** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)** | ** ** | ** **                                                                                             |
|----------------|------------|--------------------------------------------------------------------------------------------------------|
| **ý**     | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF  1934**     |
|           |       |                                                                                                   |
| ** **     | ** ** | **For the quarterly period  ended         April 1, 2006** |
|           |       |                                                                                                   |
| **o**          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF  1934**    |

 

**For thetransition period from         to         **

 

**CommissionFile Number      0-22248**

 

**ULTRATECH, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

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

 

(Former name, former addressand former fiscal year, if changed since last report.)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

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

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer o | Accelerated  filer ý | Non-accelerated  filer o |
|--------------------------------|--------------------------------|-------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

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

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpractical date:

 
| **Class**                     | ** ** | **Outstanding as of May 1, 2006** |
|-------------------------------|------------|-----------------------------------|
| common stock, $.001 par value |       | 23,914,807                        |

 

 

----

 

**ULTRATECH,INC.**

 

**INDEX**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                   | 3      |
|----------------|-------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                        |   |
| **Item 1.**    | **Financial Statements**                                                                                    | 3      |
|           |                                                                                                        |   |
|           | Condensed Consolidated Balance Sheets as of April 1, 2006 and  December 31, 2005                       | 3      |
|           |                                                                                                        |   |
|           | Condensed Consolidated Statements of Operations for the three months  ended April 1, 2006 and April 2, 2005 | 4      |
|           |                                                                                                        |   |
|           | Condensed Consolidated Statements of Cash Flows for the three months  ended April 1, 2006 and April 2, 2005 | 5      |
|           |                                                                                                        |   |
|           | Notes to Condensed Consolidated Financial Statements                                                        | 6      |
|           |                                                                                                        |   |
| **Item 2.**    | **Management’s Discussion and Analysis of Financial Condition and  Results of Operations**             | 15     |
|           |                                                                                                        |   |
| **Item 3.**    | **Quantitative and Qualitative Disclosures  About Market Risk**                                             | 22     |
|           |                                                                                                        |   |
| **Item 4.**    | **Controls and Procedures**                                                                                 | 22     |
|           |                                                                                                        |   |
| **PART II.**   | **OTHER INFORMATION**                                                                                       | 23     |
|           |                                                                                                        |   |
| **Item 1.**    | **Legal Proceedings**                                                                                       | 23     |
|           |                                                                                                        |   |
| **Item 1A.**   | **Risk Factors**                                                                                            | 23     |
|           |                                                                                                        |   |
| **Item 2.**    | **Unregistered Sales of Equity Securities and  Use of Proceeds**                                            | 32     |
|           |                                                                                                        |   |
| **Item 3.**    | **Defaults upon Senior Securities**                                                                         | 32     |
|           |                                                                                                        |   |
| **Item 4.**    | **Submission of Matters to a Vote of Security  Holders**                                                    | 32     |
|           |                                                                                                        |   |
| **Item 5.**    | **Other Information**                                                                                       | 32     |
|           |                                                                                                        |   |
| **Item 6.**    | **Exhibits**                                                                                                | 32     |
|           |                                                                                                        |   |
| **SIGNATURES** | 33                                                                                                          |

 

2

----

 

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

**Item 1.****        FinancialStatements**

 

**ULTRATECH, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

** **
| **(In thousands)**                                  | ** **   | **Apr. 1,  2006** | ** **   | **Dec. 31,  2005*** | ** **   |
|-----------------------------------------------------|--------------|-------------------|--------------|---------------------|--------------|
| ** **                                          | ** **   | **(Unaudited)**   | ** **   | ** **          | ** **   |
| ***ASSETS***                                        | *** *** | *** ***      | *** *** | *** ***        | *** *** |
| Current assets:                                     |         |              |         |                |         |
| Cash, cash equivalents, and short-term  investments |         | $                 | 124,301      |                | $            | 141,067 |   |
| Accounts receivable, net                            |         | 19,150            |         | 19,110              |         |
| Inventories                                         |         | 31,758            |         | 28,969              |         |
| Prepaid expenses and other current assets           |         | 1,243             |         | 1,589               |         |
| Total current assets                                |         | 176,452           |         | 190,735             |         |
|                                                |         |              |         |                |         |
| Long-term investments                               |         | 23,217            |         | —              |         |
|                                                |         |              |         |                |         |
| Equipment and leasehold improvements, net           |         | 23,027            |         | 25,117              |         |
|                                                |         |              |         |                |         |
| Demonstration inventories                           |         | 3,221             |         | 3,367               |         |
|                                                |         |              |         |                |         |
| Other assets                                        |         | 3,083             |         | 3,090               |         |
|                                                |         |              |         |                |         |
| Total assets                                        |         | $                 | 229,000      |                | $            | 222,309 |   |
|                                                |         |              |         |                |         |
| ***LIABILITIES AND STOCKHOLDERS’ EQUITY***     | *** *** | *** ***      | *** *** | *** ***        | *** *** |
| Current liabilities:                                |         |              |         |                |         |
| Notes payable                                       |         | $                 | 4,091        |                | $            | 4,289 |   |
| Accounts payable                                    |         | 8,814             |         | 8,403               |         |
| Deferred product and services income                |         | 3,350             |         | 1,970               |         |
| Other current liabilities                           |         | 12,195            |         | 10,892              |         |
| Total current liabilities                           |         | 28,450            |         | 25,554              |         |
|                                                |         |              |         |                |         |
| Other liabilities                                   |         | 7,611             |         | 7,805               |         |
|                                                |         |              |         |                |         |
| Stockholders’ equity                           |         | 192,939           |         | 188,950             |         |
|                                                |         |              |         |                |         |
| Total liabilities and stockholders’ equity     |         | $                 | 229,000      |                | $            | 222,309 |   |

 

----

* The Balance Sheet as ofDecember 31, 2005 has been derived from the audited financial statementsat that date.

 

*Seeaccompanying notes to unaudited condensed consolidated financial statements*

 

3

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**ULTRATECH, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
| **(In thousands, except per share  amounts)**              | ** ** | **Apr. 1,  2006**      | ** ** | **Apr. 2,  2005** | ** ** |
| Net sales:                                                 |       |                   |       |   |   |
| Products                                                   |       | $                      | 31,409     |   | $ | 23,736 |   |
| Services                                                   |       | 3,535                  |       | 3,098 |   |
| Licenses                                                   |       | —                 |       | 1,128 |   |
| Total net sales                                            |       | 34,944                 |       | 27,962 |   |
|                                                       |       |                   |       |   |   |
| Cost of sales:                                             |       |                   |       |   |   |
| Cost of products sold                                      |       | 19,116                 |       | 13,392 |   |
| Cost of services                                           |       | 2,171                  |       | 2,292 |   |
| Total cost of sales                                        |       | 21,287                 |       | 15,684 |   |
| Gross profit                                               |       | 13,657                 |       | 12,278 |   |
|                                                       |       |                   |       |   |   |
| Operating expenses:                                        |       |                   |       |   |   |
| Research, development, and engineering                     |       | 6,153                  |       | 7,503 |   |
| Selling, general, and administrative                       |       | 7,297                  |       | 7,535 |   |
| Amortization of intangible assets                          |       | —                 |       | 95 |   |
|                                                       |       |                   |       |   |   |
| Operating income (loss)                                    |       | 207                    |       | (2,855 | ) |
|                                                       |       |                   |       |   |   |
| Interest expense                                           |       | (12                    | )          | (91 | ) |
|                                                       |       |                   |       |   |   |
| Interest and other income, net                             |       | 1,517                  |       | 914 |   |
|                                                       |       |                   |       |   |   |
| Income (loss) before income taxes                          |       | 1,712                  |       | (2,032 | ) |
| Provision (benefit) for Income taxes                       |       | 130                    |       | (136 | ) |
|                                                       |       |                   |       |   |   |
| Net income (loss)                                          |       | $                      | 1,582      |   | $ | (1,896 | ) |
|                                                       |       |                   |       |   |   |
| Net income (loss) per share - basic:                       |       | $                      | 0.07       |   | $ | (0.08 | ) |
| Number of shares used in per share  computations - basic   |       | 23,830                 |       | 23,877 |   |
|                                                       |       |                   |       |   |   |
| Net income (loss) per share - diluted:                     |       | $                      | 0.06       |   | $ | (0.08 | ) |
| Number of shares used in per share  computations - diluted |       | 25,127                 |       | 23,877 |   |

 

*See accompanying notes to unaudited condensedconsolidated financial statements*

 

4

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ULTRATECH, INC

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|
| **(In thousands)**                                                                  | ** ** | **Apr. 1,  2006** | ** ** | **Apr. 2,  2005** | ** ** |
| *Cash flows from operating activities:*                                                  | * *   | * *               | * *   | * * | * * |
| Net income (loss)                                                                        |       | $                      | 1,582      |   | $ | (1,896 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in)            |       |                   |       |   |   |
| operating activities:                                                                    |       |                   |       |   |   |
| Depreciation                                                                             |       | 1,526                  |       | 1,628 |   |
| Amortization                                                                             |       | 316                    |       | 482 |   |
| Loss on disposal of equipment                                                            |       | 6                      |       | — |   |
| Stock-based compensation                                                                 |       | 473                    |       | — |   |
| Deferred income taxes                                                                    |       | 56                     |       | (19 | ) |
| Changes in operating assets and  liabilities:                                            |       |                   |       |   |   |
| Accounts receivable                                                                      |       | (40                    | )          | 307 |   |
| Inventories                                                                              |       | (1,642                 | )          | (1,250 | ) |
| Prepaid expenses and other current assets                                                |       | 290                    |       | (289 | ) |
| Demonstration inventory                                                                  |       | (116                   | )          | (59 | ) |
| Other assets                                                                             |       | 7                      |       | (146 | ) |
| Accounts payable                                                                         |       | 411                    |       | (3,437 | ) |
| Deferred product and services income                                                     |       | 1,380                  |       | 477 |   |
| Deferred license income                                                                  |       | —                 |       | (928 | ) |
| Other current liabilities                                                                |       | 1,303                  |       | 810 |   |
| Other liabilities                                                                        |       | (194                   | )          | 275 |   |
| Net cash provided by (used in) operating  activities                                     |       | 5,358                  |       | (4,045 | ) |
|                                                                                     |       |                   |       |   |   |
| *Cash flows from investing activities:*                                                  | * *   | * *               | * *   | * * | * * |
| Capital expenditures                                                                     |       | (589                   | )          | (2,405 | ) |
| Purchase of investments                                                                  |       | (14,493                | )          | (58,567 | ) |
| Proceeds from sales and maturities of  investments                                       |       | 9,960                  |       | 59,456 |   |
| Net cash used in investing activities                                                    |       | (5,122                 | )          | (1,516 | ) |
|                                                                                     |       |                   |       |   |   |
| *Cash flows from financing activities:*                                                  | * *   | * *               | * *   | * * | * * |
| Proceeds from notes payable                                                              |       | 5,931                  |       | 41,064 |   |
| Repayment of notes payable                                                               |       | (6,129                 | )          | (41,042 | ) |
| Proceeds from issuance of common stock                                                   |       | 2,442                  |       | 831 |   |
| Tax benefit from stock options                                                           |       | 21                     |       | — |   |
| Net cash provided by financing activities                                                |       | 2,265                  |       | 853 |   |
|                                                                                     |       |                   |       |   |   |
| Net effect of exchange rate changes on cash                                              |       | (124                   | )          | 189 |   |
|                                                                                     |       |                   |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                    |       | 2,377                  |       | (4,519 | ) |
|                                                                                     |       |                   |       |   |   |
| Cash and cash equivalents at beginning of  period                                        |       | 36,344                 |       | 47,985 |   |
|                                                                                     |       |                   |       |   |   |
| Cash and cash equivalents at end of period                                               |       | $                      | 38,721     |   | $ | 43,466 |   |
|                                                                                     |       |                   |       |   |   |
| Supplemental disclosures of cash flow  information:                                      |       |                   |       |   |   |
| Other non-cash change:                                                                   |       |                   |       |   |   |
| Systems transferred from (to) inventory to  (from) equipment and demonstration inventory |       | $                      | (1,035     | ) | $ | 1,757 |   |

 

*See accompanying notes to unaudited condensedconsolidated financial statements*

 

5

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**Ultratech,Inc.**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

**April 1,2006**

 

**(1)Description of Business**

 

Ultratech, Inc. (referredto as “Ultratech” and “we”) develops, manufactures and markets photolithographyand laser thermal processing equipment for manufacturers of integrated circuitsand nanotechnology components located throughout North America, Europe, Japan,Taiwan and the rest of Asia.

 

We supply step-and-repeatphotolithography systems based on one-to-one imaging technology.  Within the integrated circuits industry, wetarget the market for advanced packaging applications.  Within the nanotechnology industry, ourtarget markets include thin film head magnetic recording devices, ink jet printheads, laser diodes and LEDs (light emitting diodes).  Our laser thermal processing equipment istargeted at advanced annealing applications within the semiconductor industry.

 

In evaluating its businesssegments, we gave consideration to the Chief Executive Officer’s review offinancial information and the organizational structure of our management.  Based on this review, we concluded that, atthe present time, resources are allocated and other financial decisions aremade based on consolidated financial information.  Accordingly, we have determined that weoperate in one business segment, which is the manufacture and distribution ofcapital equipment to manufacturers of integrated circuits and nanotechnologycomponents.

 

**(2) Basisof Presentation**

 

We have prepared the unauditedcondensed consolidated financial statements in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. In the opinion of management, all adjustments, consisting of only normalrecurring adjustments considered necessary for fair presentation, have beenincluded.

 

Operating results for the threemonths ended April 1, 2006 are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2006, or any futureperiod.

 

**USE OFESTIMATES** — The preparation of the financialstatements and related disclosures in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities atthe date of the consolidated financial statements.  By their nature, these estimates andjudgments are subject to an inherent degree of uncertainty.  On an ongoing basis, management evaluates itsestimates, including those related to inventories, warranty obligations,purchase order commitments, asset retirement obligations, bad debts, estimateduseful lives of fixed assets, asset impairment, income taxes, intangibleassets, and contingencies and litigation. Management bases its estimates on historical experience and on variousother analyses and assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.  Actual results maydiffer from these estimates under different assumptions or conditions.

 

**IMPACT OFRECENTLY ISSUED ACCOUNTING STANDARDS** — In June 2005,the FASB issued Statement No. 154, “Accounting Changes and Error Corrections”(SFAS 154), a replacement of APB Opinion No. 20, “Accounting Changes”, andStatement No. 3, “Reporting Accounting Changes in Interim Financial Statements.”SFAS 154 changes the requirements for the accounting for and the reporting of achange in accounting principle.  Previously, most voluntary changes inaccounting principles required recognition by recording a cumulative effectadjustment within net income in the period of change.  SFAS 154 requires retrospective applicationto prior periods’ financial statements, unless it is impracticable to determineeither the specific period effects or the cumulative effect of the change.  SFAS 154 is effective for accounting changesmade in fiscal years beginning after December 15,

 

6

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2005.  During the quarter ended April 1, 2006, theCompany adopted FAS 154.  The adoptionhad no impact on the Company’s consolidated financial statements for the firstquarter of 2006.

 

In November 2005, the FASBissued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments” (“FSP 115-1”), whichprovides guidance on determining when investments in certain debt and equitysecurities are considered impaired, whether that impairment is other-than-temporary,and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to therecognition of an other-than temporary impairment and requires certaindisclosures about unrealized losses that have not been recognized asother-than-temporary impairments.  FSP115-1 is required to be applied to reporting periods beginning after December15, 2005.  During the quarter ended April1, 2006, the Company adopted FSP FAS 115-1 and FAS 124-1.  The adoption had no impact on the Company’sconsolidated statements of operations for the first quarter of 2006.

 

**(3)Stock-Based Compensation**

 

The Company has adopted stockplans that provide for the grant to employees of stock-based awards, includingstock options and restricted stock units, of Ultratech.  In addition, these plans permit the grant ofnonstatutory stock-based awards to be paid to consultants and outsidedirectors.

 

Prior to January 1, 2006, theCompany accounted for its stock plans under the provisions of Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25)and FASB Interpretation (FIN) No. 44, “Accounting for Certain TransactionsInvolving Stock Compensation — an Interpretation of APB Opinion No. 25” (FINNo. 44).  The Company adopted Statementof Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”(SFAS No. 123R), effective January 1, 2006 using the modified prospectivetransition method.  Under that transitionmethod, stock-based compensation expense recognized during the three monthsended April 1, 2006 includes: (a) stock options and restricted stock unitsgranted prior to, but not yet vested as of, January 1, 2006, based on thegrant-date fair value estimated in accordance with the original provisions ofSFAS No. 123, and (b) restricted stock units granted subsequent to January 1,2006, based on the grant-date fair value estimated in accordance with theprovisions of SFAS No. 123R.  Under themodified prospective transition method, results for prior periods are notrestated.

 

The Company analyzed itsstock-based compensation strategies prior to the adoption of SFAS No. 123R andmade the decision to grant restricted stock units rather than stock optionsduring the three months ended April 1, 2006. The Company recognized stock-based compensation expense of $0.5 millionduring the three months ended April 1, 2006. Included in this amount are expenses related to restricted stock unitsof $0.3 million during the three months ended April 1, 2006, which would havebeen included in the Company’s Condensed Consolidated Statements of Operationsunder the provisions of APB No. 25.  Theexpense related to restricted stock units is therefore excluded from thefollowing table, which presents the impact of the adoption of SFAS No. 123R forthe three months ended April 1, 2006.

 
| ** **                                                            | ** ** | **Three months ended April 1, 2006** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(In thousands, except per share amounts)** | ** ** | **As reported**                 | ** ** | **Excluding impact of  adoption of SFAS No.  123R** | ** ** |
| Income before income taxes                                            |       | $                                    | 1,712      |   | $ | 1,929 |   |
| Net income                                                            |       | $                                    | 1,582      |   | $ | 1,799 |   |
| Earnings per share - basic                                            |       | $                                    | 0.07       |   | $ | 0.08 |   |
| Earnings per share - diluted                                          |       | $                                    | 0.06       |   | $ | 0.07 |   |

 

There was no income tax benefitrecognized in the condensed consolidated statements of operations related tostock-based compensation expense during the three months ended April 1,2006.  The estimated fair value of

 

7

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the Company’s stock-basedawards, less expected forfeitures, is amortized over the awards’ vesting periodusing a single grant approach on a ratable basis for awards granted after theadoption of SFAS No. 123R and using a multiple grant approach on astraight-line basis for awards granted prior to the adoption of SFAS No. 123R.

 

The modified prospectivetransition method of SFAS No. 123R requires the presentation of pro formainformation for periods presented prior to the adoption of SFAS No. 123Rregarding net income (loss) and net income (loss) per share as if the Companyhad accounted for its stock plans under the fair value method of SFAS No.123R.  For pro forma purposes, fair valueof stock options was estimated using the Black-Scholes option valuation modeland amortized using a multiple grant approach on a straight-line basis.  The fair value of all of the Company’sstock-based awards was estimated assuming no expected dividends and estimatesof expected life, volatility and risk-free interest rate at the time ofgrant.  The following table illustratesthe effect on net income and net income per share if the Company had accountedfor its stock plans under the fair value method of accounting under SFAS No.123R:

 
| **(In thousands, except per share amounts)** | ** ** | **Three Months  Ended Apr. 2,  2005** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Net loss as reported                                                  |       | $                                                    | (1,896     | ) |
| Deduct: SFAS No. 123R compensation expense,  net of tax               |       | (2,683                                               | )          |
| Pro forma net loss                                                    |       | $                                                    | (4,579     | ) |
|                                                                  |       |                                                 |       |   |
| Net loss per share - basic, as reported                               |       | $                                                    | (0.08      | ) |
| Pro forma net loss per share - basic                                  |       | $                                                    | (0.19      | ) |
|                                                                  |       |                                                 |       |   |
| Net loss per share - diluted, as reported                             |       | $                                                    | (0.08      | ) |
| Pro forma net loss per share - diluted                                |       | $                                                    | (0.19      | ) |

 

The fair value of the Company’sstock options granted in the three month period ended April 2, 2005 wasestimated using the following weighted-average assumptions: 

 
| ** **               | ** ** | **Three Months  Ended Apr. 2, 2005** | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| Expected life (in years) |       | 3.5                                  |       |
| Risk-free interest rate  |       | 3.42                                 | %          |
| Volatility factor        |       | 0.52                                 |       |
| Dividend yield           |       | N/A                                  |       |

 

Stock Optionsand Restricted Stock Units

 

Ultratech’s 1993 Stock OptionPlan/Stock Issuance Plan, as amended, and its 1998 Supplemental StockOption/Stock Issuance Plan, as amended, provide for the grant of qualified andnon-qualified stock-based awards to eligible employees, consultants andadvisors, and non-employee directors of the Company and its subsidiaries.  As of April 1, 2006, there was a total of1,004,878 shares reserved for future issuance under these Plans.

 

The Company did not grant anystock options during the three months ended April 1, 2006.  The fair value of the Company’s stock optionsissued prior to the adoption of SFAS No. 123R was estimated using a Black-Scholesoption valuation model.  This modelrequires the input of highly subjective assumptions, including expected stockprice volatility and the estimated life of each award.  The fair value of these stock options wasestimated assuming no expected dividends and estimates of expected life,volatility and risk-free interest rate at the time of grant.  Prior to the adoption of SFAS No. 123R, theCompany used historical and implied market volatility as a basis for calculatingexpected volatility.

 

8

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A summary of stock optionactivity under the Plans as of April 1, 2006 and changes during the threemonths then ended is presented below:

 
| **Options**                      | ** ** | **Shares (in  thousands)** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic  Value (in  thousands)** | ** ** |
|----------------------------------|------------|----------------------------|------------|----------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------|------------|
| Outstanding at December 31, 2005 |       | 6,443,948                  |       | 17.71                                  |       | —                                                       |       | —                                          |       |
| Granted                          |       | —                     |       | —                                 |       | —                                                       |       | —                                          |       |
| Exercised                        |       | (163,128                   | )          | 14.93                                  |       | —                                                       |       | —                                          |       |
| Forfeited or expired             |       | (48,448                    | )          | 26.92                                  |       | —                                                       |       | —                                          |       |
| Outstanding at April 1, 2006     |       | 6,232,372                  |       | 17.71                                  |       | 6.75                                                         |       | $                                               | 45,821     |   |
| Exercisable at April 1, 2006     |       | 6,002,265                  |       | 17.95                                  |       | 6.74                                                         |       | $                                               | 42,830     |   |

 

The total intrinsic value ofoptions exercised during the three months ended April 1, 2006 was $1.1 million.  As of April 1, 2006, there was $0.5 millionof total unrecognized compensation cost related to nonvested stock optionsgranted and outstanding; that cost is expected to be recognized through fiscalyear 2009, with a weighted average remaining period of 0.48 year.  Cash received from stock option exercises was$2.4 million during the three months ended April 1, 2006.

 

A summary of the status of theCompany’s restricted stock units as of April 1, 2006, and changes during thethree months then ended is presented below:

 
| **Nonvested Restricted Stock  Units** | ** ** | **Shares (in  thousands)** | ** ** | **Weighted-  Average  Grant-Date  Fair Value (in  millions)** | ** ** |
|---------------------------------------|------------|----------------------------|------------|---------------------------------------------------------------|------------|
| Nonvested at December 31, 2005        |       | —                     |       | —                                                        |       |
| Granted                               |       | 168                        |       | $                                                             | 3.2        |   |
| Vested                                |       | (5                         | )          | $                                                             | 0.1        |   |
| Forfeited                             |       | (1                         | )          | —                                                        |       |
| Nonvested at April 1, 2006            |       | 162                        |       | $                                                             | 3.1        |   |

 

The fair value of the Company’srestricted stock units was calculated based upon the fair market value of theCompany’s stock at the date of grant.  Asof April 1, 2006, there was $2.5 million of total unrecognized compensationcost related to nonvested restricted stock units granted; that cost is expectedto be recognized over a remaining period of 2.75 years.

 

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

 

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

 

9

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| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| **(In thousands, except per share  amounts)**        | ** ** | **April 1,  2006**     | ** ** | **April 2,  2005** | ** ** |
| Numerator:                                           |       |                   |       |   |   |
| Net income (loss)                                    |       | $                      | 1,582      |   | $ | (1,896 | ) |
|                                                 |       |                   |       |   |   |
| Denominator:                                         |       |                   |       |   |   |
| Denominator for basic net income (loss per  share)   |       | 23,830                 |       | 23,877 |   |
| Effect of dilutive employee stock options            |       | 1,297                  |       | — |   |
| Denominator for diluted net income (loss  per share) |       | 25,127                 |       | 23,877 |   |
|                                                 |       |                   |       |   |   |
| Net income (loss) per share - basic:                 |       |                   |       |   |   |
|                                                 |       |                   |       |   |   |
| Net income (loss)                                    |       | $                      | 0.07       |   | $ | (0.08 | ) |
|                                                 |       |                   |       |   |   |
| Net income (loss) per share - diluted:               |       |                   |       |   |   |
|                                                 |       |                   |       |   |   |
| Net income (loss)                                    |       | $                      | 0.06       |   | $ | (0.08 | ) |

 

For the three-month periodsended April 1, 2006 and April 2, 2005, options to purchase 1,736,070 and6,396,235 shares of common stock at an average exercise price of $25.54 and$17.93, respectively, were excluded from the computation of diluted net lossper share, as the effect would have been anti-dilutive.  Options are anti-dilutive when we have a netloss or when the exercise price of the stock option is greater than the averagemarket price of our common stock during the period.

 

10

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**(5)Inventories**

 

Inventories consist of thefollowing:

 
| **(In thousands)** | ** ** | **Apr. 1  2006** | ** ** | **Dec. 31,  2005** | ** ** |
|--------------------|------------|------------------|------------|--------------------|------------|
| Raw materials      |       | $                | 12,409     |               | $          | 10,873 |   |
| Work-in-process    |       | 9,941            |       | 8,322              |       |
| Finished products  |       | 9,408            |       | 9,774              |       |
|               |       | $                | 31,758     |               | $          | 28,969 |   |

 

**(6) OtherAssets**

 

Other assets consist of thefollowing:

 
| **(In thousands)**                | ** ** | **Apr. 1,  2006** | ** ** | **Dec. 31,  2005** | ** ** |
|-----------------------------------|------------|-------------------|------------|--------------------|------------|
| Deferred compensation plan assets |       | $                 | 1,990      |               | $          | 1,972 |   |
| Deferred income taxes             |       | 279               |       | 274                |       |
| Other                             |       | 814               |       | 844                |       |
|                              |       | $                 | 3,083      |               | $          | 3,090 |   |

 

**(7) Lineof Credit**

 

We have a line of creditagreement with a brokerage firm.  Underthe terms of this agreement, we may borrow funds at a cost equal to the currentFederal funds open rate plus 100 basis points (approximately 5.75% as of April1, 2006).  Certain of our cash, cashequivalents and investments secure borrowings outstanding under this facility.  Funds are advanced to us under this facilitybased on pre-determined advance rates on the cash and securities held by us inthis brokerage account.  This agreementhas no set expiration date and there are no loan covenants, other than theaforementioned collateral requirement. As of April 1, 2006, $4.1 million was outstanding under this facility,with a related collateral requirement of approximately $5.5 million of ourcash, cash equivalents and investments.

 

**(8) OtherCurrent Liabilities**

 

Other current liabilitiesconsist of the following:

 
| **(In thousands)**                                | ** ** | **Apr. 1,  2006** | ** ** | **Dec. 31,  2005** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| Salaries and benefits                             |       | $                 | 4,272      |               | $          | 3,723 |   |
| Warranty accrual                                  |       | 2,586             |       | 2,397              |       |
| Advance billings                                  |       | 1,132             |       | 854                |       |
| Income taxes payable                              |       | 420               |       | 768                |       |
| Reserve for losses on purchase order  commitments |       | 340               |       | 406                |       |
| Accrued taxes-other                               |       | 2,289             |       | 1,542              |       |
| Other                                             |       | 1,156             |       | 1,202              |       |
|                                              |       | $                 | 12,195     |               | $          | 10,892 |   |

 

11

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**WarrantyAccrual**

 

We generally warrant our products for a period of 12 months for newproducts, or 3 months for refurbished products, from the date of customeracceptance for material and labor to repair the product; accordingly, anaccrual for the estimated cost of the warranty is recorded at the time theproduct is shipped.  Extended warrantyterms, if granted, result in deferral of revenue equating to our standardpricing for similar service contracts. Recognition of the related warranty cost is deferred until productrevenue is recognized.  Factors thataffect our warranty liability include the number of installed units, historicaland anticipated rates of warranty claims, and cost per claim.  We periodically assess the adequacy of ourrecorded warranty liabilities and adjust the amounts as necessary.  In 2005, the Company commenced volumeshipments of its unity-based lithography systems and commenced warrantycoverage on several of its laser annealing systems.  As may occur with new product introductions,after-sales (warranty) costs were higher than anticipated.  The Company believes its warranty accrual, asof April 1, 2006, will be sufficient to satisfy outstanding obligations as ofthat date.

 

Changes in our warranty accrual are as follows:

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| **(In thousands)**                                | ** ** | **Apr. 1,  2006**      | ** ** | **Apr. 2,  2005** | ** ** |
| Balance, beginning of the period                  |       | $                      | 2,397      |   | $ | 2,013 |   |
| Warranties issued during the period               |       | 917                    |       | 954 |   |
| Settlements made during the period                |       | (1,118                 | )          | (1,059 | ) |
| Changes in liability for pre-existing  warranties |       | 390                    |       | 118 |   |
| Balance, end of the period                        |       | $                      | 2,586      |   | $ | 2,026 |   |

 

**DeferredServices Revenue**

 

Deferred services revenue isincluded in the deferred product and services income line on the condensedconsolidated balance sheets.  We sellservice contracts for which revenue is deferred and recognized ratably over thecontract period, for time based service contracts, or as service hours aredelivered, for contracts based on a purchased quantity of hours.

 

Changes in our deferred servicerevenue are as follows:

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| **(In thousands)**                                     | ** ** | **Apr. 1,  2006**      | ** ** | **Apr. 2,  2005** | ** ** |
| Balance, beginning of the period                       |       | $                      | 1,970      |   | $ | 1,332 |   |
| Service contracts sold during the period               |       | 3,957                  |       | 1,988 |   |
| Service contract revenue recognized during  the period |       | (2,714                 | )          | (1,968 | ) |
| Balance, end of the period                             |       | $                      | 3,213      |   | $ | 1,352 |   |

 

**(9) OtherLiabilities**

 

Other liabilities consist ofthe following:

 

12

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| **(In thousands)**                   | ** ** | **Apr. 1,  2006** | ** ** | **Dec. 31,  2005** | ** ** |
|--------------------------------------|------------|-------------------|------------|--------------------|------------|
| Deferred rent                        |       | $                 | 3,074      |               | $          | 3,157 |   |
| Deferred compensation plan liability |       | 1,727             |       | 1,932              |       |
| Asset retirement obligations         |       | 2,154             |       | 2,064              |       |
| Other                                |       | 656               |       | 652                |       |
|                                 |       | $                 | 7,611      |               | $          | 7,805 |   |

 

**(10)Accumulated Other Comprehensive Income (Loss)**

 

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

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| **(In thousands)**                                     | ** ** | **Apr. 1,  2006**      | ** ** | **Apr. 2,  2005** | ** ** |
| Net income (loss)                                      |       | $                      | 1,582      |   | $ | (1,896 | ) |
| Accumulated  other comprehensive income (loss):        |       |                   |       |   |   |
| Unrealized loss on available-for-sale  investments     |       | (405                   | )          | (502 | ) |
| Unrealized gain on foreign exchange forward  contracts |       | (124                   | )          | 189 |   |
| Comprehensive  income (loss)                           |       | $                      | 1,053      |   | $ | (2,209 | ) |

 

Accumulated other comprehensiveincome (loss) presented in the condensed consolidated balance sheets iscomprised of unrealized gains or losses on available-for-sale securities andthe effect of exchange rate changes on foreign exchange forward contracts, netof tax.

 
| **(In thousands)**                                     | ** ** | **Apr. 1,  2006** | ** ** | **Dec. 31,  2005** | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| Unrealized gains (losses) on:                          |       |              |       |               |       |
| Available-for-sale investments                         |       | $                 | (1,605     | )                  | $          | (1,200 | ) |
| Foreign exchange forward contracts                     |       | 190               |       | 314                |       |
| Accumulated other comprehensive loss at end  of period |       | $                 | (1,415     | )                  | $          | (886 | ) |

 

**(11) StockRepurchase Program**

 

On September 19, 2005, theCompany’s Board of Directors authorized the repurchase of up to $30 million ofits common stock in the open market at the then prevailing market prices duringthe period commencing September 19, 2005 through September 30, 2007.  Through April 1, 2006, the Company hadrepurchased 644,535 shares of its common stock at a total purchase price of$9.2 million.  No shares were repurchasedduring the quarter ended April 1, 2006.

 

**(12)Employee Benefit Plans**

 

***Employeebonus plans***

 

We currently sponsor anexecutive incentive bonus plan that distributes employee awards based on theachievement of predetermined targets.  Wehave recorded $0.4 million and $0.0 million of expenses under this bonus planfor the quarters ended April 1, 2006 and April 2, 2005, respectively.

 

***13***

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***Employeesavings and retirement plans***

 

Ultratech sponsors a 401(k)employee salary deferral plan that allows voluntary contributions by allfull-time employees of from 1% to 20% of their pretax earnings.  Company contributions made to this plan were$0.1 million for both quarters ended April 1, 2006 and April 2, 2005.  These Company contributions generally become20 percent vested at the end of an employee’s first year of service from thedate of hire with the Company, and vest 20 percent per year of servicethereafter until they become fully vested at the end of five years ofservice.  We also sponsor an executivenon-qualified deferred compensation plan (the “Plan”) that allows qualifyingexecutives to defer current cash compensation.

 

**(13)Contingencies**

 

**LegalProceedings**

 

On February 29, 2000, we filedlawsuits asserting patent infringement and related claims against Nikon, Canon,and ASML in the U.S. District Court for the Eastern District of Virginia.  In April 2000, we reached a settlement withNikon, and in September 2001, we reached a settlement with Canon.  In the patent litigation against ASML, a jurytrial was conducted during the three-month period ended July 2, 2005.  The jury reached a verdict that the patentwas infringed, but that the asserted claims of the patent were invalid.  We filed a post-trial motion for a new trialand for judgment as a matter of law in our favor.  ASML also filed a motion for judgment as amatter of law seeking to invalidate three of the asserted claims for lack ofenablement and requested that the court award costs.  On February 13, 2006, the Court denied ourpost-trial motions, including the motion for a new trial, and entered judgmentin favor of ASML invalidating three claims of the patent for lack ofenablement.  The Court also awarded ASMLapproximately $330,000 in costs. Ultratech has filed a notice of appeal. ASML has filed a notice of cross-appeal.

 

On July 11, 2003, we filed alawsuit against a Southern California company asserting infringement of certainclaims related to U.S. patent No. 5,621,813 in the U.S. District Court in andfor the Northern District of California. On May 17, 2005, the court found the subject patent to be invalid.  Ultratech appealed that decision, but, inMarch of 2006, the Federal Circuit upheld the district court’s ruling.  Ultratech has filed a request forreconsideration of such ruling that is still pending.

 

The defendant also brought amotion for reimbursement of its attorneys’ fees and costs in a total assertedamount of approximately $2 million.  Weopposed this motion and, on October 12, 2005, the District Court denied thedefendant’s request for attorneys’ fees in its entirety.  On November 3, 2005, the defendant filed anotice of appeal with respect to the court’s ruling on its motion for attorneys’fees, and Ultratech has filed its opposing brief in that regard.  There is not yet a ruling on that appeal norany scheduled hearing date on that appeal. It is expected that such a ruling will occur following the scheduledhearing date and that the likely scheduled hearing date will be in the third orfourth quarter of 2006.

 

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**Item 2.****        Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Certain of the statements contained herein, which are not historicalfacts and which can generally be identified by words such as “anticipates”, “expects”,“intends”, “will”, “could”, “believes”, “estimates”, “continue”, and similarexpressions, are forward-looking statements under Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended, that involve risks and uncertainties, such as risksrelated to our dependence on new product introductions and market acceptance ofnew products and enhanced versions of our existing products; lengthy salescycles, including the timing of system installations and acceptances; lengthyand costly development cycles for laser-processing and lithography technologiesand applications; integration, development and associated expenses of the laserprocessing operation; delays, deferrals and cancellations of orders bycustomers; cyclicality in the semiconductor and nanotechnology industries;pricing pressures and product discounts; high degree of industry competition;intellectual property matters; expiration of licensing arrangements, and theresulting adverse impact on our licensing revenues; changes to financialaccounting standards; changes in pricing by us, our competitors or suppliers;customer concentration; international sales; timing of new productannouncements and releases by us or our competitors; ability to volume producesystems and meet customer requirements; sole or limited sources of supply;ability and resulting costs to attract or retain sufficient personnel toachieve our targets for a particular period; dilutive effect of employee stockoption grants on net income per share, which is largely dependent upon usachieving and maintaining profitability and the market price of our stock; mixof products sold; rapid technological change and the importance of timely productintroductions; outcome of litigation; manufacturing variances and productionlevels; timing and degree of success of technologies licensed to outsideparties; product concentration and lack of product revenue diversification;inventory obsolescence; asset impairment; effects of certain anti-takeoverprovisions; future acquisitions; volatility of stock price; foreign governmentregulations and restrictions, the political restrictions in Taiwan regardingoffshore investments and the exporting of sensitive technologies and jobs tocertain countries;  businessinterruptions due to natural disasters or utility failures; environmentalregulations; and any adverse effects of terrorist attacks in the United Statesor elsewhere, or government responses thereto, or military actions in Iraq,Afghanistan and elsewhere, on the economy in general, or on our business inparticular.  Due to these and additionalfactors, the statements, historical results and percentage relationships setforth below are not necessarily indicative of the results of operations for anyfuture period.  These forward-lookingstatements are based on management’s current beliefs and expectations, some orall of which may prove to be inaccurate, and which may change.  We undertake no obligation to revise orupdate any forward-looking statements to reflect any event or circumstance thatmay arise after the date of this report.

** **

**OVERVIEW**

 

Ultratech develops,manufactures and markets photolithography and laser thermal processingequipment for manufacturers of integrated circuits and nanotechnologycomponents located throughout North America, Europe, Japan, Taiwan and the restof Asia.

 

We supply step-and-repeatphotolithography systems based on one-to-one imaging technology.  Within the integrated circuits industry, wetarget the market for advanced packaging applications.  Within the nanotechnology industry, ourtarget markets include thin film head magnetic recording devices, ink jet printheads, laser diodes and LEDs (light emitting diodes).  Our laser thermal processing equipment istargeted at advanced annealing applications within the semiconductor industry.

 

**RESULTS OFOPERATIONS**

 

We derive a substantial portion of our total net sales from sales of arelatively small number of newly manufactured systems, which typically range inprice from $1.2 million to $4.5 million. As a result of these high sale prices, the timing and recognition ofrevenue from a single transaction has had and most likely will continue to havea significant impact on our net sales and operating results for any particularperiod.

 

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Our backlog at the beginning of a period typically does not include allof the sales needed to achieve our sales objectives for that period.  In addition, orders in backlog are subject tocancellation, shipment or customer acceptance delays, and deferral orrescheduling by a customer with limited or no penalties to the customer.  Consequently, our net sales and operatingresults for a period have been and will continue to be dependent upon ourobtaining orders for systems to be shipped and accepted in the same period inwhich the order is received.  Ourbusiness and financial results for a particular period could be materiallyadversely affected if an anticipated order for even one system is not receivedin time to permit shipment and customer acceptance during that period.  Furthermore, a substantial portion of ourshipments has historically occurred near the end of each quarter.  Delays in installation and customeracceptance due, for example, to our inability to successfully demonstrate theagreed-upon specifications or criteria at the customer’s facility, or to thefailure of the customer to permit installation of the system in the agreed upontime, may cause net sales in a particular period to fall significantly belowour expectations, which may materially adversely affect our operating resultsfor that period.  This risk is especiallyapplicable in connection with the introduction and initial sales of a newproduct line.  Additionally, the failureto receive anticipated orders or delays in shipments due, for example, torescheduling, delays, deferrals or cancellations by customers, additionalcustomer configuration requirements, or to unexpected manufacturingdifficulties or delays in deliveries by suppliers due to their long productionlead times or otherwise, have caused and may in the future cause net sales in aparticular period to fall significantly below our expectations, which couldmaterially adversely affect our operating results for that period.  In particular, the long manufacturing andacceptance cycles of our advanced packaging family of wafer steppers and laserthermal processing systems and the long lead time for lenses and othermaterials, could cause shipments and acceptances of such products to be delayedfrom one quarter to the next, which could materially adversely affect ourfinancial condition and results of operations for a particular quarter.

 

Additionally, the need for continued expenditures for research anddevelopment, capital equipment, ongoing training and worldwide customer serviceand support, among other factors, will make it difficult for us to reduce ouroperating expenses.

#  

# **Net sales**

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | ** **        | ** ** | ** **            | ** ** |
|------------------------------------|------------|------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In millions)**                  | ** ** | **Apr. 1,  2006**      | ** ** | **Apr. 2,  2005** | ** ** | **Amount of  Change** | ** ** | **Percentage  Change** | ** ** |
| Sales of:                          |       |                   |       |              |       |                  |       |   |   |
| Products: Systems                  |       | $                      | 26.9       |              | $          | 20.3                  |       | $ | 6.6 |   | 32 | % |
| Products: Spare parts and upgrades |       | 4.5                    |       | 3.4               |       | $                     | 1.1        |   | 32 | % |
| Services                           |       | 3.5                    |       | 3.1               |       | $                     | 0.4        |   | 14 | % |
| Licenses                           |       | —                 |       | 1.1               |       | $                     | (1.1       | ) | -100 | % |
| Total net sales                    |       | $                      | 34.9       |              | $          | 28.0                  |       | $ | 7.0 |   | 25 | % |

 

Net sales consist of revenues fromsystem sales, spare parts sales and upgrades, services and licensing oftechnologies.  System sales increased 32%in the first quarter of 2006 compared to the first quarter of 2005.  The average selling prices of systems soldincreased 32% compared to the comparable year-ago period, primarily as a resultof increased sales in laser thermal processing and advanced packagingplatforms, which typically have higher average selling prices than ournanotechnology platforms.  Unit volumeswere unchanged, compared to last year’s first quarter.

 

On a product market applicationbasis, system sales to the semiconductor industry, primarily for advancedpackaging applications, were $25.5 million for the quarter ended April 1, 2006,an increase of 98% when compared with system sales to this market in the firstquarter of 2005.  This increase was dueto a 74% increase in sales to the advanced packaging markets and to the sale ofone laser thermal processing system that was revenued during the first quarterof 2006 compared to no laser thermal processing system sales in the firstquarter of 2005.  These systems typicallyhave significantly higher average selling prices compared to the Company’snanotechnology

 

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offerings.  System sales to the nanotechnology marketwere $1.4 million for the quarter ended April 1, 2006, a decrease of 81%compared with sales of $7.4 million in the first quarter of 2005.  System sales to the nanotechnology market arehighly dependent on customer capacity demand in the thin film head industry.

 

Spare parts and upgrades salesfor the first quarter of 2006 were $4.5 million, an increase of 32% over lastyear’s first quarter, primarily as a result of a higher levels of systemupgrades compared to the same period a year ago.  Revenues from services for the first quarterof 2006 were $3.5 million, an increase of 14% over last year’s first quarter,primarily as a result of increases in service and training contracts, offset bya decrease in time and material contract service jobs compared to the sameperiod of 2005.

 

There was no revenue fromlicenses in the quarter ended April 1, 2006 compared with $1.1 million in thecomparable period a year ago.  Thisdecrease was a result of the completion of the amortization period ofprior-period proceeds from licensing agreements.  Future revenues from licensing activities, ifany, will be contingent upon the outcome of current litigation (see “LegalProceedings”), and upon existing and future licensing and royaltyarrangements.  The Company may not besuccessful in generating licensing revenues in the future and does notanticipate the recognition of additional licensing income during the remainderof 2006.

 

At April 1, 2006, we hadapproximately $3.4 million of deferred product and services income resultingfrom primarily deferred service revenue compared to $2.0 million at December31, 2005.  Deferred income related to ourproducts is recognized upon satisfying the contractual obligations forinstallation and/or customer acceptance. Deferred service revenue is recognized ratably over the contract periodor as purchased services are rendered.

 

For the quarter ended April 1, 2006, international net sales were $20.9million, or 60% of total net sales compared with $20.7 million, or 74% of totalnet sales for the first quarter of 2005. We expect sales to international customers to represent a significantmajority of our revenues during the remainder of 2006.  Our revenue derived from sales in foreigncountries is not generally subject to significant exchange rate fluctuations,principally because sales contracts for our systems are generally denominatedin U.S. dollars.  In Japan, however,orders are often denominated in Japanese yen. This subjects us to the risk of currency fluctuations.  We attempt to mitigate this risk by enteringinto foreign currency forward exchange contracts for the period between when anorder is received and when it is recorded as revenue.  After recording revenue, we use variousmechanisms, such as foreign currency forward exchange contracts and naturalhedges, to offset substantial portions of the gains or losses associated withour Japanese yen denominated receivables due to exchange ratefluctuations.  We had approximately $0.7million of Japanese yen denominated receivables at April 1, 2006.  International sales expose us to a number ofadditional risks, including fluctuations in the value of local currenciesrelative to the U.S. dollar, which impact the relative cost of ownership of ourproducts and, thus, the customer’s willingness to purchase our product.  (See “Item 1A Risk Factors: InternationalSales”).

 

**Grossprofit**

 

On a comparative basis, grossmargins were 39.1% and 43.9% for the first quarters of 2006 and 2005,respectively.  The 4.8% decrease in grossmargin was due to a less favorable mix of products sold (3.8 percentagepoints), the absence of licensing revenue resulting from the completion of theamortization period of licensing payments received in prior periods (2.3 percentagepoints), additional manufacturing costs resulting from ramp-up of production ofboth laser spike annealing systems and unity-platform lithography systems plusadditional service costs resulting from installation and warranty costs of ournew laser spike annealing systems (1.8 percentage points), partially offset byan increase in manufacturing capacity utilization (3.1 percentage points).

 

There were no licensingrevenues for the quarter ended April 1, 2006. Exclusive of licensing revenues, gross margin was  41.6% for the first quarter of 2005.  We believe disclosure of gross marginswithout reference to licensing revenues provides additional appropriatedisclosure to allow comparison of our product and service gross margins overtime because there is little, if any, cost of sales associated with ourlicensing revenues.  Future revenues fromlicensing activities, if any, will be contingent upon the outcome of currentlitigation (see “Legal Proceedings”), and upon existing and future licensingand royalty arrangements.  The Companymay not be successful in generating licensing revenues in the future and doesnot anticipate the recognition of additional licensing income during the

 

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remainder of 2006.  Gross margins have been, and will continue tobe, negatively impacted by the discontinuance of license revenue.

 

Our gross profit as apercentage of sales has been and most likely will continue to be significantlyaffected by a variety of factors, including the introduction of new products,which typically have higher manufacturing costs until manufacturingefficiencies are realized and which are typically discounted more than existingproducts until the products gain market acceptance; the mix of products sold;the rate of capacity utilization; writedown of inventory and open purchasecommitments; technology support and licensing revenues, which have little or noassociated cost of sales; product discounts, pricing and competition in ourtargeted markets; non-linearity of shipments during the quarter which canresult in manufacturing inefficiencies; the percentage of international sales,which typically have lower gross margins than domestic sales principally due tohigher field service and support costs; and start-up costs and inefficienciesassociated with the implementation of subcontracting arrangements.

 

**Operatingexpenses**

 

Research, development andengineering expenses were $6.2 million for first quarter of 2006, a decrease of$1.3 million from the amount reported for the comparable period of 2005.  The decrease was due primarily to cost savingefforts and lower spending associated with the development of our laserprocessing technologies.

 

Selling, general, andadministrative expenses were $7.3 million for the first quarter of 2006compared with $7.5 million for the comparable period of 2005.  As a percentage of net sales, selling,general, and administrative expenses decreased to 21% in the quarter endedApril 1, 2006, compared to 27% in the first quarter of 2005.  This decrease, as a percentage of net sales,was primarily due to a 25% increase in revenue, along with decreased legalcosts related to our being a plaintiff in two patent infringement lawsuits inthe first quarter of 2005.

 

# **Interest and other income, net**

 

Interest and other income, net,which consists primarily of interest income, was $1.5 million for the firstquarter of 2006, compared with $0.9 million for the comparable period of2005.  This increase was primarily attributableto higher interest rates on our investments. We presently maintain an investment portfolio with a weighted-averagematurity of approximately 1.4 years.  Asa result, changes in short-term interest rates have had, and will continue tohave, a significant impact on our interest income.

 

**Provision(benefit) for income taxes**

 

For the three months endedApril 1, 2006, we recorded an income tax expense of $0.1 million compared to anincome tax benefit of $0.1 million for the first quarter in 2005.  The tax expense recognized in the currentperiod resulted from our full year forecasted effective tax rate ofapproximately 8% of pretax income.  Thetax benefit for the prior year first quarter resulted from our then forecastedeffective tax rate of approximately 7% for the full year ended December 31,2005, applied to the first quarter loss. The estimated effective tax rate of 8% for 2006 results primarily fromforeign income taxes and the U.S. federal alternative minimum tax.  This effective tax rate is substantially lessthan the statutory rate because of available U.S. federal and state netoperating loss carryforwards.

 

In October 2004, theUnited States enacted The American Jobs Creation Act of 2004 (“the Act”).  The Act provides for a three year phase-outof current extraterritorial income tax (“ETI”) benefits and replaces ETI with aphased-in 9% domestic production activity deduction that will not be fullyeffective until 2010.  Although ouractivities qualify for the domestic production activity deduction, we will notbe able to benefit from this provision until our net operating losscarryforwards are fully utilized in future years.

 

Income tax estimates can beaffected by whether or not, and within which jurisdictions, future earningswill occur and how and when cash is repatriated to the United States, combinedwith other aspects of an overall income tax strategy.  Additionally, taxing jurisdictions couldretroactively disagree with our tax treatment of certain items, and some historicaltransactions have income tax effects into the future.  Accounting rules require these futureeffects to be evaluated using current laws, rules and regulations, each ofwhich can change at any time and in an

 

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unpredictable manner.  We believe we have adequately provided forany reasonably foreseeable outcome related to these matters, and we do notanticipate any material earnings impact from their ultimate resolutions.

 

Each quarter we assess thelikelihood that we will be able to recover our deferred tax assets.  We consider all available evidence, bothpositive and negative, including historical levels of income, expectations andrisks associated with estimates of future taxable income and ongoing prudentand feasible tax planning strategies in assessing the need for the valuationallowance.  As a result of our analysisof all available evidence, we concluded that it is more likely that ournon-Japanese net deferred tax asset will not be realized and we continue toprovide a full valuation allowance against the asset.  We closely monitor all available evidence,and may release some or all of the valuation allowance in future periods.

 

**Outlook**

 

Although we believe that ourserved markets have generally strengthened during the last twelve months, theanticipated timing of orders, shipments and customer acceptances usuallyrequires us to fill a number of production slots in any given quarter in orderto meet our sales targets.  If we areunsuccessful in our efforts to secure those production orders, or if existingproduction orders are delayed or cancelled, our results of operations will bematerially adversely impacted. Accordingly, we may not be able to achieve or maintain our current orprior level of sales.  We presentlyexpect that net sales for the second quarter of 2006 may be in a range of  10% to 15% down from the first quarter of2006.  For the full year, we believe wecould see annual revenue growth of 10% to 20% over levels achieved in 2005.

 

Because our net sales aresubject to a number of risks, including risks associated with the introductionof our new laser processing product line, delays in customer acceptances,intense competition in the capital equipment industry, uncertainty relating tothe timing and market acceptance of our products, and the condition of themacro-economy and the semiconductor industry, we may not exceed or maintain ourcurrent or prior level of net sales for any period in the future.  Additionally, we believe that the marketacceptance and volume production of our advanced packaging systems, laserprocessing systems and our nanotechnology systems are of critical importance toour future financial results.  At April1, 2006, these critical systems represented 89% of our backlog.  To the extent that these products do notachieve or maintain significant sales due to difficulties involvingmanufacturing or engineering, the inability to reduce the current longmanufacturing and customer acceptance cycles for these products, competition,excess capacity in the semiconductor or nanotechnology device industries, orany other reason, our business, financial condition and results of operationswould be materially adversely affected.

 

We believe that gross marginfor the second quarter of 2006 will be between 41% and 42%.  The final gross margin achieved will dependheavily upon sales volumes and the resulting product mix.  Should our sales not reach the levelexpected, we may incur a higher risk of inventory obsolescence and excesspurchase commitments and lower utilization of our manufacturing infrastructure,which would materially adversely impact our results of operations.  New products generally have lower grossmargins until there is widespread market acceptance and until production andafter-sales efficiencies can be achieved. Should significant market demand fail to develop for our laserprocessing systems and our new advanced packaging offerings, our business,financial condition and results of operations would be materially adverselyaffected.  In addition, higher costsassociated with extended manufacturing and customer acceptance periods onshipments of our new laser processing products have had, and will continue tohave, an adverse impact on our gross margins. We believe that operating margin for the second quarter of 2006 may bein a range of (3%) to (7%) and that net income per share may be in the range of$0.02 to ($0.02) for the second quarter of 2006.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Net cash generated by operatingactivities was $5.4 million for the three months ended April 1, 2006, comparedwith net cash used in operating activities of $4.0 million for the comparableperiod in 2005.  Net cash generated byoperating activities during the first quarter of 2006 was primarilyattributable to net income of $1.6 million, non-cash charges to income fordepreciation and amortization of $1.8 million, an increase in deferred productand services income of $1.4 million, an increase in other current liabilitiesof $1.3 million, a non-cash charge to income

 

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for stock-based compensation of$0.5 million, and an increase in accounts payable of $0.4 million, partiallyoffset by an increase in inventories of $1.6 million.

 

We believe that because of the relatively long manufacturing cycle ofcertain of our systems, particularly newer products, our inventories willcontinue to represent a significant and growing portion of workingcapital.  Currently, we are devotingsignificant resources to the development, introduction and commercialization ofour laser processing system and to the development of our next generation 1Xlithography technologies.  We currentlyintend to continue to incur significant operating expenses in the areas of research,development and engineering, manufacturing, and selling, general andadministrative costs in order to further develop, produce and support these newproducts.  Additionally, gross profitmargins, inventory and capital equipment levels may be adversely impacted inthe future by costs associated with the initial production of the laserprocessing system and by future generations of our 1X wafer steppers.  These costs include, but are not limited to,additional manufacturing overhead, costs of demonstration systems andfacilities and the establishment of additional after-sales supportorganizations.  Additionally, there canbe no assurance that operating expenses will not increase, relative to sales,as a result of adding technical, marketing and administrative personnel, amongother costs, to support our new products. If we are unable to achieve significantly increased net sales or if oursales fall below expectations, our cash flow and operating results will bematerially adversely affected until, among other factors, costs and expensescan be reduced.  Our failure to achieveour sales targets for these new products could result in additional inventorywrite-offs and asset impairment charges, either or both of which couldmaterially adversely impact our results of operations.

 

During the quarter ended April1, 2006, net cash used in investing activities was $5.1 million, attributableto net purchases of short and long-term investments of $4.5 million and capitalexpenditures of $0.6 million.

 

Net cash provided by financingactivities was $2.3 million during the first quarter of 2006, attributable to$2.4 million of proceeds received from the issuance of common stock under ouremployee stock option plans, partially offset by a net repayment of our notespayable of $0.2 million.

 

At April 1, 2006, we hadworking capital of $148 million.  Ourprincipal source of liquidity at April 1, 2006 consisted of $120.2 million incash, cash equivalents and short-term investments, net of outstandingborrowings under our line of credit.  Asof December 31, 2005, the Company classified all investment securities asshort-term, even though the stated maturity date may be one year or more beyondDecember 31, 2005, as the Company viewed its investment securities as availablefor use in its current operations.  As ofApril 1, 2006, based upon recent operating results and expectations of futureoperating income, the Company classified certain investment securities withremaining maturities of one year or more to be long-term investments.  We have a line of credit agreement with abrokerage firm.  Under the terms of thisagreement, we may borrow funds at a cost equal to the current Federal fundsopen rate plus 100 basis points (approximately 5.75% as of April 1, 2006).  Certain of our cash, cash equivalents andshort-term investments secure borrowings outstanding under this facility.  Funds are advanced to us under this facilityin accordance with pre-determined advance rates based on the cash andsecurities held by us in this brokerage account.  This agreement has no set expiration date andthere are no loan covenants.  As of April1, 2006, $4.1 million was outstanding under this facility, with a relatedcollateral requirement of approximately $5.5 million of our cash, cash equivalentsand investments.

 

On September 19, 2005, ourBoard of Directors authorized the repurchase of up to $30 million of our commonstock in the open market at then prevailing market prices during the periodcommencing September 19, 2005 through September 30, 2007.  Through April 1, 2006, we had repurchased644,535 shares of our common stock at a total purchase price of $9.2million.  No shares were repurchasedduring the quarter ended April 1, 2006. Any future repurchase of stock could have a significant impact on ourcash position.

 

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The development and manufacture of new lithography systems andenhancements are highly capital-intensive. In order to be competitive, we believe we must continue to makesignificant expenditures for capital equipment; sales, service, training andsupport capabilities; systems, procedures and controls; and expansion ofoperations and research and development, among many other items.  We expect that cash generated from operationsand our cash, cash equivalents and short-term investments will be sufficient tomeet our cash requirements for at least the next twelve months.  However, in the near-term, we may continue toutilize existing and future lines of credit, and other sources of financing, inorder to maintain our present levels of cash, cash equivalents andinvestments.  Beyond the next twelvemonths, we may require additional equity or debt financing to address ourworking capital or capital equipment needs. In addition, we may seek to raise equity or debt capital at any timethat we deem market conditions to be favorable. Additional financing, if needed, may not be available on reasonableterms, or at all.

 

In addition, we may seek toraise equity or debt capital at any time that we deem market conditions to befavorable.  Additional financing, ifneeded, may not be available on reasonable terms, or at all.

 

We may in the future pursueadditional acquisitions of complementary product lines, technologies orbusinesses.  Future acquisitions mayresult in potentially dilutive issuances of equity securities, the incurrenceof debt and contingent liabilities and amortization expenses and impairmentcharges related to goodwill and other intangible assets, which could materiallyadversely affect our financial condition and results of operations.  In addition, acquisitions involve numerousrisks, including difficulties in the assimilation of the operations,technologies, personnel and products of the acquired companies; the diversionof management’s attention from other business concerns; risks of enteringmarkets in which we have limited or no direct experience; and the potentialloss of key employees of the acquired company. In the event we acquire product lines, technologies or businesses whichdo not complement our business, or which otherwise do not enhance our sales oroperating results, we may incur substantial write-offs and higher recurringoperating costs, which could have a material adverse effect on our business,financial condition and results of operations. In the event that any such acquisition does occur, there can be noassurance as to the effect thereof on our business or operating results.

 

**ForeignCurrency**

 

As part of our overall strategyto manage the level of exposure to the risk of foreign currency exchange ratefluctuations, we attempt to hedge most of our Japanese yen denominated foreigncurrency exposures.  We use foreigncurrency forward contracts to hedge the risk that unremitted Japanese yendenominated receipts from customers, for actual or forecasted sales ofequipment after receipt of customer orders, may be adversely affected bychanges in foreign currency exchange rates. After recording revenue, we use various mechanisms, such as foreigncurrency forward exchange contracts and natural hedges, to offset substantialportions of the potential gains or losses associated with our Japanese yendenominated assets and liabilities due to exchange rate fluctuations.  At April 1, 2006, we had taken action tohedge approximately 100% of these Japanese yen denominated exposures.  In addition to natural hedges resulting fromhaving both assets and liabilities denominated in Japanese yen, we enter intoforeign currency forward contracts that generally have maturities of ninemonths or less.  We often close foreigncurrency forward contracts by entering into an offsetting contract.  At April 1, 2006, we had contracts for thesale of $9.4 million of foreign currencies at fixed rates of exchange.

 

**InformationAvailable on Company Web-site**

 

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

 

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**Item 3.****        Quantitativeand Qualitative Disclosures about Market Risk**

 

Reference is made toPart II, Item 7A, “Quantitative and Qualitative Disclosures About MarketRisk” in our Annual Report on Form 10-K for the year endedDecember 31, 2005 and to the subheading “Derivative Instruments andHedging” in Item 8, “Financial Statements and Supplementary Data”, under theheading “Notes to Consolidated Financial Statements” of our Annual Report onForm 10-K for the year ended December 31, 2005.

 

**InterestRate Risk**

 

Our exposure to market risk due to potential changes in interest ratesrelates primarily to our investment portfolio, which consisted primarily offixed interest rate instruments as of April 1, 2006.  We maintain an investment policy designed toensure the safety and preservation of our invested funds by limiting marketrisk and the risk of default.

 

Certain of our cash, cash equivalents and short and long-terminvestments serve as collateral for a line of credit we maintain with abrokerage firm.  The line of credit isused for liquidity purposes, mitigating the need to liquidate investments inorder to meet our current operating cash requirements.

 

**ForeignCurrency Risk Management**

 

The majority of our revenue, expense and capital purchasing activitiesis transacted in U.S. dollars.  However,we do enter into these transactions in other currencies, primarily Japaneseyen.  To protect against reductions invalue and the volatility of future cash flows caused by changes in currencyexchange rates, we have established transaction and balance sheet hedgingprograms.  We use foreign currencyforward contracts to hedge the risk that unremitted Japanese yen denominatedreceipts from customers for actual or forecasted sales of equipment afterreceipt of customer orders may be adversely affected by changes in foreigncurrency exchange rates.  After recordingrevenue, we use various mechanisms, such as foreign currency forward exchangecontracts and natural hedges, to offset substantial portions of the potentialgains or losses associated with our Japanese yen denominated assets andliabilities due to exchange rate fluctuations. At April 1, 2006, we had taken action to hedge approximately 100% ofthese Japanese yen denominated exposures. In addition to natural hedges resulting from having both assets andliabilities denominated in Japanese yen, we enter into foreign currency forwardcontracts that generally have maturities of nine months or less.  We often close foreign currency forwardcontracts by entering into an offsetting contract.  At April 1, 2006, we had contracts forthe sale of $9.4 million of Japanese yen at fixed rates of exchange.  Our hedging programs reduce, but do notalways entirely eliminate, the impact of currency movements.

 

**Item 4.****        Controlsand Procedures**

 

We conducted an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures, as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”), as of the end of the period coveredby this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principalfinancial officer concluded that, as of the Evaluation Date, our disclosurecontrols and procedures were effective and ensure that information required tobe disclosed by us in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

Disclosure controls and procedures are controls and other proceduresthat are designed to ensure that information required to be disclosed in ourreports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’srules and forms.  Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed in our reportsfiled or submitted under the Exchange Act is accumulated and communicated tomanagement to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, our management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives.  Management is further required to applyjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.

 

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**Changes in Internal Control Over Financial Reporting**

 

There were no changes in our internal controls over financial reportingduring the quarter ended April 1, 2006 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

**PART II.****     OTHERINFORMATION**

 

**Item 1.****        LegalProceedings**

 

On February 29, 2000, we filedlawsuits asserting patent infringement and related claims against Nikon, Canon,and ASML in the U.S. District Court for the Eastern District of Virginia.  In April 2000, we reached a settlement withNikon, and in September 2001, we reached a settlement with Canon.  In the patent litigation against ASML, a jurytrial was conducted during the three-month period ended July 2, 2005.  The jury reached a verdict that the patentwas infringed, but that the asserted claims of the patent were invalid.  We filed a post-trial motion for a new trialand for judgment as a matter of law in our favor.  ASML also filed a motion for judgment as amatter of law seeking to invalidate three of the asserted claims for lack ofenablement and requested that the court award costs.  On February 13, 2006, the Court denied ourpost-trial motions, including the motion for a new trial, and entered judgmentin favor of ASML invalidating three claims of the patent for lack of enablement.  The Court also awarded ASML approximately$330,000 in costs.  Ultratech has filed anotice of appeal.  ASML has filed anotice of cross-appeal.

 

On July 11, 2003, we filed alawsuit against a Southern California company asserting infringement of certainclaims related to U.S. patent No. 5,621,813 in the U.S. District Court in andfor the Northern District of California. On May 17, 2005, the court found the subject patent to be invalid.  We appealed that decision, but, in March of2006, the Federal Circuit upheld the district court’s ruling.  We have filed a request for reconsiderationof such ruling that is still pending.

 

The defendant also brought amotion for reimbursement of its attorneys’ fees and costs in a total assertedamount of approximately $2 million.  Weopposed this motion and, on October 12, 2005, the District Court denied thedefendant’s request for attorneys’ fees in its entirety.  On November 3, 2005, the defendant filed anotice of appeal with respect to the court’s ruling on its motion for attorneys’fees, and we have filed its opposing brief in that regard.  There is not yet a ruling on that appeal norany scheduled hearing date on that appeal.  It is expected that such a ruling will occur following the scheduledhearing date and that the likely scheduled hearing date will be in the third orfourth quarter of 2006.

 

**Item 1A****     RiskFactors**

* *

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

** **

**We currently spend, and expect to continue tospend, significant resources to develop, introduce and commercialize our laserprocessing systems and AP wafer stepper products, and we may not be successfulin achieving or increasing sales of these products.**

 

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Currently, we are devoting significant resources to the development,introduction and commercialization of our laser products as well as ourlithography wafer steppers.  We intend tocontinue to develop these products and technologies during 2006, and willcontinue to incur significant operating expenses in the areas of research,development and engineering, manufacturing and general and administrative costsin order to develop, produce and support these new products.  Additionally, gross profit margins andinventory levels may be further adversely impacted in the future by costsassociated with the initial production of our laser processing systems and byfuture generations of our 1X lithography systems.  Introduction of new products generallyinvolves higher installation costs and product performance uncertainties thatcould delay customer acceptance of our systems, resulting in a delay inrecognizing revenue associated with those systems and a reduction in grossmargins.  These costs include, but arenot limited to, additional manufacturing overhead, additional inventorywrite-offs, costs of demonstration systems and facilities, costs associatedwith the establishment of additional after-sales support organizations.  Additionally, operating expenses mayincrease, relative to sales, as a result of adding additional marketing andadministrative personnel, among other costs, to support our new products.  If we are unable to achieve significantlyincreased net sales or if our sales fall below expectations, our operatingresults will be materially adversely affected.

 

Our ability to commercialize our laser processing technologies dependson our ability to demonstrate a manufacturing-worthy tool.  We do not presently have in-house capabilityto fabricate devices.  As a result, werely on partnering with semiconductor companies to develop the annealprocess.  The development of new processtechnologies is largely dependent upon our ability to interest potentialcustomers in working on joint process development.  Our ability to deliver timely solutions isalso limited by wafer turnaround at the potential customer’s fabricationfacility.

 

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

 

Sales of our systems depend, in significant part, upon the decision ofa prospective customer to increase manufacturing capacity or to restructurecurrent manufacturing facilities, either of which typically involves asignificant commitment of capital.  Manyof our customers in the past have cancelled the development of newmanufacturing facilities and have substantially reduced their capital equipmentbudgets.  In view of the significantinvestment involved in a system purchase, we have experienced and may continueto experience delays following initial qualification of our systems as a resultof delays in a customer’s approval process. Additionally, we are presently receiving orders for systems that havelengthy delivery schedules, which may be due to longer production lead times ora result of customers’ capacity scheduling requirements.  For these and other reasons, our systemstypically have a lengthy sales cycle during which we may expend substantialfunds and management effort in securing a sale. Lengthy sales cycles subject us to a number of significant risks,including inventory obsolescence and fluctuations in operating results, overwhich we have little or no control.  Inorder to maintain or exceed our present level of net sales, we are dependentupon obtaining orders for systems that will ship and be accepted in the currentperiod.  We may not be able to obtainthose orders.

 

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

 

Although we attempt to protectour intellectual property rights through patents, copyrights, trade secrets andother measures, we believe that our success will depend more upon theinnovation, technological expertise and marketing abilities of ouremployees.  Nevertheless, we have apolicy of seeking patents when appropriate on inventions resulting from ourongoing research and development and manufacturing activities.  We own 106 United States and foreign patents,which expire on dates ranging from April 2006 to April 2023 and have 97 UnitedStates and foreign patent applications pending. In addition, we have various registered trademarks and copyrightregistrations covering mainly software programs used in the operation of oursystems.  We also rely upon trade secretprotection for our confidential and proprietary information.  We may not be able to protect our technologyadequately and competitors may be able to develop similar technologyindependently.  Our pending patentapplications may not be issued or U.S. or foreign intellectual property lawsmay not protect our intellectual property rights.  In addition, litigation may be necessary toenforce our patents, copyrights or other intellectual property rights, toprotect our trade secrets, to

 

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determine the validity andscope of the proprietary rights of others or to defend against claims ofinfringement.  Such litigation hasresulted in, and in the future could result in, substantial costs and diversionof resources and could have a material adverse effect on our business,financial condition and results of operations, regardless of the outcome of thelitigation.  Patents issued to us may bechallenged, invalidated or circumvented and the rights granted thereunder maynot provide competitive advantages to us. Furthermore, others may independently develop similar technology orproducts, or, if patents are issued to us, design around the patents issued tous.  Invalidation of our patents relatedto those technologies could allow our competitors to more effectively competeagainst us, which could result in less revenue for us.

 

On February 29, 2000, we filedlawsuits asserting patent infringement and related claims against Nikon, Canon,and ASML in the U.S. District Court for the Eastern District of Virginia.  In April 2000, we reached a settlement withNikon, and in September 2001, we reached a settlement with Canon.  In the patent litigation against ASML, a jurytrial was conducted during the three-month period ended July 2, 2005.  The jury reached a verdict that the patentwas infringed, but that the asserted claims of the patent were invalid.  We filed a post-trial motion for a new trialand for judgment as a matter of law in our favor.  ASML also filed a motion for judgment as amatter of law seeking to invalidate three of the asserted claims for lack ofenablement and requested that the court award costs.  On February 13, 2006, the Court denied ourpost-trial motions, including the motion for a new trial, and entered judgmentin favor of ASML invalidating three claims of the patent for lack ofenablement.  The Court also awarded ASMLapproximately $330,000 in costs. Ultratech has filed a notice of appeal. ASML has filed a notice of cross-appeal.

 

On July 11, 2003, we filed alawsuit against a Southern California company asserting infringement of certainclaims related to U.S. patent No. 5,621,813 in the U.S. District Court in andfor the Northern District of California. On May 17, 2005, the court found the subject patent to be invalid.  We appealed that decision, but, in March of2006, the Federal Circuit upheld the district court’s ruling.  We have filed a request for reconsiderationof such ruling that is still pending.

 

The defendant also brought a motion for reimbursement of its attorneys’fees and costs in a total asserted amount of approximately $2 million.  We opposed this motion and, on October 12,2005, the District Court denied the defendant’s request for attorneys’ fees inits entirety.  On November 3, 2005, thedefendant filed a notice of appeal with respect to the court’s ruling on itsmotion for attorneys’ fees, and we have filed its opposing brief in thatregard.  There is not yet a ruling onthat appeal nor any scheduled hearing date on that appeal.  It is expected that such a ruling will occurfollowing the scheduled hearing date and that the likely scheduled hearing datewill be in the third or fourth quarter of 2006.

 

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

 

Infringement claims by third parties or claims for indemnificationresulting from infringement claims may be asserted in the future and suchassertions could materially adversely affect our business, financial conditionand results of operations, regardless of the outcome of any litigation.  With respect to any such future claims, wemay seek to obtain a license under the third party’s intellectual propertyrights.  However, a license may not beavailable on reasonable terms or at all. We could decide, in the alternative, to resort to litigation tochallenge such claims.  Such challengescould be expensive and time consuming and could materially adversely affect ourbusiness, financial condition and results of operations, regardless of theoutcome of any litigation.

 

**We operate in a highly competitive industryin which customers are required to invest substantial resources in eachproduct, which makes it difficult to achieve significant sales to a particularcustomer once another vendor’s equipment has been purchased by that customer.**

 

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The capital equipment industry in which we operate is intenselycompetitive.  A substantial investment isrequired to install and integrate capital equipment into a semiconductor,semiconductor packaging or nanotechnology device production line.  We believe that once a device manufacturer orpackaging subcontractor has selected a particular supplier’s capital equipment,the manufacturer generally relies upon that equipment for the specificproduction line application and, to the extent possible, subsequent generationsof similar products.  Accordingly, it isdifficult to achieve significant sales to a particular customer once anothersupplier’s capital equipment has been selected.

 

We experience competition in advanced packaging from various proximityaligner companies such as Suss Microtec AG (Suss Microtec), projectioncompanies such as Ushio, Inc. (Ushio), and reduction stepper companiessuch as Nikon Precision, Canon, and ASML. While we believe that the use of reduction steppers is not easilyadapted for thick resists utilized in the advanced packaging market, somedevice manufactures may consider this technology option.  In nanotechnology, we experience competitionfrom proximity aligner companies, such as Suss Microtec, as well as otherstepper manufacturers who have developed or are developing tools specificallydesigned for nanotechnology applications. We expect our competitors to continue to improve the performance oftheir current products and to introduce new products with improved price andperformance characteristics.  This couldcause a decline in sales or loss of market acceptance of our steppers in ourserved markets, and thereby materially adversely affect our business, financialcondition and results of operations. Enhancements to, or future generations of, competing products may be developedthat offer superior cost of ownership and technical performance features.

 

With respect to our laser annealing technologies, marketed under theLSA100 product name, the primary competition comes from companies such asApplied Materials, Inc., and Dainippon Screen Manufacturing Co., LTD.  Many of these companies offer productsutilizing rapid thermal processing, or RTP, which is the current prevailingmanufacturing technology.  RTP does notprevent semiconductor device manufacturers from scaling the lateral dimensionsof their transistors to obtain improved performance, but diffusion resultingfrom the time scales associated with RTP limits the vertical dimension of thejunctions.  Faster annealing times resultin shallower and more abrupt junctions and faster transistors.  We believe our annealing technology resultsin faster transistors for a given size. We believe that RTP manufacturers recognize the need to reduce thermalcycle times and are working toward this goal. In July 2000, we licensed certain rights to our then existing laserprocessing technology, with reservations, to a competing manufacturer ofsemiconductor equipment.  We presentlyanticipate that this company will offer laser-annealing tools to thesemiconductor industry that will compete with our offerings.

 

Another potential advanced annealing solution utilizes flash lampannealing technology, or FLA.  Severalcompanies have published papers on annealing tools that incorporate flash lamptechnology in order to reduce annealing times and increase annealtemperatures.  Developers of FLAtechnology claim to have overcome annealing difficulties at the 65nm node.  This technique, which employs xenon flashlamps, has shown improvements over RTP in junction depth and sheet resistance,but we believe FLA will suffer from pattern-related non-uniformities and couldrequire additional, costly processes to reduce the reflectivity of differentareas within the chip or wafer.  Ourproprietary laser processing solution has been specifically developed toprovide junction annealing on near-instantaneous time-scales, while maintaininglow sheet resistance.  Laser spikeannealing, the first implementation of laser processing, activates dopants inthe microsecond-to-millisecond time frame without melting.  Our research indicates that, at temperaturesjust below the melting point of silicon, time durations in the microsecond tomillisecond range, are required to achieve full activation, and dopantdiffusion is minimal.

 

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

 

We believe that in order to be competitive, we will need to continue toinvest significant financial resources in new product development, new featuresand enhancements to existing products, the introduction of new stepper systemsin our served markets on a timely basis, and maintaining customer service andsupport centers worldwide.  In marketingour products, we may also face competition from vendors employing othertechnologies.  In addition, increasedcompetitive pressure has led to intensified price-based competition in certainof our markets, resulting in lower prices and margins.  Should these competitive trends continue, ourbusiness, financial condition and operating results may be materially adverselyaffected.

 

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

 

Historically, we have sold a substantial portion of our systems to alimited number of customers.  In thefirst quarter of 2006, our top five customers accounted for 71% of our totalsystem sales.  In 2005 and 2004, IntelCorporation accounted for 13% and 10% of our net sales.  We expect that sales to a relatively fewcustomers will continue to account for a high percentage of our net sales inthe foreseeable future and believe that our financial results depend insignificant part upon the success of these major customers and our ability tomeet their future capital equipment needs. Although the composition of the group comprising our largest customersmay vary from period to period, the loss of a significant customer or anyreduction in orders by a significant customer, including reductions due tomarket, economic or competitive conditions in the semiconductor, semiconductorpackaging or nanotechnology industries or in the industries that manufactureproducts utilizing integrated circuits, thin film heads or other nanotechnologycomponents, would likely have a material adverse effect on our business,financial condition and results of operations. Our ability to maintain or increase our sales in the future depends, inpart, on our ability to obtain orders from new customers as well as thefinancial condition and success of our existing customers, the semiconductorand nanotechnology industries and the economy in general.

 

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

 

On a market application basis, sales to the semiconductor industry,primarily for advanced packaging applications, accounted for approximately 95%and 63% of system revenue for the first three months of 2006 and 2005,respectively.  During the first quarterof 2006 and 2005, approximately 5% and 37%, respectively, of our systemsrevenue was derived from sales to nanotechnology manufacturers, including microsystems, thin film head and optical device manufacturers.  Our future operating results and financialcondition would be materially adversely impacted by a downturn in any of thesemarket segments, or by loss of market share in any of these segments.  A growing portion of our backlog of systemorders is comprised of laser spike annealing tools.  To date, we have limited experience with thistechnology.  Should significant demandnot materialize, due to technical, production, market, or other factors, ourbusiness, financial position and results of operations would be materiallyadversely impacted.

 

**We rely on a limited number of outsidesuppliers and subcontractors to manufacture certain components andsubassemblies, and on single or a limited group of outside suppliers forcertain materials for our products, which could result in our inability toobtain an adequate supply of required components due to the suppliers’ failureor inability to provide such components in a timely manner, or at all, andreduced control over pricing and timely delivery of components and materials,any of which could adversely affect our results of operations.**

 

**Our manufacturing activities consist of assembling and testingcomponents and subassemblies, which are then integrated into finishedsystems.  We rely on a limited number ofoutside suppliers and subcontractors to manufacture certain components andsubassemblies.  We order one of the mostcritical components of our technology, the glass for our 1X lenses, fromexternal suppliers.  We design the1X lenses and provide the lens specifications and the glass to othersuppliers, who then grind and polish the lens elements.  We then assemble and test the optical 1Xlenses.**

 

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**We procure some of our other critical systems’ components,subassemblies and services from single outside suppliers or a limited group ofoutside suppliers in order to ensure overall quality and timeliness ofdelivery.  Many of these components andsubassemblies have significant production lead times.  To date, we have been able to obtain adequateservices and supplies of components and subassemblies for our systems in atimely manner.  However, disruption ortermination of certain of these sources could have a significant adverse impacton our ability to manufacture our systems. This, in turn, would have a material adverse effect on our business,financial condition and results of operations. Our reliance on a sole supplier or a limited group of suppliers and ourreliance on subcontractors involve several risks, including a potentialinability to obtain an adequate supply of required components due to thesuppliers’ failure or inability to provide such components in a timely manner,or at all, and reduced control over pricing and timely delivery ofcomponents.  Although the timeliness,yield and quality of deliveries to date from our subcontractors have beenacceptable, manufacture of certain of these components and subassemblies is anextremely complex process, and long lead-times are required.  Any inability to obtain adequate deliveries orany other circumstance that would require us to seek alternative sources ofsupply or to manufacture such components internally could delay our ability toship our products, which could damage relationships with current andprospective customers and have a material adverse effect on our business,financial condition and results of operations.**

** **

**The semiconductor industry historically hasbeen highly cyclical and has experienced periods of oversupply, which has inturn affected the market for semiconductor equipment such as ours and whichcould adversely affect our results of operations during such periods.**

** **

**Our** business depends insignificant part upon capital expenditures by**manufacturersof semiconductors, advanced packaging semiconductors and nanotechnologycomponents, including thin film head magnetic recording devices, which in turndepend upon the current and anticipated market demand for such devices andproducts utilizing such devices.  Thesemiconductor industry historically has been highly cyclical and hasexperienced recurring periods of oversupply. This has, from time to time, resulted in significantly reduced demandfor capital equipment including the systems manufactured and marketed byus.  We believe that markets for newgenerations of semiconductors and semiconductor packaging will also be subjectto similar fluctuations.  Our businessand operating results would be materially adversely affected by downturns orslowdowns in the semiconductor packaging market or by loss of marketshare.  Accordingly, we may not be ableto achieve or maintain our current or prior level of sales.  We attempt to mitigate the risk of cyclicalityby participating in multiple markets including semiconductor, semiconductorpackaging, and nanotechnology sectors, as well as diversifying into new marketssuch as laser-based annealing for implant activation and otherapplications.  Despite such efforts, whenone or more of such markets experiences a downturn or a situation of excesscapacity, our net sales and operating results are materially adverselyaffected.

** **

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** **

**Our industry is subject to rapidtechnological change and product innovation, which could result in ourtechnologies and products being replaced by those of our competitors, whichwould adversely affect our business and results of operations.**

 

**The semiconductor and nanotechnology manufacturing industries aresubject to rapid technological change and new product introductions andenhancements.  Our ability to becompetitive in these and other markets will depend, in part, upon our abilityto develop new and enhanced systems and related software tools, and tointroduce these systems and related software tools at competitive prices and ona timely and cost-effective basis to enable customers to integrate them intotheir operations either prior to or as they begin volume productmanufacturing.  We will also be requiredto enhance the performance of our existing systems and related softwaretools.  Our success in developing new andenhanced 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 commitmentsmust be made well in advance of sales, new product decisions must anticipateboth future demand and the technology that will be available to meet thatdemand.  We may not be successful inselecting, developing, manufacturing or marketing new products and relatedsoftware tools or enhancing our existing products and related softwaretools.  Any such failure would materiallyadversely affect our business, financial condition and results of operations.**

 

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

 

We may encounter additional technical, manufacturing or otherdifficulties that could further delay future introductions or volume productionof systems or enhancements.  Ourinability to complete the development or meet the technical specifications ofany of our systems or enhancements and related software tools, or our inabilityto manufacture and ship these systems or enhancements and related softwaretools in volume and in time to meet the requirements for manufacturing thefuture generation of semiconductor or nanotechnology devices would materiallyadversely affect our business, financial condition and results ofoperations.  In addition, we may incursubstantial unanticipated costs to ensure the functionality and reliability ofour products early in the products’ life cycles.  If new products have reliability or qualityproblems, reduced orders or higher manufacturing costs, delays in customeracceptance, revenue recognition and collecting accounts receivable andadditional service and warranty expenses may result.  Any of such events may materially adverselyaffect our business, financial condition and results of operations.

** **

**A substantial portion of our sales is outsideof the United States, which subjects us to risks related to customer service,installation, foreign economic and political stability, uncertain regulatoryand tax rules, and foreign exchange rate fluctuations, all of which make itmore difficult to operate our business.**

 

**International sales accounted for approximately 60% and 74% of totalnet sales for the three months ended April 1, 2006 and April 2, 2005,respectively.  We anticipate thatinternational sales, which typically have lower gross margins than domesticsales, principally due to increased competition and higher field service andsupport costs, will continue to account for a significant portion of total netsales.  As a result, a significantportion of our net sales will continue to be subject to certain risks,including unexpected changes in regulatory requirements; difficulty insatisfying existing regulatory requirements; exchange rate fluctuations;tariffs and other barriers; political and economic instability; difficulties inaccounts receivable collections; natural disasters; difficulties in staffingand managing foreign subsidiary and branch operations; and potentially adversetax consequences.**

 

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Although we generally transact our international sales in U.S. dollars,international sales expose us to a number of additional risk factors, includingfluctuations in the value of local currencies relative to the U.S. dollar, which,in turn, impact the relative cost of ownership of our products and may furtherimpact the purchasing ability of our international customers.  However, in Japan, we have direct salesoperations and orders are often denominated in Japanese yen.  This may subject us to a higher degree ofrisk from currency fluctuations.  Weattempt to mitigate this exposure through the use of foreign currency forwardexchange contracts.  We are also subjectto the risks associated with the imposition of legislation and regulationsrelating to the import or export of semiconductors and nanotechnologyproducts.  We cannot predict whether theUnited States or any other country will implement changes to quotas, duties,taxes or other charges or restrictions upon the importation or exportation ofour products.  These factors, or theadoption of restrictive policies, may have a material adverse effect on ourbusiness, financial condition and results of operations.

** **

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

 

Our future operating results depend, in significant part, upon thecontinued contributions of key personnel, many of whom would be difficult toreplace.  Most of our employees areemployed “at will.”  We have entered intoemployment agreements with only a limited number of our employees, includingour Chief Executive Officer, President, Chief Financial Officer and Senior VicePresident World-wide Sales and Customer Operations.   Some of these agreements contain vestingacceleration and severance payment provisions that could result in significantcosts or charges to us should the employee be terminated without cause, die orhave a disability.  We do not maintainany life insurance on any of our key people. The loss of key personnel could have a material adverse effect on ourbusiness, financial condition and results of operations.  In addition, our future operating resultsdepend in significant part upon our ability to attract and retain otherqualified management, manufacturing, technical, sales and support personnel forour operations.  There are only a limitednumber of persons with the requisite skills to serve in these positions and itmay become increasingly difficult for us to hire such personnel over time.  At times, competition for such personnel hasbeen intense, particularly in the San Francisco Bay Area where we maintain ourheadquarters and principal operations. We may not be successful in attracting or retaining such personnel inthe future.  The failure to attract orretain such persons would materially adversely affect our business, financialcondition and results of operations.

** **

**Changes in financial accounting standards orpolicies in the past have affected, and in the future may affect, our reportedresults of operations.**

 

We prepare our financial statements in conformity with accountingprinciples generally accepted in the United States, or U.S. GAAP.  These principles are subject tointerpretation by the Financial Accounting Standards Board (FASB), the AmericanInstitute of Certified Public Accountants (AICPA), the Securities and ExchangeCommission (SEC) and various bodies formed to interpret and create appropriateaccounting policies.  A change in thosepolicies can have a significant effect on our reported results and may affectour reporting of transactions completed before a change is announced.

 

Accounting policies affecting many other aspects of our business,including rules relating to revenue recognition, off-balance sheettransactions, employee stock options, restructurings, asset disposals and assetretirement obligations, intangible assets, derivative and other financialinstruments, and in-process research and development charges, have recentlybeen revised or are under review. Changes to those rules or the questioning of how we interpret orimplement those rules may have a material adverse effect on our reportedfinancial results or on the way we conduct business.  In addition, our preparation of financialstatements in accordance with U.S. GAAP requires that we make estimates andassumptions that affect the recorded amounts of assets and liabilities, disclosureof those assets and liabilities at the date of the financial statements and therecorded amounts of expenses during the reporting period.  A change in the facts and circumstancessurrounding those estimates could result in a change to our estimates and couldimpact our future operating results.

 

**Changes in securities laws and listingstandards, in particular those that have resulted from the passage of theSarbanes-Oxley Act of 2002 and related rules and regulations, haveincreased our legal and financial costs. We expect to continue to spend significant resources to comply withthese requirements.**

 

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The Sarbanes-Oxley Act of 2002 required changes in our corporategovernance, public disclosure and compliance practices.  The number of rules and regulationsapplicable to us has increased, and will continue to increase, our legal andfinancial compliance cost and has made some activities more difficult, such asrequiring stockholder approval of new option plans.  In addition, we have incurred, and expect tocontinue to incur, significant costs in connection with compliance withSection 404 of the Sarbanes-Oxley Act regarding internal controls overfinancial reporting.  We incurredsignificant costs to achieve initial compliance with Section 404, and weexpect ongoing annual costs to maintain compliance to also be substantial.  We also expect these developments to make itmore difficult and more expensive to obtain director and officer liabilityinsurance, and we may be required to accept reduced coverage or incursubstantially higher costs to obtain coverage. These developments could make it more difficult for us to attract andretain qualified members of our board of directors, particularly to serve on ouraudit committee, and qualified executive officers.  In addition, in connection with ourSection 404 certification process, we may identify from time to timedeficiencies in our internal controls. Any material weakness or deficiency in our internal controls overfinancial reporting could materially and negatively impact our reportedfinancial results and the market price of our stock could significantlydecline.  Additionally, adverse publicityrelated to the disclosure of a material weakness or deficiency in internalcontrols over financial reporting could have a negative impact on ourreputation, business and stock price.

** **

**Our shareholder rights plan, equity incentiveplans, certain provisions of our Certificate of Incorporation and Bylaws, andDelaware law may discourage third parties from pursuing a change of controltransaction with us.**

 

Certain provisions of our Certificate of Incorporation, equityincentive plans, Shareholder Rights Plan, licensing agreements, Bylaws andDelaware law may discourage certain transactions involving a change in controlof our company.  In addition to theforegoing, our classified board of directors, the shareholdings of Ultratech’sofficers, directors and persons or entities that may be deemed affiliates andthe ability of the Board of Directors to issue “blank check” preferred stockwithout further stockholder approval could have the effect of delaying,deferring or preventing us from experiencing a change in control and mayadversely affect the voting and other rights of holders of our common stock.

** **

**Our stock price has experienced significantvolatility in the past and we expect this to continue in the future as a resultof many factors, some of which could be unrelated to our operatingperformance.  Such volatility can have amajor impact on the number of shares subject to outstanding stock options thatare included in calculating our earnings per share.**

 

We believe that factors such as announcements of developments relatedto our business, fluctuations in our operating results, a shortfall in revenueor earnings, changes in analysts’ expectations, general conditions in thesemiconductor and nanotechnology industries or the worldwide or regionaleconomies, sales of our securities into the marketplace, an outbreak orescalation of hostilities, announcements of technological innovations or newproducts or enhancements by us or our competitors, developments in patents orother intellectual property rights and developments in our relationships withour customers and suppliers could cause the price of our common stock tofluctuate, perhaps substantially.  Themarket price of our common stock has fluctuated significantly in the past andwe expect it to continue to experience significant fluctuations in the future,including fluctuations that may be unrelated to our performance.

 

As of April 1, 2006, we had options to purchase approximately $6.2million shares of our common stock outstanding. Among other determinants, the market price of our stock has a majorbearing on the number of stock options outstanding that are included in theweighted-average shares used in determining our net income (loss) pershare.  During periods of extremevolatility, the impact of higher stock prices can have a materially dilutiveeffect on our net income per share.** **Additionally,****optionsare excluded from the calculation of net loss per share when we have a net lossor when the exercise price of the stock option is greater than the averagemarket price of our common stock, as the impact of the stock options would beanti-dilutive.

** **

**Our results of operations and business couldbe adversely affected by wars and other military action, as well as terroristattacks and threats and government responses thereto, especially if any suchactions were directed at us or our facilities or customers.**

 

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Terrorist attacks in the United States and elsewhere, governmentresponses thereto, and military actions in Iraq, Afghanistan and elsewhere, maydisrupt our operations or those of our customers and suppliers and may affectthe availability of materials needed to manufacture our products or the meansto transport those materials to manufacturing facilities and finished productsto customers.  In addition, any of theseevents could increase volatility in the United States and world financialmarkets, which may depress the price of our common stock and may limit thecapital resources available to us or our customers or suppliers, which couldresult in decreased orders from customers, less favorable financing terms fromsuppliers, and scarcity or increased costs of materials and components of ourproducts.  Additionally, terroristattacks directly upon us may significantly disrupt our ability to conduct ourbusiness.  Any of these occurrences couldhave a significant impact on our operating results, revenues and costs and mayresult in increased volatility of the market price of our common stock.

** **

**Item 2.****        UnregisteredSales of Equity Securities and Use of Proceeds**.

 

None.

** **

**Item 3.****        Defaultsupon Senior Securities.**

 

None.

** **

**Item 4.****        Submissionof Matters to a Vote of Security Holders.**

 

None.

 

**Item 5.****        OtherInformation.**

 

None.

 

**Item 6.****        Exhibits**

** **

10.1              Descriptionof Long-Term Incentive Compensation Plan. (Incorporated by reference to Item 1.01 of our Current Report on Form 8-Kfiled on February 3, 2006 (Commission File No. 0-22248)

 

10.2              EmploymentAgreement between Registrant and Mr. Rick Friedman, Senior Vice President,World-wide Sales and Customer Services. (Incorporated by reference to Exhibit 10.1 of our Current Report onForm 8-K filed on February 3, 2006 (Commission File No. 0-22248)

 

10.3              Formof Restricted Stock Unit Issuance Agreement for Executive Officers withEmployment Agreements

 

10.4              Formof Restricted Stock Unit Issuance Agreement for All Other Executive Officers

 

31.1              Certificationof Chief Executive Officer required pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2              Certificationof Chief Financial Officer required pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1              Certificationof Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

 

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

 

**ULTRATECH, INC.**

(Registrant)

 
|   |        |                                                |
|--------|-------------|-----------------------------------------------------|
| Date:  | May 5, 2006 |                                                | By: | /s/Bruce R. Wright |
|   |        | Bruce R. Wright                                     |
|   |        | Senior Vice President, Finance and Chief  Financial |
|   |        | Officer (Duly Authorized Officer and  Principal     |
|   |        | Financial  and Accounting Officer)                  |
|        |             |                                                     |  |  |

 

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**EXHIBIT INDEX**

 
| 10.1   |   | Description of Long-Term Incentive Compensation  Plan. (Incorporated by reference to Item 1.01 of our Current Report on  Form 8-K filed on February 3, 2006 (Commission File No. 0-22248)                                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                            |
| 10.2   |   | Employment Agreement between Registrant and  Mr. Rick Friedman, Senior Vice President, World-wide Sales and Customer  Services. (Incorporated by reference to Exhibit 10.1 of our Current Report on  Form 8-K filed on February 3, 2006 (Commission File No. 0-22248) |
|   |   |                                                                                                                                                                                                                                                                            |
| 10.3   |   | Form of Restricted Stock Unit Issuance  Agreement for Executive Officers with Employment Agreements                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                            |
| 10.4   |   | Form of Restricted Stock Unit Issuance  Agreement for All Other Executive Officers                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of Chief Executive Officer  required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of Chief Financial Officer  required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                            |
| 32.1   |   | Certification of Chief Executive Officer  and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                      |

 

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