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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549****FORM 10-Q****(Mark One)**   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934******For the quarterly period ended June 28, 2008****   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934******For the transition period from**          **to******Commission File Number 0-22248****ULTRATECH, INC.**(Exact name of registrant as specified in its charter)   **DELAWARE** **94-3169580**(State or other jurisdiction of (I.R.S. Employer Identification No.)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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes þ No oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,”“large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):       Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o    (Do not check if a smaller reporting company)  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No þIndicate the number of shares outstanding of each of the issuer’s classes of common stock, as ofthe latest practicable date:   **Class** **Outstanding as of July 28, 2008**   common stock, $.001 par value 23,477,008   
 

 
**ULTRATECH, INC.****INDEX**    **PART I. FINANCIAL INFORMATION**   **Item 1. Financial Statements** 3  Condensed Consolidated Balance Sheets as of June 28, 2008 and December 31, 2007 3  Condensed Consolidated Statements of Operations for the three and six months ended June 28, 2008 andJune 30, 2007 4  Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2008 and June 30, 2007 5  Notes to Condensed Consolidated Financial Statements 6  **Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations** 13  **Item 3. Quantitative and Qualitative Disclosures About Market Risk** 20  **Item 4. Controls and Procedures** 20  **PART II. OTHER INFORMATION**   **Item 1. Legal Proceedings** 21  **Item 1A. Risk Factors** 21  **Item 2. Unregistered Sales of Equity Securities and Use of Proceeds** 28  **Item 3. Defaults Upon Senior Securities** 28  **Item 4. Submission of Matters to a Vote of Security Holders** 29  **Item 5. Other Information** 29  **Item 6. Exhibits** 30  **SIGNATURES** 31   EXHIBIT 31.1 EXHIBIT 31.2 EXHIBIT 32.1
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**PART I. FINANCIAL INFORMATION****Item 1. Financial Statements****ULTRATECH, INC.****CONDENSED CONSOLIDATED BALANCE SHEETS**           **June 28,**  **December 31,** **(In thousands )** **2008**  **2007***   **(Unaudited)**     ***ASSETS***        Current assets:        Cash and cash equivalents $116,284  $54,586 Short-term investments  25,134   77,412 Accounts receivable, net  20,839   30,562 Inventories, net  34,106   29,128 Prepaid expenses and other current assets  4,028   3,874        Total current assets  200,391   195,562          Equipment and leasehold improvements, net  14,611   16,826 Demonstration inventories  3,919   3,652 Other assets  2,803   2,601                 Total assets $221,724  $218,641                 ***LIABILITIES AND STOCKHOLDERS’ EQUITY***        Current liabilities:        Notes payable $3,700  $5,794 Accounts payable  11,284   8,200 Deferred product and services income  3,602   10,161 Other current liabilities  11,838   9,552        Total current liabilities  30,424   33,707          Other liabilities  7,498   7,534          Stockholders’ equity  183,802   177,400                 Total liabilities and stockholders’ equity $221,724  $218,641         * The Balance Sheet as of December 31, 2007 has been derived from the audited financial statements at that date.*See accompanying notes to unaudited condensed consolidated financial statements*
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**ULTRATECH, INC.****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**                   **Three Months Ended**  **Six Months Ended**   **June 28,**  **June 30,**  **June 28,**  **June 30,** **(In thousands, except per share amounts)** **2008**  **2007**  **2008**  **2007** Net sales:                Products $27,254  $26,296  $54,202  $9,803 Services  4,407   3,615   8,595   7,476 Licenses  400   100   400   100              Total net sales  32,061   30,011   63,197   57,379                  Cost of sales:                Cost of products sold  14,539   14,413   28,216   28,873 Cost of services  2,337   2,422   4,432   4,530              Total cost of sales  16,876   16,835   32,648   33,403              Gross profit  15,185   13,176   30,549   23,976                  Operating expenses:                Research, development, and engineering  5,811   5,836   11,782   11,800 Selling, general, and administrative  7,648   7,561   16,160   16,863              Operating income (loss)  1,726   (221)  2,607   (4,687)                 Interest expense  (27)  (138)  (99)  (471)Interest and other income, net  1,065   1,446   2,374   3,115              Income (loss) before income tax  2,764   1,087   4,882   (2,043)Provision for income taxes  180   67   346   182                               Net income (loss) $2,584  $1,020  $4,536  $(2,225)                              Net income(loss) per share - basic $0.11  $0.04  $0.19  $(0.10)Number ofshares used in per share computations - basic  23,488   23,368   23,472   23,395 Net income(loss) per share - diluted $0.11  $0.04  $0.19  $(0.10)Number ofshares used in per share computations - diluted  23,823   23,467   23,576   23,395 *See accompanying notes to unaudited condensed consolidated financial statements*
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**ULTRATECH, INC.****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)**           **Six Months Ended**   **June 28,**  **June 30,** **(In thousands)** **2008**  **2007** *Cash flows from operating activities:*        Net income (loss) $4,536  $(2,225)Adjustments to reconcile net loss to net cash provided by operating activities:        Depreciation  3,068   3,090 Amortization  608   428 Accretion of asset retirement obligations  77   74 Loss (gain) on disposal of equipment  (3)  4 Stock-based compensation  1,167   761 Changes in operating assets and liabilities:        Accounts receivable  9,723   (1,833)Inventories, net  (4,813)  2,220 Prepaid expenses and other current assets  (154)  118 Demonstration inventories  (668)  — Other assets  (145)  1,257 Accounts payable  3,084   (3,404)Deferred product and services income  (6,559)  3,294 Other current liabilities  2,708   (675)Other liabilities  (514)  (1,261)       Net cash provided by operating activities  12,115   1,848                 *Cash flows from investing activities:*        Capital expenditures  (1,228)  (384)Proceeds from sales of fixed assets  3   — Purchase of investments  (47,219)  (16,756)Proceeds from sales and maturities of investments  99,242   24,559        Net cash provided by investing activities  50,798   7,419                 *Cash flows from financing activities:*        Proceeds from notes payable  31,116   17,570 Repayment of notes payable  (33,210)  (14,839)Proceeds from issuance of common stock  950   1,020        Net cash provided by (used in) financing activities  (1,144)  3,751                 Net effect of exchange rate changes on cash and cash equivalents  (71)  (134)                Net increase in cash and cash equivalents  61,698   12,884          Cash and cash equivalents at beginning of period  54,586   23,883                 Cash and cash equivalents at end of period $116,284  $36,767                 Supplemental disclosures of cash flow information:        Other non-cash activities:        Capital lease of phone system $42  $— Systems transferred to inventory from equipment and other assets $165  $1,503 *See accompanying notes to unaudited condensed consolidated financial statements*
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**Ultratech, Inc.****Notes to Condensed Consolidated Financial Statements****(Unaudited)****June 28, 2008****(1) Description of Business**Ultratech, Inc. (referred to as “Ultratech,” the “Company” and “we”) develops, manufactures andmarkets photolithography and laser thermal processing equipment for manufacturers of integratedcircuits and nanotechnology components located throughout North America, Europe, Japan, Taiwan andthe rest of Asia.We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Withinthe integrated circuits industry, we target the market for advanced packaging applications. Withinthe nanotechnology industry, our target markets include thin film head magnetic recording devices,ink jet print heads, laser diodes and light emitting diodes (“LEDs”). Our laser thermal processingequipment is targeted at advanced annealing applications within the semiconductor industry.In evaluating our business segments, we gave consideration to the Chief Executive Officer’s reviewof financial information and the organizational structure of our management. Based on this review,we concluded that, at the present time, resources are allocated and other financial decisions aremade based on our consolidated financial information. Accordingly, we have determined that weoperate in one business segment, which is the manufacture and distribution of capital equipment tomanufacturers of integrated circuits and nanotechnology components.**(2) Basis of Presentation**We have prepared the unaudited condensed consolidated financial statements in accordance withgenerally accepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by U.S. generally accepted accounting principles forcomplete financial statements. In our opinion, all adjustments, consisting of only normal recurringadjustments considered necessary for fair presentation, have been included.Our fiscal period ends on the Saturday closest to month-end, except that our fiscal year ends onDecember 31. All references to the quarter refer to our fiscal quarter. Our fiscal quarters coveredby this report ended on June 28, 2008 and June 30, 2007.Operating results for the three and six months ended June 28, 2008 are not necessarily indicativeof the results that may be expected for the year ending December 31, 2008 or any future period.**USE OF ESTIMATES**— The preparation of the financial statements and related disclosures inconformity with accounting principles generally accepted in the United States requires us to makeestimates and judgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and the related disclosure of contingent assets and liabilities at the date of theconsolidated financial statements. By their nature, these estimates and judgments are subject to aninherent degree of uncertainty. On an ongoing basis, we evaluate our estimates, including thoserelated to inventories, warranty obligations, purchase order commitments, asset retirementobligations, bad debts, estimated useful lives of fixed assets, asset impairment, income taxes,intangible assets, contingencies and litigation. We base our estimates on historical experience andon various other analyses and assumptions that we believe to be reasonable under the circumstances,the results of which form the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.**IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS**— In December 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(revised 2007), *Business Combinations*(“SFAS No. 141R”). SFAS No. 141R establishes principles andrequirements for how an acquirer recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquireeand the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable theevaluation of the nature and financial effects of the business combination. SFAS No. 141R iseffective for fiscal years beginning after December 15, 2008. We do not expect the adoption of thisstatement to have an impact on our results of operations or financial position.
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In December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated FinancialStatements—an amendment of Accounting Research Bulletin No. 51*(“SFAS No. 160”). SFAS No. 160establishes accounting and reporting standards for ownership interests in subsidiaries held byparties other than the parent, the amount of consolidated net income attributable to the parent andto the noncontrolling interest, changes in a parent’s ownership interest, and the valuation ofretained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 alsoestablishes disclosurerequirements that clearly identify and distinguish between the interests of the parent and theinterests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning afterDecember 15, 2008. We do not expect the adoption of this statement to have an impact on ourresults of operations or financial position as all of our subsidiaries are wholly owned by us.In February 2008, the FASB issued FASB Staff Position No. 157-2, *Effective Date of FASB StatementNo. 157*, which delays the effective date of SFAS No. 157, *Fair Value Measurement*(“SFAS No. 157”),for all nonfinancial assets and nonfinancial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (at least annually), untilfiscal years beginning after November 15, 2008, and interim periods within those fiscal years. SFASNo. 157 establishes a framework for measuring fair value and expands disclosures about fair valuemeasurements. These nonfinancial items include assets and liabilities such as reporting unitsmeasured at fair value in a goodwill impairment test and nonfinancial assets acquired andliabilities assumed in a business combination. We are currently evaluating the impact, if any, ofadopting the deferred portion of SFAS 157 to the nonrecurring fair value measurements of ournonfinancial assets and nonfinancial liabilities.In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and HedgingActivities—an amendment of FASB Statement No. 133*(“SFAS No. 161”)*,*which requires enhanceddisclosures about an entity’s derivative and hedging activities. The statement requires thatobjectives for using derivative instruments be disclosed in terms of underlying risk and accountingdesignation. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008 andinterim periods within those fiscal years, with earlier adoption encouraged. We do not expect theadoption of this statement to have an impact on our results of operations or financial position.**(3) Stock-Based Compensation**Stock-based compensation expense recognized under SFAS No. 123 (revised 2004), *Share-Based Payment*(“SFAS No. 123R”), for employees and directors and the effect on our Condensed ConsolidatedStatements of Operations were as follows:                   **Three Months Ended**  **Six Months Ended**   **June 28,**  **June 30,**  **June 28,**  **June 30,** **(In thousands)** **2008**  **2007**  **2008**  **2007** Cost of Sales $52  $50  $80  $83 Research, development, and engineering  116   78   223   156 Selling, general and administrativeexpenses  477   274   864   522              Total stock-based compensation expense $645  $402  $1,167  $761              Compensation cost capitalized as part of inventory was immaterial during each of the three- andsix-month periods ended June 28, 2008 and June 30, 2007.As required by SFAS No. 123R, we estimate expected option forfeitures and recognize compensationcosts only for those equity awards expected to vest. As of June 28, 2008, there were $4.9 millionof total unrecognized compensation cost related to non-vested share-based compensation arrangementsgranted under our 1993 Stock Option Plan/Stock Issuance Plan, as amended, and our 1998 SupplementalStock Option/Stock Issuance Plan, as amended (collectively, the “Plans”). That cost is expected tobe recognized over a weighted average period of 1.6 years.These Plans provide for the grant of stock-based awards to our eligible employees, consultants andadvisors and non-employee directors. We believe that such awards better align the interests of ouremployees with those of our stockholders. As of June 28, 2008, there was a total of 1.9 millionshares reserved for future awards under these Plans.We used the following weighted-average assumptions to estimate the fair value of our stock optionsgranted during the three- and six-month periods ended June 28, 2008 and June 30, 2007:                 **Three Months Ended** **Six Months Ended**  **June 28,** **June 30,** **June 28,** **June 30,**  **2008** **2007** **2008** **2007**Expected life (in years)  5.33  *  5.33   4.94 Risk-free interest rate  2.95% *  2.80%  4.80%Volatility factor  0.44  *  0.48   0.48 Dividend yield  —  *  —  — * Not presented as we did not grant any stock options during the three-month period ended June30, 2007.
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**(4) Net Income (Loss) Per Share**The following sets forth the computation of basic and diluted net income (loss) per share:                   **Three Months Ended**  **Six Months Ended**   **June 28,**  **June 30,**  **June 28,**  **June 30,** **(In thousands, except per share amounts)** **2008**  **2007**  **2008**  **2007** Numerator:                Net income (loss) $2,584  $1,020  $4,536  $(2,225)                 Denominator:                Basic weighted-average shares outstanding  23,488   23,368   23,472   23,395 Effect of dilutive employee stock optionsand restricted stock units  335   99   104   —              Diluted weighted-average shares outstanding  23,823   23,467   23,576   23,395                               Net income(loss) per share - basic:                Net income (loss) $0.11  $0.04  $0.19  ($0.10)                              Net income(loss) per share - diluted:                Net income (loss) $0.11  $0.04  $0.19  ($0.10)             For the three- and six-month periods ended June 28, 2008, 2.9 million and 4.6 million shares ofcommon stock, respectively, subject to outstanding options were excluded from the computation ofdiluted net income (loss) per share, as the effect would have been anti-dilutive, compared to 4.7million and 5.7 million shares of common stock subject to outstanding option in the correspondingperiods of 2007. In addition, for each of the six-month periods ended June 28, 2008 and June 30,2007, 0.1 million shares of common stock underlying outstanding restricted stock units wereexcluded from the computation as well. For the three months ended June 28, 2008, there were noshares of common stock underlying outstanding restricted stock units excluded from the computationcompared to 0.1 million shares in the corresponding period of 2007. Options and restricted stockunits are anti-dilutive when we have a net loss or when the exercise price and the averageunrecognized compensation cost of the stock option or restricted stock unit is greater than theaverage market price of our common stock during the period.**(5) Fair Value Measurements**On January 1, 2008, we adopted SFAS No. 157 for financial assets and liabilities recognized at fairvalue on a recurring basis. In February 2008, the FASB issued FASB Staff Position No. 157-2,*Effective Date of FASB Statement No. 157*, which delays the effective date of SFAS No. 157 for allnonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed atfair value in the financial statements on a recurring basis (at least annually), until fiscal yearsbeginning after November 15, 2008, and interim periods within those fiscal years. Thesenonfinancial items include assets and liabilities such as reporting units measured at fair value ina goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a businesscombination.Fair value is defined under SFAS No. 157 as the exchange price that would be received for an assetor paid to transfer a liability (an exit price) in the principal or most advantageous market forthe asset or liability in an orderly transaction between market participants on the measurementdate. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use ofobservable inputs and minimize the use of unobservable inputs. SFAS No. 157 describes a fair valuehierarchy based on three levels of inputs, of which the first two are considered observable and thelast unobservable, that may be used to measure fair value which are the following: **•** Level 1 - Quoted prices for identical assets or liabilities in active markets.  **•** Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices foridentical or similar instruments in markets that are not active; and model-derived valuations inwhich all significant inputs and significant value drivers are observable in active markets.  **•** Level 3 - Model derived valuations in which one or more significant inputs or significant valuedrivers are unobservable.
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We measure certain financial assets and liabilities at fair value on a recurring basis, includingavailable-for-sale securities and foreign currency derivatives. The fair value of these certainfinancial assets and liabilities was determined using the following inputs at June 28, 2008:                   **Fair Value Measurements at Reporting Date Using**       **Quated Prices in**             **Active Markets for**  **Significant Other**  **Significant**       **Identical Assets**  **Observable Inputs**  **Unobservable Inputs** **(In thousands)** **Total**  **(Level 1)**  **(Level 2)**  **(Level 3)** Available-for-sale securities(1)  $113,749  $22,123  $91,626  $— Foreign currency derivatives(2)  6   —   6   —                $113,755  $22,123  $91,632  $—               (1) Included in cash and cash equivalents and short-term investments on our condensed consolidated balance sheet. (2) Included in current assets on our condensed consolidated balance sheet.Our available-for-sale securities at June 28, 2008 consisted of U.S. treasury securities (74% oftotal), money market funds (19% of total), commercial paper (5% of total) and corporate notes (1%of total). Included in available-for-sale securities at June 28, 2008 were cash equivalents of$88.6 million. Cash equivalents consist primarily of instruments with remaining maturities of threemonths or less at the date of purchase.Foreign currency derivatives at June 28, 2008 consisted of forward foreign exchange contracts forthe Japanese yen.**(6) Inventories**Inventories consist of the following:           **June 28,**  **December 31,** **(In thousands)** **2008**  **2007** Raw materials $18,751  $18,016 Work-in-process  13,040   6,938 Finished products  2,315   4,174          $34,106  $29,128        **(7) Notes Payable**We have a line of credit agreement with a brokerage firm. Under the terms of this agreement, we mayborrow funds at a cost equal to the current Federal funds open rate plus 125 basis points(approximately 3.25% as of June 28, 2008). Certain of our cash, cash equivalents and investmentssecure borrowings outstanding under this facility, but we are not restricted in the use of thoseassets. Funds are advanced to us under this facility based on pre-determined advance rates on thecash and securities held by us in this brokerage account. This agreement has no set expiration dateand there are no loan covenants, other than the aforementioned collateral requirement. As of June28, 2008, $3.7 million was outstanding under this facility, with a related collateral requirementof approximately $4.9 million of our cash, cash equivalents and investments.**(8) Other Current Liabilities**Other current liabilities consist of the following:           **June 28,**  **December 31,** **(In thousands)** **2008**  **2007** Salaries and benefits $3,767  $3,545 Warranty accrual  1,841   2,112 Advance billings  2,243   115 Accrued taxes-other  2,402   863 Reserve for losses on purchase order commitments  120   508 Capital lease, current portion  109   99 Other  1,356   2,310          $11,838  $9,552        
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**Warranty Accrual**We generally warrant our products for a period of 12 months for new products, or three months forrefurbished products, from the date of customer acceptance for material and labor to repair theproduct; accordingly, an accrual for the estimated cost of the warranty is recorded at the time theproduct is shipped. Extended warranty terms, if granted, result in deferral of revenue equating toour standard pricing for similar service contracts. Recognition of the related warranty cost isdeferred until product revenue is recognized. Factors that affect our warranty liability includethe number of installed units, historical and anticipated rates of warranty claims, and cost perclaim. We periodically assess the adequacy of our recorded warranty liabilities and adjust theamounts as necessary. We believe our warranty accrual, as of June 28, 2008, will be sufficient tosatisfy outstanding obligations as of that date. Changes in our warranty accrual are as follows:                   **Three Months Ended**  **Six Months Ended**   **June 28,**  **June 30,**  **June 28,**  **June 30,** **(In thousands)** **2008**  **2007**  **2008**  **2007** Balance, beginning of the period $1,947  $2,378  $2,112  $2,264 Warranties accrued for shipmentsduring the period  665   852   1,210   1,913 Settlements made during the period  (721)  (673)  (1,206)  (1,692)Changes in accrued warranty liabilities  (50)  (339)  (275)  (267)             Balance, end of the period $1,841  $2,218  $1,841  $2,218              **Deferred Services Revenue**We sell service contracts for which revenue is deferred and recognized ratably over the contractperiod for time based service contracts, or as service hours are delivered for contracts based on apurchased quantity of hours. Changes in our deferred service revenue are as follows:                   **Three Months Ended**  **Six Months Ended**   **June 28,**  **June 30,**  **June 28,**  **June 30,** **(In thousands)** **2008**  **2007**  **2008**  **2007** Balance, beginning of the period $2,388  $2,295  $2,087  $2,444 Service contracts sold during the period  391   1,275   1,321   2,395 Service contract revenue recognized during the period  (692)  (876)  (1,321)  (2,145)             Balance, end of the period $2,087  $2,694  $2,087  $2,694              **(9) Other Liabilities**Other liabilities consist of the following:           **June 28,**  **December 31,** **(In thousands)** **2008**  **2007** Deferred rent $1,815  $2,093 Deferred compensation  1,188   1,287 Long-term income taxes payable  792   363 Asset retirement obligation  2,146   2,222 Postretirement medical obligation  795   773 Long-term capital lease  442   463 Other  320   333          $7,498  $7,534        
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**(10) Accumulated Other Comprehensive Income (Loss)**The components of comprehensive income (loss), net of tax, are as follows:                   **Three Months Ended**  **Six Months Ended**   **June 28,**  **June 30,**  **June 28,**  **June 30,** **(In thousands)** **2008**  **2007**  **2008**  **2007** Net income (loss) $2,584  $1,020  $4,536  $(2,225)Other comprehensive income:                Unrealized gain (loss) on available-for-sale investmentsbefore adjustment  (414)  (250)  211   13 Reclassification adjustment for gains included in net income  (409)  —   (409)  —              Net unrealized gain (loss) on available-for-sale investments  (823)  (250)  (198)  13 Unrealized gain (loss) on foreign exchange forward contracts  7   (1)  (72)  (133)Change in minimum postretirement medical obligation  9   7   19   18              Comprehensive income (loss) $1,777  $776  $4,285  $(2,327)             Accumulated other comprehensive income (loss), net of tax, is comprised of the following items:           **June 28,**  **December 31,** **(In thousands)** **2008**  **2007** Unrealized gain (loss) on:        Available-for-sale investments $6  $204 Foreign exchange forward contracts  7   79 Change in minimum postretirement medical obligation  (173)  (192)       Accumulated other comprehensive income (loss) at end of period $(160) $91        **(11) Exit Activities**     Changes in our accrued severance and benefits charges in connection with exitactivities are as follows:                               **Balance at**          **Balance at**          **Balance at**   **December 31,**          **March 29,**          **June 28,** **(In thousands)** **2007**  **Expenses**  **Payments**  **2008**  **Expenses**  **Payments**  **2008** Severance and benefits (2006) $46  $—  $(33) $13  $—  $(11) $2 Severance and benefits (2007)  382   —   (225)  157   —   (157)  —                                                  Total $428  $—  $(258) $170  $—  $(168) $2                       We did not have any exit activity during the first two quarters of 2008 as compared to $0.7 millionand $0.5 million recorded during the first and second quarter of 2007, respectively. As of June 28,2008, the remaining balance of $2,000, which related to benefit payments for exit activitiesincurred in 2006, was fully paid in July 2008.**(12) Employee Benefit Plans*****Employee bonus plans***We currently sponsor an executive incentive bonus plan that distributes employee awards based onthe achievement of predetermined targets. We recorded a charge of $0.2 million and $0.5 millionunder this bonus plan for the three- and six-month periods ended June 28, 2008, respectively,compared to no charge for the corresponding periods of 2007.***Employee savings and retirement plans***We sponsor a 401(k) employee salary deferral plan that allows voluntary contributions by allfull-time employees of from 1% to 20% of their pretax earnings. Our contributions made to this planwere $0.1 million for each of the three-month periods ended June 28, 2008 and June 30, 2007 and$0.2 million for each of the six-month periods then ended. Our contributions, limited to a maximumof $2,000 per year per employee, generally become 20 percent vested at the end of an employee’sfirst year of service from the date of hire, and vest 20 percent per year of service thereafteruntil they become fully vested at the end of five years of service. We also sponsor an executivenon-qualified deferred compensation plan (the “Plan”) that allows qualifying executives to defercurrent cash compensation. As of June 28, 2008, Plan assets, representing the cash surrender valueof life insurance policies held by us and liabilities were approximately $1.2 million each,respectively, and wereincluded in our Consolidated Balance Sheets under the captions “otherassets” and “other liabilities.” In conjunction with this Plan, the related expense for each of thequarters ended June 28, 2008 and June 30, 2007 was immaterial.
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***Postretirement benefits***We have committed to providing and fully paying for lifetime postretirement medical and dentalbenefits to the Chief Executive Officer and Chief Financial Officer and their spouses, commencingafter retirement. We recorded net periodic benefit costs of $21,000 and $41,000 for the three- andsix-month periods ended June 28, 2008, respectively, compared to $13,000 and $26,000 for thecorresponding periods of 2007. These expenses included interest cost and amortization of priorservice cost.**(13) Income Taxes**In accordance with FASB Financial Interpretation Number 48, *Accounting for Uncertainty in IncomeTaxes*, we had unrecognized tax benefits of $3.3 million as of January 1, 2008. We continue torecognize interest and penalties as a component of income tax provision and accrued $56,000 forthese items as of January 1, 2008.If we are able to eventually recognize these uncertain tax positions, $2.9 million of ourunrecognized benefit would reduce the effective tax rate. We currently have a full valuationallowance against our U.S. net deferred tax asset which would impact the timing of the effectivetax rate benefit should any of these uncertain tax positions be favorably settled in the future.Over the next twelve months, we expect an immaterial decline in liabilities associated with ouruncertain tax positions as a result of expiring statutes of limitations.We are subject to federal and state tax examinations for years 1999 forward and 1997 forward,respectively, by virtue of the tax attributes carrying forward from those years. We are alsosubject to audits in the foreign jurisdictions in which we operate for years 2002 and forward.There are no tax examinations currently in progress.**(14) Commitments and Contingencies****Commitments**In September 2007, we sublet a portion of our facilities in San Jose, California and account for itas an operating lease. This sublease expires in January 2010. As of June 28, 2008, the minimumfuture sublease payments to be received were $1.0 million. In July 2007, we capitalized a five-yearlease agreement for a new phone system recorded as office equipment. The amortization of this phonesystem is included with depreciation expense.**Legal Proceedings**On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringementof certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for theNorthern District of California. On May 17, 2005, the court found the subject patent to be invalid.We appealed this decision. The defendant subsequently brought a motion for reimbursement of itsattorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed thismotion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendantfiled a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. InMarch 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent isinvalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial ofattorneys’ fees. Neither side appealed the rulings by the Federal Circuit, and they are final.In May 2006, the same company filed a state court lawsuit against us for malicious prosecution andabuse of process claiming that attorney’s fees, costs and other damages were due based on theoutcome of a federal patent litigation suit described above. We do not believe this action hasmerit, particularly given the denial by the federal court of that company’s request to be awardedattorneys’ fees payable by us in the patent litigation and the subsequent federal appellate court’saffirmation of the order denying any such award. We filed a motion to have the state courtcomplaint dismissed under California’s anti-strategic lawsuit against public participation(“anti-SLAPP”) and demurrer statutes. The anti-SLAPP statute is aimed at striking lawsuits that arebrought in order to quash an individual’s constitutional rights to free speech or seeking redressof grievances (i.e., filing suit). The state court granted the anti-SLAPP motion as to the abuse ofprocess claim, but denied it as to the malicious prosecution claim. We appealed the decisiondenying the anti-SLAPP motion as to the malicious prosecution claim but the Appellate Court upheldthe Superior Court’s ruling. We intend to continue to vigorously pursue our rights in connectionwith this action.
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**Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations**Certain of the statements contained herein, which are not historical facts and which can generallybe identified by words such as “anticipates,” “expects,” “intends,” “will,” “could,” “believes,”“estimates,” “continues,” and similar expressions, are forward-looking statements under Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”), that involve risks and uncertainties, such as risks related to ourdependence on new product introductions and market acceptance of new products and enhanced versionsof our existing products; lengthy sales cycles, including the timing of system installations andacceptances; lengthy and costly development cycles for laser-processing and lithographytechnologies and applications; integration, development and associated expenses of the laserprocessing operation; delays, deferrals and cancellations of orders by customers; cyclicality inthe semiconductor and nanotechnology industries; general economic and financial market conditionsincluding impact to capital spending; pricing pressures and product discounts; high degree ofindustry competition; intellectual property matters; changes to financial accounting standards;changes in pricing by us, our competitors or suppliers; customer concentration; internationalsales; timing of new product announcements and releases by us or our competitors; ability to volumeproduce systems and meet customer requirements; sole or limited sources of supply; ability andresulting costs to attract or retain sufficient personnel to achieve our targets for a particularperiod; dilutive effect of employee stock option grants on net income per share, which is largelydependent upon us achieving and maintaining profitability and the market price of our stock; mix ofproducts sold; rapid technological change and the importance of timely product introductions;outcome of litigation; manufacturing variances and production levels; timing and degree of successof technologies licensed to outside parties; product concentration and lack of product revenuediversification; inventory obsolescence; asset impairment; effects of certain anti-takeoverprovisions; future acquisitions; volatility of stock price; foreign government regulations andrestrictions; business interruptions due to natural disasters or utility failures; environmentalregulations; and any adverse effects of terrorist attacks in the United States or elsewhere, orgovernment responses thereto, or military actions in Iraq, Afghanistan and elsewhere, on theeconomy in general, or on our business in particular. Due to these and additional factors, thestatements, historical results and percentage relationships set forth below are not necessarilyindicative of the results of operations for any future period. These forward-looking statements arebased on management’s current beliefs and expectations, some or all of which may prove to beinaccurate, and which may change. We undertake no obligation to revise or update anyforward-looking statements to reflect any event or circumstance that may arise after the date ofthis report.**OVERVIEW**We develop, manufacture and market photolithography and laser thermal processing equipment formanufacturers of integrated circuits and nanotechnology components located throughout NorthAmerica, Europe, Japan, Taiwan and the rest of Asia.We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Withinthe integrated circuits industry, we target the market for advanced packaging applications. Withinthe nanotechnology industry, our target marketsinclude thin film head magnetic recording devices, ink jet print heads, laser diodes and lightemitting diodes (“LEDs”). Our laser thermal processing equipment is targeted at advanced annealingapplications within the semiconductor industry.**RESULTS OF OPERATIONS**We derive a substantial portion of our total net sales from sales of a relatively small number ofnewly manufactured systems, which typically range in price from $1.2 million to $5.6 million. As aresult of these high sale prices, the timing and recognition of revenue from a single transactionhas had and most likely will continue to have a significant impact on our net sales and operatingresults for any particular period.Our backlog at the beginning of a period typically does not include all of the sales needed toachieve our sales objectives for that period. In addition, orders in backlog are subject tocancellation, shipment or customer acceptance delays, and deferral or rescheduling by a customerwith limited or no penalties. Consequently, our net sales and operating results for a period havedepended and will continue to depend on our obtaining orders for systems to be shipped and acceptedin the same period in which the order is received. Our business and financial results for aparticular period could be materially adversely affected if an anticipated order for even onesystem is not received in time to permit shipment and customer acceptance during that period.Furthermore, a substantial portion of our shipments have historically occurred near the end of thequarter. Delays in installation and customer acceptance due, for example, to our inability tosuccessfully demonstrate the agreed-upon specifications or criteria at the customer’s facility, orto the failure of the customer to permit installation of the system in the agreed upon timeframe,may cause net sales in a particular period to fall significantly below our expectations, which maymaterially and adversely affect our operating results for that period. This risk is especiallyapplicable to the introduction and initial sales of a new product line. Additionally, the failureto receive anticipated orders or delays in shipments due, forexample, to rescheduling, delays,deferrals or cancellations by customers, additional customer configuration requirements, or tounexpected manufacturing difficulties or delays in deliveries by suppliers due to their longproduction lead times or otherwise, have caused and may continue to cause net sales in a particularperiod to fall significantly below our expectations, materially adversely affecting our operatingresults for that period. In particular, the long manufacturing and acceptance cycles of ouradvanced packaging family of wafer steppers and laser thermal processing systems and the long leadtime for lenses and other materials, could cause shipments and acceptances of such products to bedelayed from one quarter to the next, which could materially adversely affect our financialcondition and results of operations for a particular quarter.
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Additionally, the need for continued expenditures for research and development, capital equipment,ongoing training and worldwide customer service and support, among other factors, will make itdifficult for us to reduce our operating expenses in a particular period if we fail to achieve ournet sales goals for the period.**Net Sales***Second Quarter*                   **Three Months Ended**         **June 28,**  **June 30,**  **Amount of**  **Percentage** **(In thousands, except percentages)** **2008**  **2007**  **Change**  **Change** Sales of:                Products $27,254  $26,296  $958   3.6%Services  4,407   3,615   792   21.9%Licenses  400   100   300   300.0%              Total net sales $32,061  $30,011  $2,050   6.8%              Net sales for the second quarter of 2008 and 2007 consist of revenues from products (system andspare parts sales), services and licensing of technologies. Product sales increased 3.6% to$27.3 million for the quarter ended June 28, 2008, compared to $26.3 million in the correspondingquarter of 2007, primarily due to an increase in average selling prices of systems sold partiallyoffset by a decrease in system unit volume, resulting from a continuing shift in product mix infavor of our new laser processing products and away from our legacy product platforms.On a product market application basis, system sales to the semiconductor industry, primarily foradvanced packaging and laser processing applications, were $24.1 million for the quarter ended June28, 2008, an increase of 48.3% when comparedwith system sales of $16.2 million to this market in the corresponding quarter of 2007. Thisincrease was due to an increase in sales to the laser processing market of $6.7 million andadvanced packaging market of $1.2 million.We did not have any system sales to the nanotechnology market for the quarter ended June 28, 2008as compared with system sales of $5.6 million in the corresponding quarter of 2007. System sales tothe nanotechnology market are highly dependent on customer capacity demand in the industries weserve, including thin film heads, automotive MEMS, LED/laser diodes, and ink jet print heads, andtherefore we expect to experience significant variations in sales to this market from quarter toquarter.Revenues from services for the quarter ended June 28, 2008 were $4.4 million, an increase of 21.9%over the corresponding quarter of 2007, primarily attributable to an increase in service contractsentered and recognized during the second quarter of 2008.Revenues from licensing activities for the quarter ended June 28, 2008 were $0.4 million comparedto $0.1 million for the corresponding quarter of 2007. Thisincrease is due to the resale of our tools by our existing customersto third parties. Pursuant to our license arrangements, suchtransactions are subject to license fee and are based on units sold. Future revenues from licensingactivities, if any, will be contingent upon existing and futurelicensing and royalty arrangements. We may notbe successful in generating licensing revenues in the future and do not anticipate the recognitionof significant levels of licensing income during the remainder of 2008.At June 28, 2008, we had approximately $3.6 million of deferred product and services incomecompared to $10.2 million at December 31, 2007. The gross amounts of deferred revenues and deferredcosts at June 28, 2008 were $4.3 million and $0.7 million, respectively. The gross amounts ofdeferred revenues and deferred costs at December 31, 2007 were $14.8 million and $4.6 million,respectively. Deferred product income is recognized as revenue upon satisfying the contractualobligations for installation and/or customer acceptance. Deferred services income is recognized asrevenue ratably over the contractperiod (for time-based service contracts) or as purchasedservices are rendered (for contracts based on a purchased quantity of hours).
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For the quarter ended June 28, 2008, international net sales were $15.8 million, or 49.2% of totalnet sales, compared with $18.1 million, or 60.2% of total net sales for the corresponding quarterof 2007. In the quarter ended June 28, 2008 compared to the corresponding quarter of 2007, sales toEurope increased by $4.5 million, sales to Japan decreased by $7.6 million, sales to Taiwan and therest of Asia increased by $0.4 million, respectively. We expect sales to international customerswill continue to represent a significant portion of our revenues during the remainder of 2008 ascompanies continue to build their manufacturing plants overseas, especially in Asia.Our revenue derived from sales in foreign countries is not generally subject to significantexchange rate fluctuations, principally because sales contracts for our systems are generallydenominated in U.S. dollars. In Japan, however, orders are sometime denominated in Japanese yen.This subjects us to the risk of currency fluctuations. We attempt to mitigate this risk by enteringinto foreign currency forward exchange contracts for the period between when an order is receivedand when it is recorded as revenue. After recording revenue, we use various mechanisms, such asnatural hedges, to offset substantial portions of the gains or losses associated with our Japaneseyen denominated receivables due to exchange rate fluctuations. We had approximately $0.8 million ofJapanese yen denominated receivables at June 28, 2008. International sales expose us to a number ofadditional risks, including fluctuations in the value of local currencies relative to the U.S.dollar, which impact the relative cost of ownership of our products and, thus, the customer’swillingness to purchase our product. (See “Item 1A Risk Factors: International Sales”).*Year-To-Date*                   **Six Months Ended**         **June 28,**  **June 30,**  **Amount of**  **Percentage** **(In thousands, except percentages)** **2008**  **2007**  **Change**  **Change** Sales of:                Products $54,202  $49,803  $4,399   8.8%Services  8,595   7,476   1,119   15.0%Licenses  400   100   300   300.0%              Total net sales $63,197  $57,379  $5,818   10.1%              Product sales increased 8.8% to $54.2 million for the six months ended June 28, 2008 as compared tothe same period in 2007. This increase was primarily attributable to an increase in the averageselling prices of systems sold partially offset by a decrease in system unit volume, resulting froma continuing shift in product mix in favor of our new laser processing and advanced packagingproducts and away from our legacy product platforms.On a market segment basis, the year-over-year increase in systems sales was primarily attributableto a $7.7 million increase in sales to the packaging market and a $4.7 million increase in sales tothe laser thermal processing market, which was offset partially by a $4.9 million and $0.6 milliondecrease in sales to the nanotechnology market and the semiconductor market, respectively.Revenues from services in the first six months of 2008 increased 15.0% from the comparable periodof 2007, primarily as a result of increases in the number of service contracts in effect during thequarter. Revenues from licensing activities increased in the first six months of 2008 as comparedto the same period of 2007 primarily due to the resale of our toolsby our existing customers to third parties.For the first six months of 2008, international net sales were $34.0 million, or 53.8% of total netsales, as compared with $37.3 million, or 68.0% of total net sales, for the comparable period of2007. For the first six months of 2008, as compared to the same period of 2007, sales to Europedecreased $1.1 million, sales to Japan decreased $8.2 million, sales to Taiwan increased $1.0million and sales to the rest of Asia increased $3.3 million.**Gross Profit**On a comparative basis, gross margins increased to 47.4% for the three months ended June 28, 2008,compared to 43.9% for the corresponding period of 2007. This 3.5 percentage point increase in grossmargin was primarily due to an increase in the average selling pricesof systems sold and a change in our productmix (4.7 percentage points) and no severance and benefit charge recorded during the second quarterof 2008 (0.7 percentage points). These lower costs were partially offset by higher warranty andinstallation costs (1.9 percentage points).
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Gross margins for the six months ended June 28, 2008 increased to 48.3% compared to 41.8% in thecorresponding period in 2007. This 6.5 percentage point increase in gross margin was primarily dueto an increase in the average selling prices of systems sold and a change in our product mix (6.4 percentagepoints) and no severance and benefit charge recorded during the first six months of 2008(0.8 percentage points). These lower costs were partially offset by higher warranty andinstallation costs (0.7 percentage points).Our gross profit as a percentage of sales has been and most likely will continue to besignificantly affected by a variety of factors, including the following: the introduction of newproducts, which typically have higher manufacturing costs until manufacturing efficiencies arerealized and which are typically discounted more than existing products until the products gainmarket acceptance; the mix of products sold; the rate of capacity utilization; write-down ofinventory and open purchase commitments; product discounts, pricing and competition in our targetedmarkets; non-linearity of shipments during the quarter which can result in manufacturinginefficiencies; and the percentage of international sales, which typically have lower gross marginsthan domestic sales principally due to higher field service and support costs.**Operating Expenses***Second Quarter*                   **Three Months Ended**         **June 28,**  **June 30,**  **Amount of**  **Percentage** **(In thousands, except percentages)** **2008**  **2007**  **Change**  **Change** Research, development, andengineering $5,811  $5,836  $(25)  -0.4%Selling, general, and administrative  7,648   7,561   87   1.2%              Total operating expenses $13,459  $13,397  $62   0.5%              Research, development and engineering expenses for the quarter ended June 28, 2008 remained fairlyconsistent at $5.8 million as compared to the corresponding period in 2007. As a percentage of netsales, research, development and engineering expenses for the quarter ended June 28, 2008 decreasedto 18.1% from 19.4% for the corresponding quarter of 2007. This decrease was due primarily to theincrease in net sales as compared to the corresponding quarter of 2007 discussed above.Selling, general, and administrative expenses for the quarter ended June 28, 2008 remained fairlyconsistent at $7.6 million as compared to the same quarter of 2007. We did not record any severanceand benefit charges during the second quarter of 2008 as compared to $0.5 million recorded in thecorresponding quarter of 2007. However, we had higher sales and marketing related expenses as wellas an accrual of $0.2 million for the management incentive plan during the second quarter of 2008as compared to no such accrual for the corresponding quarter of 2007. As a percentage of net sales,selling, general, and administrative expenses for the quarter ended June 28, 2008 decreased to23.9% from 25.2% for the corresponding quarter of 2007. This decrease was primarily due to theincrease in net sales as compared to the corresponding quarter of 2007 discussed above.*Year-To-Date*                   **Six Months Ended**         **June 28,**  **June 30,**  **Amount of**  **Percentage** **(In thousands, except percentages)** **2008**  **2007**  **Change**  **Change** Research, development, andengineering  11,782   11,800   (18)  -0.2%Selling, general, and administrative  16,160   16,863   (703)  -4.2%              Total operating expenses $27,942  $28,663   ($721)  -2.5%              Research, development and engineering expenses for the first six months of 2008 remained fairlyconsistent at $11.8 million as compared to the same period in 2007. As a percentage of net sales,research, development and engineering expenses for the six-month period ended June 28, 2008decreased to 18.6% from 20.6% for the corresponding period of 2007.Selling, general, and administrative expenses were $16.2 million for the first six months of 2008as compared with $16.9 million for the same period in 2007. This decrease was primarily due to ourcontinuing effort to manage company-wide expenses and to the fact that no severance and benefitcharges were recorded during the first six months of 2008 compared to $0.9 million recorded in thecorresponding period of 2007, which decrease was offset partially by an accrual of $0.5 million forthe management incentive plan as compared to no such accrual for the corresponding period of 2007.As a percentage ofnet sales, selling, general, and administrative expenses for the six-monthperiod ended June 28, 2008 decreased to 25.6% from 29.4% for the corresponding period of 2007.
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**Interest and Other Income, Net**Interest and other income, net, which consists primarily of interest income and gain (loss) fromforeign currency exchange, was $1.1 million and $2.4 million for the three and six months endedJune 28, 2008, respectively, as compared with $1.4 million and $3.1 million for the comparableperiods of 2007. This decrease was primarily attributable to higher loss from foreign currencyexchange and a decline in interest income earned by our cash and investment positions, which waspartially offset by a gain of $0.4 million from sales of short-term investments during the secondquarter and first six months of 2008 as compared to the corresponding periods of 2007. The lossfrom foreign currency exchange was a result of appreciation of Japanese yen. The lower interestincome earned resulted from lower applicable interest rates. The cost of securities sold wasdetermined based on the specific identification method. As of June 28, 2008, the weighted-averagematurity of our investment portfolio was approximately 0.1 years. As a result, changes inshort-term interest rates have had, and will continue to have, an impact on our interest income.**Provision for Income Taxes**For the three- and six-month periods ended June 28, 2008, we recorded income tax provisions of $0.2million and $0.3 million, respectively, as compared to $67,000 and $0.2 million for the comparableperiods in 2007. The income tax provisions recognized for the six months ended June 28, 2008 andJune 30, 2007 resulted primarily from federal income taxes and foreign income taxes.Income tax estimates can be affected by whether and within which jurisdictions future earnings willoccur and how and when cash is repatriated to the United States, as well as other aspects of anoverall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree withour tax treatment of certain items, and some historical transactions have income tax effects goingforward. Accounting rules require these future effects to be evaluated using current laws, rulesand regulations, each of which can change at any time and in an unpredictable manner. We believe wehave adequately provided for any reasonably foreseeable outcome related to these matters, and we donot anticipate any material earnings impact from their ultimate resolution.Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. Weconsider all available evidence, both positive and negative, including historical levels of income,expectations and risks associated with estimates of future taxable income and ongoing prudent andfeasible tax planning strategies in assessing the need for the valuation allowance. As a result ofour analysis of all available evidence, we concluded that it is more likely than not that our netdeferred tax assets will not be realized, with the exception of those in Japan and Taiwan.Therefore, we continue to provide a full valuation allowance against net deferred tax assetsoutside of Japan and Taiwan. We closely monitor all available evidence, and may release some or allof the valuation allowance in future periods.In accordance with FASB Financial Interpretation Number 48, *Accounting for Uncertainty in IncomeTaxes*, we had unrecognized tax benefits of $3.3 million as of January 1, 2008. We continue torecognize interest and penalties as a component of income tax provision and accrued $56,000 forthese items as of January 1, 2008.If we are able to eventually recognize these uncertain tax positions, $2.9 million of theunrecognized benefit would reduce our effective tax rate. We currently have a full valuationallowance against our U.S. net deferred tax asset which would impact the timing of the effectivetax rate benefit should any of these uncertain tax positions be favorably settled in thefuture. Over the next twelve months, we expect an immaterial decline in liabilities associated withour uncertain tax positions as a result of expiring statutes of limitations.We are subject to federal and state tax examination for years 1999 forward and 1997 forward,respectively, by virtue of the tax attributes carrying forward from those years. We are alsosubject to audits in the foreign jurisdictions in which we operate for years 2002 and forward.There are no tax examinations currently in progress.**Outlook**The anticipated timing of orders, shipments and customer acceptances usually requires that we filla number of production slots in any given quarter in order to meet our sales targets. If we areunsuccessful in our efforts to secure those production orders, or if existing production orders aredelayed or cancelled, our results of operations will be materially adversely impacted. Accordingly,we may not be able to achieve or maintain our current or prior level of sales. We presently expectnet sales for the third quarter of 2008 to be higher than the net sales reported in thesecond quarter of 2008. For the full fiscal year of 2008, we believe total net sales will improvecompared to the amount reported for 2007.
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Because our net sales are subject to a number of risks, including risks associated with the marketacceptance of our new laser processing product line, delays in customer acceptance, intensecompetition in the capital equipment industry, uncertainty relating to the timing and marketacceptance of our products, and the condition of the macro-economy and the semiconductor industryand the other risks described in this report and in our Annual Report on Form 10-K for the yearended December 31, 2007, we may not exceed or even maintain our current or prior level of net salesfor any period in the future. Additionally, we believe that the market acceptance and volumeproduction of our advanced packaging systems, laser processing systems and our 1000 Platformsteppers are of critical importance to our future financial results. At June 28, 2008, thesecritical systems represented approximately 78.7% of our backlog. To the extent that these productsdo not achieve or maintain significant sales due to difficulties involving manufacturing orengineering, the inability to reduce the current long manufacturing cycles for these products,competition, excess capacity in the semiconductor or nanotechnology device industries, or for anyother reason, our business, financial condition and results of operations would be materiallyadversely affected.We believethat gross margin for the third quarter of 2008 will improve comparedto thesecond quarter of 2008. Grossmargin for the full fiscal year of 2008 is expected to improve compared to 2007 as well. The finalgross margin achieved in any quarter will depend heavily upon sales volumes and the resultingproduct mix. Should our sales not reach the level expected, we may incur a higher risk of inventoryobsolescence and excess purchase commitments and lower utilization of our manufacturinginfrastructure, which would materially adversely impact our results of operations. New productsgenerally have lower gross margins until there is widespread market acceptance and until productionand after-sales efficiencies can be achieved. Should significant market demand fail to develop forour laser processing systems and our advanced packaging offerings, our business, financialcondition and results of operations would be materially adversely affected. In addition, highercosts associated with extended manufacturing and customer acceptance periods on shipments of ourlaser processing products have had, and will continue to have, an adverse impact on our grossmargins. We anticipate our operating expenses for the full fiscalyear of 2008 will be slightly higher than the amount in fiscal year of2007. For the full fiscal year of 2008, we believe our operating cash flow will continue to bepositive.**LIQUIDITY AND CAPITAL RESOURCES**Net cash provided by operating activities was $12.1 million for the six months ended June 28, 2008,compared with $1.8 million for the comparable period in 2007. Net cash provided by operatingactivities during the first six months of 2008 was primarily attributable to our net incomegenerated from increased product and service sales and lower overall spending from our cost-cuttingmeasures plus the net effect of non-cash expenses from depreciation, amortization and stock-basedcompensation charges. Other source of cash from operating activities included decreases in tradereceivables and increases in accounts payable and other current liabilities. The decrease inaccounts receivable was due to strong collections in the first six months of 2008. The increases inaccounts payable and other current liabilities were due to timing of payments. These sources ofcash were partially offset by uses of cash from purchase of inventories and lower deferred productand service income. The decrease in deferred product and services income was primarily due torevenue recognized during the first six months of 2008.We believe that because of the relatively long manufacturing cycle of certain of our systems,particularly newer products, our inventories will continue to represent a significant portion ofworking capital. Currently, we are devoting significant resources to the introduction andcommercialization of our laser processing systems and to the development of our next generation 1Xlithography technologies. We currently intend to continue to incur significant operating expensesin the areas of research, development and engineering, manufacturing, and selling, general andadministrative costs in order to furtherdevelop, produce and support these new products. Additionally, gross profit margins, inventory andcapital equipment levels may be adversely impacted in the future by costs associated with theproduction of our laser processing systems and by future generations of our 1X wafer steppers.These costs include, but are not limited to, additional manufacturing overhead, costs ofdemonstration systems and facilities and the establishment of additional after-sales supportorganizations. Moreover, there can be no assurance that operating expenses will not increase,relative to sales, as a result of adding technical, marketing and administrative personnel, amongother costs, to support our new products. If we are unable to achieve significantly increased netsales or if our sales fall below expectations, our cash flow and operating results will bematerially adversely affected until, among other factors, costs and expenses can be reduced. Ourfailure to achieve our sales targets for these new products could result in inventory write-offsand asset impairment charges, either of which could materially adversely impact our results ofoperations.During the first six months of 2008, net cash provided by investing activities was $50.8 million,attributable to net proceeds from the sale and maturity of short and long-term investments of $52.0million, offset by capital expenditures of $1.2 million.
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Net cash used in financing activities was $1.1 million during the first six months of 2008,attributable to net repayments of $2.1 million under our notes payable offset partially by proceedsof $1.0 million received from the issuance of common stock under our employee stock option plans.At June 28, 2008, we had working capital of $170.0 million. Our principal sources of liquidity atJune 28, 2008 consisted of $137.7 million in cash, cash equivalents and short-term investments, netof outstanding borrowings under our line of credit. We have a line of credit agreement with abrokerage firm. Under the terms of this agreement, we may borrow funds at a cost equal to thecurrent Federal funds open rate plus 125 basis points (approximately 3.25% as of June 28, 2008).Certain of our cash, cash equivalents and marketable securities secure borrowings outstanding underthis facility, but we are not restricted in the use of those assets. Funds are advanced to us underthis facility in accordance with pre-determined advance rates based on the cash and securities heldby us in this brokerage account. This agreement has no set expiration date and there are no loancovenants other than a collateral requirement. As of June 28, 2008, $3.7 million was outstandingunder this facility, with a related collateral requirement of $4.9 million of our cash, cashequivalents and investments.The development and manufacture of new lithography and laser-based systems and system enhancementsis highly capital-intensive. In order to be competitive, we believe we must continue to makesignificant expenditures for capital equipment; sales, service, training and support capabilities;systems, procedures and controls; and expansion of operations and research and development, amongmany other items. We expect that cash generated from operations and our cash, cash equivalents andshort-term investments will be sufficient to meet our cash requirements for at least the nexttwelve months. However, in the near-term, we may continue to utilize existing and future lines ofcredit, and other sources of financing, in order to maintain our present levels of cash, cashequivalents and investments. Beyond the next twelve months, we may require additional equity ordebt financing to address our working capital or capital equipment needs. In addition, we may seekto raise equity or debt capital at any time that we deem market conditions to be favorable.Additional financing, if needed, may not be available on reasonable terms, or at all.We may in the future pursue acquisitions of complementary product lines, technologies orbusinesses. Future acquisitions may result in potentially dilutive issuances of equity securities,the incurrence of debt and contingent liabilities and amortization expenses and impairment chargesrelated to goodwill and other intangible assets, which could materially adversely affect ourfinancial condition and results of operations. In addition, acquisitions involve numerous risks,including difficulties in the assimilation of the operations, technologies, personnel and productsof the acquired companies; the diversion of management’s attention from other business concerns;risks of entering markets in which we have limited or no direct experience; and the potential lossof key employees of the acquired company. In the event we acquire product lines, technologies orbusinesses which do not complement our business, or which otherwise do not enhance our sales oroperating results, we may incur substantial write-offs and higher recurring operating costs, whichcould have a material adverse effect on our business, financial condition and results ofoperations. In the event that any such acquisition does occur, there can be no assurance as to theeffect thereof on our business or operating results.**Foreign Currency**As part of our overall strategy to manage the level of exposure to the risk of foreign currencyexchange rate fluctuations, we attempt to hedge most of our Japanese yen denominated foreigncurrency exposures. We use foreign currency forward contracts to hedge the risk that outstandingJapanese yen denominated receipts from customers, for actual or forecasted sales of our productsafter receipt of customer orders, may be adversely affected by changes in foreign currency exchangerates. We use foreign currency forward exchange contracts and natural hedges to offset substantialportions of the potential gains or losses associated with our Japanese yen denominated assets andliabilities due to exchange rate fluctuations. We enter into foreign currency forward contractsthat generally have maturities of nine months or less.**Critical Accounting Policies**The discussion and analysis of our financial condition and results of operations are based upon ourunaudited condensed consolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accountingpolicies and estimates. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions. Our critical accounting policies and estimates are discussed in ourAnnual Report on Form 10-K for the fiscal year ended December 31, 2007.
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**Information Available on Company Website**Our website is located at *www.ultratech.com*. We make available, free of charge through our website,our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (andamendments to those reports), as soon as reasonably practicable after such reports are filedelectronically with the SEC. We have adopted a Code of Ethics for our principal executive officer,principal financial officer, principal accounting officer or controller, or persons performingsimilar functions. We have posted this Code of Ethics on our website. Any future amendments to orwaivers of this Code will also be posted on our website.**Item 3. Quantitative and Qualitative Disclosures about Market Risk**Reference is made to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”in our Annual Report on Form 10-K for the year ended December 31, 2007 and to the subheading“Derivative Instruments and Hedging” in Item 8, “Financial Statements and Supplementary Data,”under the heading “Notes to Consolidated Financial Statements” of our Annual Report on Form 10-Kfor the year ended December 31, 2007.**Interest Rate Risk**Our exposure to market risk due to potential changes in interest rates relates primarily to ourinvestment portfolio, which consisted primarily of fixed interest rate instruments as of June 28,2008. We maintain an investment policy designed to ensure the safety and preservation of ourinvested funds by limiting market risk and the risk of default.Certain of our cash, cash equivalents and short and long-term investments serve as collateral for aline of credit we maintain with a brokerage firm. The line of credit is used for liquiditypurposes, mitigating the need to liquidate investments in order to meet our current operating cashrequirements.**Credit Risk**We mitigate credit default risk by attempting to invest in high credit quality securities and bypositioning our portfolio to respond appropriately to a significant reduction in a credit rating ofany investment issuer or guarantor. Our portfolio includes only marketable securities with activesecondary or resale markets to ensure portfolio liquidity and is diversified in accordance with ourinvestment policy. To date, we have not experienced any liquidity problems with our portfolio.As of June 28, 2008, we did not have any investments in mortgage backed or auction rate securitiesthat affect the current sub-prime mortgage market. However, we intend to closely monitordevelopments in the credit markets and make appropriate changes to our investment policy as deemednecessary. Based on our ability to liquidate our investment portfolio and our expected operatingcash flows, we do not anticipate any liquidity constraints as a result of the current creditenvironment.**Foreign Currency Risk Management**The majority of our revenue, expense and capital purchasing activities are transacted in U.S.dollars. However, we do enter into these transactions in other currencies, primarily Japanese yen.To protect against reductions in value and the volatility of future cash flows caused by changes incurrency exchange rates, we have established cash flow and balance sheet hedging programs.We use foreign currency forward contracts to hedge the risk that outstanding Japanese yendenominated receipts from customers for actual or forecasted sales of equipment may be adverselyaffected by changes in foreign currency exchange rates. Our hedging programs reduce, but do notalways entirely eliminate, the impact of currency movements.**Item 4. Controls and Procedures**We conducted an evaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as ofthe end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation,our principal executive officer and principal financial officer concluded that, as of theEvaluation Date, our disclosure controls and procedures were effective to ensure that informationrequired to be disclosed by us in reports that we file or submit under the Exchange Act isaccumulated and communicated to our management, including our principal executive officer andprincipal financial officer, to allow timely decisions regarding required disclosure, and isrecorded, processed, summarized and reported within the time periods specified in SEC rules andforms.
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Disclosure controls and procedures are controls and other procedures that are designed to ensurethat information required to be disclosed in our reports filed or submitted under the Exchange Actis recorded, processed, summarized and reported within the time periods specified in the SEC’srules and forms. Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is accumulated and communicated to management to allow timelydecisions regarding required disclosure. In designing and evaluating the disclosure controls andprocedures, our management recognizes that any controls and procedures, no matter how well designedand operated, can provide only reasonable assurance of achieving the desired control objectives.Management is further required to apply judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.**Changes in Internal Control Over Financial Reporting**There were no changes in our internal control over financial reporting during the quarter endedJune 28, 2008 that have materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.**PART II. OTHER INFORMATION****Item 1. Legal Proceedings**On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringementof certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for theNorthern District of California. On May 17, 2005, the court found the subject patent to be invalid.We appealed this decision. The defendant subsequently brought a motion for reimbursement of itsattorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed thismotion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendantfiled a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. InMarch 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent isinvalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial ofattorneys’ fees. Neither side appealed the rulings by the Federal Circuit, and they are final.In May 2006, the same company filed a state court lawsuit against us for malicious prosecution andabuse of process claiming that attorney’s fees, costs and other damages were due based on theoutcome of a federal patent litigation suit described above. We do not believe this action hasmerit, particularly given the denial by the federal court of that company’s request to be awardedattorneys’ fees payable by us in the patent litigation and the subsequent federal appellate court’saffirmation of the order denying any such award. We filed a motion to have the state courtcomplaint dismissed under California’s anti-strategic lawsuit against public participation, oranti-SLAPP, and demurrer statutes. The anti-SLAPP statute is aimed at striking lawsuits that arebrought in order to quash an individual’s constitutional rights to free speech or seeking redressof grievances (i.e., filing suit). The state court granted the anti-SLAPP motion as to the abuse ofprocess claim, but denied it as to the malicious prosecution claim. We appealed the decisiondenying the anti-SLAPP motion as to the malicious prosecution claim, but the Appellate Court upheldthe Superior Court’s ruling. We intend to continue to vigorously pursue our rights in connectionwith this action.**Item 1A. Risk Factors***In addition to risks described in the foregoing discussions, the following risks apply to ourbusiness and us*:**We currently spend, and expect to continue to spend, significant resources to develop, introduceand commercialize our laser processing systems and AP wafer stepper products, and we may not besuccessful in achieving or increasing sales of these products.**Currently, we are devoting significant resources to the development, introduction andcommercialization of our laser products as well as our lithography wafer steppers. We intend tocontinue to develop these products and technologies during 2008, and will continue to incursignificant operating expenses in the areas of research, development and engineering, manufacturingand general and administrative costs in order to develop, produce and support these new products.Additionally, gross profit margins and inventory levels may be further adversely impacted in thefuture by costs associated with the initial production of our laser processing systems and byfuture generations of our 1X lithography systems. Introduction of new products generally involveshigher installation costs and product performance uncertainties that could delay customeracceptance of our systems, resulting in a delay in recognizing revenue associated with thosesystems and a reduction in gross margins. These costs include, but are not limited to, additionalmanufacturing overhead, additional inventory write-downs, costs of demonstration systems andfacilities, costs associated with the establishment of additional after-sales supportorganizations. Additionally, operating expenses may increase, relative to sales, as a result ofaddingadditional marketing and administrative personnel, among other costs, to support our newproducts. If we are unable to achieve significantly increased net sales or if our sales fall belowexpectations, our operating results will be materially adversely affected.
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Our ability to commercialize our laser processing technologies depends on our ability todemonstrate a manufacturing-worthy tool. We do not presently have in-house capability to fabricatedevices. As a result, we must rely on partnering with semiconductor companies to develop the annealprocess. The development of new process technologies is largely dependent upon our ability tointerest potential customers in working on joint process development. Our ability to deliver timelysolutions is also limited by wafer turnaround at the potential customer’s fabrication facility.**Our sales cycle is typically lengthy and involves a significant commitment of capital by ourcustomers, which has subjected us, and is likely to continue to subject us, to delays in customeracceptances of our products and other risks, any of which could adversely impact our results ofoperations by, among other things, delaying recognition of revenue with respect to those orders andresulting in increased installation, qualification and similar costs.**Sales of our systems depend, in significant part, upon the decision of a prospective customer toincrease manufacturing capacity or to restructure current manufacturing facilities, either of whichtypically involves a significant commitment of capital. Many of our customers in the past havecancelled the development of new manufacturing facilities and have substantially reduced theircapital equipment budgets. In view of the significant investment involved in a system purchase, wehave experienced and may continue to experience delays following initial qualification of oursystems as a result of delays in a customer’s approval process. Additionally, we are presentlyreceiving orders for systems that have lengthy delivery schedules, which may be due to longerproduction lead times or a result of customers’ capacity scheduling requirements. For these andother reasons, our systems typically have a lengthy sales cycle during which we may expendsubstantial funds and management effort in securing a sale. Lengthy sales cycles subject us to anumber of significant risks, including inventory obsolescence and fluctuations in operatingresults, over which we have little or no control. In order to maintain or exceed our present levelof net sales, we are dependent upon obtaining orders for systems that will ship and be accepted inthe current period. We may not be able to obtain those orders.**The semiconductor industry historically has been highly cyclical and has experienced periods ofoversupply, which has in turn affected the market for semiconductor equipment such as ours andwhich can adversely affect our results of operations during such periods.**Our business depends in significant part upon capital expenditures by manufacturers ofsemiconductors, advanced packaging semiconductors and nanotechnology components which in turndepend upon the current and anticipated market demand for such devices and products utilizing suchdevices. The semiconductor industry historically has been highly cyclical and has experiencedrecurring periods of oversupply. This has, from time to time, resulted in significantly reduceddemand for capital equipment including the systems manufactured and marketed by us. We believe thatmarkets for new generations of semiconductors and semiconductor packaging will also be subject tosimilar fluctuations. Our business and operating results would be materially adversely affected bydownturns or slowdowns in the semiconductor packaging market or by loss of market share.Accordingly, we may not be able to achieve or maintain our current or prior level of sales. Weattempt to mitigate the risk of cyclicality by participating in multiple markets includingsemiconductor, semiconductor packaging, and nanotechnology sectors, as well as diversifying intonew markets such as laser-based annealing for implant activation and other applications. Despitesuch efforts, when one or more of such markets experiences a downturn or a situation of excesscapacity, our net sales and operating results are materially adversely affected.**We may not be successful in protecting our intellectual property rights or we could be found tohave infringed the intellectual property rights of others, either of which could weaken ourcompetitive position and adversely affect our results of operations.**Although we attempt to protect our intellectual property rights through patents, copyrights, tradesecrets and other measures, we believe that our success will depend more upon the innovation,technological expertise and marketing abilities of our employees. Nevertheless, we have a policy ofseeking patents when appropriate on inventions resulting from our ongoing research and developmentand manufacturing activities. We own 142 United States and foreign patents, which expire on datesranging from October 2008 to September 2027 and have 64 United States and foreign patentapplications pending. In addition, we have various registered trademarks and copyrightregistrations covering mainly applications used in the operation of our systems. We also rely upontrade secret protection for our confidential and proprietary information. We may not be able toprotect our technology adequately and competitors may be able to develop similar technologyindependently. Our pending patent applications may not be issued or U.S. or foreign intellectualproperty laws may not protect our intellectual property rights. In addition, litigation may benecessary to enforce our patents, copyrights or other intellectual property rights, to protect ourtrade secrets, to determine the validity and scope of the proprietary rights of others or to defendagainst claims of infringement. Such litigation has resulted in, and in the future could result in,substantial costs and diversion of resources and could have a material adverse effect on ourbusiness, financial condition and results of operations, regardless of the outcome of thelitigation. Patents issued to us may be challenged, invalidated or circumvented and the rightsgranted thereunder may not provide competitive advantages to us. Furthermore, others mayindependently develop similar technology or products, or, if patents are issued to us, designaround the patents issued to us. Invalidation of our patents related to those technologies couldallow our competitors to more effectively compete against us, which could result in less revenuefor us.
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On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringementof certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for theNorthern District of California. On May 17, 2005, the court found the subject patent to be invalid.We appealed this decision. The defendant subsequently brought a motion for reimbursement of itsattorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed thismotion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendantfiled a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. InMarch 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent isinvalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial ofattorneys’ fees. Neither side appealed the rulings by the Federal Circuit, and they are final.In May 2006, the same company filed a state court lawsuit against us for malicious prosecution andabuse of process claiming that attorney’s fees, costs and other damages were due based on theoutcome of the federal patent litigation suit described above. We do not believe this action hasmerit, particularly given the denial by the federal court of that company’s request to be awardedattorneys’ fees payable by us in the patent litigation and the subsequent federal appellate court’saffirmation of the order denying any such award. We filed a motion to have the state courtcomplaint dismissed under California’s anti-strategic lawsuit against public participation(“anti-SLAPP”) and demurrer statutes. The anti-SLAPP statute is aimed at striking lawsuits that arebrought in order to quash an individual’s constitutional rights to free speech or seeking redressof grievances (i.e., filing suit). The state court granted the anti-SLAPP motion as to the abuse ofprocess claim, but denied it as to the malicious prosecution claim. We appealed the decisiondenying the anti-SLAPP motion as to the malicious prosecution claim, but the Appellate Court upheldthe Superior Court’s ruling. We intend to continue to vigorously pursue our rights in connectionwith this action.We believe that the outcome of these matters will not be material to our business, financialcondition or results of operations.We have from time to time been notified of claims that we may be infringing intellectual propertyrights possessed by third parties. We believe that the outcome of these matters will not bematerial to our business, results of operations or financial condition.Infringement claims by third parties or claims for indemnification resulting from infringementclaims may be asserted in the future and such assertions could materially adversely affect ourbusiness, financial condition and results of operations, regardless of the outcome of anylitigation. With respect to any such future claims, we may seek to obtain a license under the thirdparty’s intellectual property rights. However, a license may not be available on reasonable termsor at all. We could decide, in the alternative, to resort to litigation to challenge such claims.Such challenges could be expensive and time consuming and could materially adversely affect ourbusiness, financial condition and results of operations, regardless of the outcome of anylitigation.**We operate in a highly competitive industry in which customers are required to invest substantialresources in each product, which makes it difficult to achieve significant sales to a particularcustomer once another vendor’s equipment has been purchased by that customer.**The capital equipment industry in which we operate is intensely competitive. A substantialinvestment is required to install and integrate capital equipment into a semiconductor,semiconductor packaging or nanotechnology device production line.We believe that once a device manufacturer or packaging subcontractor has selected a particularsupplier’s capital equipment, the manufacturer generally relies upon that equipment for thespecific production line application and, to the extent possible, subsequent generations of similarproducts. Accordingly, it is difficult to achieve significant sales to a particular customer onceanother supplier’s capital equipment has been selected.We experience competition in advanced packaging from various proximity aligner companies such asSuss Microtec AG (Suss Microtec) and projection companies such as Ushio, Inc. (Ushio). In addition,some device manufacturers may consider using reduction steppers for advanced packaging processes.In nanotechnology, we experience competition from proximity aligner companies, such as SussMicrotec, as well as other stepper manufacturers who have developed or are developing toolsspecifically designed for nanotechnology applications. We expect our competitors in the lithographyarena to continue to improve the performance of their current products and to introduce newproducts with improved price and performance characteristics. This could cause a decline in salesor loss of market acceptance of our steppers in our served markets, andthereby materiallyadversely affect our business, financial condition and results of operations. Enhancements to, orfuture generations of, competing products may be developed that offer superior cost of ownershipand technical performance features.
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With respect to our laser annealing technologies, marketed under the LSA100A product name, theprimary competition comes from companies such as Dainippon Screen Manufacturing Co., Ltd., AppliedMaterials, Inc. and Mattson Technology, Inc. Many of these companies offer products utilizing rapidthermal processing (“RTP”) which is the current prevailing manufacturing technology. RTP does notprevent semiconductor device manufacturers from scaling the lateral dimensions of their transistorsto obtain improved performance, but diffusion resulting from the time scales associated with RTPlimits the vertical dimension of the junctions. Faster annealing times result in shallower and moreabrupt junctions and faster transistors. We believe that RTP manufacturers recognize the need toreduce thermal cycle times and are working toward this goal. In July 2000, we licensed certainrights to our then existing laser processing technology, with reservations, to a competingmanufacturer of semiconductor equipment. We presently anticipate that this company will offerlaser-annealing tools to the semiconductor industry that will compete with our offerings.Another potential advanced annealing solution utilizes flash lamp annealing technology, or FLA.Several companies have published papers on annealing tools that incorporate flash lamp technologyin order to reduce annealing times and increase anneal temperatures. Developers of FLA technologyclaim to have overcome annealing difficulties at the 65nm node. This technique, which employs xenonflash lamps, has shown improvements over RTP in junction depth and sheet resistance, but we believeFLA suffers from pattern-related non-uniformities and could require additional, costly processes toequalize the reflectivity of different areas within the chip or wafer. Our proprietary laserprocessing solution has been specifically developed to provide junction annealing onnear-instantaneous time-scales, while achieving high activation levels. Laser spike annealing, ourfirst implementation of laser processing, activates dopants in the microsecond-to-millisecond timeframe without melting. Our research indicates that, at temperatures just below the melting point ofsilicon, time durations in the microsecond to millisecond range are required to achieve fullactivation and minimal dopant diffusion.Additionally, competition to our laser processing products may come from other laser annealingtools, including those presently being used by the flat panel display industry to re-crystallizesilicon. Manufacturers of these tools may try to extend the use of their technologies tosemiconductor device applications.We believe that in order to be competitive, we will need to continue to invest significantfinancial resources in new product development, new features and enhancements to existing products,the introduction of new stepper systems in our served markets on a timely basis, and maintainingcustomer service and support centers worldwide. In marketing our products, we may also facecompetition from vendors employing other technologies. In addition, increased competitive pressurehas led to intensified price-based competition in certain of our markets, resulting in lower pricesand margins. Should these competitive trends continue, our business, financial condition andoperating results may be materially adversely affected.**We sell our products primarily to a limited number of customers and to customers in a limitednumber of industries, which subjects us to increased risks related to the business performance ofour customers, and therefore their need for our products, and the business cycles of the marketsinto which we sell.**Historically, we have sold a substantial portion of our systems to a limited number of customers.In the three- and six-month periods ended June 28, 2008, our top five customers accounted for 88.0%and 62.7% of our system sales compared to 88.9% and 58.1%, in the comparable periods of 2007. Weexpect that sales to a relatively few customers will continue to account for a high percentage ofour net sales in the foreseeable future and believe that our financial results depend insignificant part upon the success of these major customers and our ability to meet their futurecapital equipment needs. Although the composition of the group comprising our largest customers mayvary from period to period, the loss of a significant customer or any reduction in orders by asignificant customer, including reductions due to market, economic or competitive conditionsin the semiconductor, semiconductor packaging or nanotechnology industries or in the industriesthat manufacture products utilizing integrated circuits, thin film heads or other nanotechnologycomponents, would likely have a material adverse effect on our business, financial condition andresults of operations. Our ability to maintain or increase our sales in the future depends, inpart, on our ability to obtain orders from new customers as well as the financial condition andsuccess of our existing customers, the semiconductor and nanotechnology industries and the economyin general.In addition to the business risks associated with dependence on a few major customers, thesesignificant customer concentrations have in the past resulted in significant concentrations ofaccounts receivable. These significant and concentrated receivables expose us to additional risks,including the risk of default by one or more customers representing a significant portion of ourtotal receivables. If we were required to take additional accounts receivable reserves, ourbusiness, financial condition and results of operations would be materially adversely affected.
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On a market application basis, sales to the semiconductor industry, primarily for advancedpackaging applications and laser thermal processing applications, accounted for 100% and 74.4% ofsystem revenue for the second quarter of 2008 and 2007, respectively, while sales to nanotechnologymanufacturers, including micro systems, thin film head and optical device manufacturers, accountedfor the remainder of our systems revenue. For the first six months of 2008, sales to thesemiconductor industry and nanotechnology manufacturers accounted for 96.7% and 3.3%, respectively,compared to 84.1% and 15.9% of the corresponding periods in 2007. Our future operating results andfinancial condition would be materially adversely impacted by a downturn in any of theseindustries, or by loss of market share in any of these industries. A growing portion of our backlogof system orders is comprised of laser spike annealing tools. To date, we have limited customerexperience with this technology. Should significant demand not materialize, due to technical,production, market, or other factors, our business, financial position and results of operationswould be materially adversely impacted.**We rely on a limited number of outside suppliers and subcontractors to manufacture certaincomponents and subassemblies, and on single or a limited group of outside suppliers for certainmaterials for our products, which could result in a potential inability to obtain an adequatesupply of required components due to the suppliers’ failure or inability to provide such componentsin a timely manner, or at all, and reduced control over pricing and timely delivery of componentsand materials, any of which could adversely affect our results of operations.**Our manufacturing activities consist of assembling and testing components and subassemblies, whichare then integrated into finished systems. We rely on a limited number of outside suppliers andsubcontractors to manufacture certain components and subassemblies. We order one of the mostcritical components of our technology, the glass for our 1X lenses, from external suppliers. Wedesign the 1X lenses and provide the lens specifications and the glass to other suppliers, who thengrind and polish the lens elements. We then assemble and test the optical 1X lenses.We procure some of our other critical systems’ components, subassemblies and services from singleoutside suppliers or a limited group of outside suppliers in order to ensure overall quality andtimeliness of delivery. Many of these components and subassemblies have significant production leadtimes. To date, we have been able to obtain adequate services and supplies of components andsubassemblies for our systems in a timely manner. However, disruption or termination of certain ofthese sources could have a significant adverse impact on our ability to manufacture our systems.This, in turn, would have a material adverse effect on our business, financial condition andresults of operations. Our reliance on a sole supplier or a limited group of suppliers and ourreliance on subcontractors involve several risks, including a potential inability to obtain anadequate supply of required components due to the suppliers’ failure or inability to provide suchcomponents in a timely manner, or at all, and reduced control over pricing and timely delivery ofcomponents. Although the timeliness, yield and quality of deliveries to date from oursubcontractors have been acceptable, manufacture of certain of these components and subassembliesis an extremely complex process, and long lead-times are required. Any inability to obtain adequatedeliveries or any other circumstance that would require us to seek alternative sources of supply orto manufacture such components internally could delay our ability to ship our products, which coulddamage relationships with current and prospective customers and have a material adverse effect onour business, financial condition and results of operations.**Our industry is subject to rapid technological change and product innovation, which could result inour technologies and products being replaced by those of our competitors, which would adverselyaffect our business and results of operations.**The semiconductor and nanotechnology manufacturing industries are subject to rapid technologicalchange and new product introductions and enhancements. Our ability to be competitive in these andother markets will depend, in part, upon our ability to develop new and enhanced systems andrelated applications, and to introduce these systems and related applications at competitive pricesand on a timely and cost-effective basis to enable customers to integrate them into theiroperations either prior to or as they begin volume product manufacturing. We will also be requiredto enhance the performance of our existing systems and related applications. Our success indeveloping new and enhanced systems and related applications depends upon a variety of factors,including product selection, timely and efficient completion of product design, timely andefficient implementation of manufacturing and assembly processes, product performance in the fieldand effective sales and marketing. Because new product development commitments must be made well inadvance of sales, new product decisions must anticipate both future demand and the technology thatwill be available to meet that demand. We may not be successful in selecting, developing,manufacturing or marketing new products and related applications or enhancing our existing productsand related applications. Any such failure would materially adversely affect our business,financial condition and results of operations.Because of the large number of components in our systems, significant delays can occur between asystem’s introduction and our commencement of volume production of such systems. We haveexperienced delays from time to time in the introduction of, and technical and manufacturingdifficulties with, certain of our systems and enhancements and related application toolsfeatures and options, and may experience delays and technical and manufacturing difficulties infuture introductions or volume production of new systems or enhancements and related applicationtools features and options.
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We may encounter additional technical, manufacturing or other difficulties that could further delayfuture introductions or volume production of systems or enhancements. Our inability to complete thedevelopment or meet the technical specifications of any of our systems or enhancements and relatedapplications, or our inability to manufacture and ship these systems or enhancements and relatedtools in volume and in time to meet the requirements for manufacturing the future generation ofsemiconductor or nanotechnology devices would materially adversely affect our business, financialcondition and results of operations. In addition, we may incur substantial unanticipated costs toensure the functionality and reliability of our products early in the products’ life cycles. If newproducts have reliability or quality problems, reduced orders or higher manufacturing costs, delaysin customer acceptance, revenue recognition and collecting accounts receivable and additionalservice and warranty expenses may result. Any of such events may materially adversely affect ourbusiness, financial condition and results of operations.**A substantial portion of our sales are outside of the United States, which subjects us to risksrelated to customer service, installation, foreign economic and political stability, uncertainregulatory and tax rules, and foreign exchange rate fluctuations, all of which make it moredifficult to operate our business.**International sales accounted for approximately 49.2% and 53.8% of total net sales for the three-and six-month periods ended June 28, 2008, respectively, compared to 60.2% and 68.0% in thecomparable period of 2007. We anticipate that international sales will continue to account for asignificant portion of total net sales. As a result, a significant portion of our net sales willcontinue to be subject to certain risks, including unexpected changes in regulatory requirements;difficulty in satisfying existing regulatory requirements; exchange rate fluctuations; tariffs andother barriers; political and economic instability; difficulties in accounts receivablecollections; natural disasters; difficulties in staffing and managing foreign subsidiary and branchoperations; and potentially adverse tax consequences.Although we generally transact our international sales in U.S. dollars, international sales exposeus to a number of additional risk factors, including fluctuations in the value of local currenciesrelative to the U.S. dollar, which, in turn, impact the relative cost of ownership of our productsand may further impact the purchasing ability of our international customers. We have direct salesoperations in Japan and orders are often denominated in Japanese yen. This may subject us to ahigher degree of risk from currency fluctuations. We attempt to mitigate this exposure throughforeign currency hedging. We are also subject to the risks associated with the imposition oflegislation and regulations relating to the import or export of semiconductors and nanotechnologyproducts. We cannot predict whether the United States or any other country will implement changesto quotas, duties, taxes or other charges or restrictions upon the importation or exportation ofour products. These factors, or the adoption of restrictive policies, may have a material adverseeffect on our business, financial condition and results of operations.**Our investment portfolio may become impaired by further deterioration of the capital markets.**Our cash equivalent and short-term investment portfolio as of June 28, 2008 consisted of U.S.treasury securities, corporate notes, commercial paper and money market funds. We follow anestablished investment policy and set of guidelines to monitor, manage and limit our exposure tointerest rate and credit risk. The policy sets forth credit quality standards and limits ourexposure to any one issuer, as well as our maximum exposure to various asset classes.As a result of current financial market conditions, investments in some financial instruments, suchas structured investment vehicles, sub-prime mortgage-backed securities and collateralized debtobligations, may lose some or all of their value due to liquidity and credit concerns. As of June28, 2008, we had no holdings in these categories of investments and no impairment charge associatedwith our short-term investment portfolio. Although we believe our current investment portfolio haslittle risk of impairment, we cannot predict future market conditions or market liquidity and ourinvestment portfolio could become impaired.**We are dependent on our key personnel, especially Mr. Zafiropoulo, our Chief Executive Officer, andour business and results of operations would be adversely affected if we were to lose our keyemployees.**Our future operating results depend, in significant part, upon the continued contributions of keypersonnel, many of whom would be difficult to replace. We have entered into employment agreementsonly with our Chief Executive Officer and Chief Financial Officer, and our employees are employed“at will.” The agreements with our Chief Executive Officer and Chief Financial Officer containvesting acceleration and severance payment provisions that could result in significant costs orcharges to us should the employee be terminated without cause, die or have a disability. We do notmaintain any life insurance on any of our key employees. The loss of key personnel could have amaterial adverse effect on our business, financial condition and results of operations. Inaddition, our future operating results depend in significant part upon ourability to attract and retain other qualified management, manufacturing, technical, sales andsupport personnel for our operations. There are only a limited number of persons with the requisiteskills to serve in these positions and it may become increasingly difficult for us to hire suchpersonnel over time. At times, competition for such personnel has been intense, particularly in theSan Francisco Bay Area, where we maintain our headquarters and principal operations, and we may notbe successful in attracting or retaining such personnel. The failure to attract or retain suchpersons would materially adversely affect our business, financial condition and results ofoperations.
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**Changes in financial accounting standards or policies in the past have affected, and in the futuremay, affect, our reported results of operations.**We prepare our financial statements in conformity with accounting principles generally accepted inthe United States (“U.S. GAAP”). These principles are subject to interpretation by the FinancialAccounting Standards Board (“FASB”), the American Institute of Certified Public Accountants(“AICPA”), the SEC and various bodies formed to interpret and create appropriate accountingpolicies. A change in those policies can have a significant effect on our reported results and mayaffect our reporting of transactions which are completed before a change is announced.Accounting policies affecting many other aspects of our business, including rules relating torevenue recognition, off-balance sheet transactions, employee stock options, restructurings, assetdisposals and asset retirement obligations, derivative and other financial instruments haverecently been revised or are under review. Changes to those rules or the questioning of how weinterpret or implement those rules may have a material adverse effect on our reported financialresults or on the way we conduct business. In addition, our preparation of financial statements inaccordance with U.S. GAAP requires that we make estimates and assumptions that affect the recordedamounts of assets and liabilities, disclosure of those assets and liabilities at the date of thefinancial statements and the recorded amounts of expenses during the reporting period. A change inthe facts and circumstances surrounding those estimates could result in a change to our estimatesand could impact our future operating results.**Changes in securities laws and listing standards, in particular those that have resulted from thepassage of the Sarbanes-Oxley Act of 2002 and related rules and regulations, have increased ourlegal and financial costs, and we expect to continue to spend significant resources to comply withthese requirements.**The Sarbanes-Oxley Act of 2002 required changes in our corporate governance, public disclosure andcompliance practices. The rules and regulations applicable to us have increased and will continueto increase our legal and financial compliance costs, and have made some activities more difficult,such as by requiring stockholder approval of new stock option plans. In addition, we have incurredand expect to continue to incur significant costs in connection with compliance with Section 404 ofthe Sarbanes-Oxley Act regarding internal control over financial reporting. We also expect thesedevelopments to make it more difficult and more expensive to obtain director and officer liabilityinsurance, and we may be required to accept reduced coverage or incur substantially higher costs toobtain coverage. These developments could make it more difficult for us to attract and retainqualified members of our board of directors, particularly to serve on our audit committee, andqualified executive officers. In addition, in connection with our Section 404 certificationprocess, we may identify from time to time deficiencies in our internal controls. Any materialweakness or deficiency in our internal control over financial reporting could materially andnegatively impact our reported financial results and the market price of our stock couldsignificantly decline. Additionally, adverse publicity related to the disclosure of a materialweakness or deficiency in internal control over financial reporting could have a negative impact onour reputation, business and stock price.**Our equity incentive plans, certain provisions of our Certificate of Incorporation and Bylaws, andDelaware law may discourage third parties from pursuing a change of control transaction with us.**Certain provisions of our Certificate of Incorporation, equity incentive plans, licensingagreements, Bylaws and Delaware law may discourage certain transactions involving a change incontrol of our company. In addition to the foregoing, our classified board of directors, theshareholdings of our officers, directors and persons or entities that may be deemed affiliates andthe ability of the Board of Directors to issue “blank check” preferred stock without furtherstockholder approval could have the effect of delaying, deferring or preventing us fromexperiencing a change in control and may adversely affect the voting and other rights of holders ofour Common Stock.**Our stock price has experienced significant volatility in the past and we expect this to continuein the future as a result of many factors, some of which could be unrelated to our operatingperformance, and such volatility can have a major impact on the number of shares subject tooutstanding stock options and restricted stock units that are included in calculating our earningsper share.**We believe that factors such as announcements of developments related to our business, fluctuationsin our operating results, a shortfall in revenue or earnings, changes in analysts’ expectations,general conditions in the semiconductor andnanotechnology industries or the worldwide or regional economies, sales of our securities into themarketplace, an outbreak or escalation of hostilities, announcements of technological innovationsor new products or enhancements by us or our competitors, developments in patents or otherintellectual property rights and developments in our relationships with our customers and supplierscould cause the price of our Common Stock to fluctuate, perhaps substantially. The market price ofour Common Stock has fluctuated significantly in the past and we expect it to continue toexperience significant fluctuations in the future, including fluctuations that may be unrelated toour performance.
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As of June 28, 2008, we had options and restricted stock units to purchase approximately 5.2million shares of our Common Stock outstanding. Among other determinants, the market price of ourstock has a major bearing on the number of shares subject to outstanding stock options andrestricted stock units that are included in the weighted-average shares used in determining our netincome (loss) per share. During periods of extreme volatility, the impact of higher stock pricescan have a materially dilutive effect on our net income (loss) per share. Additionally, sharessubject to outstanding options and restricted stock units are excluded from the calculation of netincome (loss) per share when we have a net loss or when the exercise price and the averageunrecognized compensation cost of the stock option or restricted stock unit is greater than theaverage market price of our Common Stock, as the impact of the stock options or restricted stockunit would be anti-dilutive.**Our results of operations and business could be adversely affected by wars and other militaryaction, as well as terrorist attacks and threats and government responses thereto, especially ifany such actions were directed at us or our facilities or customers.**Terrorist attacks in the United States and elsewhere, government responses thereto, and militaryactions in Iraq, Afghanistan and elsewhere, may disrupt our operations or those of our customersand suppliers and may affect the availability of materials needed to manufacture our products orthe means to transport those materials to manufacturing facilities and finished products tocustomers. In addition, any of these events could increase volatility in the United States andworld financial markets which may depress the price of our Common Stock and may limit the capitalresources available to us or our customers or suppliers, which could result in decreased ordersfrom customers, less favorable financing terms from suppliers, and scarcity or increased costs ofmaterials and components of our products. Additionally, terrorist attacks directly upon us maysignificantly disrupt our ability to conduct our business. Any of these occurrences could have asignificant impact on our operating results, revenues and costs and may result in increasedvolatility of the market price of our Common Stock.**If we acquire companies, products, or technologies, we may face risks associated with thoseacquisitions.**We may not realize the anticipated benefits of any acquisition or investment. We may in the futurepursue additional acquisitions of complementary product lines, technologies or businesses. Futureacquisitions may result in potentially dilutive issuances of equity securities, the incurrence ofdebt and contingent liabilities and amortization expenses and impairment charges related togoodwill and other intangible assets, which could materially adversely affect our financialcondition and results of operations. In addition, acquisitions involve numerous risks, includingdifficulties in the assimilation of the operations, technologies, personnel and products of theacquired companies; the diversion of management’s attention from other business concerns; risks ofentering markets in which we have limited or no direct experience; and the potential loss of keyemployees of the acquired company. In the event we acquire product lines, technologies orbusinesses which do not complement our business, or which otherwise do not enhance our sales oroperating results, we may incur substantial write-offs and higher recurring operating costs, whichcould have a material adverse effect on our business, financial condition and results ofoperations. In the event that any such acquisition does occur, there can be no assurance as to theeffect thereof on our business or operating results.**Our long-term expenses reduction programs may result in an increase in short-term expenses.**As part of our continued effort to reduce company-wide expenses since the fourth quarter of 2006,during 2006 and 2007, we recorded certain expenses related to workforce reductions pursuant to theprovisions of FASB Statement No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*. Although we expect our cost cutting efforts to result in a decrease in expenses overthe long-term, these accounting charges may result in an increase in our short-term expenses. Wemay from time to time undertake additional expense reduction programs or actions, any of whichcould result in current period charges and expenses that could have a material adverse effect onthat period’s operating results.**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.**None.**Item 3. Defaults Upon Senior Securities.**None.
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**Item 4. Submission of Matters to a Vote of Security Holders.**None.**Item 5. Other Information.**None.
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**Item 6. Exhibits.**   3.1(a) Amended and Restated Certificate of Incorporation of the Registrant, filed October 6, 1993.   3.1.1(a) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated May17, 1995.   3.1.2(a) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, datedJune 17, 1998.   3.1.3(a) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, datedJune 20, 2003.   3.2(b) Bylaws of the Registrant, as amended.   31.1 Certification of Chief Executive Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   31.2 Certification of Chief Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   32.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (a) Previously filed with our Quarterly Report on Form 10-Q for thequarter ended June 28, 2003 (Commission File No. 0-22248) andincorporated herein by reference. (b) Previously filed with our Current Report on Form 8-K filed onFebruary 2, 2007 (Commission File No. 0-22248) and incorporated hereinby reference. * Exhibit 32.1 is being furnished and shall not be deemed to be filedfor purposes of Section 18 of the Securities Exchange Act of 1934, asamended, or otherwise subject to the liability of that section, norshall such exhibit be deemed to be incorporated by reference in anyregistration statement or other document filed under the SecuritiesAct of 1933, as amended, or the Securities Exchange Act, except asotherwise stated in such filing.
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**SIGNATURES**Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto duly authorized.         **ULTRATECH, INC.**(Registrant)         Date: July 31, 2008 By: /s/ BRUCE WRIGHT Bruce Wright