<PAGE>

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

                                    FORM 10-Q

      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

(Mark One)

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

             FOR THE QUARTERLY PERIOD ENDED                MARCH 31, 2000
                                                 ------------------------------



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

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

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

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

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

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

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


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

          Class                           Outstanding as of May 8, 2000
-------------------------------   ---------------------------------------------
 common stock, $.001 par value                     21,102,309


                                       1

<PAGE>


                             ULTRATECH STEPPER, INC.

                                      INDEX

<TABLE>
<CAPTION>

                                                                                                        Page No.
                                                                                                        --------
<S>            <C>                                                                                      <C>
PART 1.          FINANCIAL INFORMATION

ITEM 1.          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                 Condensed Consolidated Balance Sheets as of March 31, 2000 and
                 December 31, 1999......................................................................     3

                 Condensed Consolidated Statements of Operations for the three months
                 ended March 31, 2000 and 1999...........................................................    4

                 Condensed Consolidated Statements of Cash Flows for the three months ended
                 March 31, 2000 and 1999.................................................................    5

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

ITEM 2.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................................   10

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................   24


PART 2.          OTHER INFORMATION

ITEM 1.          LEGAL PROCEEDINGS.......................................................................   25

ITEM 2.          CHANGES IN SECURITIES AND USE OF PROCEEDS...............................................   25

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES.........................................................   25

ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................   25

ITEM 5.          OTHER INFORMATION.......................................................................   25

ITEM 6.          EXHIBITS AND REPORTS ON FORM 8-K........................................................   25




SIGNATURES...............................................................................................   26

</TABLE>


                                       2

<PAGE>

PART 1. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                        ULTRATECH STEPPER, INC.
                CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                        Mar. 31,        Dec. 31,
(in thousands)                                           2000            1999*
--------------------------------------------------------------------------------
<S>                                                    <C>             <C>
ASSETS                                                 (Unaudited)

Current assets:
    Cash, cash equivalents and
     short-term investments                             $132,469        $143,544
    Accounts receivable, net                              18,179          19,993
    Inventories                                           33,476          28,975
    Current portion of leases receivable                     680           1,354
    Prepaid expenses and other
     current assets                                        2,277           2,040
--------------------------------------------------------------------------------
Total current assets                                     187,081         195,906

Equipment and leasehold
  improvements, net                                       21,050          20,486

Restricted long-term investments                           5,564           5,479

Leases receivable, net                                         -             282

Intangible assets, net                                     8,422           8,940

Other assets                                               5,228           5,715
--------------------------------------------------------------------------------

Total assets                                            $227,345        $236,808
================================================================================

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

Current liabilities:
    Notes payable                                       $  1,137        $    490
    Accounts payable                                       8,203           7,931
    Deferred income                                       16,163             353
    Other current liabilities                             19,436          23,531
--------------------------------------------------------------------------------
Total current liabilities                                 44,939          32,305

Other liabilities                                            276             289

Stockholders' equity:
    Common stock                                              21              21
    Additional paid-in capital                           175,624         175,573
    Accumulated other comprehensive loss, net             (2,637)         (2,408)
    Retained earnings                                      9,122          31,028
--------------------------------------------------------------------------------
Total stockholders' equity                               182,130         204,214
--------------------------------------------------------------------------------

Total liabilities and stockholders' equity              $227,345        $236,808
================================================================================
</TABLE>

* The Balance Sheet as of December 31, 1999 has been derived from the audited
financial statements at that date.

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                      3

<PAGE>

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


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
                                                                  Three Months Ended
                                                                 --------------------
                                                                 Mar. 31,    Mar. 31,
(In thousands, except per share amounts)                           2000        1999
-------------------------------------------------------------------------------------
<S>                                                             <C>         <C>
Net sales:
  Products                                                       $25,727      $21,640
  Services                                                         4,173        4,139
-------------------------------------------------------------------------------------
Total net sales                                                   29,900       25,779

Cost of sales:
  Cost of products sold                                           17,213       13,949
  Cost of services                                                 3,274        3,109
-------------------------------------------------------------------------------------

Total cost of sales                                               20,487       17,058
-------------------------------------------------------------------------------------

Gross profit                                                       9,413        8,721

OPERATING EXPENSES:
  Research, development, and
    engineering                                                    7,076        6,537
  Amortization of goodwill                                           519          306
  Selling, general, and
    administrative                                                 6,553        6,255
-------------------------------------------------------------------------------------

Operating loss                                                    (4,735)      (4,377)

Interest expense                                                     (71)        (121)

Interest and other income, net                                     1,783        1,969
-------------------------------------------------------------------------------------

Loss before cumulative effect of a change in accounting
  principle                                                       (3,023)      (2,529)

Cumulative effect on prior years of the application of SAB 101
  "Revenue Recognition in Financial Statements"                  (18,883)          --
-------------------------------------------------------------------------------------

Net loss                                                        $(21,906)     $(2,529)
=====================================================================================
EARNINGS PER SHARE-BASIC:
  Loss before cumulative effect of a change in accounting
    principle                                                     $(0.14)      $(0.12)
  Cumulative effect on prior years of the application of
    SAB 101 "Revenue Recognition in Financial Statements"         $(0.88)       $0.00
  Net loss                                                        $(1.02)      $(0.12)

Number of shares used in
  per share computations - basic                                  21,442       21,124


EARNINGS PER SHARE-DILUTED
  Loss before cumulative effect of a change in accounting
    principle                                                     $(0.14)      $(0.12)
  Cumulative effect on prior years of the application of
    SAB 101 "Revenue Recognition in Financial Statements"         $(0.88)       $0.00
  Net loss                                                        $(1.02)      $(0.12)

Number of shares used in
  per share computations - diluted                                21,442       21,124
-------------------------------------------------------------------------------------
</TABLE>

  SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       4

<PAGE>

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


<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                 --------------------
                                                                 Mar. 31,    Mar. 31,
(In thousands)                                                     2000        1999
-------------------------------------------------------------------------------------
<S>                                                             <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                        $(21,906)     $(2,529)
Charges to income not affecting cash                               3,205        2,603
Change in accounting principle - SAB 101 "Revenue Recognition
  in Financial Statements"                                        18,883           --
Net effect of changes in operating assets
  and liabilities                                                 (8,820)         779
-------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities               (8,638)         853


CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures                                              (2,686)      (1,501)
Net reduction in available-for-sale securities                     3,578       10,422
Segregation of restricted long-term investments                      (87)         (86)
-------------------------------------------------------------------------------------
Net cash provided by investing activities                            805        8,835


CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayment) from issuance of notes payable              647         (224)
Net proceeds from issuance of common stock
  pursuant to employee stock plans                                    51           60
-------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                  698         (164)

Net increase (decrease) in cash and cash equivalents              (7,135)       9,524

Cash and cash equivalents at beginning
  of period                                                       46,978       54,142
-------------------------------------------------------------------------------------

Cash and cash equivalents at end of period                       $39,843      $63,666
=====================================================================================
</TABLE>

  SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       5

<PAGE>

                             ULTRATECH STEPPER, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                 MARCH 31, 2000

(1)  BASIS OF PRESENTATION

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

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

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

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

From time to time, the Company leases its products to customers typically as
sales-type leases, in accordance with the provisions of the Statement of
Financial Accounting Statement No. 13, "Accounting for Leases." These leases
generally have a five-year term.

The Company previously recognized revenue from the sales of its products
generally upon shipment, which usually preceded installation and final
customer acceptance, provided that final customer acceptance and collection
of the related receivable were probable. Effective January 1, 2000, the
Company changed its method of accounting for product sales to recognize such
revenues when the contractual obligation for installation has been satisfied,
or when installation is substantially complete, and customer acceptance
provisions have lapsed, provided collections of the related receivable are
probable. The Company believes the change in accounting principle is
preferable based on guidance provided in SEC Staff Accounting Bulletin No.
101 (SAB 101), "Revenue Recognition in Financial Statements." The cumulative
effect of the change in accounting principle, $18,883,000 (or $.88 per share,
basic and diluted) was reported as a charge in the quarter ended March 31,
2000 in the accompanying statement of operations.

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

During the quarter ended March 31, 2000, the Company substantially changed
its operations to implement SAB 101. Nearly all system revenue for the period
resulted from systems shipped prior to January 1, 2000 and accepted during
the quarter. This reflects the Company's traditional time frame for shipment,
installation and customer acceptance. The net result of shipments and
acceptances during the quarter was a reduction of approximately $5.0 million
in deferred income. The Company believes that estimate of its system revenue
under its prior method of accounting would not be indicative of results that
would have been achieved if the Company had not substantially changed its
operations to implement SAB 101.

RECLASSIFICATIONS - Certain condensed consolidated financial statement
amounts have been reclassified for consistent presentation.


                                       6

<PAGE>

FISCAL PERIODS: The Company's first fiscal quarter in 2000 and 1999 ended on
April 1, 2000 and April 3, 1999, respectively. For convenience of
presentation, the Company's financial statements have been shown as having
ended on March 31, 2000 and March 31, 1999.

Operating results for the three-month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2000, or any future period.

(2) INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>

                                                             Mar. 31, 2000       Dec. 31, 1999
                                                             -------------       -------------
(In thousands)                                                (Unaudited)
<S>                                                          <C>                  <C>
Raw materials.........................................             $13,292             $12,589
Work-in-process.......................................              15,559              13,484
Finished products.....................................               4,625               2,902
                                                             -------------       -------------
                                                                   $33,476             $28,975
                                                             -------------       -------------
                                                             -------------       -------------
</TABLE>

(3) OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

<TABLE>
<CAPTION>

                                                             Mar. 31, 2000       Dec. 31, 1999
                                                             -------------       -------------
(In thousands)                                                (Unaudited)
<S>                                                          <C>                  <C>
Salaries and benefits.................................             $ 3,375             $ 3,369
Warranty reserves.....................................               4,325               3,997
Advance billings......................................               3,463               4,845
Income taxes payable..................................               4,973               5,081
Sales returns and allowances..........................                   -               1,471
Reserve for losses on purchase order commitments......               1,477               2,423
Other.................................................               1,823               2,345
                                                             -------------       -------------
                                                                   $19,436             $23,531
                                                             -------------       -------------
                                                             -------------       -------------

</TABLE>

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

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


                                       7

<PAGE>

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                          -------------------------------
                                                             Mar. 31,            Mar. 31,
(Unaudited, in thousands, except per share amounts)            2000                1999
-----------------------------------------------------------------------------------------
<S>                                                       <C>               <C>
Numerator:
    Loss before cumulative effect of a change in
         accounting principle                                 $ (3,023)        $ (2,529)
    Cumulative effect on prior years of the application
         of SAB 101 "Revenue Recognition in Financial
         Statement"                                            (18,883)               -
                                                           ------------------------------
    Net Loss                                                   (21,906)          (2,529)

Denominator:
    Denominator for basic net income (loss) per share           21,442           21,124
    Effect of dilutive employee stock options                        -                -
                                                           -------------   --------------
    Denominator for diluted net income (loss) per share         21,442           21,124
                                                           -------------   --------------

EARNINGS PER SHARE - BASIC:
    Loss before cumulative effect of a change in
         accounting principle                                 $ (0.14)         $ (0.12)
                                                           =============   ==============
    Cumulative effect on prior years of the application
         of SAB 101 "Revenue Recognition in Financial
         Statement"                                           $ (0.88)         $  0.00
                                                           =============   ==============
    Net loss                                                  $ (1.02)         $ (0.12)
                                                           =============   ==============

EARNINGS PER SHARE - DILUTED:
    Loss before cumulative effect of a change in
         accounting principle                                 $ (0.14)         $ (0.12)
                                                           =============   ==============
    Cumulative effect on prior years of the application
         of SAB 101 "Revenue Recognition in Financial
         Statement"                                           $ (0.88)         $  0.00
                                                           =============   ==============
    Net loss                                                  $ (1.02)         $ (0.12)
                                                           =============   ==============
</TABLE>

For the three-month period ended March 31, 2000, options to purchase
3,251,000 shares of Common Stock at an average exercise price of $16.26 were
excluded from the computation of diluted net loss per share as the effect
would have been antidilutive. This compares to the exclusion of 3,004,000
options at an average exercise price of $16.88 for the three-month period
ended March 31, 1999. Options are anti-dilutive when the Company has a net
loss or when the exercise price of the stock option is greater than the
average market price of the Company's Common Stock.

(5) COMPREHENSIVE LOSS

The components of comprehensive loss are as follows:


                                       8

<PAGE>

<TABLE>
<CAPTION>
                                                Three Months Ended Mar. 31,
                                                ---------------------------
(Unaudited, in thousands)                          2000           1999
---------------------------------------------------------------------------
<S>                                             <C>             <C>
Net loss.....................................    $(21,906)        $(2,529)
Accumulated other comprehensive loss.........
    Unrealied holding loss on
      available-for-sale securities..........        (231)         (1,016)
    Tax effect...............................           -               -
---------------------------------------------------------------------------
Comprehensive loss                               $(22,137)        $(3,545)
</TABLE>

Accumulated other comprehensive loss presented in the accompanying condensed
consolidated balance sheets consists entirely of accumulated unrealized
holding loss on available-for-sale securities. The unrealized holding loss on
available-for-sale securities is not currently adjusted for income taxes as a
result of the Company's operating losses.

(6) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.

In June 1999, the Financial Accounting Standards Board issued Statement No.
137 (FAS 137), "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133." FAS 137 amends
the Financial Accounting Standards Board issued Statement No. 133 (FAS 133),
"Accounting for Derivative Instruments and Hedging Activities" which was
issued in June 1998 and was to be effective for all fiscal quarters of fiscal
year beginning after June 15, 1999. FAS 137 defers the effective date of FAS
133 to be effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. Accordingly, the Company will adopt the provisions of
FAS 133 for its 2001 fiscal year. FAS 133 establishes accounting and
reporting standards for derivative instruments and requires recognition of
all derivatives as assets or liabilities in the statement of financial
position and measurement of those instruments at fair value. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.

(7) SUBSEQUENT EVENTS

In April 2000, the Company's Board of Directors authorized the repurchase by
the Company of up to 2.0 million shares of its common stock in the open
market at prevailing market prices.

In April 2000, the Company reached a decision to restructure certain of its
operations. As a result of this decision, the Company will dispose of its
electron beam lithography assets and related workforce and will take a charge
against operations in the quarter ending June 30, 2000. There remains
significant uncertainty as to the amount of the charge. However, the Company
presently anticipates that the negative charge to operations in the quarter
ending June 30, 2000 will not exceed $11 million.


                                       9


<PAGE>



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

OVERVIEW

Certain of the statements contained in this report may be considered
forward-looking statements that may involve a number of risks and
uncertainties. In addition to the factors discussed herein, other factors
that could cause actual results to differ materially include the following:
cyclicality in the Company's served markets; highly competitive industry;
difficulties in assimilating acquired operations; international sales;
lengthy sales cycles; customer concentration; rapid technological change and
the importance of timely product introductions; future acquisitions;
expansion of the Company's current product lines; changes to financial
accounting standards, dependence on key personnel; sole or limited sources of
supply; intellectual property matters; environmental regulations; effects of
certain anti-takeover provisions; volatility of stock price; and the other
risk factors listed from time to time in the Company's SEC reports.

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

Ultratech develops, manufactures and markets photolithography equipment
(steppers) designed to reduce the cost of manufacturing integrated circuits,
thin film heads for disk drives and micromachined components. The Company
supplies step-and-repeat systems based on one-to-one and reduction optical
technologies to customers located throughout North America, Europe, Japan and
the rest of Asia. These products range from low-cost systems for high-volume
manufacturing to advanced systems for cost-effective production of
leading-edge devices and for research and development applications.

In April 2000, the Company reached a decision to restructure certain of its
operations. As a result of this decision, the Company will dispose of its
electron beam lithography assets and related workforce and will take a charge
against operations in the quarter ending June 30, 2000. There remains
significant uncertainty as to the amount of the charge. However, the Company
presently anticipates that the negative charge to operations in the quarter
ending June 30, 2000 will not exceed $11 million. The Company determined that
two recent events transpired that required a change in its electron beam
technology efforts. The first event was the announced intention of a major
semiconductor equipment manufacturer to acquire the market share leader in
electron beam technology. The second event was the Company's decision to
ensure that its research and development spending was in line with the
current stage of the industry's economic cycle and the Company's stated
desire to increase stockholder value. As a result of these two events, and
the Company's inability to timely find a partner for sharing future
development funding or a buyer for the technology, the Company decided to
dispose of its electron beam technologies and related operations. The Company
had not recognized any revenue related to its electron beam technology during
1999 or the first quarter of 2000.

The following discussion should be read in conjunction with the Company's
1999 Annual Report on Form 10-K, which is available upon request.

RESULTS OF OPERATIONS

The Company's operating results have fluctuated significantly in the past and
will continue to fluctuate significantly in the future. Such variability
depends upon a variety of factors, including substantial cyclicality in the
Company's target markets; various competitive factors including price-based
competition and competition from vendors employing other technologies; the
timing and terms of significant orders; the timing of shipments and customer
acceptances; lengthy sales cycles for the Company's products; the mix of
products sold; inventory and open purchase commitment reserve positions;
changes to financial accounting standards; concentration of credit risk;
lengthy development cycles for new products; market acceptance of new
products and enhanced versions of the Company's products; delayed shipments
to customers due to customer configuration changes and other factors;


                                       10

<PAGE>

acquisition activities requiring the devotion of substantial management
resources; lengthy manufacturing cycles for the Company's products; the
timing of new product announcements and releases by the Company or its
competitors; manufacturing inefficiencies associated with the startup of new
product introductions; customer concentration; ability to volume produce
systems and meet customer requirements; patterns of capital spending by
customers; product discounts; changes in pricing by the Company, its
competitors or suppliers; political and economic instability throughout the
world, in particular the Asia/Pacific region; natural disasters; regulatory
changes; and business interruptions related to the Company's occupation of
its facilities. The Company's gross profit as a percentage of sales has been
and will continue to be significantly affected by a variety of factors,
including product discounts and increased competition in the Company's
targeted markets; the mix of products sold; inventory and open purchase
commitment reserve provisions; the rate of capacity utilization; nonlinearity
of shipments during the quarter; the introduction of new products, which
typically have higher manufacturing costs until manufacturing efficiencies
are realized and are typically discounted more than existing products until
the products gain market acceptance; the percentage of international sales,
which typically have lower gross margins than domestic sales principally due
to higher field service and support costs; and the implementation of
subcontracting arrangements.

The Company derives a substantial portion of its total net sales from sales
of a relatively small number of newly manufactured systems, which typically
range in price from $800,000 to $2.4 million for the Company's 1X steppers,
and $1.5 million to more than $6 million for the Company's reduction
steppers. As a result of these high sale prices, the timing of recognition of
revenue from a single transaction has had and will continue to have a
significant impact on the Company's net sales and operating results. The
Company's backlog at the beginning of a period typically does not include all
of the sales needed to achieve the Company's objectives for that period. In
addition, orders in backlog are subject to cancellation, shipment or customer
acceptance delays, and deferral or rescheduling by a customer with limited or
no penalties. Consequently, the Company's net sales and operating results for
a period have been and will continue to be dependent upon the Company
obtaining orders for systems to be shipped and accepted in the same period in
which the order is received. The Company's business and financial results for
a particular period could be materially adversely affected if an anticipated
order for even one system is not received in time to permit shipment and
customer acceptance during the particular period. Furthermore, a substantial
portion of the Company's shipments has historically been realized near the
end of each quarter. Delays in installation and customer acceptance due, for
example, to the inability of the Company to successfully demonstrate the
agreed upon specifications or criteria at the customer's facility, or to the
failure of the customer to permit installation of the system in the agreed
upon time, may cause net sales in a particular period to fall significantly
below the Company's expectations, which may materially adversely affect the
Company's operating results for such period. Additionally, the failure to
receive anticipated orders or delays in shipments due, for example, to
reschedulings, delays, deferrals or cancellations by customers, additional
customer configuration requirements, or to unexpected manufacturing
difficulties or delays in deliveries by suppliers due to their long
production lead times or otherwise, has caused and may continue to cause net
sales in a particular period to fall significantly below the Company's
expectations, which has and could continue to materially adversely affect the
Company's operating results for such period. In particular, the long
manufacturing cycles of the Company's Saturn Wafer Stepper(R), and the
Company's reduction stepper producT offerings, and the long lead time for
lenses and other materials, could cause shipments of such products to be
delayed from one quarter to the next, which could materially adversely affect
the Company's financial condition and results of operations for a particular
quarter.

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


                                       11

<PAGE>

affect the Company's gross margins and results of operations. The Company
presently anticipates that this trend will continue for at least the next few
quarters.

The Company presently expects that net sales for the three-month period
ending June 30, 2000 may be flat to higher than net sales in the comparable
period in 1999. However, due to lack of order visibility and uncertainty as
to the timing of shipments and customer acceptances, the Company can give no
assurance that it will be able to achieve or maintain its current sales
levels. The Company presently expects to recognize an operating loss for the
quarter ending June 30, 2000, exclusive of the charge to dispose of the
Company's electron beam assets and related workforce, and may recognize a net
loss. These losses may extend to future quarters due, in part, to the
significant level of planned research, development and engineering spending,
relative to sales; the current low rate of capacity utilization; and the
current backlog and order levels for the Company's products.

NET SALES

Net sales consist of revenue from system sales, spare parts sales, and
service. For the quarter ended March 31, 2000, net sales were $29.9 million,
an increase of 16% as compared with net sales of $25.8 million for the
comparable period in 1999. The increase, relative to the 1999 period, was
primarily attributed to improved conditions within the semiconductor
industry, which has resulted in higher capital spending levels, partially
offset by lower equipment sales to the thin film head industry. Substantially
all system revenue for the quarter ended March 31, 2000 resulted from systems
shipped in 1999 (see discussion of SAB 101, below). Overall, unit sales for
the three-month period ended March 31, 2000 increased 50% from the comparable
period in 1999, while the weighted-average selling price of all units sold
decreased by approximately 6% in the 2000 period, relative to the comparable
period in 1999. Service revenue for the three-month period ended March 31,
2000 increased slightly.

The Company previously recognized revenue from the sales of its products
generally upon shipment, which usually preceded installation and final
customer acceptance, provided that final customer acceptance and collection
of the related receivable were probable. Effective January 1, 2000, the
Company changed its method of accounting for product sales to recognize such
revenues when the contractual obligation for installation has been satisfied,
or when installation is substantially complete, and customer acceptance
provisions have lapsed, provided collections of the related receivable are
probable. The Company believes the change in accounting principle is
preferable based on guidance provided in SEC Staff Accounting Bulletin No.
101 (SAB 101), "Revenue Recognition in Financial Statements."

During the quarter ended March 31, 2000, the Company substantially changed
its operations to implement SAB 101. Nearly all system revenue for the period
resulted from systems shipped prior to January 1, 2000 and accepted during
the quarter. This reflects the Company's traditional time frame for shipment,
installation and customer acceptance. The net result of shipments and
acceptances during the quarter was a reduction of approximately $5.0 million
in deferred income. The Company believes that estimate of its system revenue
under its prior method of accounting would not be indicative of results that
would have been achieved if the Company had not substantially changed its
operations to implement SAB 101.

For the quarter ended March 31, 2000, international net sales were $14.4
million, as compared with $11.6 million for the comparable period in 1999.
International net sales represented 48% of total net sales for the quarter
ended March 31, 2000, as compared with 45% for the comparable period in 1999.
The increase in international sales, both in terms of absolute dollars and as
a percentage of total net sales, was primarily attributed to higher sales to
Japan. The Company's operations in foreign countries are not generally
subject to significant exchange rate fluctuations, principally because sales
contracts for the Company's systems are generally denominated in U.S.
dollars. In Japan, however, orders are typically denominated in Japanese yen.
This may subject the Company to a higher degree of risk from currency
fluctuations. The Company attempts to mitigate this exposure through the use
of foreign


                                       12

<PAGE>

exchange contracts; however, there can be no assurance of the success of
any such efforts. International sales expose the Company to a number of
additional risks, including fluctuations in the value of local currencies
relative to the U.S. dollar, which, in turn, impact the relative cost of
ownership of the Company's products. (See "Additional Risk Factors:
International Sales; Japanese Market").

In prior years, the Company experienced significant shipment delays and
purchase order restructuring by several of its customers, and also
experienced purchase order cancellations. There can be no assurance that this
trend will not occur in the future. Accordingly, the Company can give no
assurance that it will be able to achieve or maintain its current or prior
level of sales. Additionally, the thin film head industry is presently in a
state of over capacity. This has resulted, and may continue to result, in
reduced order levels from this important market, which could continue to
materially adversely effect the Company's results of operations. The Company
presently expects that net sales for the three-month period ending June 30,
2000 may be flat to higher than net sales in the comparable period in 1999.
However, due to lack of order visibility and uncertainty as to the timing of
shipments and customer acceptances, the Company can give no assurance that it
will be able to achieve or maintain its current sales levels.

Because the Company's net sales are subject to a number of risks, including
intense competition in the capital equipment industry and the timing and
market acceptance of the Company's products, there can be no assurance that
the Company will exceed or maintain its current level of net sales for any
period in the future. Additionally, the Company believes that the market
acceptance and volume production of its Saturn Spectrum III, XLS advanced
reduction stepper and its 1000 series family of wafer steppers, are of
critical importance to its future financial results. To the extent that these
products do not achieve significant sales due to difficulties involving
manufacturing or engineering, the inability to reduce the current long
manufacturing cycles for such products, competition, excess capacity in the
semiconductor of thin film industry, or any other reason, the Company's
business, financial condition and results of operations would be materially
adversely affected.

GROSS PROFIT

The Company's gross profit as a percentage of net sales, or gross margin, was
31.5% for the quarter ended March 31, 2000, as compared with a gross margin
of 33.8% for the comparable period in 1999. On a comparative basis, gross
margins for the quarter ended March 31, 2000 were adversely impacted by
competitive pressure on selling prices, high rates of underutilized service
capacity and lower gross margins on service revenues.

The Company believes that gross margins for the quarter ending June 30, 2000
may be lower than gross margins achieved during the comparable period a year
ago, primarily as a result of anticipated product sales mix and continued
pricing pressure from orders presently in backlog. Intense competition in the
markets the Company serves, and continued low levels of capacity utilization
may make it difficult for the Company to increase or maintain its current
gross margin percentages in the near term. The Company is presently
increasing inventory purchases based on current and forecasted demand for its
Saturn Spectrum III wafer stepper. The purchase of such additional
inventories will result in a significantly higher risk of obsolescence, which
may require inventory write-offs, which negatively impact gross margins.
Additionally, new products generally have lower gross margins until there is
widespread market acceptance and until production and after-sales
efficiencies can be achieved. Should the Saturn Spectrum III, and the
Company's reduction stepper offerings, fail to develop or generate
significant market demand, the Company's business, financial condition and
results of operations would be materially adversely affected.

RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES

The Company's research, development and engineering expenses were $7.1
million for the quarter ended March 31, 2000, as compared with $6.5 million
for the comparable period in 1999. As a

                                       13

<PAGE>

percentage of total net sales, research, development and engineering
expenses were 23.7% for the quarter ended March 31, 2000, as compared with
25.3% for the comparable period in 1999. The dollar increase, as compared to
the comparable period in 1999, was primarily related to higher spending on
the Company's electron beam technology.

The Company continues to invest significant resources in the development and
enhancement of its Verdant rapid thermal annealing/laser doping systems and
technologies, together with continuing expenditures for its 1X and reduction
optical products and technologies. The Company presently expects that the
absolute dollar amount of research, development and engineering expenses for
the quarter ending June 30, 2000 will decrease, relative to the comparable
period a year ago, as a result of the discontinuance of the Company's
electron beam technology efforts.

AMORTIZATION OF GOODWILL

Amortization of goodwill was $519,000 for the quarter ended March 31, 2000,
as compared with $306,000 for the comparable period in 1999. The additional
amortization expense was directly related to intangible assets purchased in
December 1999.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $6.6 million for the
quarter ended March 31, 2000, as compared with $6.3 million for the
comparable period in 1999. As a percentage of net sales, selling, general and
administrative expenses declined to 21.9% for the quarter ended March 31,
2000, as compared to 24.3% of net sales for the comparable period in 1999.
The increase in absolute dollars, as compared with the comparable periods in
1999, was primarily due to higher sales, service and support expenses
typically associated with an increase in sales. The Company presently
anticipates that selling, general and administrative expenses for the
three-month period ending June 30, 2000 will decrease, relative to the
comparable period in 1999, due primarily to the discontinuance of the
Company's electron beam technology efforts.

INTEREST AND OTHER INCOME, NET

Interest and other income, net, which consists primarily of interest income,
was $1.8 million for the quarter ended March 31, 2000, as compared with $2.0
million for the comparable period in 1999. This decrease in interest and
other income, net, was primarily related to lower invested balances.

INCOME TAX EXPENSE

The Company did not recognize an income tax benefit on its pre-tax loss for
the quarters ended March 31, 2000 and 1999, due to uncertainty related to the
utilization of its net operating loss carry-forward.

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operating activities was $8.6 million for the quarter ended
March 31, 2000, as compared with net cash provided by operating activities of
$0.9 million during the comparable period in 1999. Cash used in operating
activities was primarily attributed to the net loss of $21.9 million and a
net change in operating assets and liabilities of $8.8 million, partially
offset by the non-cash cumulative adjustment from a change in accounting
principal of $18.9 million and other non-cash charges to income of $3.2
million. The primary components of the $8.6 million change in operating
assets and liabilities were a decrease in deferred income of $5.0 million, an
increase in inventories of $4.5 million as a result of increased purchases of
reduction stepper parts and assemblies, and a decrease in other current
liabilities of $4.1 million, partially offset by a decrease in accounts
receivable of $3.7 million and a decrease in leases receivable of $1.0
million.


                                       14

<PAGE>

The Company sells certain of its accounts receivable in order to mitigate its
credit risk and to enhance cash flow. Sales of accounts receivable typically
precede final customer acceptance of the system. Among other terms and
conditions, the agreements include provisions that require the Company to
repurchase receivables if certain conditions are present including, but not
limited to, disputes with the customer regarding suitability of the product,
and from time-to-time the Company has repurchased certain accounts and leases
receivable in accordance with these terms. At March 31, 2000, $5.1 million of
sold accounts receivable were outstanding to third party financial
institutions. The Company may continue to attempt to mitigate the impact of
extended payment terms and non-linear shipments by selling a substantial
portion of its accounts receivable in the future. There can be no assurance
that this financing will be available on reasonable terms, or at all.

The Company believes that because of the relatively long manufacturing cycle
of certain of its systems, particularly newer products, the Company's
inventories will continue to represent a significant portion of working
capital. In particular, the Company is increasing its purchases of inventory
for its Saturn Spectrum III wafer stepper. Higher inventory levels may
increase the risk of inventory obsolescence, which may adversely impact the
Company results of operations.

In April 2000, the Company reached a decision to restructure certain of its
operations. As a result of this decision, the Company will dispose of its
electron beam lithography assets and related workforce and will take a charge
against operations in the quarter ending June 30, 2000. There remains
significant uncertainty as to the amount of the charge. However, the Company
presently anticipates that the negative charge to operations in the quarter
ending June 30, 2000 will not exceed $11 million. Cash expenditures relative
to the restructuring are not anticipated to exceed $3 million.

During the quarter ended March 31, 2000, the Company generated cash flows
from investing activities of $0.8 million, as net cash generated from a
reduction in available-for-sale securities of $3.6 million was partially
offset by capital expenditures of $2.7 million.

In April 2000, the Company announced that it had signed a letter of intent to
sell a 6.34 acre undeveloped lot adjacent to its headquarters facility in San
Jose. The Company presently leases this lot, with an option to purchase. The
Company presently anticipates that this transaction will close in the quarter
ending September 30, 2000. Although the terms of the agreement have not been
disclosed, the transaction is anticipated to result in a non-operating gain
that would be recognized in the quarter ending September 30, 2000. This
transaction would also eliminate the present requirement of approximately
$5.5 of the Company's investments used as collateral to secure obligations of
the lessor.

Cash provided by financing activities was $0.7 million during the three-month
period ended March 31, 2000, primarily as a result of borrowings under the
Company's unsecured line of credit.

In April 2000, the Company's Board of Directors authorized the repurchase by
the Company of up to 2.0 million shares of its common stock in the open
market at prevailing market prices. The Company intends to finance the
repurchase of its shares from its existing cash, cash equivalents and short
term investments.

At March 31, 2000, the Company had working capital of $142.1 million. The
Company's principal source of liquidity at March 31, 2000 consisted of $132.5
million in cash, cash equivalents and short-term investments.

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


                                       15

<PAGE>

months. Beyond the next twelve months, the Company may require additional
equity or debt financing to address its working capital or capital equipment
needs. Additionally, the Company may in the future pursue additional
acquisitions of complementary product lines, technologies or businesses.
Future acquisitions by the Company may result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other
intangible assets, which could materially adversely affect any Company
profitability. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products
of the acquired companies; the diversion of management's attention from other
business concerns; risks of entering markets in which the Company has no or
limited direct experience; and the potential loss of key employees of the
acquired company. In the event the Company acquires product lines,
technologies or businesses which do not complement the Company's business, or
which otherwise do not enhance the Company's sales or operating results, the
Company may incur substantial write-offs and higher recurring operating
costs, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event that any such
acquisition does occur, there can be no assurance as to the effect thereof on
the Company's business or operating results. Additionally, the Company may
experience renewed interest in its equipment leasing program and this may
result in the further formation of significant long-term receivables, which,
in turn, would require the use of substantial amounts of working capital. The
formation of significant long-term receivables and the granting of extended
customer payment terms exposes the Company to additional risks, including
potentially higher customer concentration and higher potential operating
expenses relating to customer defaults. If reserves on lease receivables were
required in the future, the Company's business, financial condition and
results of operations could be materially adversely affected. To the extent
that the Company's financial resources are insufficient to fund the Company's
activities, additional funds will be required. There can be no assurance that
additional financing will be available on reasonable terms, or at all.

YEAR 2000 DISCLOSURE:

As of the Company's fiscal month ended April 29, 2000 the Company has not
experienced any significant negative impact related to the Year 2000 problem
in any of its business-critical functions.

ADOPTION OF THE EURO

The introduction of a European single currency, the Euro, was initially
implemented as of January 1, 1999, and the transition period will continue
through Jan 1, 2002. As of March 31, 2000, the adoption of the Euro has not
had a material effect on the Company's foreign exchange and hedging
activities or the Company's use of derivative instruments. While the Company
will continue to evaluate the impact of the Euro introduction over time,
based on currently available information, management does not believe that
the introduction of the Euro currency will have a material adverse impact on
the Company's financial condition or overall trends in results of operations.

ADDITIONAL RISK FACTORS

CYCLICALITY OF SEMICONDUCTOR AND THIN FILM HEAD INDUSTRIES   The Company's
business depends in significant part upon capital expenditures by
manufacturers of semiconductors and thin film head magnetic recording
devices, which in turn depend upon the current and anticipated market demand
for such devices and products utilizing such devices. The semiconductor
industry is highly cyclical and historically has experienced recurring
periods of oversupply. This has, from time to time, resulted in significantly
reduced demand for capital equipment including the systems manufactured and
marketed by the Company. The Company believes that markets for new
generations of semiconductors will also be subject to similar fluctuations.
Accordingly, the Company can give no assurance that it will be able to
achieve or maintain its current level of sales.


                                       16

<PAGE>

The Company attempts to mitigate the risk of cyclicality by participating in
both the semiconductor and thin film head markets, as well as diversifying
into new markets such as photolithography for micromachining. Despite such
efforts, when one or more of such markets experiences a downturn or slowdown,
such as is currently occurring in the thin film head market, the Company's
net sales and operating results are materially adversely affected. The
Company presently expects that net sales for the three-month period ending
June 30, 2000 may be flat to higher than net sales in the comparable period
in 1999. However, due to lack of order visibility and uncertainty as to the
timing of shipments and customer acceptances, the Company can give no
assurance that it will be able to achieve or maintain its current sales
levels. . The Company presently expects to recognize an operating loss for
the quarter ending June 30, 2000, exclusive of the charge to dispose of the
Company's electron beam assets and related workforce, and may recognize a net
loss. These losses may extend to future quarters due, in part, to the
significant level of planned research, development and engineering spending,
relative to sales; the current low rate of capacity utilization; and the
current backlog and order levels for the Company's products.

During 1999 and 1998, approximately 30% and 50%, respectively, of the
Company's net sales were derived from sales to thin film head manufacturers
and micromachining customers. For the first three months of 2000, sales to
thin film head manufacturers and micromachining customers accounted for
approximately 15% of total net sales. The Company believes the TFH market is
currently in a state of over-capacity and expects this situation to last for
at least the next several quarters. This has and will continue to result in
lower sales and delays or deferrals of customer orders from these industries,
which will continue to materially adversely affect the Company's business,
financial condition and results of operations in the near term. Additionally,
the Company is experiencing increased competition in this market from Nikon,
Canon and ASML. The Company's business and operating results would be
materially adversely affected by continued downturns or slowdowns in the thin
film head market or by loss of market share.

HIGHLY COMPETITIVE INDUSTRY  The capital equipment industry in which the
Company operates is intensely competitive. A substantial investment is
required to install and integrate capital equipment into a semiconductor or
thin film head production line. The Company believes that once a device
manufacturer has selected a particular vendor's capital equipment, the
manufacturer generally relies upon that equipment for the specific production
line application and, to the extent possible, subsequent generations of
similar products. Accordingly, it is difficult to achieve significant sales
to a particular customer once another vendor's capital equipment has been
selected. The Company experiences intense competition worldwide from a number
of leading foreign and domestic stepper manufacturers, such as Nikon Inc.
("Nikon"), Canon Inc. ("Canon"), ASM Lithography, Ltd. ("ASML") and Silicon
Valley Group ("SVG"), Inc.'s Micralign products, all of which have
substantially greater financial, marketing and other resources than the
Company. Nikon supplies a 1X stepper for use in the manufacture of liquid
crystal displays and Canon, Nikon and ASML offer reduction steppers for thin
film head fabrication. Additionally, the Company's XLS reduction stepper
product line competes directly with advanced reduction steppers offered by
Canon, Nikon and ASML. Current thin film head front-end production involves
manufacturing steps that require critical feature sizes. Although the
reduction stepper product lines address critical feature sizes, additional
development of these product lines may be necessary to fully address the
unique requirements of thin film head manufacturing. Additionally, ASML has
entered the low-cost lithography market. ASML and Nikon have each introduced
an i-line step-and-scan system as a lower cost alternative to the DUV
step-and-scan system for use on the less critical layers. These systems
compete with widefield steppers, such as the Company's Saturn and Titan
steppers, for advanced mix-and-match applications. In addition, the Company
believes that the high cost of developing new lithography tools has
increasingly caused its competitors to collaborate with customers and other
parties in various areas such as research and development, manufacturing and
marketing, or to acquire other competitors, thereby resulting in a combined
competitive threat with significantly enhanced financial, technical and other
resources. The Company expects its competitors to continue to improve the
performance of their current products. These competitors have stated that
they will introduce new products with improved price and performance
characteristics that will compete directly


                                       17

<PAGE>

with the Company's products. This could cause a decline in sales or loss of
market acceptance of the Company's steppers, and thereby materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that enhancements to, or future generations of,
competing products will not be developed that offer superior cost of
ownership and technical performance features. The Company believes that to be
competitive, it will require significant financial resources in order to
continue to invest in new product development, features and enhancements, to
introduce next generation stepper systems on a timely basis, and to maintain
customer service and support centers worldwide. In marketing its products,
the Company may also face competition from vendors employing other
technologies. In addition, increased competitive pressure has led to
intensified price-based competition, resulting in lower prices and margins.
Should these competitive trends continue, the Company's business, financial
condition and operating results would continue to be materially adversely
affected. There can be no assurance that the Company will be able to compete
successfully in the future.

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

DEVELOPMENT OF NEW PRODUCT LINES; EXPANSION OF OPERATIONS   Currently, the
Company is devoting significant resources to the development, introduction
and commercialization of new products and technologies that are outside the
Company's core businesses. During the remainder of 2000, the Company will
continue to develop these products and will continue to incur significant
operating expenses in the areas of research, development and engineering and
general and administrative costs in order to further develop and support
these new products. Additionally, gross profit margins and inventory levels
may be further adversely impacted in the future by costs associated with the
initial production of these new product lines. These costs include, but are
not limited to, additional manufacturing overhead, additional inventory
write-offs, costs associated with managing multiple sites and the
establishment of additional after-sales support organizations. Additionally,
there can be no assurance that operating expenses will not increase, relative
to sales, as a result of adding additional marketing and administrative
personnel, among other costs, to support the Company's new products. If the
Company is unable to achieve significantly increased net sales or its sales
fall below expectations, the Company's operating results will be materially
adversely affected until, among other factors, costs and expenses can be
reduced.

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

CUSTOMER CONCENTRATION    Historically, the Company has sold a substantial
portion of its systems to a limited number of customers. In 1999, no single
customer accounted for 10% or more of the Company's net sales. However, sales
to one customer accounted for approximately 25% in 1998. The Company expects
that sales to a relatively few customers will continue to account for a high
percentage of its net sales in the foreseeable future and believes that the
Company's financial results depend in


                                       18

<PAGE>

significant part upon the success of these major customers, and the
Company's ability to meet their future capital equipment needs. Although the
composition of the group comprising the Company's largest customers may vary
from period to period, the loss of a significant customer or any reduction in
orders by any significant customer, including reductions due to market,
economic or competitive conditions in the semiconductor or magnetic recording
head industries or in the industries that manufacture products utilizing
integrated circuits or thin film heads, may have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company's ability to maintain or increase its sales in the future will
depend, in part, upon its ability to obtain orders from new customers as well
as the financial condition and success of its customers, the semiconductor
and thin film head industries and the economy in general, of which there can
be no assurance. (See "Additional Risk Factors: Cyclicality of Semiconductor
and Thin Film Head Industries").

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

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

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

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


                                       19

<PAGE>

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

INTERNATIONAL SALES; JAPANESE MARKET    International sales accounted for
approximately 53% and 47% of total net sales for the years 1999 and 1998,
respectively. During the three-month period ended March 31, 2000,
international sales accounted for approximately 48% of total net sales, as
compared to 45% for the comparable period in 1999. The Company anticipates
that international sales, which typically have lower gross margins than
domestic sales, principally due to increased competition and higher field
service and support costs, will continue to account for a significant portion
of total net sales. As a result, a significant portion of the Company's 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, natural disasters, difficulties in staffing and
managing foreign subsidiary and branch operations and potentially adverse tax
consequences. Although the Company generally transacts its international
sales in U.S. dollars, international sales expose the Company to a number of
additional risk factors, including fluctuations in the value of local
currencies relative to the U.S. dollar, which, in turn, impact the relative
cost of ownership of the Company's products and may further impact the
purchasing ability of its international customers. In Japan, however, the
Company has commenced direct sales operations and orders are typically
denominated in Japanese yen. This may subject the Company to a higher degree
of risk from currency fluctuations. The Company attempts to mitigate this
exposure through the use of foreign exchange contracts. The Company is also
subject to the risks associated with the imposition of legislation and
regulations relating to the import or export of semiconductors and magnetic
recording head products. The Company cannot predict whether quotas, duties,
taxes or other charges or restrictions will be implemented by the United
States, Japan or any other country upon the importation or exportation of the
Company's products in the future. There can be no assurance that any of these
factors or the adoption of restrictive policies will not have a material
adverse effect on the Company's business, financial condition and results of
operations.

Although the Company has sold a number of its systems to Japanese thin film
head manufacturers, to date, the Company has made limited sales of its
systems to Japanese semiconductor manufacturers. The Japanese semiconductor
market segment is large, represents a substantial percentage of the worldwide
semiconductor manufacturing capacity, and is difficult for foreign companies
to penetrate. The Company is at a competitive disadvantage with respect to
Japanese semiconductor capital equipment suppliers that have been engaged for
some time in collaborative efforts with Japanese semiconductor manufacturers,
and currently dominate the Japanese stepper market. The Company believes that
increased penetration of the Japanese market is critical to its financial
results and intends to continue to invest significant resources in Japan in
order to meet this objective

INTELLECTUAL PROPERTY RIGHTS    Although the Company attempts to protect its
intellectual property rights through patents, copyrights, trade secrets and
other measures, it believes that any success will depend more upon the
innovation, technological expertise and marketing abilities of its employees.
Nevertheless, the Company has a policy of seeking patents when appropriate on
inventions resulting from its ongoing research and development and
manufacturing activities. The Company owns various United States and foreign
patents, which expire on dates ranging from July 2000 to December 2018, and
has various United States and foreign patent applications pending. The
Company also has various registered trademarks and copyright registrations
covering mainly software programs used in the operation of its stepper
systems. The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that the
Company will be able to protect its technology adequately or that competitors
will not be able to develop similar technology independently. There can be no
assurance that any of the Company's pending patent applications will be
issued or that foreign intellectual property laws will protect the Company's
intellectual property rights. In addition, litigation may be necessary to
enforce the Company's patents, copyrights or other


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<PAGE>

intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition and results of
operations, regardless of the outcome of the litigation. There can be no
assurance that any patent issued to the Company will not be challenged,
invalidated or circumvented or that the rights granted thereunder will
provide competitive advantages to the Company. Furthermore, there can be no
assurance that others will not independently develop similar products,
duplicate the Company's products or, if patents are issued to the Company,
design around the patents issued to the Company.

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

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

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


                                       21

<PAGE>

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

CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT THE COMPANY'S REPORTED
RESULTS OF OPERATIONS   The Company prepares its financial statements to
conform with generally accepted accounting principles, or GAAP. GAAP are
subject to interpretation by the American Institute of Certified Public
Accountants, the SEC and various bodies formed to interpret and create
appropriate accounting policies. A change in those policies can have a
significant effect on the Company's reported results and may even affect its
reporting of transactions completed before a change is announced.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), entitled "Revenue Recognition in
Financial Statements." The Company implemented the provisions of SAB 101
effective January 1, 2000. The Company previously recognized revenue from the
sales of its products generally upon shipment, which usually preceded
installation and final customer acceptance, provided that final customer
acceptance and collection of the related receivable were probable. Effective
January 1, 2000, the Company changed its method of accounting for product
sales to recognize such revenues when the contractual obligation for
installation has been satisfied, or when installation is substantially
complete, and customer acceptance provisions have lapsed, provided collection
of the related receivable are probable. The Company believes the change in
accounting principle is preferable based on guidance provided in SAB 101. The
cumulative effect of the change in accounting principle, $18,883,000 (or $.88
per share, basic and diluted) was reported as a charge in the quarter ended
March 31, 2000 in the accompanying statement of operations.

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

During the quarter ended March 31, 2000, the Company substantially changed
its operations to implement SAB 101. Nearly all system revenue for the period
resulted from systems shipped prior to January 1, 2000 and accepted during
the quarter. This reflects the Company's traditional time frame for shipment,
installation and customer acceptance. The net result of shipments and
acceptances during the quarter was a reduction of approximately $5.0 million
in deferred income. The Company believes that estimate of its system revenue
under its prior method of accounting would not be indicative of results that
would have been achieved if the Company had not substantially changed its
operations to implement SAB 101.

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


                                       22

<PAGE>

expenses during the reporting  period. A change in the facts and
circumstances surrounding those estimates could result in a change to the
Company's estimates and could impact its future operating results.

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

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


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<PAGE>


ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to Part II, Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk" in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 and to the subheading "Derivative
Instruments and Hedging" in Item 8, "Financial Statements and Supplementary
Data", under the heading "Notes to Consolidated Financial Statement" of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.



                                       24


<PAGE>

<TABLE>
<S>               <C>                                                                                         <C>
PART 2:           OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS.                                                                          None.

ITEM 2.           CHANGES IN SECURITIES AND USE OF PROCEEDS.                                                  None.

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES.                                                            None.

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

ITEM 5.           OTHER INFORMATION.

</TABLE>

                  On April 3, 2000, the Company announced it had signed a Letter
                  of Intent to sell a 6.34 acre undeveloped lot adjacent to its
                  headquarter facility in San Jose. The Company presently leases
                  this lot, with an option to purchase. The Company presently
                  anticipates that this transaction will close in the quarter
                  ending September 30, 2000.

                  On April 18, 2000, the Board of Directors authorized the
                  Company to repurchase up to 2.0 million shares of its common
                  stock in the open market at prevailing market prices. The
                  actual number of shares purchased and the timing of such
                  repurchases will be based on a number of factors, including
                  the market price of the stock and market conditions.

                  On April 18, 2000 Mr. Larry Carter, whose term of office
                  expires at the Annual Meeting, indicated that he will not
                  serve on the Board of Directors after his current term, which
                  expires at the 2000 Annual Meeting.

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

                  (A) EXHIBITS

                  Exhibit 10.3.2   1993 Stock Option/Stock Issuance Plan
                                   (Amended and Restated as of January 3, 2000)

                  Exhibit 10.12.1  Supplemental Stock Option/Stock Issuance
                                   Plan as amended and restated effective
                                   October 19, 1999

                  Exhibit 27       Financial Data Schedule

                  (B) REPORTS ON FORM 8-K

                  The Company did not file any reports on Form 8-K during the
three months ended March 31, 2000.


                                       25


<PAGE>


                                   SIGNATURES

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



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



Date:     May 11, 2000           By:  /s/ Bruce R. Wright
     -----------------------        -----------------------------------
                                    Bruce R. Wright
                                    Senior Vice President, Finance and Chief
                                    Financial Officer (Duly Authorized Officer
                                    and Principal Financial and Accounting
                                    Officer)


                                       26