely affect our business, financial condition andresults of operations.

 

**InternationalSales  **International net sales accounted forapproximately 73% and 64% of total net sales for the first three quarters of2005 and 2004, respectively. ** **International net sales accountedfor approximately 65% and 61% of total net sales for the years 2004 and 2003,respectively. We anticipate that international sales, which typically havelower gross margins than domestic sales, principally due to increasedcompetition and higher field service and support costs, will continue toaccount for a significant portion of total net sales. As a result, asignificant portion of our net sales will continue to be subject to certainrisks, including unexpected changes in regulatory requirements; difficulty insatisfying existing regulatory requirements; exchange rate fluctuations;tariffs and other barriers; political and economic instability; difficulties inaccounts receivable collections; natural disasters; difficulties in staffingand managing foreign subsidiary and branch operations; and potentially adversetax consequences.

 

Althoughwe generally transact our international sales in U.S. dollars, internationalsales expose us to a number of additional risk factors, including fluctuationsin the value of local currencies relative to the U.S. dollar, which, in turn,impact the relative cost of ownership of our products and may further impactthe purchasing ability of our international customers. However, in Japan, wehave direct sales operations and orders are often denominated in Japanese yen.This may subject us to a higher degree of risk from currency fluctuations. Weattempt to mitigate this exposure through the use of foreign currency forwardexchange contracts. We are also subject to the risks associated with theimposition of legislation and regulations relating to the import or export ofsemiconductors and nanotechnology products. We cannot predict whether theUnited States or any other country will implement changes to quotas, duties,taxes or other charges or restrictions upon the importation or exportation ofour products. These factors, or the adoption of restrictive policies, may havea material adverse effect on our business, financial condition and results ofoperations.

 

**Changes toFinancial Accounting Standards May Affect the Company’s Reported Results ofOperations  **We prepare our financial statements inconformity with accounting principles generally accepted in the United States,or U.S. GAAP. These principles are subject to interpretation by the FinancialAccounting Standards Board (FASB), the American Institute of Certified PublicAccountants (AICPA), the Securities and Exchange Commission (SEC) and variousbodies formed to interpret and create appropriate accounting policies. A changein those policies can have a significant effect on our reported results and mayaffect our reporting of transactions completed before a change is announced.

 

Accountingpolicies affecting many other aspects of our business, includingrules relating to revenue recognition, off-balance sheet transactions,employee stock options, restructurings, asset disposals, intangible assets,derivative and other financial instruments, and in-process research anddevelopment charges, have recently been revised or are under review. Changes tothose rules or the questioning of how we interpret or implement thoserules may have a material adverse effect on our reported financial resultsor on the way we conduct business. In addition, our preparation of financialstatements in accordance with U.S. GAAP requires that we make estimates and assumptionsthat affect the recorded amounts of assets and liabilities, disclosure of thoseassets and liabilities at the date of the financial statements and the recordedamounts of expenses during the reporting period. A change in the facts andcircumstances surrounding those estimates could result in a change to ourestimates and could impact our future operating results.

 

**Sole orLimited Sources of Supply  **Our manufacturing activities consist ofassembling and testing components and subassemblies, which are then integratedinto finished systems. We rely on a limited number of outside suppliers andsubcontractors to manufacture certain components and subassemblies. We orderone of the most critical components of our technology, the glass for our 1Xlenses, from external suppliers. We design the 1X lenses and provide the lensspecifications and the glass to other suppliers, who then grind and polish thelens elements. We then assemble and test the optical 1X lenses.

 

We procure some of our other critical systems’components, subassemblies and services from single outside suppliers or alimited group of outside suppliers in order to ensure overall quality andtimeliness of delivery. Many of these components and subassemblies havesignificant production lead times. To date, we have been able to obtainadequate services and supplies of components and subassemblies for our systemsin a timely manner. However, disruption or termination of certain of thesesources could have a significant adverse impact on our ability to manufactureour systems. This, in turn, would have a material adverse effect on ourbusiness, financial condition and results of operations. Our reliance on a solesupplier or a limited group of suppliers and our reliance on subcontractorsinvolve several risks, including a potential inability to obtain an adequatesupply of required components due to the suppliers’ failure or inability toprovide such components in a timely manner, or at all, and reduced control overpricing and timely delivery of components. Although the timeliness, yield and 

 

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quality of deliveries to date from oursubcontractors have been acceptable, manufacture of certain of these componentsand subassemblies is an extremely complex process, and long lead-times arerequired. Any inability to obtain adequate deliveries or any other circumstancethat would require us to seek alternative sources of supply or to manufacturesuch components internally could delay our ability to ship our products, whichcould damage relationships with current and prospective customers and have amaterial adverse effect on our business, financial condition and results ofoperations.

 

**Dependenceon Key Personnel  **Our future operating results depend, insignificant part, upon the continued contributions of key personnel, many ofwhom would be difficult to replace. We have entered into employment agreementswith only a limited number of our employees, including our Chief ExecutiveOfficer, Chief Operating Officer and Chief Financial Officer. All of ouremployees are employed “at will.” Some of these agreements contain vestingacceleration and severance payment provisions that could result in significantcosts or charges to us should the employee be terminated without cause, die orhave a disability. We do not maintain any life insurance on any of our keypeople. The loss of key personnel could have a material adverse effect on ourbusiness, financial condition and results of operations. In addition, ourfuture operating results depend in significant part upon our ability to attractand retain other qualified management, manufacturing, technical, sales andsupport personnel for our operations. There are only a limited number ofpersons with the requisite skills to serve in these positions and it may becomeincreasingly difficult for us to hire such personnel over time. At times,competition for such personnel has been intense, particularly in the SanFrancisco Bay Area where we maintain our headquarters and principal operations,and there can be no assurance that we will be successful in attracting orretaining such personnel. The failure to attract or retain such persons wouldmaterially adversely affect our business, financial condition and results ofoperations.

 

**Volatilityof Stock Price and Dilutive Impact of Employee Stock Options  **We believe that factors such as announcements of developments relatedto our business, fluctuations in our operating results, a shortfall in revenueor earnings, changes in analysts’ expectations, general conditions in thesemiconductor and nanotechnology industries or the worldwide or regionaleconomies, sales of our securities into the marketplace, an outbreak orescalation of hostilities, announcements of technological innovations or newproducts or enhancements by us or our competitors, developments in patents orother intellectual property rights and developments in our relationships withour customers and suppliers could cause the price of our common stock tofluctuate, perhaps substantially. The market price of our common stock hasfluctuated significantly in the past and we expect it to continue to experiencesignificant fluctuations in the future, including fluctuations that may beunrelated to our performance.

 

Asof October 1, 2005, we had options to purchase approximately 6.4 million sharesof our common stock outstanding. Among other determinants, the market price ofour stock has a major bearing on the number of shares subject to outstandingstock options that are included in the weighted-average shares used indetermining our net income (loss) per share. During periods of extremevolatility, the impact of higher stock prices can have a materially dilutiveeffect on our net income (loss) per share.****Additionally,options are excluded from the calculation of net income (loss) per share whenwe have a net loss or when the exercise price of the stock option is greaterthan the average market price of our common stock, as the impact of the stockoptions would be anti-dilutive.

 

**Effects ofCertain Anti-Takeover Provisions  **Certain provisions of our Certificate ofIncorporation, equity incentive plans, shareholder rights plan, licensingagreements, Bylaws and Delaware law may discourage certain transactionsinvolving a change in control of our company. In addition to the foregoing, ourclassified board of directors, the shareholdings of our officers, directors andpersons or entities that may be deemed affiliates and the ability of the Boardof Directors to issue “blank check” preferred stock without further stockholderapproval could have the effect of delaying, deferring or preventing a change incontrol of Ultratech and may adversely affect the voting and other rights ofholders of common stock.

 

**Changes in Securities Laws and RegulationsHave Increased Our Costs****  **The Sarbanes-Oxley Act of 2002 requiredchanges in our corporate governance, public disclosure and compliancepractices. The number of rules and regulations applicable to us hasincreased, and will continue to increase, our legal and financial compliance costs,and has made some activities more difficult, such as by requiring stockholderapproval of new option plans. In addition, we have incurred and expect tocontinue to incur significant costs in connection with compliance with Section 404of the Sarbanes-Oxley Act regarding internal control over financial reporting.We also expect these developments to make it more difficult and more expensiveto obtain director and officer liability insurance, and we may be required toaccept reduced coverage or incur substantially higher costs to obtain coverage.These developments could make it more difficult for us to attract and retainqualified members of our board of directors, particularly to serve on our auditcommittee, and qualified executive officers. In addition, in connection withour Section 404 certification process, we may identify from time to timedeficiencies in our internal control over financial reporting. Any materialweakness or deficiency in our internal control over financial reporting couldmaterially and negatively impact our reported financial results and the marketprice of our stock could significantly decline. Additionally, adverse publicityrelated to the disclosure of a material weakness or deficiency in internalcontrol over financial reporting could have a negative impact on ourreputation, business and stock price.

 

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**CaliforniaManufacturing Location  **We performall of our manufacturing activities (final assembly, system testing and certainsubassembly activities) in clean room environments totaling approximately26,000 square feet located in San Jose, California. Performing manufacturingoperations in California exposes us to a higher risk of natural disasters,including earthquakes. In addition, in the past California has experiencedpower shortages, which have interrupted our operations. Such shortages couldoccur in the future and could again interrupt our operations resulting inproduct shipment delays, increased costs and other problems, any of which couldhave a material adverse effect on our business, customer relationships andresults of operations. We are not insured against natural disasters and powershortages and the occurrence of such an event could have a material adverse impactour results of operations.

 

**EnvironmentalRegulations  **We aresubject to a variety of governmental regulations relating to the use, storage,discharge, handling, emission, generation, manufacture and disposal of toxic orother hazardous substances. We believe that we are currently in compliance inall material respects with such regulations and that we have obtained allnecessary environmental permits to conduct our business. Nevertheless, thefailure to comply with current or future regulations could result insubstantial fines being imposed on us, suspension of production, alteration ofthe manufacturing process or cessation of operations. Such regulations couldrequire us to acquire expensive remediation equipment or to incur substantialexpenses to comply with environmental regulations. Any failure by us to controlthe use, disposal or storage of, or adequately restrict the discharge of,hazardous or toxic substances could subject us to significant liabilities.

 

**Terrorist Attacks and Threats, and Government Responses Thereto, May ****Negatively Impact Our Operations, Revenues, Costs and Stock Price  **Terroristattacks in the United States and elsewhere, government responses thereto, andmilitary actions in Iraq, Afghanistan and elsewhere, may disrupt our operationsor those of our customers and suppliers and may affect the availability ofmaterials needed to manufacture our products or the means to transport thosematerials to manufacturing facilities and finished products to customers. Inaddition, any of these events could increase volatility in the United Statesand world financial markets which may depress the price of our common stock andmay limit the capital resources available to us or our customers or suppliers,which could result in decreased orders from customers, less favorable financingterms from suppliers, and scarcity or increased costs of materials andcomponents of our products. Additionally, terrorist attacks on Ultratech itselfmay significantly disrupt our ability to conduct our business. Any of theseoccurrences could have a significant impact on our operating results, revenuesand costs and may result in increased volatility of the market price of ourcommon stock.

 

**Information Available on Company Web-site**

 

Ultratech’s web-site is located at *www.ultratech.com*. We make available, free of charge,through our web-site, our annual report on Form 10-K, quarterly reports onForm 10-Q and current reports on Form 8-K (and amendments to thosereports), as soon as reasonably practicable after such reports are filedelectronically with the SEC. We have adopted a Code of Ethics for our principalexecutive officer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions. We have posted this Codeof Ethics on our web-site. Any future amendments to this Code will also beposted on our web-site.

 

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**Item 3.  Quantitative and Qualitative Disclosures about Market Risk**

 

Reference is made to Part II, Item 7A, “Quantitative andQualitative Disclosures About Market Risk” in our Annual Report on Form 10-Kfor the year ended December 31, 2004 and to the subheading “DerivativeInstruments and Hedging” in Item 8, “Financial Statements and SupplementaryData”, under the heading “Notes to Consolidated Financial Statements” of ourAnnual Report on Form 10-K for the year ended December 31, 2004.

 

**Interest Rate Risk**

 

Our exposure to market risk due to potentialchanges in interest rates, relates primarily to our investment portfolio, whichconsisted primarily of fixed interest rate instruments as of October 1,2005. We maintain an investment policy designed to ensure the safety andpreservation of our invested funds by limiting market risk and the risk ofdefault.

 

Certain of our cash, cash equivalents andshort-term investments serve as collateral for a line of credit we maintainwith a brokerage firm. The line of credit is used for liquidity purposes,mitigating the need to liquidate investments in order to meet our currentoperating cash requirements.

 

**Foreign Currency Risk Management**

 

The majority of our revenue, expense andcapital purchasing activities are transacted in U.S. dollars. However, we doenter into these transactions in other currencies, primarily Japanese yen. Toprotect against reductions in value and the volatility of future cash flowscaused by changes in currency exchange rates we have established transactionand balance sheet hedging programs. We use foreign currency forward contractsto hedge the risk that unremitted Japanese yen denominated receipts fromcustomers for actual or forecasted sales of equipment after receipt of customerorders may be adversely affected by changes in foreign currency exchange rates.After recording revenue, we use various mechanisms, such as foreign currencyforward exchange contracts and natural hedges, to offset substantial portionsof the potential gains or losses associated with our Japanese yen denominatedassets and liabilities due to exchange rate fluctuations. At October 1,2005, we had taken action to hedge approximately 100% of these Japanese yendenominated exposures. In addition to natural hedges resulting from having bothassets and liabilities denominated in Japanese yen, we enter into foreigncurrency forward contracts that generally have maturities of nine months orless. We often close foreign currency forward contracts by entering into anoffsetting contract. At October 1, 2005, we had contracts for the sale of$8.2 million of Japanese yen at fixed rates of exchange. Our hedging programsreduce, but do not always entirely eliminate, the impact of currency movements.

 

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**Item 4.   Controls andProcedures**

 

We conducted an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of theend of the period covered by this report (the “Evaluation Date”). Based uponthe evaluation, our principal executive officer and principal financial officerconcluded that as of the Evaluation Date our disclosure controls and procedureswere effective to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

Disclosure controls and procedures arecontrols and other procedures that are designed to ensure that informationrequired to be disclosed in our reports filed or submitted under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is accumulated and communicated to management to allow timely decisionsregarding required disclosure. In designing and evaluating the disclosurecontrols and procedures, our management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives. Management isfurther required to apply judgment in evaluating the cost-benefit relationshipof possible controls and procedures.

 

**Changes in Internal Control Over FinancialReporting**

 

There were no changes in our internal controlover financial reporting during the quarter ended October 1, 2005 thathave materially affected, or are reasonably likely to materially affect ourinternal control over financial reporting.

 

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| **PART II:** | ** ** | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** ** |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** |
| **Item 1.**       | ** ** | **Legal Proceedings.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** ** |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** |
|              |       | On February 29, 2000, we filed  lawsuits asserting patent infringement and related claims against Nikon,  Canon, and ASML in the U.S. District Court for the Eastern District of  Virginia. In April 2000, we reached a settlement with Nikon, and in  September 2001, we reached a settlement with Canon. In the patent  litigation against ASML, a jury trial was conducted during the three-month  period ended July 2, 2005. The jury reached a verdict that the patent  was infringed, but that the asserted claims of the patent were invalid. We  have filed a post-trial motion for a new trial and for judgment as a matter  of law in our favor. ASML has also filed a motion for judgment as a matter of  law. In addition, ASML has requested that the court award costs in the amount  of $450,000 and has reserved the right to seek attorneys’ fees. We have  recorded an amount for court costs in our financial statements, but we  believe the possible claim for attorneys’ fees would be without merit and we  plan to vigorously defend ourselves against such a claim. | ** ** | ** ** |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** ** |
| **Item 2.**       | ** ** | **Unregistered Sales of Equity Securities and  Use of Proceeds**.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | ** ** |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** |
|              |       | On August 24, 2005, we issued 1,500  shares of our common stock in an unregistered, private placement under  Section 4(2) of the Securities Act of 1933 to Semiconductor  Equipment and Materials International (SEMI), a non-profit global trade  organization, to support their efforts to educate youth interested in science  and math about career opportunities in the semiconductor industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | ** ** |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** ** |
| **Item 3.**       | ** ** | **Defaults upon Senior Securities.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | None.      |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** |
| **Item 4.**       | ** ** | **Submission of Matters to a Vote of Security  Holders.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** ** |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** |
| ** **        | ** ** | The  following proposals were voted upon by the Company’s stockholders at the  Company’s Annual Stockholders’ Meeting held on July 19, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** ** |
| ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** |
| ** **        | ** ** | 1.     The following persons  were elected as directors of the Company to serve for a term ending upon the  Annual Stockholders’ Meeting indicated beside their respective names and  until their successors are elected and qualified:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | ** ** |

 
| ** **                | ** ** | **Terms Ending Upon the  Annual Stockholders’ Meeting** | ** ** | **Votes for** | ** ** | **Votes withheld** | ** ** |
|---------------------------|------------|--------------------------------------------------------------|------------|---------------|------------|--------------------|------------|
| Thomas D.  George         |       | 2007                                                         |       | 22,013,187    |       | 604,248            |       |
| Dennis R.  Raney          |       | 2007                                                         |       | 22,517,962    |       | 99,473             |       |
| Vincent F.  Sollitto, Jr. |       | 2007                                                         |       | 22,502,638    |       | 114,797            |       |

 
| ** **  | ** ** | The Company’s board of directors consists  of seven members being Arthur W.   Zafiropoulo, Joel F. Gemunder, Nicholas Konidaris, Rick Timmins,  Thomas D. George, Dennis R. Raney and Vincent F. Sollitto, Jr.                                                                                             |       |       |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                           |       |       |
| ** **  | ** ** | 2.     A proposal to ratify the  appointment of Ernst & Young LLP as the Company’s independent registered  public accounting firm for the fiscal year ending December 31, 2005 was  approved by the vote of 22,565,320 shares for; 36,145 shares against; and  15,970 shares abstained. |       |       |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                           |       |       |
| **Item 5.** | ** ** | **Other Information.**                                                                                                                                                                                                                                                                                               |       | None       |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                           | ** ** | ** ** |
| **Item 6**  | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                         | ** ** | ** ** |

 
|   | 31.1 |   | Certification of Chief Executive Officer  required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|--------|------|--------|--------------------------------------------------------------------------------------------------------------------|

 

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|   | 31.2   |   | Certification of Chief Financial Officer  required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                         |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                       |
|   | 32.1   |   | Certification of Chief Executive Officer  and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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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 theundersigned thereunto duly authorized.

 

**ULTRATECH, INC.**

(Registrant)

 
|                               |                  |
|------------------------------------|-----------------------|
| Date:                              | November 7, 2005 |   | By: | /s/Bruce R. Wright |   |
|                               |                  | Bruce R. Wright |
|                               |                  | Senior Vice President, Finance and Chief  Financial |
|                               |                  | Officer (Duly Authorized Officer and  Principal |   |
| Financial  and Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| 31.1   |   | Certification of Chief Executive Officer  required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                       |
| 31.2   |   | Certification of Chief Financial Officer  required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                         |
|   |   |                                                                                                                                                                                       |
| 32.1   |   | Certification of Chief Executive Officer  and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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