##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended July 4, 2009



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

For the transition period from              to

Commission File Number 0-22248





ULTRATECH, 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 since last report.)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Non-accelerated filer     |  |  ̈
|                        |  |                                                  | 
|Accelerated filer       |  | x  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:



|                              |  |                                
|----------------------------- |  | -------------------------------
|Class                         |  | Outstanding as of July 31, 2009
|common stock, $0.01 par value |  | 21,818,898                     









---

##### Table of Contents

ULTRATECH, INC.

INDEX



|                                                                                                                   |  |   
|------------------------------------------------------------------------------------------------------------------ |  | --
|PART I. FINANCIAL INFORMATION                                                                                      |  | 3 
|Item 1. Financial Statements                                                                                       |  | 3 
|Condensed Consolidated Balance Sheets as of July 4, 2009 and December 31, 2008                                     |  | 3 
|Condensed Consolidated Statements of Operations for the three and six months ended July 4, 2009 and June 
28, 2008 |  | 4 
|Condensed Consolidated Statements of Cash Flows for the six months ended July 4, 2009 and June 28, 2008            |  | 5 
|Notes to Condensed Consolidated Financial Statements                                                               |  | 6 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 17
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 24
|Item 4. Controls and Procedures                                                                                    |  | 24
|PART II. OTHER INFORMATION                                                                                         |  | 25
|Item 1. Legal Proceedings                                                                                          |  | 25
|Item 1A. Risk Factors                                                                                              |  | 25
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                |  | 33
|Item 3. Defaults Upon Senior Securities                                                                            |  | 33
|Item 4. Submission of Matters to a Vote of Security Holders                                                        |  | 33
|Item 5. Other Information                                                                                          |  | 33
|Item 6. Exhibits                                                                                                   |  | 34
|SIGNATURES                                                                                                         |  | 35
|EXHIBIT 31.1                                                                                                       |  |   
|EXHIBIT 31.2                                                                                                       |  |   
|EXHIBIT 32.1                                                                                                       |  |   



2



---

##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ULTRATECH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                           |  |             |         |                   |   |        
|------------------------------------------ |  | ----------- | ------- | ----------------- | - | -------
|(In thousands)                             |  | July 4,2009 |         | December 31,2008*
|                                           |  | (Unaudited) |         |                  
|ASSETS                                     |  |             |         |                   |   |        
|                                           |  |            
|Current assets:                            |  |             |         |                   |   |        
|Cash and cash equivalents                  |  | $           | 74,629  |                   | $ | 94,034 
|Short-term investments                     |  |             | 79,816  |                   |   | 64,464 
|Accounts receivable, net                   |  |             | 19,128  |                   |   | 18,318 
|Inventories                                |  |             | 28,758  |                   |   | 31,618 
|Prepaid expenses and other current assets  |  |             | 3,681   |                   |   | 4,836  
|                                           |  |             |         |                   |   |        
|Total current assets                       |  |             | 206,012 |                   |   | 213,270
|                                           |  |            
|Equipment and leasehold improvements, net  |  |             | 12,459  |                   |   | 12,788 
|Demonstration inventories                  |  |             | 1,240   |                   |   | 82     
|Other assets                               |  |             | 2,736   |                   |   | 3,051  
|                                           |  |             |         |                   |   |        
|Total assets                               |  | $           | 222,447 |                   | $ | 229,191
|                                           |  |             |         |                   |   |        
|                                           |  |            
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |             |         |                   |   |        
|Current liabilities:                       |  |             |         |                   |   |        
|Notes payable                              |  | $           | 9,600   |                   | $ | 6,000  
|Accounts payable                           |  |             | 4,068   |                   |   | 8,830  
|Deferred product and services income       |  |             | 2,356   |                   |   | 4,328  
|Other current liabilities                  |  |             | 5,998   |                   |   | 9,923  
|                                           |  |             |         |                   |   |        
|Total current liabilities                  |  |             | 22,022  |                   |   | 29,081 
|                                           |  |            
|Other liabilities                          |  |             | 6,442   |                   |   | 6,687  
|                                           |  |            
|Stockholders equity                       |  |             | 193,983 |                   |   | 193,423
|                                           |  |             |         |                   |   |        
|Total liabilities and stockholders equity |  | $           | 222,447 |                   | $ | 229,191
|                                           |  |             |         |                   |   |        





|* | The Balance Sheet as of December 31, 2008 has been derived from the audited financial statements at that date.
|- | --------------------------------------------------------------------------------------------------------------

See accompanying notes to unaudited condensed consolidated financial statements



3



---

##### Table of Contents

ULTRATECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                          |  |                    |        |   |                  |   |        |             |  |   |              |   |  |   |        |  
|--------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------ | ----------- |  | - | ------------ | - |  | - | ------ | -
|                                                          |  | Three Months Ended |        |   | Six Months Ended |  
|(In thousands, except per share amounts)                  |  | July 4,2009        |        |   | June 28,2008     |   |        | July 4,2009 |  |   | June 28,2008 |  
|Net sales:                                                |  |                    |        |   |                  |   |        |             |  |   |              |   |  |   |        |  
|Products                                                  |  | $                  | 15,006 |   |                  | $ | 27,254 |             |  | $ | 37,127       |   |  | $ | 54,202 |  
|Services                                                  |  |                    | 3,590  |   |                  |   | 4,407  |             |  |   | 7,042        |   |  |   | 8,595  |  
|Licenses                                                  |  |                    |       |   |                  |   | 400    |             |  |   | 82           |   |  |   | 400    |  
|                                                          |  |                    |        |   |                  |   |        |             |  |   |              |   |  |   |        |  
|Total net sales                                           |  |                    | 18,596 |   |                  |   | 32,061 |             |  |   | 44,251       |   |  |   | 63,197 |  
|                                                          |  |                    |        |  
|Cost of sales:                                            |  |                    |        |   |                  |   |        |             |  |   |              |   |  |   |        |  
|Cost of products sold                                     |  |                    | 9,308  |   |                  |   | 14,539 |             |  |   | 20,700       |   |  |   | 28,216 |  
|Cost of services                                          |  |                    | 2,156  |   |                  |   | 2,337  |             |  |   | 4,027        |   |  |   | 4,432  |  
|                                                          |  |                    |        |   |                  |   |        |             |  |   |              |   |  |   |        |  
|Total cost of sales                                       |  |                    | 11,464 |   |                  |   | 16,876 |             |  |   | 24,727       |   |  |   | 32,648 |  
|                                                          |  |                    |        |   |                  |   |        |             |  |   |              |   |  |   |        |  
|Gross profit                                              |  |                    | 7,132  |   |                  |   | 15,185 |             |  |   | 19,524       |   |  |   | 30,549 |  
|                                                          |  |                    |        |  
|Operating expenses:                                       |  |                    |        |   |                  |   |        |             |  |   |              |   |  |   |        |  
|Research, development, and engineering                    |  |                    | 4,458  |   |                  |   | 5,811  |             |  |   | 9,635        |   |  |   | 11,782 |  
|Selling, general, and administrative                      |  |                    | 5,961  |   |                  |   | 7,648  |             |  |   | 12,924       |   |  |   | 16,160 |  
|                                                          |  |                    |        |   |                  |   |        |             |  |   |              |   |  |   |        |  
|Operating income (loss)                                   |  |                    | (3,287 | ) |                  |   | 1,726  |             |  |   | (3,035       | ) |  |   | 2,607  |  
|                                                          |  |                    |        |  
|Interest expense                                          |  |                    | 319    |   |                  |   | (27    | )           |  |   | 309          |   |  |   | (99    | )
|Interest and other income, net                            |  |                    | 2,439  |   |                  |   | 1,065  |             |  |   | 2,394        |   |  |   | 2,374  |  
|                                                          |  |                    |        |   |                  |   |        |             |  |   |              |   |  |   |        |  
|Income (loss) before income tax                           |  |                    | (529   | ) |                  |   | 2,764  |             |  |   | (332         | ) |  |   | 4,882  |  
|Provision for income taxes                                |  |                    | (42    | ) |                  |   | 180    |             |  |   | (36          | ) |  |   | 346    |  
|                                                          |  |                    |        |   |                  |   |        |             |  |   |              |   |  |   |        |  
|Net income (loss)                                         |  | $                  | (487   | ) |                  | $ | 2,584  |             |  | $ | (296         | ) |  | $ | 4,536  |  
|                                                          |  |                    |        |   |                  |   |        |             |  |   |              |   |  |   |        |  
|                                                          |  |                    |        |  
|Net income (loss) per share - basic                       |  | $                  | (0.02  | ) |                  | $ | 0.11   |             |  | $ | (0.01        | ) |  | $ | 0.19   |  
|Number of shares used in per share computations - basic   |  |                    | 23,669 |   |                  |   | 23,488 |             |  |   | 23,644       |   |  |   | 23,472 |  
|Net income (loss) per share - diluted                     |  | $                  | (0.02  | ) |                  | $ | 0.11   |             |  | $ | (0.01        | ) |  | $ | 0.19   |  
|Number of shares used in per share computations - diluted |  |                    | 23,669 |   |                  |   | 23,823 |             |  |   | 23,644       |   |  |   | 23,576 |  

See accompanying notes to unaudited condensed consolidated financial statements



4



---

##### Table of Contents

ULTRATECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                |  |                  |         |   |              |   |         |  
|------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                                |  | Six Months Ended |        
|(In thousands)                                                                  |  | July 4,2009      |         |   | June 28,2008 |  
|Cash flows from operating activities:                                           |  |                  |         |   |              |   |         |  
|Net income (loss)                                                               |  | $                | (296    | ) |              | $ | 4,536   |  
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                  |         |   |              |   |         |  
|Depreciation                                                                    |  |                  | 2,219   |   |              |   | 3,068   |  
|Amortization                                                                    |  |                  | 227     |   |              |   | 608     |  
|Accretion of asset retirement obligations                                       |  |                  | 84      |   |              |   | 77      |  
|Gain on disposal of equipment                                                   |  |                  | (10     | ) |              |   | (3      | )
|Stock-based compensation                                                        |  |                  | 1,095   |   |              |   | 1,167   |  
|Deferred income taxes                                                           |  |                  | (12     | ) |              |   |        |  
|Changes in operating assets and liabilities:                                    |  |                  |         |   |              |   |         |  
|Accounts receivable                                                             |  |                  | (810    | ) |              |   | 9,723   |  
|Inventories                                                                     |  |                  | 1,702   |   |              |   | (4,813  | )
|Prepaid expenses and other current assets                                       |  |                  | 1,155   |   |              |   | (154    | )
|Demonstration inventories                                                       |  |                  |        |   |              |   | (668    | )
|Other assets                                                                    |  |                  | 258     |   |              |   | (145    | )
|Accounts payable                                                                |  |                  | (4,762  | ) |              |   | 3,084   |  
|Deferred product and services income                                            |  |                  | (1,972  | ) |              |   | (6,559  | )
|Other current liabilities                                                       |  |                  | (3,841  | ) |              |   | 2,637   |  
|Other liabilities                                                               |  |                  | (317    | ) |              |   | (514    | )
|                                                                                |  |                  |         |   |              |   |         |  
|Net cash provided by (used in) operating activities                             |  |                  | (5,280  | ) |              |   | 12,044  |  
|                                                                                |  |                  |         |   |              |   |         |  
|                                                                                |  |                 
|Cash flows from investing activities:                                           |  |                  |         |   |              |   |         |  
|Capital expenditures                                                            |  |                  | (1,994  | ) |              |   | (1,228  | )
|Proceeds from sales of fixed assets                                             |  |                  | 10      |   |              |   | 3       |  
|Purchase of investments in securities                                           |  |                  | (47,169 | ) |              |   | (47,219 | )
|Proceeds from maturities of investments                                         |  |                  | 31,477  |   |              |   | 99,242  |  
|                                                                                |  |                  |         |   |              |   |         |  
|Net cash provided by (used in) investing activities                             |  |                  | (17,676 | ) |              |   | 50,798  |  
|                                                                                |  |                  |         |   |              |   |         |  
|                                                                                |  |                 
|Cash flows from financing activities:                                           |  |                  |         |   |              |   |         |  
|Proceeds from notes payable                                                     |  |                  | 18,103  |   |              |   | 31,116  |  
|Repayment of notes payable                                                      |  |                  | (14,503 | ) |              |   | (33,210 | )
|Proceeds from issuance of common stock for stock option exercises               |  |                  | 405     |   |              |   | 950     |  
|Tax payment for issuance of common stock from release of restricted stock units |  |                  | (454    | ) |              |   |        |  
|                                                                                |  |                  |         |   |              |   |         |  
|Net cash provided by (used in) financing activities                             |  |                  | 3,551   |   |              |   | (1,144  | )
|                                                                                |  |                  |         |   |              |   |         |  
|                                                                                |  |                 
|Net increase (decrease) in cash and cash equivalents                            |  |                  | (19,405 | ) |              |   | 61,698  |  
|                                                                                |  |                  |         |   |              |   |         |  
|                                                                                |  |                 
|Cash and cash equivalents at beginning of period                                |  |                  | 94,034  |   |              |   | 54,586  |  
|                                                                                |  |                  |         |   |              |   |         |  
|                                                                                |  |                 
|Cash and cash equivalents at end of period                                      |  | $                | 74,629  |   |              | $ | 116,284 |  
|                                                                                |  |                  |         |   |              |   |         |  
|                                                                                |  |                 
|Supplemental disclosures of cash flow information:                              |  |                  |         |   |              |   |         |  
|Other non-cash activities:                                                      |  |                  |         |   |              |   |         |  
|Capital lease of phone system                                                   |  | $                |        |   |              | $ | 42      |  
|Systems transferred from (to) inventory to (from) equipment and other assets    |  | $                | 1,158   |   |              | $ | (165    | )

See accompanying notes to unaudited condensed consolidated financial statements



5



---

##### Table of Contents

Ultratech, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

July 4, 2009

(1) Description of Business

Ultratech, Inc. (referred to as Ultratech, the Company and we)
develops, manufactures and markets photolithography and laser thermal processing equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Japan, Taiwan and the rest of Asia.

We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuits industry, we target the market
for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, laser diodes and light emitting diodes (LEDs). Our laser thermal
processing equipment is targeted at advanced annealing applications within the semiconductor industry.

In evaluating our business, we gave consideration
to the Chief Executive Officers review of financial information and the organizational structure of our management. Based on this review, we concluded that, at the present time, resources are allocated and other financial decisions are made
based on our consolidated financial information. Accordingly, we have determined that we operate in one business segment, which is the manufacture and distribution of capital equipment to manufacturers of integrated circuits and nanotechnology
components.

(2) Basis of Presentation

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

Our fiscal periods end on the Saturday closest to month-end, except that our fiscal year
ends on December 31. All references to the quarter refer to our fiscal quarter. Our fiscal quarters covered by this report ended on July 4, 2009 and June 28, 2008.

Operating results for the three and six months ended July 4, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or any future period.

We have evaluated subsequent events, as defined by Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events, through
August 6, 2009, which is the date that the financial statements were issued.

USE OF ESTIMATESThe preparation of the financial statements
and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities at the date of the consolidated financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our estimates,
including those related to inventories, warranty obligations, purchase order commitments, asset retirement obligations, bad debts, estimated useful lives of fixed assets, asset impairment, income taxes, intangible assets, contingencies and
litigation. We base our estimates on historical experience and on various other analyses and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDSIn December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R).
SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective for fiscal years beginning after
December 15, 2008. We adopted this statement on January 1, 2009 and the adoption did not have an impact on our results of operations or financial position.



6



---

##### Table of Contents

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of Accounting Research Bulletin No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. We adopted this statement on January 1, 2009 and the adoption did not have an impact on our results of operations or financial position as all of our subsidiaries are wholly owned by us.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement
No. 133 (SFAS No. 161), which requires enhanced disclosures about an entitys derivative and hedging activities. The statement requires that objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years, with earlier adoption encouraged. We adopted this statement on
January 1, 2009 and the adoption did not have an impact on our results of operations or financial position. See Derivative Instruments and Hedging in Note 7 for the disclosures.

In June 2008, FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (FSP
EITF 03-6-1). FSP EITF 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. FSP EITF
03-6-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008 and requires retrospective adjustment to earnings per share data. We adopted this statement on January 1, 2009 and
the adoption did not have an impact on our results of operations or financial position.

In February 2008, the FASB issued FASB Staff Position (FSP)
No. SFAS 157-2, Effective Date of FASB Statement No. 157(FSP SFAS 157-2), which delays the effective date of SFAS No. 157, Fair Value Measurement (SFAS No. 157), for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a
goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. We adopted FSP SFAS 157-2 on January 1, 2009 and the adoption did not have an impact on our results of operations or financial
position.

In April 2009, the FASB issued FSP SFAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(FSP SFAS 157-4), which provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of
activity for the asset or liability have significantly decreased. FSP SFAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. In addition, FSP SFAS 157-4 requires disclosure in interim and annual
periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. We adopted FSP SFAS 157-4 during the three-month period ended July 4, 2009 and the adoption did not have an impact on
our results of operations or financial position.

In April 2009, the FASB issued FSP SFAS No. 107-1, Interim Disclosures about Fair Value of
Financial Instruments(FSP SFAS 107-1), which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements. We adopted FSP SFAS 107-1 during the three-month period ended July 4, 2009 and the adoption did not have an impact on our results of operations or financial
position. See Investments in Note 6 for the disclosures.

In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments(FSP SFAS 115-2/124-2), which amends the requirements for the recognition and measurement of other-than-temporary impairments for debt securities by modifying the
pre-existing intent and ability indicator. Under FSP 115-2/124-2, an other-than-temporary impairment is triggered in circumstances where (1) an entity has the intent to sell the security, (2) it is more likely than not that the
entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security. Additionally, FSP SFAS 115-2/124-2 changes the presentation
of an other-than-temporary impairment in the income statement for those impairments involving credit losses. The credit loss component of the impairment charge will be recognized in earnings and the remainder of the impairment will be recorded in
other comprehensive income (loss). FSP 115-2/124-2 does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. We adopted FSP 115-2/124-2 during the three-month period ended
July 4, 2009 and the adoption did not have an impact on our results of operations or financial position.



7



---

##### Table of Contents

In May 2009, the FASB issued SFAS No. 165, Subsequent Events(SFAS No. 165), which establishes
general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 distinguishes between subsequent events that should be
recognized in the financial statements and those that should not. It requires disclosure of the date through which subsequent events were evaluated. We adopted this statement during the three-month period ended July 4, 2009 and the adoption did
not have an impact on our results of operations or financial position.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162. This statement will replace SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and
will establish the FASB Accounting Standards Codification (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in
conformity with accounting principles generally accepted in the United States (U.S. GAAP). Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants. On the effective date of this statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification will become non-authoritative. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this statement is not expected to have
an impact on our results of operations or financial position.

(3) Stock-Based Compensation

Stock-based compensation expense recognized under SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), for employees and
directors and the effect on our Condensed Consolidated Statements of Operations were as follows:



|                                             |  |                    |     |                  |   |             |  |              |       |  |   |      
|-------------------------------------------- |  | ------------------ | --- | ---------------- | - | ----------- |  | ------------ | ----- |  | - | -----
|                                             |  | Three Months Ended |     | Six Months Ended
|(In thousands)                               |  | July 4,2009        |     | June 28,2008     |   | July 4,2009 |  | June 28,2008
|Cost of Sales                                |  | $                  | 31  |                  | $ | 52          |  | $            | 58    |  | $ | 80   
|Research, development, and engineering       |  |                    | 111 |                  |   | 116         |  |              | 210   |  |   | 223  
|Selling, general and administrative expenses |  |                    | 431 |                  |   | 477         |  |              | 827   |  |   | 864  
|                                             |  |                    |     |                  |   |             |  |              |       |  |   |      
|Total stock-based compensation expense       |  | $                  | 573 |                  | $ | 645         |  | $            | 1,095 |  | $ | 1,167
|                                             |  |                    |     |                  |   |             |  |              |       |  |   |      

Compensation cost capitalized as part of inventory was immaterial during each of the three- and six-month periods
ended July 4, 2009 and June 28, 2008.

As required by SFAS No. 123R, we estimate expected option forfeitures and recognize compensation
costs only for those equity awards expected to vest. As of July 4, 2009, there were $2.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our 1993 Stock Option Plan/Stock
Issuance Plan, as amended (1993 Plan), and our 1998 Supplemental Stock Option/Stock Issuance Plan, as amended ( 1998 Plan). That cost is expected to be recognized over a weighted average period of 2.7 years.

These plans provide for the grant of stock-based awards to our eligible employees, consultants and advisors and non-employee directors. We believe that such awards
better align the interests of our employees with those of our stockholders. There were no shares reserved for future awards under the 1998 Plan since the plan expired on October 19, 2008. However, as of July 4, 2009, there were
2.1 million shares reserved for future awards under the 1993 Plan.

We used the following weighted-average assumptions to estimate the fair value of
our stock options granted during the three- and six-month periods ended July 4, 2009 and June 28, 2008:



|                         |  |                    |  |              |                  |  |             |   |  |              |  
|------------------------ |  | ------------------ |  | ------------ | ---------------- |  | ----------- | - |  | ------------ | -
|                         |  | Three Months Ended |  |              | Six Months Ended | 
|                         |  | July 4,2009        |  | June 28,2008 |                  |  | July 4,2009 |   |  | June 28,2008 |  
|Expected life (in years) |  | *                  |  | 5.33         |                  |  | 5.15        |   |  | 5.33         |  
|Risk-free interest rate  |  | *                  |  | 2.95         | %                |  | 1.75        | % |  | 2.80         | %
|Volatility factor        |  | *                  |  | 0.44         |                  |  | 0.51        |   |  | 0.48         |  
|Dividend yield           |  | *                  |  |             |                  |  |            |   |  |             |  



|* | Not presented as we did not grant any stock options during the three-month period ended July 4, 2009.
|- | -----------------------------------------------------------------------------------------------------



8



---

##### Table of Contents

(4) Net Income Per Share

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



|                                                                     |  |                    |        |                  |              |   |             |  |   |              |   |  |   |       
|-------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- | ------------ | - | ----------- |  | - | ------------ | - |  | - | ------
|                                                                     |  | Three Months Ended |        | Six Months Ended
|(In thousands, except per share amounts)                             |  | July 4,2009        |        |                  | June 28,2008 |   | July 4,2009 |  |   | June 28,2008
|Numerator:                                                           |  |                    |        |                  |              |   |             |  |   |              |   |  |   |       
|Net income (loss)                                                    |  | $                  | (487   | )                |              | $ | 2,584       |  | $ | (296         | ) |  | $ | 4,536 
|                                                                     |  |                    |        |                 
|Denominator:                                                         |  |                    |        |                  |              |   |             |  |   |              |   |  |   |       
|Basic weighted-average shares outstanding                            |  |                    | 23,669 |                  |              |   | 23,488      |  |   | 23,644       |   |  |   | 23,472
|Effect of dilutive employee stock options and restricted stock units |  |                    |       |                  |              |   | 335         |  |   |             |   |  |   | 104   
|                                                                     |  |                    |        |                  |              |   |             |  |   |              |   |  |   |       
|Diluted weighted-average shares outstanding                          |  |                    | 23,669 |                  |              |   | 23,823      |  |   | 23,644       |   |  |   | 23,576
|                                                                     |  |                    |        |                  |              |   |             |  |   |              |   |  |   |       
|                                                                     |  |                    |        |                 
|Net income (loss) per share - basic:                                 |  |                    |        |                  |              |   |             |  |   |              |   |  |   |       
|Net income (loss)                                                    |  | $                  | (0.02  | )                |              | $ | 0.11        |  | $ | (0.01        | ) |  | $ | 0.19  
|                                                                     |  |                    |        |                  |              |   |             |  |   |              |   |  |   |       
|                                                                     |  |                    |        |                 
|Net income (loss) per share - diluted:                               |  |                    |        |                  |              |   |             |  |   |              |   |  |   |       
|Net income (loss)                                                    |  | $                  | (0.02  | )                |              | $ | 0.11        |  | $ | (0.01        | ) |  | $ | 0.19  
|                                                                     |  |                    |        |                  |              |   |             |  |   |              |   |  |   |       

For the three- and six-month periods ended July 4, 2009, 4.5 million and 4.6 million shares of
common stock, respectively, subject to outstanding options were excluded from the computation of diluted net income per share, as the effect would have been anti-dilutive, compared to 2.9 million and 4.6 million shares of common stock
subject to outstanding options in the corresponding periods of 2008. In addition, for each of the three and six months ended July 4, 2009, there were 0.2 million shares of common stock underlying outstanding restricted stock units excluded
from the computation compared to 0.1 million shares in the corresponding period of 2008. Options and restricted stock units are anti-dilutive when we have a net loss or when the exercise price and the average unrecognized compensation cost of
the stock option or restricted stock unit is greater than the average market price of our common stock during the period.

(5) Fair Value
Measurements

On January 1, 2008, we adopted SFAS No. 157 for financial assets and liabilities recognized at fair value on a recurring basis.
On January 1, 2009, we adopted FSP SFAS 157-2 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. These nonfinancial items
include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. The adoption of this deferred portion of SFAS
No. 157 did not have any impact on our results of operations or financial position.

Fair value is defined under SFAS No. 157 as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. SFAS No. 157 describes a fair value hierarchy based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:



| |  |  | Level 1 - Quoted prices for identical assets or liabilities in active markets.
| | - |  | ------------------------------------------------------------------------------



| |  |  | Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 - Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



9



---

##### Table of Contents

We measure certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale
securities and foreign currency derivatives. The fair value of these certain financial assets and liabilities was determined using the following inputs at July 4, 2009 and December 31, 2008, respectively:



|                                 |  |                                                    |         |                                                             |   |                                             |  |                                        |        |  |   |  
|-------------------------------- |  | -------------------------------------------------- | ------- | ----------------------------------------------------------- | - | ------------------------------------------- |  | -------------------------------------- | ------ |  | - | -
|                                 |  | Fair Value Measurements at July 4, 2009 Using     
|(In thousands)                   |  | Total                                              |         | Quated Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Available-for-sale securities(1) |  | $                                                  | 135,576 |                                                             | $ | 53,760                                      |  | $                                      | 81,816 |  | $ | 
|Foreign currency derivatives(2)  |  |                                                    | 5       |                                                             |   |                                            |  |                                        | 5      |  |   | 
|                                 |  |                                                    |         |                                                             |   |                                             |  |                                        |        |  |   |  
|                                 |  | $                                                  | 135,581 |                                                             | $ | 53,760                                      |  | $                                      | 81,821 |  | $ | 
|                                 |  |                                                    |         |                                                             |   |                                             |  |                                        |        |  |   |  
|                                 | 
|                                 |  | Fair Value Measurements at December 31, 2008 Using
|(In thousands)                   |  | Total                                              |         | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Available-for-sale securities(1) |  | $                                                  | 137,110 |                                                             | $ | 56,658                                      |  | $                                      | 80,452 |  | $ | 
|Foreign currency derivatives(2)  |  |                                                    | 198     |                                                             |   |                                            |  | $                                      | 198    |  |   | 
|                                 |  |                                                    |         |                                                             |   |                                             |  |                                        |        |  |   |  
|                                 |  | $                                                  | 137,308 |                                                             | $ | 56,658                                      |  | $                                      | 80,650 |  | $ | 
|                                 |  |                                                    |         |                                                             |   |                                             |  |                                        |        |  |   |  





|(1) | Included in cash and cash equivalents and short-term investments on our condensed consolidated balance sheet.
|--- | -------------------------------------------------------------------------------------------------------------

|(2) | Included in other current liabilities on our condensed consolidated balance sheet. See Investments in Note 6 for further details.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

Our available-for-sale securities at July 4, 2009 consisted of securities and obligations of U.S. government agencies (50% of
total), money market funds (42% of total), commercial paper (7% of total) and corporate debt securities (1% of total), as compared to securities and obligations of U.S. government agencies (46% of total), money market funds (41% of total) and
commercial paper (13% of total) at December 31, 2008. Included in available-for-sale securities at July 4, 2009 and December 31, 2008 were cash equivalents of $55.8 million and $72.6 million, respectively. Cash equivalents
consist primarily of instruments with maturities of three months or less at the date of purchase.

Foreign currency derivatives at July 4, 2009 and
December 31, 2008 consisted of forward foreign exchange contracts for the Japanese yen. See Investments in Note 6 for further details.

(6) Investments

We classified all of our investments as available for sale as of July 4, 2009 and December 31, 2008.
Accordingly, we state our investments at estimated fair value. Fair values are determined based on quoted market prices or pricing models using current market rates. We deem all investments to be available to meet current working capital
requirements. The cost of securities sold was determined based on the specific identification method.

The following is a summary of our investments:



|                                                                   |  |               |         |                               |   |                     |  |               |    |                               |   |                     |  |   |         |  |   |     |  |   |   |  |   |        
|------------------------------------------------------------------ |  | ------------- | ------- | ----------------------------- | - | ------------------- |  | ------------- | -- | ----------------------------- | - | ------------------- |  | - | ------- |  | - | --- |  | - | - |  | - | -------
|                                                                   |  | July 4, 2009  |         | December 31, 2008            
|Cash equivalents and Available-for-sale Investments (in thousands) |  | AmortizedCost |         | AccumulatedOtherComprehensive |   | EstimatedFair Value |  | AmortizedCost |    | AccumulatedOtherComprehensive |   | EstimatedFair Value
|                                                                   |  | Gains         |         | Losses                        |   |                     |  | Gains         |    | Losses                        |  
|Securities and obligations of U.S. government agencies             |  | $             | 70,258  |                               | $ | 370                 |  | $             | 1  |                               | $ | 70,627              |  | $ | 61,819  |  | $ | 638 |  | $ |  |  | $ | 62,457 
|U.S. corporate debt securities                                     |  |               | 1,207   |                               |   |                    |  |               | 10 |                               |   | 1,197               |  |   |        |  |   |    |  |   |  |  |   |       
|Money market funds and commercial paper                            |  |               | 63,754  |                               |   |                    |  |               | 2  |                               |   | 63,752              |  |   | 74,642  |  |   | 11  |  |   |  |  |   | 74,653 
|                                                                   |  |               |         |                               |   |                     |  |               |    |                               |   |                     |  |   |         |  |   |     |  |   |   |  |   |        
|Total                                                              |  | $             | 135,219 |                               | $ | 370                 |  | $             | 13 |                               | $ | 135,576             |  | $ | 136,461 |  | $ | 649 |  | $ |  |  | $ | 137,110
|                                                                   |  |               |         |                               |   |                     |  |               |    |                               |   |                     |  |   |         |  |   |     |  |   |   |  |   |        



10



---

##### Table of Contents

The following is a reconciliation of our investments to the balance sheet classifications at July 4, 2009 and
December 31, 2008:



|                                     |  |              |         |                   |   |        
|------------------------------------ |  | ------------ | ------- | ----------------- | - | -------
|(In thousands)                       |  | July 4, 2009 |         | December 31, 2008
|Cash equivalents                     |  | $            | 55,760  |                   | $ | 72,646 
|Short-term investments               |  |              | 79,816  |                   |   | 64,464 
|                                     |  |              |         |                   |   |        
|Investments, at estimated fair value |  | $            | 135,576 |                   | $ | 137,110
|                                     |  |              |         |                   |   |        

The gross amortized cost and estimated fair value of our investments at July 4, 2009 and December 31,
2008, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.



|                                      |  |                    |         |                   |   |                    |  |           |         |  |   |        
|------------------------------------- |  | ------------------ | ------- | ----------------- | - | ------------------ |  | --------- | ------- |  | - | -------
|                                      |  | July 4, 2009       |         | December 31, 2008
|(In thousands)                        |  | GrossAmortizedCost |         | FairValue         |   | GrossAmortizedCost |  | FairValue
|Due in one year or less               |  | $                  | 134,012 |                   | $ | 134,379            |  | $         | 122,241 |  | $ | 122,658
|Due after one year through five years |  |                    | 1,207   |                   |   | 1,197              |  |           | 14,220  |  |   | 14,452 
|                                      |  |                    |         |                   |   |                    |  |           |         |  |   |        
|Total                                 |  | $                  | 135,219 |                   | $ | 135,576            |  | $         | 136,461 |  | $ | 137,110
|                                      |  |                    |         |                   |   |                    |  |           |         |  |   |        

We do not have any cash equivalents and investments with unrealized losses at December 31, 2008. The
following table provides the breakdown of the cash equivalents and investments with unrealized losses at July 4, 2009:



|                                                                         |  |                                         |        |                                         |   |           |  |                       |   |           |   |                       |  |   |        |  |   |   
|------------------------------------------------------------------------ |  | --------------------------------------- | ------ | --------------------------------------- | - | --------- |  | --------------------- | - | --------- | - | --------------------- |  | - | ------ |  | - | --
|                                                                         |  | In Loss Position forLess Than 12 Months |        | In Loss Position forMore Than 12 Months |   | Total    
|(In thousands)                                                           |  | FairValue                               |        | GrossUnrealizedLosses                   |   | FairValue |  | GrossUnrealizedLosses |   | FairValue |   | GrossUnrealizedLosses
|U.S. Treasury securities and obligations of the U.S. government agencies |  | $                                       | 1,999  |                                         | $ | 1         |  | $                     |  |           | $ |                      |  | $ | 1,999  |  | $ | 1 
|U.S. corporate debt securities                                           |  |                                         | 1,197  |                                         |   | 10        |  |                       |  |           |   |                      |  |   | 1,197  |  |   | 10
|Money market funds and commercial paper                                  |  |                                         | 9,992  |                                         |   | 2         |  |                       |  |           |   |                      |  |   | 9,992  |  |   | 2 
|                                                                         |  |                                         |        |                                         |   |           |  |                       |   |           |   |                       |  |   |        |  |   |   
|Total                                                                    |  | $                                       | 13,188 |                                         | $ | 13        |  | $                     |  |           | $ |                      |  | $ | 13,188 |  | $ | 13
|                                                                         |  |                                         |        |                                         |   |           |  |                       |   |           |   |                       |  |   |        |  |   |   

We review our investment portfolio regularly for impairment. A security is considered impaired when its fair value
is less than its cost basis. If we intend to sell an impaired debt security or it is more likely than not that we will be required to sell it prior to recovery of its amortized cost basis, an other-than-temporary-impairment (OTTI) is
deemed to have occurred. In these instances, the OTTI loss is recognized in earnings equal to the entire difference between the debt securitys amortized cost basis and its fair value at the balance sheet date.

If we do not intend to sell an impaired debt security and it is not more likely than not that we will be required to sell it prior to recovery of its amortized cost
basis, we must determine whether it will recover its amortized cost basis. If we conclude it will not, a credit loss exists and the resulting OTTI is separated into:



| |  |  | The amount representing the credit loss, which is recognized in earnings, and
| | - |  | -----------------------------------------------------------------------------



| |  |  | The amount related to all other factors, which is recognized in other comprehensive income.
| | - |  | -------------------------------------------------------------------------------------------

As part of this assessment we will consider the various characteristics of each security, including, but not limited to the following: the length of time and the extent
to which the fair value has been less than the amortized cost basis; adverse conditions specifically related to the security, an industry, or a geographic area; the payment structure of the debt security; failure of the issuer of the security to
make scheduled interest or principal payments; any changes to the rating of the security by a rating agency and related outlook or status; recoveries or additional declines in fair value subsequent to the balance sheet date. The relative importance
of this information varies based on the facts and circumstances surrounding each security, as well as the economic environment at the time of assessment.

We have not recorded any OTTI of our investments during the three- and six-month periods ended July 4, 2009 and June 28, 2008.



11



---

##### Table of Contents

(7) Derivative Instruments and Hedging

The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we also enter into these transactions in other currencies, primarily Japanese yen as we have direct sales
operations in Japan and orders are often denominated in Japanese yen. This subjects us to a higher degree of risk from currency exchange rate fluctuations.

We attempt to mitigate this risk through derivative instruments, mainly foreign currency forward contracts. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, we have
established cash flow and balance sheet hedging programs. Our hedging programs reduce, but do not always entirely eliminate, the impact of currency movements. We enter into foreign currency forward contracts that generally have maturities of nine
months or less.

Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), all
derivatives are recorded on the balance sheet at fair value. The gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. All of
our derivatives are designated as hedging instruments under SFAS No. 133. The fair value of derivative instruments recorded in our Condensed Consolidated Balance Sheets is as follows:



|                           |  |                                      |  |            |  
|-------------------------- |  | ------------------------------------ |  | ---------- | -
|                           |  | Asset Derivatives as of July 4, 2009
|(In thousands)             |  | Balance Sheet Location               |  | Fair Value
|Foreign exchange contracts |  | Other current liabilities            |  | $          | 5
|                           |  |                                      |  |            |  
|Total derivatives          |  |                                      |  | $          | 5
|                           |  |                                      |  |            |  

Cash Flow Hedging

We use foreign exchange forward contracts to hedge the risk that forecasted revenue may be adversely affected by changes in foreign currency exchange rates. These hedges are designated as cash flow hedges. We do not
enter into these forward contracts for speculative purposes. The effective portion of the contracts gains or losses is included in accumulated other comprehensive income (loss) (OCI) until the period in which the forecasted sale
being hedged is recognized, at which time the amount in OCI is reclassified to earnings as a component of revenue.

To the extent that any of these
contracts are not considered to be effective in offsetting the change in the value of the forecasted sales being hedged, the ineffective portion of these contracts is immediately reclassified from OCI and recognized in the consolidated statement of
operations as a component of interest and other income (expense), net. The contracts are considered ineffective when the underlying forecasted transaction does not occur within the designated hedge period or it becomes probable that the forecasted
transaction will not occur.

We calculate hedge effectiveness at a minimum each fiscal quarter. We measure hedge effectiveness by comparing the cumulative
change in the spot rate of the derivative with the cumulative change in the spot rate of the anticipated sales transactions. We record any excluded components of the hedge in interest and other income (expense), net. There was no hedge
ineffectiveness for the quarter ended July 4, 2009 and we did not have any derivatives classified as cash flow hedges at July 4, 2009. The following sets forth the effect of the derivative instruments on our Condensed Consolidated
Statements of Operations for the six-month period ended July 4, 2009:



|                                                           |  |                                                                                   |    |                                                                                |               |                                                                                            |   |                                                                                              |  |                                                                                                         |  |   |  
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------- | -- | ------------------------------------------------------------------------------ | ------------- | ------------------------------------------------------------------------------------------ | - | -------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | - | -
|                                                           |  |                                                                                   |    |                                                                                |              
|Derivatives in SFAS No. 133 Cash Flow Hedging Relationship |  | Amount of Loss Recognized in OCI on Derivative (Effective Portion) (in
thousands) |    | Location of LossReclassified fromAccumulated OCIinto Income(Effective Portion) |               | Amount of LossReclassified fromAccumulated OCIinto Income(Effective Portion)(in thousands) |   | Location of GainRecognized in Incomeon Derivative (AmountExcluded fromEffectiveness Testing) |  | Amount of GainRecognized inIncome onDerivative (AmountExcluded fromEffectiveness Testing)(in thousands)
|Foreign exchange contracts                                 |  | $                                                                                 | 40 |                                                                                | Product Sales |                                                                                            | $ | 40                                                                                           |  | Interest and otherincome (expense), net                                                                 |  | $ | 1

Fair Value Hedging

We manage the foreign currency risk associated with Japanese yen denominated assets and liabilities using foreign exchange forward contracts. The change in fair value of these derivatives is recognized as a component
of interest and other income (expense), net and is intended to offset the remeasurement gains and losses associated with the non-functional currency denominated assets and liabilities. At July 4, 2009, we had currency forward contracts for the
sale of 37 million Japanese yen, or approximately $0.4 million. The fair value of derivatives classified as balance sheet hedges at July 4, 2009 was a liability of $5,000 recorded as other current



12



---

##### Table of Contents

liabilities. The following sets forth the effect of the derivative instruments on our Condensed Consolidated Statements of Operations for the three-
and six-month periods ended July 4, 2009:



|                                                            |  |                                                      |  |                                                          |      |   |                                            |   |    
|----------------------------------------------------------- |  | ---------------------------------------------------- |  | -------------------------------------------------------- | ---- | - | ------------------------------------------ | - | ---
|                                                            |  |                                                      |  | Amount of Gain (Loss) Recognized inIncome on Derivatives
|Derivatives in SFAS No. 133 Fair Value Hedging Relationship |  | Location of Gain Recognized in Income on Derivatives |  | Three Months EndedJuly 4, 2009(in thousands)             |      |   | Six Months EndedJuly 4, 2009(in thousands)
|Foreign exchange contracts                                  |  | Interest and other income (expense), net             |  | $                                                        | (412 | ) |                                            | $ | 231

(8) Inventories

Inventories consist of the following:



|                  |  |             |        |                  |   |       
|----------------- |  | ----------- | ------ | ---------------- | - | ------
|(In thousands)    |  | July 4,2009 |        | December 31,2008
|Raw materials     |  | $           | 13,170 |                  | $ | 15,380
|Work-in-process   |  |             | 5,702  |                  |   | 7,175 
|Finished products |  |             | 9,886  |                  |   | 9,063 
|                  |  |             |        |                  |   |       
|                  |  | $           | 28,758 |                  | $ | 31,618
|                  |  |             |        |                  |   |       

(9) Notes Payable

We have a line of 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 plus 125 basis points (approximately 1.46% as of July 4, 2009).
Funds are advanced to us under this facility based on pre-determined advance rates on the cash and securities held by us in this brokerage account. Under this facility, we may borrow up to 75% of our total cash, cash equivalents and investments
balance in this brokerage account with no restriction in the use of those assets. This agreement has no set expiration date and there are no loan covenants, other than the aforementioned collateral requirement. As of July 4, 2009, $9.6 million
was outstanding under this facility, with a related collateral requirement of approximately $12.8 million of our cash, cash equivalents and investments.

(10) Other Current Liabilities

Other current liabilities consist of the following:



|                               |  |             |       |                  |   |      
|------------------------------ |  | ----------- | ----- | ---------------- | - | -----
|(In thousands)                 |  | July 4,2009 |       | December 31,2008
|Salaries and benefits          |  | $           | 3,745 |                  | $ | 4,949
|Warranty accrual               |  |             | 995   |                  |   | 1,522
|Accrued taxes-other            |  |             | 264   |                  |   | 1,374
|Capital lease, current portion |  |             | 116   |                  |   | 113  
|Other                          |  |             | 878   |                  |   | 1,965
|                               |  |             |       |                  |   |      
|                               |  | $           | 5,998 |                  | $ | 9,923
|                               |  |             |       |                  |   |      

Warranty Accrual

We generally warrant our products for a period of twelve months for new products, or three months for refurbished products, from the date of customer acceptance for material and labor to repair the product;
accordingly, an accrual for the estimated cost of the warranty is recorded at the time the product is shipped. Extended warranty terms, if granted, result in deferral of revenue equating to our standard pricing for similar service contracts.
Recognition of the related warranty cost is deferred until product revenue is recognized. Factors that affect our warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. We
periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. We believe our warranty accrual, as of July 4, 2009, will be sufficient to satisfy outstanding obligations as of that date. Changes in
our warranty accrual are as follows:



13



---

##### Table of Contents

|                                                   |  |                    |       |   |                  |   |       |             |  |   |              |   |  |   |        |  
|-------------------------------------------------- |  | ------------------ | ----- | - | ---------------- | - | ----- | ----------- |  | - | ------------ | - |  | - | ------ | -
|                                                   |  | Three Months Ended |       |   | Six Months Ended |  
|(In thousands)                                     |  | July 4,2009        |       |   | June 28,2008     |   |       | July 4,2009 |  |   | June 28,2008 |  
|Balance, beginning of the period                   |  | $                  | 1,136 |   |                  | $ | 1,947 |             |  | $ | 1,522        |   |  | $ | 2,112  |  
|Warranties accrued for shipments during the period |  |                    | 359   |   |                  |   | 665   |             |  |   | 624          |   |  |   | 1,210  |  
|Settlements made during the period                 |  |                    | (580  | ) |                  |   | (721  | )           |  |   | (1,319       | ) |  |   | (1,206 | )
|Changes in accrued warranty liabilities            |  |                    | 80    |   |                  |   | (50   | )           |  |   | 168          |   |  |   | (275   | )
|                                                   |  |                    |       |   |                  |   |       |             |  |   |              |   |  |   |        |  
|Balance, end of the period                         |  | $                  | 995   |   |                  | $ | 1,841 |             |  | $ | 995          |   |  | $ | 1,841  |  
|                                                   |  |                    |       |   |                  |   |       |             |  |   |              |   |  |   |        |  

Accrued TaxesOther

The decrease in accrued taxes-other from December 31, 2008 to July 4, 2009 includes the realization of a foreign consumption tax incentive which is included in interest and other income, net ($2.1 million)
and interest expense ($0.4 million) recorded in our Condensed Consolidated Statements of Operations for the three- and six-month periods ended July 4, 2009.

Deferred Services Revenue

A portion of our revenue is generated from service contracts. Payments from certain of these service
contracts are collected in advance. As such, revenues from these service contracts are deferred and recognized ratably over the contract period for time based service contracts, or as service hours are delivered for contracts based on a purchased
quantity of hours. Changes in our deferred service revenue are as follows:



|                                                      |  |                    |       |   |                  |   |       |             |  |   |              |   |  |   |        |  
|----------------------------------------------------- |  | ------------------ | ----- | - | ---------------- | - | ----- | ----------- |  | - | ------------ | - |  | - | ------ | -
|                                                      |  | Three Months Ended |       |   | Six Months Ended |  
|(In thousands)                                        |  | July 4,2009        |       |   | June 28,2008     |   |       | July 4,2009 |  |   | June 28,2008 |  
|Balance, beginning of the period                      |  | $                  | 2,107 |   |                  | $ | 2,388 |             |  | $ | 2,117        |   |  | $ | 2,087  |  
|Service contracts sold during the period              |  |                    | 462   |   |                  |   | 391   |             |  |   | 1,302        |   |  |   | 1,321  |  
|Service contract revenue recognized during the period |  |                    | (627  | ) |                  |   | (692  | )           |  |   | (1,477       | ) |  |   | (1,321 | )
|                                                      |  |                    |       |   |                  |   |       |             |  |   |              |   |  |   |        |  
|Balance, end of the period                            |  | $                  | 1,942 |   |                  | $ | 2,087 |             |  | $ | 1,942        |   |  | $ | 2,087  |  
|                                                      |  |                    |       |   |                  |   |       |             |  |   |              |   |  |   |        |  

(11) Other Liabilities

Other liabilities consist of the following:



|                                  |  |             |       |                  |   |      
|--------------------------------- |  | ----------- | ----- | ---------------- | - | -----
|(In thousands)                    |  | July 4,2009 |       | December 31,2008
|Deferred rent                     |  | $           | 1,194 |                  | $ | 1,505
|Deferred compensation             |  |             | 1,005 |                  |   | 941  
|Long-term income taxes payable    |  |             | 755   |                  |   | 767  
|Asset retirement obligation       |  |             | 2,364 |                  |   | 2,281
|Postretirement medical obligation |  |             | 546   |                  |   | 546  
|Long-term capital lease           |  |             | 326   |                  |   | 385  
|Other                             |  |             | 252   |                  |   | 262  
|                                  |  |             |       |                  |   |      
|                                  |  | $           | 6,442 |                  | $ | 6,687
|                                  |  |             |       |                  |   |      



14



---

##### Table of Contents

(12) Accumulated Other Comprehensive Income (Loss)

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



|                                                                           |  |                    |      |   |                  |   |       |             |  |   |              |   |  |   |       |  
|-------------------------------------------------------------------------- |  | ------------------ | ---- | - | ---------------- | - | ----- | ----------- |  | - | ------------ | - |  | - | ----- | -
|                                                                           |  | Three Months Ended |      |   | Six Months Ended |  
|(In thousands)                                                             |  | July 4,2009        |      |   | June 28,2008     |   |       | July 4,2009 |  |   | June 28,2008 |  
|Net income (loss)                                                          |  | $                  | (487 | ) |                  | $ | 2,584 |             |  | $ | (296         | ) |  | $ | 4,536 |  
|Other comprehensive income (loss):                                         |  |                    |      |   |                  |   |       |             |  |   |              |   |  |   |       |  
|Unrealized gain (loss) on available-for-sale investments before adjustment |  |                    | (19  | ) |                  |   | (414  | )           |  |   | (348         | ) |  |   | 211   |  
|Reclassification adjustment for gains included in net income               |  |                    |     |   |                  |   | (409  | )           |  |   |             |   |  |   | (409  | )
|                                                                           |  |                    |      |   |                  |   |       |             |  |   |              |   |  |   |       |  
|Net unrealized gain (loss) on available-for-sale investments               |  |                    | (19  | ) |                  |   | (823  | )           |  |   | (348         | ) |  |   | (198  | )
|                                                                           |  |                    |      |  
|Unrealized gain (loss) on foreign exchange forward contracts               |  |                    |     |   |                  |   | 7     |             |  |   | 84           |   |  |   | (72   | )
|Change in minimum postretirement medical obligation                        |  |                    | 65   |   |                  |   | 9     |             |  |   | 74           |   |  |   | 19    |  
|                                                                           |  |                    |      |   |                  |   |       |             |  |   |              |   |  |   |       |  
|Comprehensive income (loss)                                                |  | $                  | (441 | ) |                  | $ | 1,777 |             |  | $ | (486         | ) |  | $ | 4,285 |  
|                                                                           |  |                    |      |   |                  |   |       |             |  |   |              |   |  |   |       |  

Accumulated other comprehensive income, net of tax, is comprised of the following items:



|                                                        |  |             |     |   |                  |   |     |  
|------------------------------------------------------- |  | ----------- | --- | - | ---------------- | - | --- | -
|(In thousands)                                          |  | July 4,2009 |     |   | December 31,2008 |  
|Unrealized gain (loss) on:                              |  |             |     |   |                  |   |     |  
|Available-for-sale investments                          |  | $           | 300 |   |                  | $ | 648 |  
|Foreign exchange forward contracts                      |  |             |    |   |                  |   | (84 | )
|Change in minimum postretirement medical obligation     |  |             | (16 | ) |                  |   | (90 | )
|                                                        |  |             |     |   |                  |   |     |  
|Accumulated other comprehensive income at end of period |  | $           | 284 |   |                  | $ | 474 |  
|                                                        |  |             |     |   |                  |   |     |  

(13) Exit Activities

Changes in our accrued severance and benefits charges in connection with exit activities are as follows:



|                                          |  |                            |    |          |   |          |  |   |                       |   |  |   |  
|----------------------------------------- |  | -------------------------- | -- | -------- | - | -------- |  | - | --------------------- | - |  | - | -
|(In thousands)                            |  | Balance atDecember 31,2008 |    | Expenses |   | Payments |  |   | Balance atJuly 4,2009
|Severance and benefits (fiscal year 2008) |  | $                          | 18 |          | $ |         |  | $ | (18                   | ) |  | $ | 
|Severance and benefits (fiscal year 2009) |  |                            |   |          |   | 576      |  |   | (576                  | ) |  |   | 
|                                          |  |                            |    |          |   |          |  |   |                       |   |  |   |  
|Total                                     |  | $                          | 18 |          | $ | 576      |  | $ | (594                  | ) |  | $ | 
|                                          |  |                            |    |          |   |          |  |   |                       |   |  |   |  

We did not have any exit activity during the three-month period ended July 4, 2009. During the first quarter
of 2009, in our continuing effort to reduce company-wide expenses, we eliminated 21 full-time positions, 90% in the United States and 10% internationally. We recorded severance and benefits charges totaling $0.6 million during the six-month period
ended July 4, 2009. Of this $0.6 million, $0.3 million was recorded as research, development and engineering expenses, $0.2 million as cost of sales and the remaining $0.1 million as selling, general and administrative expenses. We did not have
any exit activity during the first two quarters of 2008. As of July 4, 2009, there were no exit activity liabilities.

(14) Employee Benefit
Plans

Employee bonus plans

We sponsor an
executive incentive bonus plan that distributes employee awards based on the achievement of predetermined targets. We recorded a charge of $0.1 million and $0.2 million under this bonus plan for the three- and six-month periods ended
July 4, 2009, respectively, as compared to $0.2 million and $0.5 million for the corresponding periods of 2008.

Employee savings and retirement
plans

We sponsor a 401(k) employee salary deferral plan that allows voluntary contributions by all full-time employees of from 1% to 20% of their
pretax earnings. We may also make matching contributions to this plan at our discretion. Our contributions, when made, are limited to a maximum of $2,000 per year per employee, generally become 20% vested at the end of an employees first year
of service from the date of hire, and vest 20% per year of service thereafter until they become fully vested at the end of five years of service. We did not make any contributions to this plan for the three- and six-month periods ended
July 4, 2009 as compared to the contribution of $0.1 million and $0.2 million made for the corresponding periods of 2008.



15



---

##### Table of Contents

We also sponsor an executive non-qualified deferred compensation plan (the Plan) that allows qualifying
executives to defer current cash compensation. As of July 4, 2009, Plan assets, representing the cash surrender value of life insurance policies held by us, and liabilities were approximately $0.9 million each, respectively, and were
included in our Consolidated Balance Sheets under the captions Other assets and Other liabilities. In conjunction with this Plan, the related expense for each of the quarters ended July 4, 2009 and June 28, 2008 was
immaterial.

Postretirement benefits

We have
committed to providing and fully paying for lifetime postretirement medical and dental benefits to our Chief Executive Officer and Chief Financial Officer and their spouses, commencing after retirement. We recorded net periodic benefit costs of
$71,000 and $92,000 for each of the three- and six-month periods ended July 4, 2009, respectively, compared to $21,000 and $41,000 for the three- and six- month periods ended June 28, 2008. These expenses included interest cost and
amortization of prior service cost.

(15) Income Taxes

In accordance with FASB Financial Interpretation Number 48, Accounting for Uncertainty in Income Taxes, we had unrecognized tax benefits of $3.4 million as of January 1, 2009. We continue to recognize interest and penalties
as a component of income tax provision and accrued $34,000 for these items as of January 1, 2009.

If we are able to eventually recognize these
uncertain tax positions, $3.0 million of our unrecognized benefit would reduce the effective tax rate. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate
benefit should any of these uncertain tax positions be favorably settled in the future. Over the next twelve months, we expect an immaterial decline in liabilities associated with our uncertain tax positions as a result of expiring statutes of
limitations.

We are subject to federal and state tax examinations for years 1999 forward and 1997 forward, respectively, by virtue of the tax attributes
carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2001 and forward. There are no tax examinations currently in progress.

(16) Commitments and Contingencies

Commitments

In September 2007, we sublet a portion of our facilities in San Jose, California and account for it as an operating lease. This sublease expires in
January 2010. As of July 4, 2009, the minimum future sublease payments to be received were $0.3 million.

In July 2007, we capitalized a
five-year lease agreement for a new phone system recorded as office equipment. The amortization of this phone system is included with depreciation expense.

In August 2008, we entered into agreements with a leasing company for the sale and leaseback of certain assets for an initial term of four years. The sale price of the items was $6.8 million. There was no gain or loss from this transaction.
Under this sale-leaseback arrangement, we have an option to purchase the assets back at the future current fair market value upon the expiration of the lease in 2012. The lease is classified as operating lease in accordance with SFAS No. 13,
Accounting for Leases. In January 2009, we bought back assets with value totaling to $1.3 million. As of July 4, 2009, the minimum future lease payments to be made were $4.5 million.

Legal Proceedings

On July 11, 2003, we filed a lawsuit
against a Southern California company asserting infringement 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 to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on
October 12, 2005, the District Court denied the defendants request for attorneys fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the
courts ruling on its motion for attorneys fees. In March 2006, the Federal Circuit court upheld the district courts ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the
District Courts denial of attorneys fees. Neither side appealed the rulings by the Federal Circuit, and they are final.



16



---

##### Table of Contents

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process
claiming that attorneys fees, costs and other damages were due based on the outcome of the federal patent litigation suit described above. We do not believe this action has merit, particularly given the denial by the federal court of that
companys request to be awarded attorneys fees payable by us in the patent litigation and the subsequent federal appellate courts affirmation of the order denying any such award. We filed a motion to have the state court complaint
dismissed under Californias anti-strategic lawsuit against public participation (anti-SLAPP) and demurrer statutes. The anti-SLAPP statute is aimed at striking lawsuits that are brought in order to quash an individuals
constitutional rights to free speech or seeking redress of grievances (i.e., filing suit). The state court granted the anti-SLAPP motion as to the abuse of process claim, but denied it as to the malicious prosecution claim. Our subsequent appeals to
the appellate court and California Supreme Court were unsuccessful, and the matter has returned to Riverside County Superior Court, and discovery is proceeding. We intend to vigorously defend ourselves in this action.

Item 2. Managements Discussion and Analysis 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 words such as anticipates,
expects, intends, will, could, believes, estimates, continues, and similar expressions, are forward-looking statements under Section 27A of the Securities Act
of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), that involve risks and uncertainties, such as risks related to timing, delays, deferrals
and cancellations of orders by customers, including as a result of semiconductor manufacturing capacity as well as our customers financial condition and demand for semiconductors; cyclicality in the semiconductor and nanotechnology industries;
general economic and financial market conditions including impact on capital spending, as well as difficulty in predicting changes in such conditions; rapid technological change and the importance of timely product introductions; customer
concentration; our dependence on new product introductions and market acceptance of new products and enhanced versions of our existing products; lengthy sales cycles, including the timing of system installations and acceptances; lengthy and costly
development cycles for laser-processing and lithography technologies and applications; integration, development and associated expenses of the laser processing operation; pricing pressures and product discounts; high degree of industry competition;
intellectual property matters; changes in pricing by us, our competitors or suppliers; international sales; timing of new product announcements and releases by us or our competitors; ability to volume produce systems and meet customer requirements;
sole or limited sources of supply; effect of capital market fluctuations on our investment portfolio; ability and resulting costs to attract or retain sufficient personnel to achieve our targets for a particular period; dilutive effect of employee
stock option grants on net income per share, which is largely dependent upon our achieving and maintaining profitability and the market price of our stock; mix of products sold; outcome of litigation; manufacturing variances and production levels;
timing and degree of success of technologies licensed to outside parties; product concentration and lack of product revenue diversification; inventory obsolescence; asset impairment; changes to financial accounting standards; effects of certain
anti-takeover provisions; future acquisitions; volatility of stock price; foreign government regulations and restrictions; business interruptions due to natural disasters or utility failures; environmental regulations; and any adverse effects of
terrorist attacks in the United States or elsewhere, or government responses thereto, or military actions in Iraq, Afghanistan and elsewhere, on the economy in general, or on our business in particular. Due to these and additional factors, the
statements, historical results and percentage relationships set forth below are not necessarily indicative of the results of operations for any future period. These forward-looking statements are based on managements current beliefs and
expectations, some or all of which may prove to be inaccurate, and which may change. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.

OVERVIEW

We develop, manufacture and market
photolithography and laser thermal processing equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Japan, Taiwan and the rest of Asia.

We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuits industry, we target the market for advanced
packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, laser diodes and light emitting diodes (LEDs). Our laser thermal processing equipment
is targeted at advanced annealing applications within the semiconductor industry.

RESULTS OF OPERATIONS

We derive a substantial portion of our total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from
$1.2 million to $6.0 million. As a result of these high sale prices, the timing and recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on our net sales and operating results
for any particular period.



17



---

##### Table of Contents

Our backlog at the beginning of a period typically does not include all of the sales needed to achieve our sales
objectives for that period. In addition, orders in backlog are subject to cancellation, shipment or customer acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. Consequently, our net sales and operating
results for a period have been and will continue to be dependent upon our obtaining orders for systems to be shipped and accepted in the same period in which the order is received. Our business and financial results for a particular period could be
materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and customer acceptance during that period. Furthermore, a substantial portion of our shipments has historically occurred near the
end of each quarter. Delays in installation and customer acceptance due, for example, to our inability to successfully demonstrate the agreed-upon specifications or criteria at the customers facility, or to the failure of the customer to
permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below our expectations, which may materially adversely affect our operating results for that period. This risk is especially
applicable in connection with the introduction and initial sales of a new product line. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to rescheduling, delays, deferrals or cancellations by
customers, additional customer configuration requirements, or to unexpected manufacturing difficulties or delays in deliveries by suppliers due to their long production lead times or otherwise, have caused and may continue to cause net sales in a
particular period to fall significantly below our expectations, materially adversely affecting our operating results for that period. In particular, the long manufacturing and acceptance cycles of our advanced packaging family of wafer steppers and
laser thermal processing systems and the long lead time for lenses and other materials, could cause shipments and acceptances of such products to be delayed from one quarter to the next, which could materially adversely affect our financial
condition and results of operations for a particular quarter.

Additionally, the need for continued expenditures for research and development, capital
equipment, ongoing training and worldwide customer service and support, among other factors, will make it difficult for us to reduce our operating expenses in a particular period if we fail to achieve our net sales goals for the period.

Net Sales

Second Quarter



|                                   |  |                    |        |                 |   |        |                  |   |         |   |  |        |  
|---------------------------------- |  | ------------------ | ------ | --------------- | - | ------ | ---------------- | - | ------- | - |  | ------ | -
|                                   |  | Three Months Ended |        | Amount ofChange |   |        | PercentageChange |  
|(In thousands, except percentages) |  | July 4,2009        |        | June 28,2008    |   |       
|Sales of:                          |  |                    |        |                 |   |        |                  |   |         |   |  |        |  
|Products                           |  | $                  | 15,006 |                 | $ | 27,254 |                  | $ | (12,248 | ) |  | -44.9  | %
|Services                           |  |                    | 3,590  |                 |   | 4,407  |                  |   | (817    | ) |  | -18.5  | %
|Licenses                           |  |                    |       |                 |   | 400    |                  |   | (400    | ) |  | -100.0 | %
|                                   |  |                    |        |                 |   |        |                  |   |         |   |  |        |  
|Total net sales                    |  | $                  | 18,596 |                 | $ | 32,061 |                  | $ | (13,465 | ) |  | -42.0  | %
|                                   |  |                    |        |                 |   |        |                  |   |         |   |  |        |  

Net sales consist of revenues from products (system and spare parts sales), services and licensing of
technologies. Product sales decreased 44.9% to $15.0 million for the quarter ended July 4, 2009, compared to $27.3 million in the corresponding quarter of 2008, primarily due to a decrease in system unit volume and lower average selling
prices resulting from the continuing weakening of global financial and economic conditions.

On a product market application basis, system sales to the
semiconductor industry, consisting of sales to the advanced packaging market, the laser processing applications market and the semiconductor market, decreased $12.3 million to $11.7 million for the quarter ended July 4, 2009, compared to $24.1
million in the corresponding quarter of 2008. This decrease was due to a decrease in sales to the laser processing market of $5.4 million and a decrease in sales to the advanced packaging market of $6.9 million.

There were no system sales to the nanotechnology market for the quarter ended July 4, 2009 and the corresponding quarter of 2008. System sales to the nanotechnology
market are highly dependent on customer capacity demand in the industries we serve, including thin film heads, automotive MEMS, LED/laser diodes, and ink jet print heads, and therefore we expect to experience significant variations in sales to this
market from quarter to quarter.

Revenues from services for the quarter ended July 4, 2009 decreased by $0.8 million to $3.6 million, as compared
with $4.4 million in the corresponding quarter of 2008. This decrease is primarily due to fewer new service contracts that were recognized as revenue in the quarter as compared to the corresponding quarter of 2008.

There was no revenue from licensing activities for the quarter ended July 4, 2009, as compared to $0.4 million for the corresponding quarter of 2008. This decrease
is primarily due to the timing and frequency of the resale of our tools by our existing customers to third parties. Pursuant to our license arrangements, such transactions are subject to a license fee based on units sold. Future revenues from



18



---

##### Table of Contents

licensing activities, if any, will be contingent upon existing and future licensing arrangements. We may not be successful in generating licensing revenues
in the future and do not anticipate the recognition of significant levels of licensing income during the remainder of 2009.

At July 4, 2009, we had
approximately $2.4 million of deferred product and services income compared to $4.3 million at December 31, 2008. The gross amount of deferred revenues at July 4, 2009 was $2.4 million as compared to $5.3 million at December 31,
2008. The gross amount of deferred costs at July 4, 2009 was immaterial as compared to $1.0 million at December 31, 2008. Deferred product income is recognized as revenue upon satisfying the contractual obligations for installation and/or
customer acceptance. Deferred services income is recognized as revenue ratably over the contract period (for time-based service contracts), or as purchased services are rendered (for contracts based on a purchased quantity of hours).

For the quarter ended July 4, 2009, international net sales were $15.3 million, or 82.4% of total net sales, compared with $15.8 million, or 49.2% of total net
sales for the corresponding quarter of 2008. In the quarter ended July 4, 2009 compared to the corresponding quarter of 2008, sales to Europe decreased by $5.6 million, sales to Japan increased by $2.7 million, sales to Taiwan
increased by $0.2 million and sales to the rest of Asia increased by $2.3 million. We expect sales to international customers will continue to represent a significant portion of our revenues during the remainder of 2009 as companies continue to
build their manufacturing plants overseas, especially in Asia.

Our revenue derived from sales in foreign countries is not generally subject to significant
exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, however, orders are sometime denominated in Japanese yen. This subjects us to the risk of currency fluctuations. We
attempt to mitigate this risk by entering into foreign currency forward exchange contracts for the period between when an order is received and when it is recorded as revenue. After recording revenue, we use various mechanisms, such as natural
hedges, to offset substantial portions of the gains or losses associated with our Japanese yen denominated receivables due to exchange rate fluctuations. We had approximately 48.2 million of Japanese yen denominated receivables at July 4,
2009. International sales expose us to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which impact the relative cost of ownership of our products and, thus, the customers
willingness to purchase our product. (See Item 1A Risk Factors).

Year-To-Date



|                                   |  |                  |        |              |   |                 |  |   |                  |   |  |       |  
|---------------------------------- |  | ---------------- | ------ | ------------ | - | --------------- |  | - | ---------------- | - |  | ----- | -
|                                   |  | Six Months Ended |        |              |   |                 |  |  
|(In thousands, except percentages) |  | July 4,2009      |        | June 28,2008 |   | Amount ofChange |  |   | PercentageChange |  
|Sales of:                          |  |                  |        |              |   |                 |  |   |                  |   |  |       |  
|Products                           |  | $                | 37,127 |              | $ | 54,202          |  | $ | (17,075          | ) |  | -31.5 | %
|Services                           |  |                  | 7,042  |              |   | 8,595           |  |   | (1,553           | ) |  | -18.1 | %
|Licenses                           |  |                  | 82     |              |   | 400             |  |   | (318             | ) |  | -79.5 | %
|                                   |  |                  |        |              |   |                 |  |   |                  |   |  |       |  
|Total net sales                    |  | $                | 44,251 |              | $ | 63,197          |  | $ | (18,946          | ) |  | -30.0 | %
|                                   |  |                  |        |              |   |                 |  |   |                  |   |  |       |  

Product sales decreased 31.5% to $37.1 million for the six months ended July 4, 2009 as compared to the same
period in 2008. This decrease was primarily attributable to a change in product mix and lower average selling prices of systems sold resulting from the continuing weakening of global financial and economic conditions.

On a market segment basis, in the six months ended July 4, 2009, system sales to the semiconductor industry decreased $18.4 million from the corresponding period of
2008. This decrease was due to lower sales to the advanced packaging market of $8.4 million and the laser processing market of $11.2 million, partially offset by an increase in sales to the semiconductor market of $1.2 million. In the six
months ended July 4, 2009, system sales to the nanotechnology market increased $2.6 million from the corresponding period of 2008.

Revenues from
services in the six months ended July 4, 2009 decreased 18.1% from the comparable period of 2008, primarily as a result of decreases in the number of service contracts in effect during the quarter. Revenues from licensing activities decreased
in the six months ended July 4, 2009 as compared to the same period of 2008, primarily due to lower licensing revenue associated with the resale of our tools by our existing customers to third parties.

For the six months ended July 4, 2009, international net sales were $23.5 million, or 53.1% of total net sales, as compared with $34.0 million, or 53.8% of total
net sales, for the comparable period of 2008. For the six months ended July 4, 2009, as compared to the same period of 2008, sales to Europe decreased $6.1 million, sales to Japan decreased $5.1 million, sales to Taiwan decreased $2.3 million
and sales to the rest of Asia increased $3.0 million.



19



---

##### Table of Contents

Gross Profit

On a
comparative basis, gross margins decreased to 38.4% for the three-month period ended July 4, 2009, compared to 47.4% for the corresponding period of 2008. This 9.0 percentage point decrease in gross margin was primarily due to a change in
our product mix and lower average selling prices (5.3 percentage points) and higher service cost due to lower utilization (5.2 percentage points), partially offset by lower warranty and installation costs (1.5 percentage points).

Gross margin for the six months ended July 4, 2009 decreased to 44.1% compared to 48.3% in the corresponding period of 2008. This 4.2 percentage
point decrease in gross margin was primarily due to a change in our product mix and lower average selling prices (1.1 percentage points), higher service cost due to lower utilization (4.7 percentage points) and severance and benefit charges
recorded during the first quarter of 2009 (0.3 percentage points). These higher costs were partially offset by lower warranty and installation costs (1.9 percentage points)

Our gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including the following: the introduction of new products, which typically have
higher manufacturing costs until manufacturing efficiencies are realized and which are typically discounted more than existing products until the products gain market acceptance; the mix of products sold; the rate of capacity utilization; write-down
of inventory and open purchase commitments; product discounts, pricing and competition in our targeted markets; non-linearity of shipments during the quarter which can result in manufacturing inefficiencies; and the percentage of international
sales, which typically have lower gross margins than domestic sales principally due to higher field service and support costs.

Operating Expenses

Second Quarter



|                                       |  |                    |        |              |   |                 |  |   |                  |   |  |       |  
|-------------------------------------- |  | ------------------ | ------ | ------------ | - | --------------- |  | - | ---------------- | - |  | ----- | -
|                                       |  | Three Months Ended |        |              |   |                 |  |  
|(In thousands, except percentages)     |  | July 4,2009        |        | June 28,2008 |   | Amount ofChange |  |   | PercentageChange |  
|Research, development, and engineering |  | $                  | 4,458  |              | $ | 5,811           |  | $ | (1,353           | ) |  | -23.3 | %
|Selling, general, and administrative   |  |                    | 5,961  |              |   | 7,648           |  |   | (1,687           | ) |  | -22.1 | %
|                                       |  |                    |        |              |   |                 |  |   |                  |   |  |       |  
|Total operating expenses               |  | $                  | 10,419 |              | $ | 13,459          |  | $ | (3,040           | ) |  | -22.6 | %
|                                       |  |                    |        |              |   |                 |  |   |                  |   |  |       |  

Research, development and engineering expenses for the quarter ended July 4, 2009 were $4.5 million, as
compared to $5.8 million for the corresponding period in 2008. This decrease was primarily attributable to our continuing effort to manage company-wide expenses: lower salary and related expenses of $0.6 million resulting from workforce reduction,
lower contractor and consultant fees of $0.3 million and lower travel expenses and outside services of $0.2 million each. As a percentage of net sales, research, development and engineering expenses for the quarter ended July 4, 2009 increased
to 24.0% from 18.1% for the corresponding quarter of 2008. This increase was due primarily to the decrease in net sales as compared to the corresponding quarter of 2008 discussed above.

Selling, general, and administrative expenses for the quarter ended July 4, 2009 were $6.0 million as compared to $7.6 million for the corresponding quarter of 2008. This decrease was primarily attributable
to our continuing effort to manage company-wide expenses: lower salary and related expenses of $1.1 million, lower travel and related expenses of $0.4 million and lower consultant and contract fees of $0.2 million. As a percentage of net sales,
selling, general and administrative expenses for the quarter ended July 4, 2009 increased to 32.1% from 23.9% for the corresponding quarter of 2008. This increase was due primarily to the decrease in net sales as compared to the corresponding
quarter of 2008 discussed above.

Year-To-Date



|                                       |  |                  |        |              |   |                 |  |    |                  |   |  |       |  
|-------------------------------------- |  | ---------------- | ------ | ------------ | - | --------------- |  | -- | ---------------- | - |  | ----- | -
|                                       |  | Six Months Ended |        |              |   |                 |  |   
|(In thousands, except percentages)     |  | July 4,2009      |        | June 28,2008 |   | Amount ofChange |  |    | PercentageChange |  
|Research, development, and engineering |  |                  | 9,635  |              |   | 11,782          |  |    | (2,147           | ) |  | -18.2 | %
|Selling, general, and administrative   |  |                  | 12,924 |              |   | 16,160          |  |    | (3,236           | ) |  | -20.0 | %
|                                       |  |                  |        |              |   |                 |  |    |                  |   |  |       |  
|Total operating expenses               |  | $                | 22,559 |              | $ | 27,942          |  | ($ | 5,383            | ) |  | -19.3 | %
|                                       |  |                  |        |              |   |                 |  |    |                  |   |  |       |  

Research, development and engineering expenses were $9.6 million for the six months ended July 4, 2009 as
compared to $11.8 million for the corresponding period in 2008. This decrease was primarily due to workforce reduction and our continuing effort to



20



---

##### Table of Contents

manage company-wide expenses discussed above. As a percentage of net sales, research, development and engineering expenses for the six-month period ended
July 4, 2009 increased to 21.8% from 18.6% for the corresponding period of 2008. This increase was due primarily to the decrease in net sales as compared to the corresponding quarter of 2008 discussed above.

Selling, general and administrative expenses were $12.9 million for the six months ended July 4, 2009 as compared with $16.2 million for the corresponding period in
2008. This decrease was primarily due to workforce reduction and our continuing effort to manage company-wide expenses discussed above. As a percentage of net sales, selling, general and administrative expenses for the six-month period ended
July 4, 2009 increased to 29.2% from 25.6% for the corresponding period of 2008. This increase was due primarily to the decrease in net sales as compared to the corresponding quarter of 2008 discussed above.

Interest and Other Income, Net

Interest and other income, net, which
consists primarily of the recognition of a foreign consumption tax incentive in the three-month period ended July 4, 2009 and interest income and gain (loss) from foreign currency exchange in both the second quarter of 2009 and 2008.
Interest and other income, net was $2.8 million for the three months ended July 4, 2009, as compared with $1.0 million for the comparable period of 2008. This increase was primarily attributable to the recognition of a foreign consumption
tax incentive totaling $2.5 million, partially offset by a decline in interest income earned by our cash and investment positions of $1.0 million and a decrease in loss from foreign currency exchange of $0.2 million.

The foreign consumption tax incentive related to a benefit we received in fiscal years 2004 and 2005 and was previously reserved due to uncertainties as to the ultimate
realization of the incentive. We have determined that those uncertainties have been sufficiently reduced to allow recognition of the benefit. We do not expect to recognize any additional benefit with respect to this tax incentive. The loss from
foreign currency exchange was a result of depreciation of Japanese yen. The lower interest income earned resulted from lower applicable interest rates. The cost of securities sold was determined based on the specific identification method. As of
July 4, 2009, the weighted-average maturity of our investment portfolio was less than a year. Changes in interest rates have had, and will continue to have, an impact on our interest income.

Provision for Income Taxes

For the three- and six-month periods
ended July 4, 2009, we recorded an income tax benefit of $42,000 and $36,000, respectively, as compared to an income tax provision of $0.2 million and $0.3 million for the comparable periods in 2008. The income tax benefit recognized for the
three- and six-month periods ended July 4, 2009 resulted primarily from the federal refundable tax credit offset by foreign income taxes.

Income tax
estimates can be affected by whether and within which jurisdictions future earnings will occur and how and when cash is repatriated to the United States, as well as other aspects of an overall income tax strategy. Additionally, taxing jurisdictions
could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations,
each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters, and we do not anticipate any material earnings impact from their ultimate
resolution.

Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider available evidence, both positive
and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. As a result of
our analysis, we concluded that it is more likely than not that our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax
assets outside of Japan and Taiwan. We closely monitor available evidence, and may release some or all of the valuation allowance in future periods.

In
accordance with FASB Financial Interpretation Number 48, Accounting for Uncertainty in Income Taxes, we had unrecognized tax benefits of $3.4 million as of January 1, 2009. We continue to recognize interest and penalties as a
component of income tax provision and accrued $34,000 for these items as of January 1, 2009.

If we are able to eventually recognize these uncertain
tax positions, $3.0 million of the unrecognized benefit would reduce our effective tax rate. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should
any of these uncertain tax positions be favorably settled in the future. Over the next twelve months, we expect an immaterial decline in liabilities associated with our uncertain tax positions as a result of expiring statutes of limitations.



21



---

##### Table of Contents

We are subject to federal and state tax examination for years 1999 forward and 1997 forward, respectively, by virtue of
the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2001 and forward. There are no tax examinations currently in progress.

Outlook

The anticipated timing of orders, shipments and customer
acceptances usually requires that we fill a number of production slots in any given quarter in order to meet our sales targets. If we are unsuccessful in our efforts to secure those production orders, or if existing production orders are delayed or
cancelled, our results of operations will be materially adversely impacted. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We presently expect net sales for the third quarter of 2009 to be higher than the
net sales reported in the second quarter of 2009. For the full fiscal year of 2009, we believe that total net sales will decrease from the amount reported for 2008 and that our cash flow will be neutral in the second half of 2009.

Because our net sales are subject to a number of risks, including risks associated with the market acceptance of our new laser processing product line, delays in
customer acceptance, intense competition in the capital equipment industry, uncertainty relating to the timing and market acceptance of our products, and the condition of the macro-economy and the semiconductor industry and the other risks described
in this report and in our Annual Report on Form 10-K for the year ended December 31, 2008, we may not exceed or even maintain our current or prior level of net sales for any period in the future. Additionally, we believe that the market
acceptance and volume production of our advanced packaging systems, laser processing systems and our 1000 Platform steppers are of critical importance to our future financial results. At July 4, 2009, these critical systems represented
approximately 77.3% of our backlog. To the extent that these products do not achieve or maintain significant sales due to difficulties involving manufacturing or engineering, the inability to reduce the current long manufacturing cycles for these
products, competition, excess capacity in the semiconductor or nanotechnology device industries, or for any other reason, our business, financial condition and results of operations would be materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating
activities was $5.3 million for the six months ended July 4, 2009, compared with net cash provided by operating activities of $12.0 million for the comparable period in 2008. Net cash used in operating activities during the three months
ended July 4, 2009 was primarily attributable to our net loss from operations, decrease in accounts payable, deferred product and service income and other current liabilities and increase in trade receivables. The decrease in deferred product
and services income was primarily due to reduced system shipments and acceptance resulting in fewer systems deferred at July 4, 2009. These uses of cash were partially offset by the net effect of non-cash expenses from depreciation,
amortization and stock-based compensation charges. Other sources of cash from operating activities included decreases in inventories, prepaid expenses and other current assets.

We believe that because of the relatively long manufacturing cycle of certain of our systems, particularly newer products, our inventories will continue to represent a significant portion of working capital.
Currently, we are devoting significant resources to the commercialization of our laser processing systems and to the development of our next generation 1X lithography technologies. We currently intend to continue to incur significant operating
expenses in the areas of research, development and engineering, manufacturing, and 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 may be adversely impacted in the future by costs associated with the production of our laser processing systems and by future generations of our 1X wafer steppers. These costs include, but are not limited to, additional
manufacturing overhead, costs of demonstration systems and facilities and the establishment of additional after-sales support organizations. Moreover, there can be no assurance that operating expenses will not increase, relative to sales, as a
result of adding technical, marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our cash flow and operating
results will be materially adversely affected until, among other factors, costs and expenses can be reduced. Our failure to achieve our sales targets for these new products could result in inventory write-offs and asset impairment charges, either of
which could materially adversely impact our results of operations.

During the first six months ended July 4, 2009, net cash used in investing
activities was $17.7 million, attributable to net purchase of short-term investments of $15.7 million and capital expenditures of $2.0 million during the quarter ended July 4, 2009.

Net cash provided by financing activities was $3.6 million during the six months ended July 4, 2009, attributable to net proceeds of $3.6 million under our
notes payable and proceeds from the issuance of common stock of $0.4 million offset partially by tax payments of $0.5 million for the issuance of common stock from the release of restricted stock units under our employee stock option plans.

At July 4, 2009, we had working capital of $184.0 million. Our principal sources of liquidity at July 4, 2009 consisted of
$144.8 million in cash, cash equivalents and short-term investments, net of outstanding borrowings under our line of credit. We have



22



---

##### Table of Contents

a line of 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 plus 125 basis points (approximately 1.45% as of July 4, 2009). Certain of our cash, cash equivalents and marketable securities secure borrowings outstanding under this facility, but we are not restricted in the use of those assets. Funds
are advanced to us under this facility in accordance with pre-determined advance rates based on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants other than a
collateral requirement. As of July 4, 2009, $9.6 million was outstanding under this facility, with a related collateral requirement of approximately $12.8 million of our cash, cash equivalents and short-term investments.

The development and manufacture of new lithography and laser-based systems and system enhancements is highly capital-intensive. In order to be competitive, we believe we
must continue to make significant expenditures for capital equipment; sales, service, training and support capabilities; systems, procedures and controls; and expansion of operations and research and development, among many other items. We expect
that cash generated from operations and our cash, cash equivalents and short-term investments will be sufficient to meet our cash requirements for at least the next twelve months. However, in the near-term, we may continue to utilize existing and
future lines of credit, and other sources of financing, in order to maintain our present levels of cash, cash equivalents and investments. Beyond the next twelve months, we may require additional equity or debt financing to address our working
capital or capital equipment needs. In addition, we may seek to raise equity or debt capital at any time that we deem market conditions to be favorable. Additional financing, if needed, may not be available on reasonable terms, or at all.

We may in the future pursue acquisitions of complementary product lines, technologies or businesses. Future acquisitions may result in potentially
dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses and impairment charges related to goodwill and other intangible assets, which could materially adversely affect our financial
condition and results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, personnel and products of the acquired companies; the diversion of managements
attention from other business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of key employees of the acquired company. In the event we acquire product lines, technologies or businesses
which do not complement our business, or which otherwise do not enhance our sales or operating results, we may incur substantial write-offs and higher recurring operating costs, which could have a material adverse effect on our business, financial
condition and results of operations. In the event that any such acquisition does occur, there can be no assurance as to the effect thereof on our business or operating results.

Foreign Currency

As part of our overall strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, we attempt to hedge most of our Japanese yen denominated foreign currency exposures. We use foreign currency forward contracts to hedge the risk that outstanding Japanese yen denominated receipts from customers, for
actual or forecasted sales of our products after receipt of customer orders, may be adversely affected by changes in foreign currency exchange rates. We use foreign currency forward exchange contracts and natural hedges to offset substantial
portions of the potential gains or losses associated with our Japanese yen denominated assets and liabilities due to exchange rate fluctuations. We enter into foreign currency forward contracts that generally have maturities of nine months or less.

Critical Accounting Policies

The discussion and
analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.

Information Available on Company Website

Our website is located at www.ultratech.com. We make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (and
amendments to those reports), as soon as reasonably practicable after such reports are filed electronically with the SEC. We have adopted a Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer
or controller, or persons performing similar functions. We have posted this Code of Ethics on our website. Any future amendments to or waivers of this Code of Ethics will also be posted on our website.



23



---

##### Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year
ended December 31, 2008 and to the subheading Derivative Instruments and Hedging under the heading Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data of our
Annual Report on Form 10-K for the year ended December 31, 2008.

Interest Rate Risk

Our exposure to market risk due to potential changes in interest rates relates primarily to our investment portfolio, which consisted primarily of fixed interest rate
instruments as of July 4, 2009. We maintain an investment policy designed to ensure the safety and preservation of our invested funds by limiting market risk and the risk of default.

Certain of our cash, cash equivalents and short and long-term investments serve as collateral for a line of credit we maintain with a brokerage firm. The line of credit
is used for liquidity purposes, mitigating the need to liquidate investments in order to meet our current operating cash requirements.

Credit Risk

We mitigate credit default risk by attempting to invest in high credit quality securities and by positioning our portfolio to respond appropriately to a
significant reduction in a credit rating of any investment issuer or guarantor. Our portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and is diversified in accordance with our
investment policy. To date, we have not experienced any liquidity problems with our portfolio.

As of July 4, 2009, we did not have any investments in
mortgage backed or auction rate securities or any security investments in the financial service sector. However, we intend to closely monitor developments in the credit markets and make appropriate changes to our investment policy as we deem
necessary or advisable. Based on our ability to liquidate our investment portfolio and our expected operating cash flows, we do not anticipate any liquidity constraints as a result of the current credit environment.

Foreign Currency Risk Management

The majority of our revenue,
expense and capital purchasing activities are transacted in U.S. dollars. However, we do enter into these transactions in other currencies, primarily Japanese yen. To protect against reductions in value and the volatility of future cash flows caused
by changes in currency exchange rates, we have established cash flow and balance sheet hedging programs.

We use foreign currency forward contracts to
hedge the risk that outstanding Japanese yen denominated receipts from customers for actual or forecasted sales of equipment may be adversely affected by changes in foreign currency exchange rates. Our hedging programs reduce, but do not always
entirely eliminate, the impact of currency movements. See Derivative Instruments and Hedging in Note 7 under the heading Notes to Condensed Consolidated Financial Statements of Item 1, Financial Statements
herein for further disclosures.

Item 4. Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, as of the end of the period covered by this report (the Evaluation Date). Based upon the evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive
officer and principal financial officer, to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is further
required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.



24



---

##### Table of Contents

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended July 4, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On July 11, 2003, we filed a lawsuit against a Southern
California company asserting infringement 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 to be invalid.
We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the
District Court denied the defendants request for attorneys fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the courts ruling on its motion
for attorneys fees. In March 2006, the Federal Circuit court upheld the district courts ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Courts denial of
attorneys fees. Neither side appealed the rulings by the Federal Circuit, and they are final.

In May 2006, the same company filed a state court
lawsuit against us for malicious prosecution and abuse of process claiming that attorneys fees, costs and other damages were due based on the outcome of the federal patent litigation suit described above. We do not believe this action has
merit, particularly given the denial by the federal court of that companys request to be awarded attorneys fees payable by us in the patent litigation and the subsequent federal appellate courts affirmation of the order denying any
such award. We filed a motion to have the state court complaint dismissed under Californias anti-strategic lawsuit against public participation, or anti-SLAPP, and demurrer statutes. The anti-SLAPP statute is aimed at striking lawsuits that
are brought in order to quash an individuals constitutional rights to free speech or seeking redress of grievances (i.e., filing suit). The state court granted the anti-SLAPP motion as to the abuse of process claim, but denied it as to the
malicious prosecution claim. Our subsequent appeals to the appellate court and California Supreme Court were unsuccessful, and the matter has returned to Riverside County Superior Court, and discovery is proceeding. We intend to vigorously defend
ourselves in this action.

Item 1A. Risk Factors

In addition to risks described in the foregoing discussions, the following risks apply to our business and us:

The current global financial and economic crisis could result in the cancellation, deferral or rescheduling of orders by our customers as well as changes in projection of new business.

Orders in backlog are subject to cancellation, deferral or rescheduling by a customer with limited or no penalties. Sales of our systems depend, in significant part, upon
the decision of a prospective customer to increase manufacturing capacity or to restructure current manufacturing facilities, either of which typically involves a significant commitment of capital. Further, the purchase of our products involves a
significant commitment of capital on the part of our customers. If the markets for our customers products experience a period of declining demand or if our customers ability to raise capital is limited, they may choose to cancel, delay
or reschedule purchases of our products. The current global financial and economic crisis and the uncertainty created thereby could result in such a decline in demand or limited ability to raise capital, or could otherwise affect our customers
markets, financial condition or willingness to incur expenses. As a result, we could experience the cancellation, delay or rescheduling of orders in our current backlog or of orders we currently expect to receive. Any such decision by our customers
or potential customers would adversely affect our net sales and results of operations.

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

Sales of
our systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity, replace older equipment or to restructure current manufacturing facilities, either of which typically involves a significant
commitment of capital. Many of our customers in the past have cancelled the development of new manufacturing facilities and have substantially reduced their capital equipment budgets. In view of the significant investment involved in a system
purchase, we have experienced



25



---

##### Table of Contents

and may continue to experience delays following initial qualification of our systems as a result of delays in a customers approval process.
Additionally, we are presently receiving orders for systems that have lengthy delivery schedules, which may be due to longer production lead times or a result of customers capacity scheduling requirements. For these and other reasons, our
systems typically have a lengthy sales cycle during which we may expend substantial funds and management effort in securing a sale. Lengthy sales cycles subject us to a number of significant risks, including inventory obsolescence and fluctuations
in operating results, over which we have little or no control. In order to maintain or exceed our present level of net sales, we are dependent upon obtaining orders for systems that will ship and be accepted in the current period. We may not be able
to obtain those orders. Other important factors that could cause demand for our products to fluctuate include:



| |  | competitive pressures, including pricing pressures, from companies that have competing products;
|- |  | ------------------------------------------------------------------------------------------------



| |  | changes in customer product needs; and
|- |  | --------------------------------------



| |  | strategic actions taken by our competitors.
|- |  | -------------------------------------------

The
semiconductor industry historically has been highly cyclical and has experienced periods of oversupply, which have in turn affected the market for semiconductor equipment such as ours and which can adversely affect our results of operations during
such periods.

Our business depends in significant part upon capital expenditures by manufacturers of semiconductors, advanced packaging semiconductors
and nanotechnology components which in turn depend upon the current and anticipated market demand for such devices and products utilizing such devices. The semiconductor industry historically has been highly cyclical and has experienced recurring
periods of oversupply. This has, from time to time, resulted in significantly reduced demand for capital equipment including the systems manufactured and marketed by us. We believe that markets for new generations of semiconductors and semiconductor
packaging will also be subject to similar fluctuations. Our business and operating results would be materially adversely affected by downturns or slowdowns in the semiconductor packaging market or by loss of market share. Accordingly, we may not be
able to achieve or maintain our current or prior level of sales. We attempt to mitigate the risk of cyclicality by participating in multiple markets including semiconductor, semiconductor packaging, and nanotechnology sectors, as well as
diversifying into new markets such as laser-based annealing for implant activation and other applications. Despite such efforts, when one or more of such markets experiences a downturn or a situation of excess capacity, our net sales and operating
results are materially adversely affected.

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

Currently, we are devoting significant resources to the development, introduction and commercialization of our laser products as well as our lithography wafer steppers. We intend to continue to develop these products and technologies during
2009, and will continue to incur significant operating expenses in the areas of research, development and engineering, manufacturing and general and administrative costs in order to develop, produce and support these new products. Additionally,
gross profit margins and inventory levels may be further adversely impacted in the future by costs associated with the initial production of our laser processing systems and by future generations of our 1X lithography systems. Introduction of new
products generally involves higher installation costs and product performance uncertainties that could delay customer acceptance of our systems, resulting in a delay in recognizing revenue associated with those systems and a reduction in gross
margins. These costs include, but are not limited to, additional manufacturing overhead, additional inventory write-downs, costs of demonstration systems and facilities and costs associated with the establishment of additional after-sales support
organizations. Additionally, operating expenses may increase, relative to sales, as a result of adding additional marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly
increased net sales or if our sales fall below expectations, our operating results could be materially adversely affected.

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



26



---

##### Table of Contents

We operate in a highly competitive industry in which customers are required to invest substantial resources in each
product, which makes it difficult to achieve significant sales to a particular customer once another vendors equipment has been purchased by that customer.

The capital equipment industry in which we operate is intensely competitive. A substantial investment is required to install and integrate capital equipment into a semiconductor, semiconductor packaging or
nanotechnology device production line. We believe that once a device manufacturer or packaging subcontractor has selected a particular suppliers capital equipment, the manufacturer generally relies upon that equipment for the specific
production line application and, to the extent possible, subsequent generations of similar products. Accordingly, it is difficult to achieve significant sales to a particular customer once another suppliers capital equipment has been selected.

We experience competition in advanced packaging from various proximity aligner companies such as Suss Microtec AG (Suss Microtec) and used
projection systems. In addition, some device manufacturers may consider using reduction steppers for advanced packaging processes. In nanotechnology, we experience competition from proximity aligner companies, such as Suss Microtec, as well as other
stepper manufacturers who have developed or are developing tools specifically designed for nanotechnology applications. We expect our competitors in the lithography arena to continue to improve the performance of their current products and to
introduce new products with improved price and performance characteristics. This could cause a decline in sales or loss of market acceptance of our steppers in our served markets, and thereby materially adversely affect our business, financial
condition and results of operations. Enhancements to, or future generations of, competing products may be developed that offer superior cost of ownership and technical performance features.

With respect to our laser annealing technologies, marketed under the LSA100A product name, the primary competition comes from companies such as Dainippon Screen
Manufacturing Co., Ltd., Applied Materials, Inc. and Mattson Technology, Inc. Many of these companies offer products utilizing rapid thermal processing (RTP) which is the current prevailing manufacturing technology. RTP does not prevent
semiconductor device manufacturers from scaling the lateral dimensions of their transistors to obtain improved performance, but diffusion resulting from the time scales associated with RTP limits the vertical dimension of the junctions. Faster
annealing times result in shallower and more abrupt junctions and faster transistors. We believe that RTP manufacturers recognize the need to reduce 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.

Another potential advanced
annealing solution utilizes flash lamp annealing technology, or FLA. Several companies have published papers on annealing tools that incorporate flash lamp technology in order to reduce annealing times and increase anneal temperatures. Developers of
FLA technology claim to have overcome annealing difficulties at the 65nm node. This technique, which employs xenon flash lamps, has shown improvements over RTP in junction depth and sheet resistance, but we believe FLA suffers from pattern-related
non-uniformities and could require additional, costly processes to equalize the reflectivity of different areas within the chip or wafer. Our proprietary laser processing solution has been specifically developed to provide junction annealing on
near-instantaneous time-scales, while achieving high activation levels. Laser spike annealing, our first implementation of laser processing, activates dopants in the microsecond-to-millisecond time frame without melting. Our research indicates that,
at temperatures just below the melting point of silicon, time durations in the microsecond to millisecond range are required to achieve full activation and minimal dopant diffusion.

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

We believe that in order to be competitive, we will need
to continue to invest significant financial resources in new product development, new features and enhancements to existing products, the introduction of new stepper systems in our served markets on a timely basis, and maintaining customer service
and support centers worldwide. In marketing our products, we may also face competition from vendors employing other technologies. In addition, increased competitive pressure has led to intensified price-based competition in certain of our markets,
resulting in lower prices and margins. Should these competitive trends continue, our business, financial condition and operating results may be materially adversely affected.

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

Historically, we have sold a substantial portion of
our systems to a limited number of customers. In the three- and six-month periods ended July 4, 2009, our top five customers accounted for 98.9% and 84.3% of our system sales compared to 88.0% and 62.7%, in the comparable period of 2008. We
expect that sales to a relatively few customers will continue to account for a high percentage of our



27



---

##### Table of Contents

net sales in the foreseeable future and believe that our financial results depend in significant part upon the success of these major customers and our
ability to meet their future capital equipment needs. Although the composition of the group comprising our largest customers may vary from period to period, the loss of a significant customer or any reduction in orders by a significant customer,
including reductions due to market, economic or competitive conditions in the semiconductor, semiconductor packaging or nanotechnology industries or in the industries that manufacture products utilizing integrated circuits, thin film heads or other
nanotechnology components, would likely have a material adverse effect on our business, financial condition and results of operations. Our ability to maintain or increase our sales in the future depends, in part, on our ability to obtain orders from
new customers as well as the financial condition and success of our existing customers, the semiconductor and nanotechnology industries and the economy in general.

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

On a market application basis, sales to the semiconductor
industry, primarily for advanced packaging applications and laser thermal processing applications, accounted for all of our system revenue for the each of the second quarters of 2009 and 2008. We did not have any sales to nanotechnology
manufacturers, including micro systems, thin film head and optical device manufacturers, in each of the second quarters of 2009 and 2008. Our future operating results and financial condition would be materially adversely impacted by a downturn in
any of these industries, or by loss of market share in any of these industries. A growing portion of our backlog of system orders is comprised of laser spike annealing tools. To date, we have limited customer experience with this technology. Should
significant demand not materialize, due to technical, production, market, or other factors, our business, financial position and results of operations would be materially adversely impacted.

We rely on a limited number of outside suppliers and subcontractors to manufacture certain components and subassemblies, and on single or a limited group of outside
suppliers for certain materials for our products, which could result in a potential inability to obtain an adequate supply of required components due to the suppliers failure or inability to provide such components in a timely manner, or at
all, and reduced control over pricing and timely delivery of components and materials, any of which could adversely affect our results of operations.

Our manufacturing activities consist of assembling and testing components and subassemblies, which are then integrated into finished systems. We rely on a limited number of outside suppliers and subcontractors to manufacture certain
components and subassemblies. We order one of the most critical components of our technology, the glass for our 1X lenses, from external suppliers. We design the 1X lenses and provide the lens specifications and the glass to other suppliers, who
then grind and polish the lens 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 a limited group of outside suppliers in order to ensure overall quality and timeliness of delivery. Many of these components and subassemblies have significant production lead times. To
date, we have been able to obtain adequate services and supplies of components and subassemblies for our systems in a timely manner. However, disruption or termination of certain of these sources could have a significant adverse impact on our
ability to manufacture our systems. This, in turn, would have a material adverse effect on our business, financial condition and results of operations. Our reliance on a sole supplier or a limited group of suppliers and our reliance on
subcontractors involve several risks, including a potential inability to obtain an adequate supply of required components due to the suppliers failure or inability to provide such components in a timely manner, or at all, and reduced control
over pricing and timely delivery of components. Although the timeliness, yield and quality of deliveries to date from our subcontractors have been acceptable, manufacture of certain of these components and subassemblies is an extremely complex
process, and long lead-times are required. Any inability to obtain adequate deliveries or any other circumstance that would require us to seek alternative sources of supply or to manufacture such components internally could delay our ability to ship
our products, which could damage relationships with current and prospective customers and have a material adverse effect on our business, financial condition and results of operations.

Our industry is subject to rapid technological change and product innovation, which could result in our technologies and products being replaced by those of our competitors, which would adversely affect our
business and results of operations.

The semiconductor and nanotechnology manufacturing industries are subject to rapid technological change, evolving
industry standards and new product introductions and enhancements. Our ability to be competitive in these and other markets will depend, in part, upon our ability to develop new and enhanced systems and related applications, and to introduce these
systems and related applications at competitive prices and on a timely and cost-effective basis to enable customers to integrate them into their operations



28



---

##### Table of Contents

either prior to or as they begin volume product manufacturing. We will also be required to enhance the performance of our existing systems and related
applications. Our success in developing new and enhanced systems and related applications depends upon a variety of factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of
manufacturing and assembly processes, product performance in the field and effective sales and marketing. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both future customer
requirements and the technology that will be available to meet those requirements. We may not be successful in selecting, developing, manufacturing or marketing new products and related applications or enhancing our existing products and related
applications. Any such failure would materially adversely affect our business, financial condition and results of operations. Further, we may make substantial investments in new products before we know whether they are technically feasible or
commercially viable, and as a result may incur significant product development expenses that do not result in new products or revenues

Because of the
large number of components in our systems, significant delays can occur between a systems introduction and our commencement of volume production of such systems. We have experienced delays from time to time in the introduction of, and
technical and manufacturing difficulties with, certain of our systems and enhancements and related application tools features and options, and may experience delays and technical and manufacturing difficulties in future introductions or volume
production of new systems or enhancements and related application tools features and options.

We may encounter additional technical, manufacturing or
other difficulties that could further delay future introductions or volume production of systems or enhancements. Our inability to complete the development or meet the technical specifications of any of our systems or enhancements and related
applications, or our inability to manufacture and ship these systems or enhancements and related tools in volume and in time to meet the requirements for manufacturing the future generation of semiconductor or nanotechnology devices would materially
adversely affect our business, financial condition and results of operations. In addition, we may incur substantial unanticipated costs to ensure the functionality and reliability of our products early in the products life cycles. If new
products have reliability or quality problems, reduced orders or higher manufacturing costs, delays in customer acceptance, revenue recognition and collecting accounts receivable and additional service and warranty expenses may result. Any of such
events may materially adversely affect our business, financial condition and results of operations.

We may not be successful in protecting our
intellectual property rights or we could be found to have infringed the intellectual property rights of others, either of which could weaken our competitive position and adversely affect our results of operations.

Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, 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 resulting from our ongoing research and development and manufacturing
activities. We own 158 United States and foreign patents, which expire on dates ranging from December 2009 to March 2027 and have 47 United States and foreign patent applications pending. In addition, we have various registered trademarks and
copyright registrations covering mainly applications used in the operation of our systems. We also rely upon trade secret protection for our confidential and proprietary information. We may not be able to protect our technology adequately and
competitors may be able to develop similar technology independently. Our pending patent applications may not be issued or U.S. or foreign intellectual property laws may not protect our intellectual property rights. In addition, litigation may be
necessary to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation
has resulted in, and in the future could result in, substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations, regardless of the outcome of the litigation.
Patents issued to us may be challenged, invalidated or circumvented and the rights granted thereunder may not provide competitive advantages to us. Furthermore, others may independently develop similar technology or products, or, if patents are
issued to us, design around the patents issued to us. Invalidation of our patents related to those technologies, or the expiration of patents covering our key technologies, could allow our competitors to more effectively compete against us, which
could result in less revenue for us.

On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement 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 to be invalid. We appealed this decision. The defendant subsequently
brought a motion for reimbursement of its attorneys fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendants request for
attorneys fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the courts ruling on its motion for attorneys fees. In March 2006, the Federal
Circuit court upheld the district courts ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Courts denial of attorneys fees. Neither side appealed the rulings by the
Federal Circuit, and they are final.



29



---

##### Table of Contents

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process
claiming that attorneys fees, costs and other damages were due based on the outcome of the federal patent litigation suit described above. We do not believe this action has merit, particularly given the denial by the federal court of that
companys request to be awarded attorneys fees payable by us in the patent litigation and the subsequent federal appellate courts affirmation of the order denying any such award. We filed a motion to have the state court complaint
dismissed under Californias anti-strategic lawsuit against public participation (anti-SLAPP) and demurrer statutes. The anti-SLAPP statute is aimed at striking lawsuits that are brought in order to quash an individuals
constitutional rights to free speech or seeking redress of grievances (i.e. filing suit). The state court granted the anti-SLAPP motion as to the abuse of process claim, but denied it as to the malicious prosecution claim. Our subsequent appeals to
the appellate court and California Supreme Court were unsuccessful, and the matter has returned to Riverside County Superior Court, and discovery is proceeding. We intend to vigorously defend ourselves in this action.

We believe that the outcome of these matters will not be material to our business, financial condition or results of operations.

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

Infringement claims by third parties or claims for
indemnification resulting from infringement claims may be asserted in the future and such assertions could materially adversely affect our business, financial condition and results of operations, regardless of the outcome of any litigation. With
respect to any such future claims, we may seek to 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 decide, in the alternative, to resort to
litigation to challenge such claims. Such challenges could be expensive and time consuming and could materially adversely affect our business, financial condition and results of operations, regardless of the outcome of any litigation.

A substantial portion of our sales are outside of the United States, which subjects us to risks related to customer service, installation, foreign economic and
political stability, uncertain regulatory and tax rules, and foreign exchange rate fluctuations, all of which make it more difficult to operate our business.

International sales accounted for approximately 82.4% and 53.1% of total net sales for the three- and six-month periods ended July 4, 2009, compared to 49.2% and 53.8% in the comparable periods of 2008. We anticipate that international
sales will continue to account for a significant portion of total net sales. As a result, a significant portion of our net sales will continue to be subject to certain risks, including unexpected changes in regulatory requirements; difficulty in
satisfying existing regulatory requirements; exchange rate fluctuations; tariffs and other barriers; political and economic instability; difficulties in accounts receivable collections; reduced protection of intellectual property; natural disasters;
difficulties in staffing and managing foreign subsidiary and branch operations; and potentially adverse tax consequences.

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

Our investment portfolio may
become impaired by further deterioration of the capital markets.

Our cash equivalent and short-term investment portfolio as of July 4, 2009
consisted of securities and obligations of U.S. government agencies, money market funds, commercial paper and corporate debt securities. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to
interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.

As a result of current financial market conditions, investments in some financial instruments, such as structured investment vehicles, sub-prime mortgage-backed securities and collateralized debt obligations, may lose
some or all of their value due to liquidity and



30



---

##### Table of Contents

credit concerns. As of July 4, 2009, we had no holdings in these categories of investments and no impairment charge associated with our short-term
investment portfolio. Although we believe our current investment portfolio has little risk of impairment, we cannot predict future market conditions or market liquidity and our investment portfolio could become impaired.

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

Our future operating results depend, in significant part, upon the continued contributions of key
personnel, many of whom would be difficult to replace. We have entered into employment agreements only with our Chief Executive Officer and Chief Financial Officer, and our employees are employed at will. The agreements with our Chief
Executive Officer and Chief Financial Officer contain vesting acceleration and severance payment provisions that could result in significant costs or charges to us should the employee be terminated without cause, die or have a disability. We do not
maintain any life insurance on any of our key employees. The loss of key personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, our future operating results depend in significant
part upon our ability to attract and retain other qualified management, manufacturing, technical, sales and support personnel for our operations. There are only a limited number of persons with the requisite skills to serve in these positions and it
may become increasingly difficult for us to hire such personnel over time. At times, competition for such personnel has been intense, particularly in the San Francisco Bay Area, where we maintain our headquarters and principal operations, and we may
not be successful in attracting or retaining such personnel. The failure to attract or retain such persons would materially adversely affect our business, financial condition and results of operations.

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

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

Accounting policies affecting many other aspects of our business, including rules relating to revenue recognition, off-balance sheet transactions, employee stock options, restructurings, asset disposals and asset
retirement obligations, derivative and other financial instruments have recently been revised or are under review. Changes to those rules or the questioning of how we interpret or implement those rules may have a material adverse effect on our
reported financial results or on the way we conduct business. In addition, our preparation of financial statements in accordance with U.S. GAAP requires that we make estimates and assumptions that affect the recorded amounts of assets and
liabilities, disclosure of those assets and liabilities at the date of the financial statements and the recorded amounts of expenses during the reporting period. A change in the facts and circumstances surrounding those estimates could result in a
change to our estimates and could impact our future operating results.

Our equity incentive plans, certain provisions of our Certificate of
Incorporation and Bylaws, and Delaware law may discourage third parties from pursuing a change of control transaction with us.

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

We use hazardous substances in the operation of our business, and any failure on our part to comply with applicable regulations or to appropriately control the use, disposal or storage of such substances could
subject us to significant liabilities.

We are subject to a variety of governmental regulations relating to environment protection and workplace safety,
including the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. The failure to comply with current or future regulations could result in substantial fines being imposed on us,
suspension of production, alteration of the manufacturing process or cessation of operations. Such regulations could require us to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any
failure by us to comply with these regulations, including any failure to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances, could subject us to significant liabilities.



31



---

##### Table of Contents

Our stock price has experienced significant volatility in the past and we expect this to continue in the future as a
result of many factors, some of which could be unrelated to our operating performance, and such volatility can have a major impact on the number of shares subject to outstanding stock options and restricted stock units that are included in
calculating our earnings per share.

We believe that factors such as announcements of developments related to our business, fluctuations in our
operating results, a shortfall in revenue or earnings, changes in analysts expectations, general conditions in the semiconductor and nanotechnology industries or the worldwide or regional economies, sales of our securities into the
marketplace, an outbreak or escalation of hostilities, announcements of technological innovations or new products or enhancements by us or our competitors, developments in patents or other intellectual property rights and developments in our
relationships with our customers and suppliers could cause the price of our Common Stock to fluctuate, perhaps substantially. The market price of our Common Stock has fluctuated significantly in the past and we expect it to continue to experience
significant fluctuations in the future, including fluctuations that may be unrelated to our performance.

As of July 4, 2009, we had options and
restricted stock units to purchase approximately 4.7 million shares of our Common Stock outstanding. Among other determinants, the market price of our stock has a major bearing on the number of shares subject to outstanding stock options and
restricted stock units that are included in the weighted-average shares used in determining our net income per share. During periods of extreme volatility, the impact of higher stock prices can have a materially dilutive effect on our net income per
share. Additionally, shares subject to outstanding options and restricted stock units are excluded from the calculation of net income per share when we have a net loss or when the exercise price and the average unrecognized compensation cost of the
stock option or restricted stock unit is greater than the average market price of our Common Stock, as the impact of the stock options or restricted stock units would be anti-dilutive.

Our results of operations and business could be adversely affected by wars and other military action, as well as terrorist attacks and threats and government responses thereto, especially if any such actions were
directed at us or our facilities or customers.

Terrorist attacks in the United States and elsewhere, government responses thereto, and military actions
in Iraq, Afghanistan and elsewhere, may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing
facilities and finished products to customers. In addition, any of these events could increase volatility in the United States and world financial markets which may depress the price of our Common Stock and may limit the capital resources available
to us or our customers or suppliers, which could result in decreased orders from customers, less favorable financing terms from suppliers, and scarcity or increased costs of materials and components of our products. Additionally, terrorist attacks
directly upon us may significantly disrupt our ability to conduct our business. Any of these occurrences could have a significant impact on our operating results, revenues and costs and may result in increased volatility of the market price of our
Common Stock.

If we acquire companies, products, or technologies, we may face risks associated with those acquisitions.

We may not realize the anticipated benefits of any acquisition or investment. We may in the future pursue additional acquisitions of complementary product lines,
technologies or businesses. Future acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses and impairment charges related to goodwill and other
intangible assets, which could materially adversely affect our financial condition and results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, personnel and
products of the acquired companies; the diversion of managements attention from other business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of key employees of the acquired
company. In the event we acquire product lines, technologies or businesses which do not complement our business, or which otherwise do not enhance our sales or operating results, we may incur substantial write-offs and higher recurring operating
costs, which could have a material adverse effect on our business, financial condition and results of operations. In the event that any such acquisition does occur, there can be no assurance as to the effect thereof on our business or operating
results.

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

As part of our continued effort to reduce company-wide expenses, we have recorded certain expenses related to work force reductions pursuant to the provisions of FASB
Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Although we expect our cost cutting efforts to result in a decrease in expenses over the long-term, these accounting charges may result in an increase
in our short-term expenses. We may from time to time undertake additional expense reduction programs or actions, any of which could result in current period charges and expenses that could have a material adverse effect on that periods
operating results.



32



---

##### Table of Contents

If earthquakes or other catastrophic events occur, our business may be harmed.

We perform all of our manufacturing activities in cleanroom environments in San Jose, California, an area known for seismic activity. Performing manufacturing operations
in California exposes us to a higher risk of natural disasters, including earthquakes. In addition, in the past California has experienced power shortages, which have interrupted our operations. Such shortages could occur in the future. An
earthquake, other natural disaster, power shortage or other similar events could interrupt or otherwise limit our operations resulting in product shipment delays, increased costs and other problems, any of which could have a material adverse effect
on our business, customer relationships and results of operations.

Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.



33



---

##### Table of Contents

Item 6. Exhibits



|         |  |                                                                                                                                                                               
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(a)   |  | Amended and Restated Certificate of Incorporation of the Registrant, filed October 6, 1993.                                                                                   
|         | 
|3.1.1(a) |  | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed May 17, 1995.                                                         
|         | 
|3.1.2(a) |  | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed June 17, 1998.                                                        
|         | 
|3.1.3(a) |  | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed June 20, 2003.                                                        
|         | 
|3.2(b)   |  | Amended and Restated Bylaws of the Registrant, as amended.                                                                                                                    
|         | 
|10.1(c)  |  | Resignation Letter Agreement, dated May 14, 2009, between the Registrant and Scott Jewler.                                                                                    
|         | 
|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.



|(a) | Previously filed with our Quarterly Report on Form 10-Q for the quarter ended June 28, 2003 (Commission File No. 0-22248) and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Previously filed with our Current Report on Form 8-K filed on October 20, 2008 (Commission File No. 0-22248) and incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Previously filed with our Current Report on Form 8-K on May 20, 2009 (Commission File No. 0-22248) and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|* | Exhibit 32.1 is being furnished and shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor
shall such exhibit be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act, or the Exchange Act, except as otherwise stated in such filing.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34



---

##### Table of Contents

SIGNATURES

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



|                     |  |  |  |                              |  |                                                                                                                                   
|-------------------- |  |  |  | ---------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|                     |  |  |  | ULTRATECH, INC. (Registrant)
|                     |  |  | 
|Date: August 6, 2009 |  |  |  | By:                          |  | /s/    BRUCE WRIGHT                                                                                                               
|                     |  |  |  |                              |  | Bruce Wright                                                                                                                      
|                     |  |  |  |                              |  | Senior Vice President, Finance and Chief Financial
Officer (Duly Authorized Officerand Principal Financial and Accounting Officer)



35



---

##### Table of Contents

EXHIBIT INDEX



|         |  |                                                                                                                                                                               
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(a)   |  | Amended and Restated Certificate of Incorporation of the Registrant, filed October 6, 1993.                                                                                   
|         | 
|3.1.1(a) |  | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed May 17, 1995.                                                         
|         | 
|3.1.2(a) |  | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed June 17, 1998.                                                        
|         | 
|3.1.3(a) |  | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed June 20, 2003.                                                        
|         | 
|3.2(b)   |  | Amended and Restated Bylaws of the Registrant, as amended.                                                                                                                    
|         | 
|10.1(c)  |  | Resignation Letter Agreement, dated May 14, 2009, between the Registrant and Scott Jewler.                                                                                    
|         | 
|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.



|(a) | Previously filed with our Quarterly Report on Form 10-Q for the quarter ended June 28, 2003 (Commission File No. 0-22248) and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Previously filed with our Current Report on Form 8-K on October 20, 2008 (Commission File No. 0-22248) and incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Previously filed with our Current Report on Form 8-K on May 20, 2009 (Commission File No. 0-22248) and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|* | Exhibit 32.1 is being furnished and shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor
shall such exhibit be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act, or the Exchange Act, except as otherwise stated in such filing.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



36