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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-QQUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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

For the Quarterly period ended March 31, 2002

|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

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

DELAWARE(State or other jurisdiction of
incorporation or organization)

94-3169580(I.R.S. employer identification number)3050 Zanker Road, San Jose, California(Address of principal executive offices)

95134(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.)

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

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

|Class                         |  | Outstanding as of May 8, 2002
|----------------------------- |  | -----------------------------
|common stock, $.001 par value |  | 22,573,397                   

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ULTRATECH STEPPER, INC.    INDEX

|           |                                                                                                    |  | Page No.
|---------- | -------------------------------------------------------------------------------------------------- |  | --------
|PART 1.    | FINANCIAL INFORMATION                                                                              |  |         
|Item 1.    | Condensed Consolidated Financial Statements                                                        |  | 3       
|           | Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001                   |  | 3       
|           | Condensed Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 |  | 4       
|           | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 |  | 5       
|           | Notes to Condensed Consolidated Financial Statements                                               |  | 6       
|Item 2.    | Management's Discussion and Analysis of Financial Condition and Results of Operations              |  | 10      
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 27      
|PART 2.    | OTHER INFORMATION                                                                                  |  |         
|Item 1.    | Legal Proceedings                                                                                  |  | 28      
|Item 2.    | Changes in Securities and Use of Proceeds                                                          |  | 28      
|Item 3.    | Defaults upon Senior Securities                                                                    |  | 28      
|Item 4.    | Submission of Matters to a Vote of Security Holders                                                |  | 28      
|Item 5.    | Other Information                                                                                  |  | 28      
|Item 6.    | Exhibits and Reports on Form 8-K                                                                   |  | 28      
|SIGNATURES |                                                                                                    |  | 29      

2

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PART 1. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

|(In thousands)                             |                                                   | Mar. 31, 2002 |         | Dec. 31, 2001* |  
|------------------------------------------ | ------------------------------------------------- | ------------- | ------- | -------------- | -
|
|ASSETS                                     |                                                   |               |         |                |  
|Current assets:                            |                                                   |               |         |                |  
|                                           | Cash, cash equivalents and short-term investments |               | $       | 162,764        |  
|                                           | Accounts receivable, net                          |               |         | 13,721         |  
|                                           | Inventories                                       |               |         | 26,410         |  
|                                           | Prepaid expenses and other current assets         |               |         | 1,924          |  
|                                           |                                                   |               |         |                |  
|Total current assets                       |                                                   |               | 204,819 |                |  
|Equipment and leasehold improvements, net  |                                                   |               | 23,101  |                |  
|Demonstration inventories, net             |                                                   |               | 3,458   |                |  
|Intangible assets, net                     |                                                   |               | 1,143   |                |  
|Other assets                               |                                                   |               | 2,496   |                |  
|                                           |                                                   |               |         |                |  
|Total assets                               |                                                   | $             | 235,017 |                | $
|                                           |                                                   |               |         |                |  
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                   |               |         |                |  
|Current liabilities:                       |                                                   |               |         |                |  
|                                           | Accounts payable                                  |               | $       | 8,588          |  
|                                           | Deferred product and service income               |               |         | 3,778          |  
|                                           | Deferred license income                           |               |         | 11,246         |  
|                                           | Other current liabilities                         |               |         | 18,038         |  
|                                           |                                                   |               |         |                |  
|Total current liabilities                  |                                                   |               | 41,650  |                |  
|Other liabilities                          |                                                   |               | 163     |                |  
|Stockholders' equity:                      |                                                   |               |         |                |  
|                                           | Common stock                                      |               |         | 23             |  
|                                           | Additional paid-in capital                        |               |         | 197,024        |  
|                                           | Accumulated other comprehensive gain, net         |               |         | 1,419          |  
|                                           | Treasury stock                                    |               |         | (6,867         | )
|                                           | Retained earnings                                 |               |         | 1,605          |  
|                                           |                                                   |               |         |                |  
|Total stockholders' equity                 |                                                   |               | 193,204 |                |  
|                                           |                                                   |               |         |                |  
|Total liabilities and stockholders' equity |                                                   | $             | 235,017 |                | $
|                                           |                                                   |               |         |                |  

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See accompanying notes to condensed consolidated financial statements

3

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (Unaudited)

|                               |                                                         | Three Months Ended |       
|------------------------------ | ------------------------------------------------------- | ------------------ | ------
|
|Net sales:                     |                                                         |                    |       
|                               | Products                                                |                    | $     
|                               | Services                                                |                    |       
|                               | Licenses                                                |                    |       
|                               |                                                         |                    |       
|Total net sales                |                                                         |                    | 19,785
|Cost of sales:                 |                                                         |                    |       
|                               | Cost of products sold                                   |                    |       
|                               | Cost of services                                        |                    |       
|                               |                                                         |                    |       
|Total cost of sales            |                                                         |                    | 11,853
|                               |                                                         |                    |       
|Gross profit                   |                                                         |                    | 7,932 
|Operating expenses:            |                                                         |                    |       
|                               | Research, development, and engineering                  |                    |       
|                               | Amortization of intangible assets                       |                    |       
|                               | Selling, general, and administrative                    |                    |       
|                               |                                                         |                    |       
|Operating income (loss)        |                                                         |                    | (4,072
|Interest expense               |                                                         |                    | (3    
|Interest and other income, net |                                                         |                    | 1,653 
|                               |                                                         |                    |       
|Income (loss) before tax       |                                                         |                    | (2,422
|Income taxes                   |                                                         |                    |      
|                               |                                                         |                    |       
|Net income (loss)              |                                                         | $                  | (2,422
|                               |                                                         |                    |       
|Earnings per sharebasic:      |                                                         |                    |       
|                               | Net income (loss)                                       |                    | $     
|                               | Number of shares used in per share computationsbasic   |                    |       
|Earnings per sharediluted:    |                                                         |                    |       
|                               | Net income (loss)                                       |                    | $     
|                               | Number of shares used in per share computationsdiluted |                    |       
|                               |                                                         |                    |       

See accompanying notes to condensed consolidated financial statements

4

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)

|                                                                            |  | Three Months Ended |        
|--------------------------------------------------------------------------- |  | ------------------ | -------
|
|Cash flows from operating activities:                                       |  |                    |        
|Net income (loss)                                                           |  | $                  | (2,422 
|Charges to income not affecting cash                                        |  |                    | 2,460  
|Net effect of changes in operating assets and liabilities                   |  |                    | (6,152 
|                                                                            |  |                    |        
|Net cash used in operating activities                                       |  |                    | (6,114 
|Cash flows from investing activities:                                       |  |                    |        
|Capital expenditures                                                        |  |                    | (550   
|Net increase in available-for-sale securities                               |  |                    | (4,769 
|                                                                            |  |                    |        
|Net cash used in investing activities                                       |  |                    | (5,319 
|Cash flows from financing activities:                                       |  |                    |        
|Repayment of notes payable                                                  |  |                    |       
|Net proceeds from issuance of common stock pursuant to employee stock plans |  |                    | 1,381  
|                                                                            |  |                    |        
|Net cash provided by financing activities                                   |  |                    | 1,381  
|Net effect of exchange rate changes on cash                                 |  |                    | (66    
|Net increase (decrease) in cash and cash equivalents                        |  |                    | (10,118
|Cash and cash equivalents at beginning of period                            |  |                    | 62,729 
|                                                                            |  |                    |        
|Cash and cash equivalents at end of period                                  |  | $                  | 52,611 
|                                                                            |  |                    |        

See accompanying notes to condensed consolidated financial statements

5

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Ultratech Stepper, Inc.  Notes to Condensed Consolidated Financial Statements  (Unaudited)  March 31, 2002

(1)    Basis of Presentation

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

COMPANY
AND INDUSTRY INFORMATIONThe Company operates in one business segment, which is the manufacture and distribution of photolithography equipment to manufacturers of
integrated circuits and nanotechnology components.

USE
OF ESTIMATESThe preparation of the accompanying unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles
requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, accounting for the
allowance for doubtful accounts, inventory reserves, purchase order commitments, warranty costs and income taxes. Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

REVENUE
RECOGNITIONSales of the Company's products are recognized when the contractual obligation for installation (if any) has been satisfied, or installation is
substantially complete, and/or
customer acceptance provisions have lapsed, provided collections of the related receivable are probable. The Company sells service contracts for which revenue is recognized ratably over the contract
period. The Company recognizes revenue from licensing and technology support agreements ratably over the contract period, or the estimated useful life of the licensed technologies, whichever is
applicable.

FISCAL
PERIODS: The Company's first fiscal quarter in 2002 and 2001 ended on March 30, 2002 and March 31, 2001, respectively. For convenience of presentation, the Company's
financial statements have been shown as having ended on March 31, 2002 and March 31, 2001.

Operating
results for the three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002,
or any future period.

(2)    Inventories

Inventories
consist of the following:

(In thousands)

Mar. 31, 2002

Dec. 31, 2001(Unaudited)Raw materials

$
14,524

$
12,239Work-in-process


10,492


11,001Finished products


1,394


2,807$
26,410

$
26,047


6

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(3)    Other Current Liabilities

Other current liabilities consist of the following:

(In thousands)

Mar. 31, 2002

Dec. 31, 2001(Unaudited)Salaries and benefits

$
2,668

$
3,368Warranty reserves


1,681


1,895Advance billings


2,327


3,010Income taxes payable


3,937


4,304Accrued restructuring cost


3,270


4,338Reserve for losses on purchase order commitments


1,024


1,024Other


3,131


3,656$
18,038

$
21,595


(4)    Basic and Diluted Net Income (Loss) per Share

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

Three Months Ended(Unaudited, in thousands, except per share amounts)

Mar. 31,
2002

Mar. 31,
2001Numerator:Net income (loss)

$
(2,422
)
$
5,644Denominator:Denominator for earnings per share  basic


22,485


21,715Effect of dilutive employee stock options





1,246Denominator for earnings per share  diluted


22,485


22,961Earnings per sharebasic:Net income (loss)

$
(0.11
)
$
0.26Earnings per sharediluted:Net income (loss)

$
(0.11
)
$
0.25


For
the three-month period ended March 31, 2002, options to purchase 4,673,000 shares of Common Stock at an average exercise price of $16.55 were excluded from the computation of
diluted net loss per share as the effect would have been anti-dilutive. This compares to the exclusion of 220,000 options at an average exercise price of $31.73 per share for the
three-month period ended March 31, 2001, as the effect would have been anti-dilutive. Options are anti-dilutive when the Company has a net loss or when the exercise
price of the stock option is greater than the average market price of the Company's Common Stock.

7

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(5)    Reporting Comprehensive Income (Loss)

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

Three Months Ended(Unaudited, in thousands)

Mar. 31,
2002

Mar. 31,
2001Net income (loss)

$
(2,422
)
$
5,644Accumulated other comprehensive income (loss):Unrealized gain (loss) on available-for-sale securities


(1,001
)

1,549Unrealized loss on foreign exchange forward contracts


(66
)

(239
)Tax effect





Comprehensive income (loss)

$
(3,489
)
$
6,954


Accumulated
other comprehensive income (loss) presented in the accompanying condensed consolidated balance sheets consists entirely of accumulated unrealized gains or losses on
available-for-sale securities and the effect of exchange rate changes on foreign exchange forward contracts, as a result of adopting SFAS 133. The unrealized gain on
available-for-sale securities is not currently adjusted for income taxes as a result of the Company's operating loss carry forward.

(6)    Restructure of Operations

In September 2001, the Company reached a decision to consolidate its manufacturing operations and eliminate approximately 20% of its workforce. As a result
of this decision, the Company recorded a restructuring charge of $12.0 million, or $0.54 per share (diluted) in the quarter ended September 30, 2001. Additionally, the Company recognized
restructuring charges of $0.3 million, or $0.01 per share (diluted) in the quarter ended December 31, 2001, primarily related to employee severance costs of
$0.6 million (from additional personnel actions) and higher fixed asset disposal costs of $0.4 million, partially offset by revised facility closure and other cost estimates of
$0.7 million. Of the full-year charge of $12.3 million, non-cash components included a $4.1 million impairment charge for intangible assets related to the
Company's XLS reduction product platform acquired in 1998 and a $1.5 million impairment charge for fixed assets disposed of in conjunction with the consolidation of manufacturing facilities.
The cash components of this charge included $4.0 million for estimated expenditures related to the closure of facilities, $2.5 million for employee severance costs and
$0.1 million of other restructuring costs. There were no adjustments recorded to these restructuring costs in the three-month period ended March 31, 2002. As of March 31, 2002 the
amount of restructuring cost accrued but unpaid was $3.3 million.

Components
of accrued restructuring cost and amounts charged against the plan as of March 31, 2002 were as follows:

|(in millions)            |  | Sept. 30, 2001 |     | Expenditures/
Adjustments |   | Dec. 31,
2001 |   | Expenditures |     | Mar. 31,
2002
|------------------------ |  | -------------- | --- | ------------------------- | - | ------------- | - | ------------ | --- | -------------
|Facility closure costs   |  | $              | 4.3 |                           | $ | (1.1          | ) | $            | 3.2 |              
|Employee severance costs |  |                | 1.9 |                           |   | (0.8          | ) |              | 1.1 |              
|Other costs              |  |                | 0.5 |                           |   | (0.5          | ) |              |    |              
|                         |  |                |     |                           |   |               |   |              |     |              
|Total                    |  | $              | 6.7 |                           | $ | (2.4          | ) | $            | 4.3 |              
|                         |  |                |     |                           |   |               |   |              |     |              

8

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(7)    Recent Accounting Pronouncements

On July 20, 2001 the Financial Accounting Standards Board (FASB) issued statement of Financial Accounting Standards No. 141 (SFAS 141)
"Business Combinations" and Statement No. 142 (SFAS 142) "Goodwill and Other Intangible Assets".

SFAS 141
requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method. The adoption of SFAS 141 did not have a material effect on the Company's financial condition or results of operations.

SFAS 142
requires the discontinuance of goodwill amortization. SFAS 142 is required to be applied for fiscal years beginning after December 15, 2001, with certain
early adoption permitted. The Company has adopted the Statement effective January 1, 2002 and the Company has determined that there is no material effect on its financial condition and results
of operations.

In
August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated retirement costs. The Company does not anticipate a material effect on its financial condition or results of
operations from the adoption of SFAS 143, which will take place in the Company's first fiscal quarter of 2003.

In
October 2001, the FASB issued SFAS 144, "Accounting for the Impairment of Disposal of Long-lived Assets." SFAS 144 supersedes SFAS 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of," and addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. The Company is in the process of assessing the effect of adopting SFAS 144, which will be effective for
the Company's first fiscal quarter of 2003.

9

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Certain of the statements contained in this report may be considered forward-looking statements under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve a number of risks and uncertainties. In addition to the factors discussed herein, factors that could
cause actual results to differ materially include the following: cyclicality in the Company's served markets, including the current severe downturn in the semiconductor industry; delays, deferrals and
cancellations of orders by customers; expiration of technology support and licensing arrangements, and the resulting adverse impact on the Company's licensing revenues; timing and degree of success of
technologies licensed to outside parties; product concentration and lack of product revenue diversification; high degree of industry competition; lengthy development cycles for advanced lithography
technologies and applications; mix of products sold; lengthy sales cycles, including the timing of system acceptances; inventory obsolescence; manufacturing inefficiencies and the ability to volume
produce systems; integration and development of Verdant operations; failure to develop the Company's reduction stepper products; the ability and resulting costs to attract or retain sufficient
personnel to achieve the Company's targets for a particular period; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon the Company attaining
profitability and the market price of the Company's stock; sole or limited sources of supply; international sales; customer concentration; rapid technological change and the importance of timely
product introductions; future acquisitions; changes to financial accounting standards; intellectual property matters; environmental regulations; effects of certain anti-takeover
provisions; volatility of stock price; any adverse effects of the recent terrorist attacks in the United Sates, or the related U.S. retaliation, on the economy, in general or on our business in
particular; and the other risk factors listed in this filing and other Company filings with the SEC. The Company undertakes no obligation to update any of its disclosures to reflect such future
events.

In
September 2001, the Company reached a decision to discontinue its XLS product line and to close its Wilmington, Massachusetts facility. The Company also announced a workforce
reduction of approximately 20%, inclusive of those employees impacted by the plant closure.

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

The
following discussion should be read in conjunction with the Company's 2001 Annual Report on Form 10-K, which is available from the Company upon request.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to inventories, warranty obligations, purchase order commitments, bad debts, income taxes, intangible assets, restructuring and contingencies and litigation.
Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.

10

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The
Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:

Revenue Recognition

The Company recognizes revenues when the contractual obligation for installation (if any) has been satisfied, or installation is substantially complete, and/or
customer acceptance provisions have lapsed, provided collections of the related receivable are probable.

Deferred
income related to the Company's products is recognized upon satisfying the contractual obligations for installation (if any) and customer acceptance. Deferred income related to
service revenue is recognized ratably over the life of the related service contract. Deferred income relative to the Company's licensing activities is recognized over the estimated useful life of the
licensed technologies, or the contract period of any technology transfer support arrangements.

Inventories and Purchase Order Commitments

The Company reserves for purchase order commitments, and estimates the effects of obsolescence and unrealizable carrying values of its inventories based upon
estimates of future demand and market conditions. With the exception of certain long lead time items, principally optical components, the Company presently reserves inventories and purchase order
commitments in excess of 18 months of production demand. Due to the cyclical nature of the Company's business, during periods of peak demand, the Company has shortened this production outlook
to as few as 12 months of production demand. Should actual production demand differ from management's estimates, revisions to inventory write-downs and purchase order commitment reserves would
be required.

Warranty Obligations

The Company provides for the estimated cost of its product warranties at the time revenue is recognized. The Company's warranty obligation is affected by product
failure rates, material usage rates and the efficiency by which the product failure is corrected. Should actual product failure rates, material usage rates and labor efficiencies differ from the
Company's estimates, revisions to the estimated warranty liability would be required.

Bad Debt

The Company maintains an allowance for doubtful accounts receivable for estimated losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to deteriorate, or even a single customer was otherwise unable to make payments, additional allowances may be required. The average selling
price of the Company's systems is in excess of $1.0 million dollars. Accordingly, a single customer default could have a material adverse effect on the Company's results of operations.

Deferred Taxes

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Based on the uncertainty of
future pre-tax income, the Company has presently fully reserved its deferred tax assets. In the event the Company was to determine that it would be able to realize its deferred tax assets
in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made.

11

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RESULTS OF OPERATIONS

The Company's operating results have fluctuated significantly in the past and most likely will continue to fluctuate significantly in the future. Factors that
have caused operating results to fluctuate significantly in the past and most likely will continue to cause fluctuations in the future include those mentioned above as well as: patterns of capital
spending by customers; lengthy development cycles for new products; market acceptance of new products and enhanced versions of the Company's existing products; delayed shipments to customers due to
customer configuration changes and other factors; lengthy manufacturing cycles for the Company's products; the timing of new product announcements and releases by the Company or its competitors;
manufacturing inefficiencies associated with the startup of new product introductions; product discounts; changes in pricing by the Company, its competitors or suppliers; shutdown of operations;
acquisition activities requiring issuance of additional equity or debt securities, the expenditure of cash and the devotion of substantial management resources; sale of assets; outcome of litigation;
political and economic instability throughout the world, in particular the Asia/Pacific region; changes in sales or distribution agreements; natural disasters; regulatory changes; and business
interruptions related to the Company's occupation of its facilities.

The
Company's gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including the mix of products sold;
product discounts and competition in the Company's targeted markets; technology support and licensing revenues, which have little, if any, associated cost of sales; inventory and open purchase
commitment reserve provisions; the rate of capacity utilization; non-linearity of shipments during the quarter; the introduction of new products, which typically have higher manufacturing
costs until manufacturing efficiencies are realized and are typically discounted more than existing products until the products gain market acceptance; the percentage of international sales, which
typically have lower gross margins than domestic sales principally due to higher field service and support costs; and the implementation of subcontracting arrangements.

The
Company derives a substantial portion of its total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $900,000 to
$3.4 million for the Company's 1X steppers, and from $1.5 million per system to more than $7.0 million per system for the Company's reduction steppers. As a result of these high
sale prices, the timing of recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on the Company's net sales and operating results for any
particular period.

The
Company's backlog at the beginning of a period typically does not include all of the sales needed to achieve the Company's sales objectives for that period. In addition, orders in
backlog are subject to cancellation, shipment or customer acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. Consequently, the Company's net sales and
operating results for a period have been and will continue to be dependent upon the Company obtaining orders for systems to be shipped and accepted in the same period in which the order is received.
The Company's business and financial results for a particular period could be materially adversely affected if an anticipated order for even
one system is not received in time to permit shipment and customer acceptance during that period. Furthermore, a substantial portion of the Company's shipments has historically been realized near the
end of each quarter. Delays in installation and customer acceptance due, for example, to the inability of the Company to successfully demonstrate the agreed-upon specifications or criteria
at the customer's facility, or to the failure of the customer to permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below the
Company's expectations, which may materially adversely affect the Company's operating results for such period. Additionally, the failure to receive anticipated orders or delays in shipments due, for
example, to reschedulings, delays, deferrals or cancellations by customers, additional customer configuration requirements, or to unexpected manufacturing difficulties or delays in deliveries by
suppliers due to their long production lead times or otherwise, have caused and may continue to cause net sales in a

12

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particular period to fall significantly below the Company's expectations, materially adversely affecting the Company's operating results for that period. In particular, the long manufacturing cycles
of the Company's Saturn Wafer Stepper®, and the Company's reduction stepper product offerings, and the long lead time for lenses and other materials, could cause shipments of such products
to be delayed from one quarter to the next, which could materially adversely affect the Company's financial condition and results of operations for a particular quarter.

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

Net sales

Net sales consist of revenues from system sales, spare parts sales, service and licensing of technologies. For the three months ended March 31, 2002, net
sales were $19.8 million, a decrease of 55% as compared with net sales of $44.2 million for the comparable period in 2001. System sales decreased 61%, to $12.6 million, on a unit
volume decline of 71%. The decline in system sales was partially offset by a change in model mix in favor of the Company's more expensive models. Weighted-average selling prices were essentially
unchanged from the year-ago period. The decline in unit volumes was attributable to weaker demand from all geographic territories, with the steepest declines occurring in Japan and Asia,
excluding Japan. On a market segment basis, the decline in unit volumes was primarily attributable to a lack of demand from semiconductor and semiconductor packaging customers. Revenues from services
declined 46%, to $2.4 million, primarily as a result of decreased utilization of plant capacity within the semiconductor industry. Revenues from licensing and licensing support arrangements
declined to $2.5 million, as compared with $3.0 million in the comparable period in 2001, as a result of a large technology support agreement that expired in February 2002. The
Company presently anticipates that revenues from licensing and licensing support arrangements will decline to $0.9 million in the quarter ending June 30, 2002 and will remain at that
level for the balance of 2002, as the full impact of the expired technology support agreement is realized. Spare part sales decreased 46%, to $2.3 million, primarily as a result of decreased
utilization of plant capacity within the semiconductor industry.

At
March 31, 2002, the Company had approximately $6.7 million of deferred revenue resulting from products shipped but not yet installed and accepted, as compared with
$6.0 million at December 31, 2001. This resulted in a net increase in deferred product and service income of approximately $0.2 million during the three-month period ended
March 31, 2002, as compared to the balance at December 31, 2001. During the three-month period ended March 31, 2002, deferred license income decreased by $2.5 million, to
$11.2 million, as a result of amortization of proceeds received in prior periods. Amortization of license income results in current period license revenue.

On
a product market application basis, system sales to the semiconductor and semiconductor packaging industries were $11.3 million for the three-month period ended
March 31, 2002, a decrease of 57% as compared with system sales of $26.4 million in the comparable period in 2001. System sales to the nanotechnology market were $1.3 million for
the three-month period ended March 31, 2002, a decrease of 79% as compared with sales of $6.1 million in the comparable period in 2001, primarily as a result of lower demand from
microsystems and optical networking customers.

For
the three-month period ended March 31, 2002, international net sales were $7.4 million, or 37% of total net sales, as compared with $28.4 million, or 64% of
total net sales for the comparable period in 2001. The decline in international net sales, both in terms of absolute dollars and as a percentage of total net sales, was primarily attributable to
decreased sales of the Company's Saturn Spectrum 3 Wafer Stepper to semiconductor packaging companies in Japan. The Company's operations

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in foreign countries are not generally subject to significant exchange rate fluctuations, principally because sales contracts for the Company's systems are generally denominated in U.S. dollars. In
Japan, however, orders are typically denominated in Japanese yen. This subjects the Company to the risk of currency fluctuations. The Company attempts to mitigate this exposure through the use of
foreign exchange contracts; however, this effort can be costly and there can be no assurance of the success of any such efforts. International sales expose the Company to a number of additional risks,
including fluctuations in the value of local currencies relative to the U.S. dollar, which, in turn, impact the relative cost of ownership of the Company's products. (See "Additional Risk Factors:
International Sales; Japanese Market").

The
semiconductor, semiconductor packaging, thin film head and optical networking industries have been and are presently experiencing severe downturns due, in part, to the macro-economic
conditions facing the U.S. and world economies. Although the Company's level of new orders increased in the three-month period ended March 31, 2002, as compared with the three-month period
ended December 31, 2001, the Company's total backlog declined during the period. Further, the anticipated timing of shipments and customer acceptances will require the Company to fill a number
of production slots in the current and subsequent quarters in order to meet its near-term sales targets. If the Company is unsuccessful in its efforts to secure those production orders, or
if existing production orders are delayed or cancelled, its results of operations will be materially adversely impacted in the near-term. Accordingly, the Company can give no assurance
that it will be able to achieve or maintain its current or prior level of sales.

As
a result of current order trends, the severe downturn in the industries the Company serves and generally weak macro-economic conditions, the Company presently expects that net sales
for the quarter ending June 30, 2002 will be substantially lower than net sales in the comparable period in 2001, but may be slightly higher than net sales recognized in the quarter ended
March 31, 2002. Further, the Company anticipates that it will experience operating and net losses for the three-month period ending June 30, 2002.

Because
the Company's net sales are subject to a number of risks, including intense competition in the capital equipment industry, uncertainty relating to the timing and market
acceptance of the Company's products and the condition of the macro-economy and the semiconductor industry, the Company may not exceed or maintain its current or prior level of net sales for any
period in the future. Additionally, the Company believes that the market acceptance and volume production of its Saturn Spectrum 3e, its 300mm offerings and its 1000 series family of
wafer steppers, are of critical importance to its future financial results. To the extent that these products do not achieve significant sales due to difficulties involving manufacturing or
engineering, the inability to reduce the current long manufacturing cycles for these products, competition, excess capacity in the semiconductor or nanotechnology device industries, customer
acceptances, or any other reason, the Company's business, financial condition and results of operations would be materially adversely affected.

Gross profit

The Company's gross profit as a percentage of net sales, or gross margin, was 40.1% for the three-month period ended March 31, 2002, as compared with 47.9%
for the comparable period in 2001. On a comparative basis, gross margin was adversely affected by significantly lower capacity utilization. Lack of capacity utilization results in increased levels of
manufacturing and service overhead allocated to each unit. This impact was partially offset by the closing of the Company's Wilmington, Massachusetts facility and other cost reduction measures taken
in the second half of 2001, as well as a higher percentage of the Company's overall revenues coming from licensing activities (for which there is no related cost of sales). Exclusive of licensing and
licensing support revenues, gross margin was 31.6% for the three-month period ended March 31, 2002, as compared with 44.2% for the comparable period in 2001.

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The
Company believes that gross margin for the quarter ending June 30, 2002 will be significantly lower than levels achieved during the comparable period a year ago, resulting
primarily from lower levels of licensing revenues (which have no corresponding cost of sales) and higher inefficiencies caused by decreased production and shipment levels, partially offset by cost
containment measures. Additionally, the Company presently expects that gross margin in the quarter ending June 30, 2002 may be sequentially flat to lower than gross margin achieved in the
quarter ended March 31, 2002, due primarily to lower licensing revenues, partially offset by a more favorable product mix. Gross margin achieved during any one period is heavily dependent upon
the mix of products sold, capacity utilization, the weighted average sales price of systems sold and the level of licensing revenue relative to total net sales. Continued weakness in the Company's
business may result in a higher risk of inventory
obsolescence, which would materially adversely impact results of operations. In particular, the Company has made significant investments in long-lead time items relating to the
introduction of its 157nm reduction stepper technologies. These assets face certain technology risks in addition to the risks inherent with slowing business conditions. Additionally, increased
price-based competition and declining revenues from licensing and technology support agreements may contribute to further erosion of gross margin.

New
products generally have lower gross margins until there is widespread market acceptance and until production and after-sales efficiencies can be achieved. Should significant market
demand fail to develop for the Company's 300mm offerings, its Saturn Spectrum 3e or the Verdant laser thermal processing system, the Company's business, financial condition and results
of operations would be materially adversely affected.

Research, development and engineering expenses

The Company's research, development and engineering expenses were $5.8 million for the three-month period ended March 31, 2002, as compared with
$7.4 million for the comparable period in 2001. The decline in spending was primarily attributable to the discontinuance of the Company's XLS reduction stepper platform, reduced spending on
laser thermal processing technologies, and other cost reduction measures implemented in the second half of 2001.

The
Company continues to invest significant resources in the development and enhancement of its Verdant laser thermal processing systems and technologies and its 1X and advanced
reduction optical products and related technologies. The Company presently expects that the absolute dollar amount of research, development and engineering expenses for the quarter ending
June 30, 2002 will be lower than levels incurred in the comparable period in 2001, primarily as a result of the aforementioned mentioned cost reduction measures, but may be up slightly as
compared with expenses for the quarter ended March 31, 2002.

Amortization of intangible assets

Amortization of intangible assets was $0.1 million for the three-month period ended March 31, 2002, as compared with $0.5 million for the
comparable period in 2001. The reduction in amortization was a direct result of impairment charges recognized in the quarter ended September 30, 2001 relating to certain intangible assets.

Selling, general and administrative expenses

Selling, general and administrative expenses were $6.1 million for the three-month period ended March 31, 2002, as compared with $9.1 million
for the comparable period in 2001. As a percentage of net sales, selling, general and administrative expenses increased to 30.7% in the three-month period ended March 31, 2002, as compared with
20.7% in the comparable period in 2001. The decline, in absolute dollars, was primarily attributable to cost containment measures implemented in the second

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half of 2001 and lower sales and support expenses, including sales commissions, typically associated with a decline in sales, partially offset by higher legal and consulting expenses incurred in
conjunction with the Company's planned expansion into China (see "Liquidity and Capital Resources" for additional information). The Company presently anticipates that selling, general and
administrative expenses for the three-month period ending June 30, 2002 will be significantly lower than the comparable period in 2001, due primarily to lower anticipated net sales and the
aforementioned cost reduction measures. Additionally, the Company presently expects that selling, general and administrative expenses may be flat to slightly lower, as compared with the quarter ended
March 31, 2002.

Interest and other income, net

Interest and other income, net, which consists primarily of interest income, was $1.7 million for the three-month period ended March 31, 2002, as
compared with $2.2 million for the comparable period in 2001. The decrease in interest and other income, net, was primarily related to lower interest rates on the Company's investments. The
Company presently maintains an investment portfolio with a weighted-average maturity of less than one year. Consequently, changes in short-term interest rates have a major impact on the
Company's interest income. Future changes are expected to have a similar impact. The Company presently expects that interest and other income, net, for the three-month period ending June 30,
2002, will be significantly lower than levels achieved in the comparable period in 2001, primarily as a result of lower interest rates and lower invested balances. Additionally, the Company presently
expects that interest and other income, net, for the three-month period ending June 30, 2002, will be sequentially lower than levels achieved in the three-month period ended March 31,
2002, primarily as a result of lower invested balances and maturing transactions that will be reinvested at lower interest rates.

Income Tax Expense

The Company did not recognize a tax benefit for the three-month period ended March 31, 2002, due to uncertainty related to the utilization of its net
operating loss carry-forward. For the comparable period in 2001, the Company recognized income tax expense of $0.6 million, or 10% of pre-tax income, consisting primarily of foreign
tax obligations. The difference between the rate recognized in the quarter ended March 31, 2001 and the statutory rate is primarily attributable to certain deferred tax asset reserves
recognized in prior years.

The
Company presently anticipates that it will recognize income tax expense in 2002, primarily as a result of foreign income taxes. However, the Company believes that the tax rate in
2002 will be substantially less than the statutory rate, primarily as a result of available federal net operating loss carry-forwards and certain deferred tax asset reserves recognized in prior years.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $6.1 million for the three-month period ended March 31, 2002, as compared with $0.9 million used in
operating activities during the comparable period in 2001. Cash flow used in operating activities was primarily attributable to the Company's net loss of $2.4 million and a net change in
operating assets and liabilities of $6.2 million, partially offset by non-cash charges to income of $2.5 million. The $6.2 million net change in operating assets and
liabilities was primarily a result of a decline in deferred license income of $2.5 million, a decline in accrued restructuring cost of $1.1 million, a decline in accrued salaries and
benefits of $0.7 million, a decline in advanced billings of $0.7 million, a decline in other accrued liabilities of $0.5 million and a decline in accounts payable of
$0.5 million. The Company has, in prior periods, sold certain of its accounts receivable in order to mitigate its credit risk and to enhance cash flow. Sales of accounts receivable typically
precede final customer acceptance of the system. Although credit risk effectively

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passes to the third party financial institution, among other terms and conditions, the agreements include provisions that require the Company to repurchase receivables if disputes arise with the
customer regarding suitability of the product. At March 31, 2002, there were no sold accounts receivable outstanding to third-party financial institutions. The Company may sell certain of its
accounts receivable in the future. There can be no assurance that this form of financing will be available on reasonable terms, or at all.

The
Company believes that because of the relatively long manufacturing cycle of certain of its systems, particularly newer products, the Company's inventories will continue to represent
a significant portion of working capital. In particular, the Company recently increased its purchases of inventory, long-term prepaid inventory and capital equipment for its Saturn
Spectrum 3e wafer stepper, Verdant laser thermal processing system and its 157nm advanced reduction stepper. Higher inventory and capital asset levels may increase the risk of inventory
obsolescence and asset impairment, which may adversely impact the Company's results of operations. Additionally, certain technological barriers exist relative to the Company's commercialization of its
157nm technologies. If the Company is unable to resolve those barriers, additional write-off of inventories would be required. This would materially adversely impact the Company's results
of operations.

The
semiconductor, semiconductor packaging, thin film head and optical networking industries have been and are presently experiencing a severe downturn due, in part, to macro-economic
conditions facing the U.S. and world economies. As a result, the Company has recently experienced significantly lower order rates for its systems and this trend may continue in the
near-term. Prolonged weakness in the Company's business would place the Company's inventories at a greater risk of obsolescence. Lower
demand for the Company's systems may lead to additional inventory write-offs and purchase commitment reserves, which would materially adversely impact the Company's results of operations.
Additionally, worsening business conditions increase the likelihood of further restructuring of operations and impairments to the Company's assets, either of which would materially adversely impact
results of operations.

During
the three-month period ended March 31, 2002, net cash used in investing activities was $5.3 million, attributable to net investments in
available-for-sale securities of $4.8 million and capital expenditures of $0.5 million.

Cash
generated by financing activities was $1.4 million during the three-month period ended March 31, 2002, attributable to proceeds received from the issuance of common
stock pursuant to employee stock plans.

At
March 31, 2002, the Company had working capital of $163.0 million. The Company's principal source of liquidity at March 31, 2002 consisted of
$162.8 million in cash, cash equivalents and short-term investments. The Company presently anticipates that it will use a significant amount of cash for operating activities during
the three-month period ending June 30, 2002, primarily as a result of a significant reduction in accounts payable and anticipated operating and net losses for the period.

The
Company has recently formed a subsidiary in the People's Republic of China. Present plans include the commencement of sales and service operations, as well as limited manufacturing
and systems test capabilities. The commencement of operations in China will require the investment of capital, including certain intangible assets. Additionally, commencement of operations in foreign
countries subjects the Company to additional risks (see "Additional Risk Factors: International Sales; Japanese Market" and "Additional Risk Factors: Intellectual Property Rights").

The
development and manufacture of new lithography systems and enhancements are highly capital-intensive. In order to be competitive, the Company must continue to make significant
expenditures for capital equipment; sales, service, training and support capabilities; systems, procedures and controls; and expansion of operations and research and development, among many other
items.

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The Company expects that anticipated cash flows from operations and its cash, cash equivalents and short-term investments will be sufficient to meet the Company's cash requirements for
the next twelve months. Beyond the next twelve months, the Company may require additional equity or debt financing to address its working capital or capital equipment needs. In addition, the Company
may seek to raise equity or debt capital at any time that it deems market conditions to be favorable.

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

To
the extent that the Company's financial resources are insufficient to fund the Company's activities, additional funds will be required. There can be no assurance that additional
financing will be available on reasonable terms, or at all.

Foreign Currency

The Company uses foreign exchange contracts to hedge the risk that unremitted Japanese yen denominated receipts from customers for actual or forecasted sales of
equipment after receipt of customer purchase orders and the unremitted Japanese yen denominated payments to suppliers for actual or forecasted deliveries of raw material from Japan after issuance of
Company purchase orders may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, the Company attempts to hedge most of these Japanese yen denominated foreign currency exposures anticipated over the ensuing twelve-month period. At March 31, 2002,
the Company had taken action to hedge approximately all of these Japanese yen denominated exposures. To hedge this exposure, the Company used foreign exchange forward contracts that generally have
maturities of nine months or less, which generally will be rolled over to provide continuing coverage throughout the year. The Company often closes foreign exchange sale contracts by purchasing an
offsetting purchase contract. At March 31, 2002, the Company had contracts for the sale of $2.8 million and the purchase of $1.1 million of foreign currencies at fixed rates.

Adoption of the Euro

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

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Additional Risk Factors

Cyclicality of Semiconductor, Semiconductor Packaging and Thin Film Head IndustriesThe Company's business depends in
significant part upon capital expenditures by manufacturers of semiconductors and nanotechnology components, including thin film head magnetic recording devices, which in turn depend upon the current
and anticipated market demand for such devices and products utilizing such devices. The semiconductor industry historically has been highly cyclical and has experienced recurring periods of
oversupply. This has, from time to time, resulted in significantly reduced demand for capital equipment including the systems manufactured and marketed by the Company. The semiconductor and
semiconductor packaging industries are presently experiencing a severe downturn. The Company also believes that markets for new generations of semiconductors and semiconductor packaging will also be
subject to similar fluctuations. Accordingly, the Company can give no assurance that it will be able to achieve or maintain its current or prior level of sales.

The
Company attempts to mitigate the risk of cyclicality by participating in multiple markets including semiconductor, semiconductor packaging, thin film head and other nanotechnology
sectors, as well as diversifying into new markets such as photolithography for optical networking (a nanotechnology application). Despite such efforts, when one or more of such markets experiences a
downturn or a situation of excess capacity, such as is presently occurring in the semiconductor, semiconductor packaging, optical networking and thin film head markets, the Company's net sales and
operating results are materially adversely affected.

During
2001 and 2000, approximately 33% and 18%, respectively, of the Company's net sales were derived from sales to nanotechnology manufacturers, including thin film head ("TFH") and
optical networking device manufacturers. The Company believes the TFH market is currently in a state of over-capacity and expects this situation to last for at least the next several
quarters. This has and will continue to result in lower sales and delays or deferrals of customer orders from this industry, which will continue to materially adversely affect the Company's business,
financial condition and results of operations in the near term. Additionally, the Company is experiencing increased competition in this market. The Company's business and operating results would be
materially adversely affected by continued downturns or slowdowns in the TFH market or by loss of market share.

Highly Competitive IndustryThe capital equipment industry in which the Company operates is intensely competitive. A
substantial investment is required to install and integrate capital equipment into a semiconductor, semiconductor packaging or nanotechnology device production line. The Company believes that once a
device manufacturer or packaging subcontractor has selected a particular vendor's capital equipment, the manufacturer generally relies upon that equipment for the specific production line application
and, to the extent possible, subsequent generations of similar products. Accordingly, it is difficult to achieve significant sales to a particular customer once another vendor's capital equipment has
been selected. The Company experiences intense competition worldwide from a number of leading stepper manufacturers, such as Nikon, Canon and ASML, all of which have substantially greater financial,
marketing and other resources than the Company. Nikon supplies a 1X stepper for use in the manufacture of liquid crystal displays and Canon, Nikon and ASML offer reduction steppers for thin film head
fabrication. With respect to the semiconductor packaging and nanotechnology markets, the Company experiences intense competition from various proximity aligner companies such as Suss Microtec AG (Karl
Suss).

ASML,
Canon and Nikon have each introduced an i-line step-and-scan system as a lower cost alternative to the deep ultra-violet (DUV)
step-and-scan system for use on the less critical layers. These systems compete with wide-field steppers, such as the Company's Saturn and Titan steppers, for
advanced mix-and-match applications. In addition, the Company believes that the high cost of developing new lithography tools has increasingly caused its competitors to
collaborate with customers and other parties in various areas such as research and development, manufacturing and marketing, or

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

Foreign
integrated circuit manufacturers have a significant share of the worldwide market for certain types of integrated circuits for which the Company's systems are used. The Japanese
stepper manufacturers are well established in the Japanese stepper market, and it is extremely difficult for non-Japanese lithography equipment companies to penetrate the Japanese stepper
market. Although the Company has experienced recent success in its introduction of its Saturn Spectrum 3 into the Japanese marketplace, to date the Company has not established itself as a major
competitor in the Japanese equipment market and there can be no assurance that the Company will be able to achieve significant sales to Japanese manufacturers in the future. (See "International Sales;
Japanese Market").

Development of New Product Lines; Expansion of OperationsCurrently, the Company is devoting significant resources to the
development, introduction and commercialization of its Verdant laser thermal processing system and to the volume production of its Saturn Spectrum 3e and 300mm wafer steppers. The
Company currently intends to continue to develop these products during the remainder of 2002 and will continue to incur significant operating expenses in the areas of research, development and
engineering, manufacturing and general and administrative costs in order to further develop, produce and support these new products. Additionally, gross profit margins and inventory levels may be
further adversely impacted in the future by costs associated with the initial production of these new product lines. These costs include, but are not limited to, additional manufacturing overhead,
additional inventory write-offs, costs of demonstration systems and facilities, costs associated with managing multiple sites and the establishment of additional after-sales support
organizations. Additionally, there can be no assurance that operating expenses will not increase, relative to sales, as a result of adding additional marketing and administrative personnel, among
other costs, to support the Company's new products. If the Company is unable to achieve significantly increased net sales or its sales fall below expectations, the Company's operating results will be
materially adversely affected until, among other factors, costs and expenses can be reduced.

Lengthy Sales CyclesSales of the Company's systems depend, in significant part, upon the decision of a prospective customer
to increase manufacturing capacity or to restructure current manufacturing facilities, either of which typically involves a significant commitment of capital. Many of the Company's customers have
cancelled the development of new manufacturing facilities and have substantially reduced their capital equipment budgets. In view of the significant investment involved in a system purchase, the
Company has experienced and may continue to experience delays following initial qualification of the Company's systems as a result of delays in a customer's approval process. Additionally, the Company
is presently receiving orders for systems that have lengthy delivery

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schedules, which may be due to longer production lead times or a result of customers' capacity scheduling requirements. In order to maintain or exceed the Company's present level of net sales, the
Company is dependent upon obtaining orders for systems that will ship and be accepted in the current period. There can be no assurance that the Company will be able to obtain those orders. For these
and other reasons, the Company's systems typically have a lengthy sales cycle during which the Company may expend substantial funds and management effort in securing a sale. Lengthy sales cycles
subject the Company to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which the Company has little or no control.

Customer ConcentrationHistorically, the Company has sold a substantial portion of its systems to a limited number of
customers. In 2001, no single customer accounted for 10% or more of the Company's net sales. In 2000, one customer accounted for approximately 10% of total net sales. For the three months ended
March 31, 2002, one customer accounted for 25% of total net sales.

For
the three-month periods ended March 31, 2002 and 2001, one customer accounted for $1.5 million and $2.3 million, respectively, of licensing revenue from an
agreement that expired in February 2002. The Company presently expects that there will be no further licensing revenue from this customer during the remainder of 2002.

The
Company expects that sales to a relatively few customers will continue to account for a high percentage of its net sales in the foreseeable future and believes that the Company's
financial results depend in significant part upon the success of these major customers and the Company's ability to meet their future capital equipment needs. Although the composition of the group
comprising the Company's largest customers may vary from period to period, the loss of a significant customer or any reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the semiconductor, semiconductor packaging or nanotechnology industries or in the industries that manufacture products utilizing integrated circuits, thin
film heads or other nanotechnology components, may have a material adverse effect on the Company's business, financial condition and results of operations. The Company's ability to maintain or
increase its sales in the future will depend, in part, upon its ability to obtain orders from new customers as well as the financial condition and success of its existing customers, the semiconductor
and nanotechnology industries and the economy in general, of which there can be no assurance.

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

Rapid Technological Change; Importance of Timely Product IntroductionThe semiconductor, semiconductor packaging and
nanotechnology manufacturing industries are subject to rapid technological change and new product introductions and enhancements. The Company's ability to be competitive in these and other markets
will depend, in part, upon its ability to develop new and enhanced systems and related software tools, and to introduce these systems and related software tools at competitive prices and on a timely
and cost-effective basis to enable customers to integrate them into their operations either prior to or as they begin volume product manufacturing. The Company will also be required to
enhance the performance of its existing systems and related software tools. Any success of the Company in developing new and enhanced systems and related software tools depends upon a variety of
factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, product performance in the field
and effective sales and marketing. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both future demand and the

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technology that will be available to supply that demand. There can be no assurance that the Company will be successful in selecting, developing, manufacturing or marketing new products and related
software tools or enhancing its existing products and related software tools. Any such failure would materially adversely affect the Company's business, financial condition and results of operations.

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

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

Intellectual Property RightsAlthough the Company attempts to protect its intellectual property rights through patents,
copyrights, trade secrets and other measures, it believes that any success will depend more upon the innovation, technological expertise and marketing abilities of its employees. Nevertheless, the
Company has a policy of seeking patents when appropriate on inventions resulting from its ongoing research and development and manufacturing activities. The Company owns various United States and
foreign patents, which expire on dates ranging from May 2002 to October 2020 and has various United States and foreign patent applications pending. The Company also has various
registered trademarks and copyright registrations covering mainly software programs used in the operation of its stepper systems. The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that the Company will be able to protect its technology adequately or that competitors will not be able to develop similar
technology independently. There can be no assurance that any of the Company's pending patent applications will be issued or that U.S. or foreign intellectual property laws will protect the Company's
intellectual property rights. In particular, the Company is presently reviewing expansion plans in the People's Republic of China, where the Company has no prior experience in protecting or defending
its intellectual property rights. In addition, litigation may be necessary to enforce the Company's patents, copyrights or other intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial condition and results of operations, regardless of the outcome of the litigation. Patents issued to the Company may be
challenged, invalidated or circumvented and the rights granted thereunder may not provide competitive advantages to the Company. Furthermore, others may independently develop similar products,
duplicate the Company's products or, if patents are issued to the Company, design around the patents issued to the Company. Additionally, the Company presently has several agreements in force to
license certain of its technologies. Challenges to, or invalidation of, patents related to those technologies would expose the Company to the risk of forfeiture of revenues and further risk of damage
claims.

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On
February 29, 2000, in the U.S. District Court of Virginia, the Company filed patent infringement lawsuits against Nikon, Canon and ASML. In April 2000, the Company
reached a settlement with Nikon and in September 2001, the Company reached a settlement with Canon. The litigation against ASML is ongoing. On October 12, 2001, the Company was sued in
the District Court in Massachusetts for alleged infringement of certain patents owned by Silicon Valley Group, Inc. ("SVG"), a company recently acquired by ASML. The case is in its early stages
and the Company is evaluating the claim.

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

Infringement
claims by third parties or claims for indemnification resulting from infringement claims may be asserted in the future and such assertions, if proven to be true, may
materially adversely affect the Company's business, financial condition and results of operations, regardless of the outcome of any litigation. With respect to any such future claims, the Company may
seek to obtain a license under the third party's intellectual property rights. However, a license may not be available on reasonable terms or at all. The Company could decide, in the alternative, to
resort to litigation to challenge such claims. Such challenges could be expensive and time consuming and could materially adversely affect the Company's business, financial condition and results of
operations, regardless of the outcome of any litigation.

Sole or Limited Sources of SupplyThe Company is relying increasingly on outside vendors and subcontractors to manufacture
certain components and subassemblies. This strategy has enabled the Company to increase its manufacturing capacity. The Company orders one of the most critical components of its technology, the glass
for its 1X lenses, from suppliers on purchase orders. The Company designs the 1X lenses and provides the lens specifications to other suppliers that grind the lens elements. The Company then assembles
and tests the optical 1X lenses in its metrology laboratory. The Company has recorded the critical parameters of each of its optical lenses sold since 1982, and believes that such information enables
it to supply lenses to its customers that match the characteristics of its customers' existing lenses. Additionally, the Company orders reduction lenses from suppliers on purchase orders. These lenses
are designed to the Company's specifications and tested by the supplier.

In
addition to glass, the Company procures many of its other critical systems' components, subassemblies and services from a single outside supplier or a limited group of outside
suppliers in order to ensure overall quality and timeliness of delivery. Many of these components and subassemblies have significant production lead times. To date, the Company has been able to obtain
adequate services and supplies of components and subassemblies for its systems in a timely manner. However, disruption or termination of certain of these sources could result in a significant adverse
impact on the Company's
ability to manufacture its systems. This, in turn, would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's reliance on sole or a
limited group of suppliers and the Company's increasing reliance on subcontractors involve several risks, including a potential inability to obtain an adequate supply of required components due to the
suppliers' failure or inability to provide such components in a timely manner, or at all, and reduced control over pricing and timely delivery of components. Although the timeliness, yield and quality
of

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deliveries to date from the Company's subcontractors have been acceptable, manufacture of certain of these components and subassemblies is an extremely complex process, and long
lead-times are required. Any inability to obtain adequate deliveries or any other circumstance that would require the Company to seek alternative sources of supply or to manufacture such
components internally could delay the Company's ability to ship its products, which could damage relationships with current and prospective customers and have a material adverse effect on the
Company's business, financial condition and results of operations.

International Sales; Japanese MarketInternational net sales accounted for approximately 51% and 54% of total net sales for
the years 2001 and 2000, respectively. For the three months ended March 31, 2002, international net sales accounted for approximately 37% of total net sales, as compared with 64% for the
comparable period in 2001. The Company anticipates that international sales, which typically have lower gross margins than domestic sales, principally due to increased competition and higher field
service and support costs, will continue to account for a significant portion of total net sales and may increase as a percentage of total net sales in the near-term. As a result, a
significant and growing portion of the Company's net sales will continue to be subject to certain risks, including dependence on outside sales representative organizations; transitions to direct sales
organizations from outside sales representative organizations, such as the Company recently completed in Taiwan; unexpected changes in regulatory requirements; difficulty in satisfying existing
regulatory requirements; exchange rate fluctuations; tariffs and other barriers; political and economic instability; difficulties in accounts receivable collections; natural disasters; difficulties in
staffing and managing foreign subsidiary and branch operations; and potentially adverse tax consequences. Although the Company generally transacts its international sales in U.S. dollars,
international sales expose the Company to a number of additional risk factors, including fluctuations in the value of local currencies relative to the U.S. dollar, which, in turn, impact the relative
cost of ownership of the Company's products and may further impact the purchasing ability of its international customers. In Japan, however, the Company has direct sales operations and orders are
often denominated in Japanese yen. This may subject the Company to a higher degree of risk from currency fluctuations. The Company attempts to mitigate this exposure through the use of foreign
exchange contracts. The Company is also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of semiconductors and nanotechnology
products. The Company cannot predict whether changes to quotas, duties, taxes or other charges or restrictions will be implemented by the United States, Japan or any other country upon the importation
or exportation of the Company's products in the future. These factors, or the adoption of restrictive policies, may have a material adverse effect on the Company's business, financial condition and
results of operations.

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

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Changes to Financial Accounting Standards May Affect the Company's Reported Results of OperationsThe Company prepares its
financial statements to conform with generally accepted accounting principles, or GAAP. These principles are subject to interpretation by the American Institute of Certified Public Accountants, the
SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on the Company's reported results and may even affect
its reporting of transactions completed before a change is announced.

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

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

Volatility of Stock Price and Dilutive Impact of Employee Stock OptionsThe Company believes that factors such as
announcements of developments related to the Company's business, fluctuations in the Company's operating results, a shortfall in revenue or earnings, changes in analysts' expectations, general
conditions in the semiconductor, semiconductor packaging and nanotechnology industries or the
worldwide or regional economies, sales of securities of the Company into the marketplace, an outbreak of hostilities, announcements of technological innovations or new products or enhancements by the
Company or its competitors, developments in patents or other intellectual property rights and developments in the Company's relationships with its customers and suppliers could cause the price of the
Company's Common Stock to fluctuate, perhaps substantially. The market price of the Company's Common Stock may continue to experience significant fluctuations in the future, including fluctuations
that may be unrelated to the Company's performance.

As
of March 31, 2002, the Company had approximately 4.7 million stock options outstanding. Among other determinants, the market price of the Company's stock has a major
bearing on the number of stock options outstanding that are included in the weighted-average shares used in determining the Company's net income (loss) per share. During periods of extreme volatility,
the impact of higher stock prices can have a materially dilutive effect on the Company's net income (loss) per share (diluted). Additionally, options are excluded from the calculation of net income
(loss) per share when the Company has a net loss or when the exercise price of the stock option is greater than the average market price of the Company's Common Stock, as the impact of the stock
options would be anti-dilutive.

Terrorist Attacks and Threats, and Government Responses Thereto, May Negatively Impact All Aspects of Our Operations, Revenues, Costs and Stock
Price.The recent terrorist attacks in the

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United States, and the resulting United States retaliation, and any similar future events may disrupt our operations or those of our customers and suppliers and may affect the availability of
materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. In addition, any of these events could increase
volatility in the United States and world financial markets which may depress the price of the Company's Common Stock and may limit the capital resources available to the Company or its customers or
suppliers, which could result in decreased orders from customers, less favorable financing terms from suppliers, and scarcity or increased costs of materials and components of our products. Any of
these occurrences could have a significant impact on our operating results, revenues and costs and may result in increased volatility of the market price of our Common Stock.

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

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Reference is made to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 and to the subheading "Derivative Instruments and Hedging" in Item 8, "Financial Statements and Supplementary Data", under the
heading "Notes to Consolidated Financial Statement" of the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

Foreign Currency Risk Management

Foreign exchange contracts are used primarily by the Company to hedge the risk that unremitted Japanese yen denominated receipts from customers for actual or
forecasted sales of equipment after receipt of customer purchase orders and the unremitted Japanese yen denominated payments to suppliers for actual or forecasted deliveries of raw material from Japan
after issuance of Company purchase orders may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of
foreign currency exchange rate fluctuations, the Company attempts to hedge most of these Japanese yen denominated foreign currency exposures anticipated over the ensuing twelve-month period. At
March 31, 2002, the Company had taken action to hedge approximately all of these Japanese yen denominated exposures. To hedge this exposure, the Company used foreign exchange contracts that
generally have maturities of nine months or less, which generally will be rolled over to provide continuing coverage throughout the year. The Company often closes foreign exchange sale contracts by
purchasing an offsetting purchase contract.

The
Company records these foreign exchange contracts at fair value in its consolidated balance sheet and the related gains or losses on these contracts are deferred in stockholders'
equity (as a component of comprehensive income). These deferred gains and losses are recognized in income in the period in which the sales or purchases being hedged are received and recognized in
income. However, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the sales or purchases being hedged, any changes in
fair value relating to the ineffective portion of these contracts are immediately recognized in income. Gains and losses on foreign exchange contracts are generally included as a component of interest
and other income, net, in the Company's consolidated statement of operations.

At
March 31, 2002, the Company had contracts for the sale of $2.8 million and the purchase of $1.1 million of foreign currencies at fixed rates. The Company had not
deferred any gains or losses on foreign exchange contracts at March 31, 2002.

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PART 2: OTHER INFORMATION

Item 1. Legal Proceedings.



Item 2. Changes in Securities and Use of Proceeds.



Item 3. Defaults upon Senior Securities.



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



Item 5. Other Information.



Item 6. Exhibits and Reports on Form 8-K



10.12.2

1998 Supplemental Stock Option/Stock Issuance Plan (Amended and Restated effective January 29, 2002).






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SIGNATURES

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

|                   |  | ULTRATECH STEPPER, INC.(Registrant)
|------------------ |  | -----------------------------------
|Date: May 10, 2002 |  | By:                                

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EXHIBIT INDEX

|EXHIBIT 10.12.2 |  | 1998 Supplemental Stock Option/Stock Issuance Plan (Amended and Restated effective
January 29, 2002)
|--------------- |  | ----------------------------------------------------------------------------------------------------

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