<PAGE>

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

                                    FORM 10-Q
       QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

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

                 FOR THE QUARTERLY PERIOD ENDED                JUNE 30, 1999
                                                            -------------------



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

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

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

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

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

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

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

-------------------------------------------------------------------------------
             (Former name, former address and former fiscal year,
              if changed since last report.)


Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

                 Yes      X                 No
                       -------                   -------

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

              Class                        Outstanding as of August 9, 1999
------------------------------------    --------------------------------------
   common stock, $.001 par value                     21,367,955

<PAGE>

                             ULTRATECH STEPPER, INC.

                                      INDEX

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

ITEM 1.          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                 Condensed Consolidated Balance Sheets as of June 30, 1999 and
                 December 31,1998...................................................................     3

                 Condensed Consolidated Statements of Operations for the three months
                 ended June 30, 1999 and 1998 and the six months ended June 30, 1999
                 and 1998...........................................................................     4

                 Condensed Consolidated Statements of Cash Flows for the six months ended
                 June 30, 1999 and 1998.............................................................     5

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

ITEM 2.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................     9

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................    26


PART 2.          OTHER INFORMATION

ITEM 1.          LEGAL PROCEEDINGS..................................................................    27

ITEM 2.          CHANGES IN SECURITIES AND USE OF PROCEEDS..........................................    27

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES....................................................    27

ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................    27

ITEM 5.          OTHER INFORMATION..................................................................    27

ITEM 6.          EXHIBITS AND REPORTS ON FORM 8-K...................................................    27


SIGNATURES..........................................................................................    28
</TABLE>

                                       2

<PAGE>

PART 1.  FINANCIAL  INFORMATION
Item 1.  Condensed Consolidated Financial Statements

                             ULTRATECH STEPPER, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                      JUNE 30,              Dec. 31,
(In thousands)                                         1999                  1998*
---------------------------------------------------------------------------------------
ASSETS                                              (Unaudited)
<S>                                                 <C>                     <C>
Current assets:
        Cash, cash equivalents and
          short-term investments                    $  146,884              $  146,107
        Accounts receivable, net                        19,133                  11,899
        Inventories                                     27,576                  36,750
        Current portion of leases receivable             1,520                   2,012
        Prepaid expenses and other
          current assets                                 2,895                   5,088
---------------------------------------------------------------------------------------
Total current assets                                   198,008                 201,856

Equipment and leasehold
  improvements, net                                     21,425                  23,319

Restricted long-term investments                         5,500                   5,510

Leases receivable, net                                     949                   1,536

Intangible assets, net                                   7,621                   8,438

Other assets                                             4,989                   5,276
---------------------------------------------------------------------------------------

Total assets                                        $  238,492              $  245,935
=======================================================================================
---------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
        Notes payable                               $    1,655              $    1,881
        Accounts payable                                 6,901                   8,541
        Other current liabilities                       25,072                  25,017
---------------------------------------------------------------------------------------
Total current liabilities                               33,628                  35,439

Other liabilities                                          317                     345

Stockholders' equity:
        Common stock                                        21                      21
        Additional paid-in capital                     174,256                 174,155
        Accumulated other comprehensive
          income (loss), net                            (1,321)                    779
        Retained earnings                               31,591                  35,196
---------------------------------------------------------------------------------------
Total stockholders' equity                             204,547                 210,151
---------------------------------------------------------------------------------------

Total liabilities and stockholders' equity          $  238,492              $  245,935
=======================================================================================
</TABLE>
*  The Balance Sheet as of December 31, 1998 has been derived from
   the audited financial statements at that date.

       SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                       3

<PAGE>

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

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                 Three Months Ended          Six Months Ended
                                                --------------------       --------------------
                                                JUNE 30,    June 30,       JUNE 30,    June 30,
(In thousands, except per share amounts)         1999        1998           1999        1998
-----------------------------------------------------------------------------------------------
<S>                                             <C>         <C>            <C>         <C>
Net sales:
        Products                                $24,431     $19,020        $46,071     $43,794
        Services                                  4,853       3,375          8,992       6,383
-----------------------------------------------------------------------------------------------
Total net sales                                  29,284      22,395         55,063      50,177

Cost of sales:
        Cost of products sold                    15,111      13,940         29,060      28,039
        Cost of services                          2,878       2,208          5,987       4,027
-----------------------------------------------------------------------------------------------
Total cost of sales                              17,989      16,148         35,047      32,066
-----------------------------------------------------------------------------------------------
Gross profit                                     11,295       6,247         20,016      18,111

OPERATING EXPENSES:
        Research, development, and
          engineering                             6,765       6,841         13,302      14,014
        Amortization of goodwill                    430          34            737          72
        Selling, general, and
          administrative                          6,825       6,258         13,079      12,696
        Acquired in-process research
          and development                            --      12,566             --      12,566
-----------------------------------------------------------------------------------------------
Operating loss                                   (2,725)    (19,452)        (7,102)    (21,237)

Interest expense                                   (120)        (82)          (241)       (109)

Interest and other income, net                    1,771       1,592          3,740       3,295
-----------------------------------------------------------------------------------------------
Loss before tax benefit                          (1,074)    (17,942)        (3,603)    (18,051)

Tax benefit                                          --      (2,578)            --      (3,048)
-----------------------------------------------------------------------------------------------
Net loss                                         (1,074)    (15,364)        (3,603)    (15,003)
===============================================================================================

-----------------------------------------------------------------------------------------------
Net loss per share--basic                        ($0.05)     ($0.74)        ($0.17)     ($0.72)

Number of shares used in
  per share computations--basic                  21,264      20,895         21,194      20,864

Net loss per share--diluted                      ($0.05)     ($0.74)        ($0.17)     ($0.72)

Number of shares used in
  per share computations--diluted                21,264      20,895         21,194      20,864
===============================================================================================
</TABLE>

          SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       4

<PAGE>

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

<TABLE>
<CAPTION>
                                                                           Six Months Ended
                                                                        ----------------------
                                                                        JUNE 30,      June 30,
(In thousands)                                                            1999          1998
-----------------------------------------------------------------------------------------------
<S>                                                                     <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                ($3,603)      ($15,003)
Charges to income not affecting cash                                      6,293         17,844
Net effect of changes in operating assets
  and liabilities                                                         3,102          7,867
-----------------------------------------------------------------------------------------------
Net cash provided by operating activities                                 5,792         10,708

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures                                                     (3,210)        (8,281)
Net reduction in available-for-sale securities                            3,342         31,227
Purchase of certain assets and liabilities of Integrated
  Solutions, Inc., net of cash acquired                                      --        (19,429)
Segregation of restricted long-term investments                             (46)          (117)
-----------------------------------------------------------------------------------------------
Net cash provided by investing activities                                    86          3,400

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable                                      --          1,437
Repayment of note payable                                                  (226)            --
Net proceeds from issuance of common stock
  pursuant to employee stock plans                                          101          1,300
-----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                        (125)         2,737

Net increase in cash and cash equivalents                                 5,753         16,845

Cash and cash equivalents at beginning
  of period                                                              54,142         43,898
-----------------------------------------------------------------------------------------------

Cash and cash equivalents at end of period                              $59,895        $60,743
===============================================================================================
</TABLE>

        SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                       5

<PAGE>

                             ULTRATECH STEPPER, INC.
               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                 JUNE 30, 1999

(1)  BASIS OF PRESENTATION

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

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

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

The Company's second fiscal quarter in 1999 and 1998 ended on July 3, 1999
and July 4, 1998, respectively. For convenience of presentation, the
Company's financial statements have been shown as having ended on June 30,
1999 and June 30, 1998.

Operating results for the three-month and six-month periods ended June 30,
1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999, or any future period.

(2) INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                               June 30, 1999      Dec. 31, 1998
                                               -------------      -------------
(In thousands)                                  (Unaudited)
<S>                                            <C>                <C>
Raw materials..............................         $ 12,073           $ 19,677
Work-in-process............................            9,381              8,799
Finished products..........................            6,122              8,274
                                               -------------      -------------
                                                    $ 27,576           $ 36,750
                                               =============      =============
</TABLE>

(3) OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

<TABLE>
<CAPTION>
                                               June 30, 1999      Dec. 31, 1998
                                               -------------      -------------
(In thousands)                                  (Unaudited)
<S>                                            <C>                <C>
Salaries and benefits......................         $  4,678           $  3,865
Warranty reserves..........................            3,982              4,207
Advance billings...........................            1,340              1,694
Income taxes payable.......................            5,904              1,630
Sales returns and allowances...............            2,000              2,000
Reserve for losses on purchase order
  commitments..............................            2,972              5,849
Other......................................            4,196              5,772
                                               -------------      -------------
                                                    $ 25,072           $ 25,017
                                               =============      =============
</TABLE>

                                       6

<PAGE>

(4) COMPUTATION OF NET LOSS PER SHARE

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

<TABLE>
<CAPTION>
                                                      Three Months Ended          Six Months Ended
                                                     --------------------       --------------------
                                                     June 30,    June 30,       June 30,    June 30,
(In thousands, except per share amounts)              1999        1998           1999        1998
-----------------------------------------------------------------------------------------------------
<S>                                                  <C>         <C>            <C>         <C>
Numerator:
        Net loss                                     ($1,074)    ($15,364)      ($3,603)    ($15,003)

Denominator:
        Denominator for basic net loss per share      21,264       20,895        21,194       20,864
        Effect of dilutive employee stock options         --           --            --           --
                                                     -------     --------       -------     --------
        Denominator for diluted net loss per share    21,264       20,895        21,194       20,864
                                                     -------     --------       -------     --------
Net loss per share--basic                             ($0.05)      ($0.74)       ($0.17)      ($0.72)
                                                     =======     ========       =======     ========
Net loss per share--diluted                           ($0.05)      ($0.74)       ($0.17)      ($0.72)
                                                     =======     ========       =======     ========
</TABLE>

For the three-month and six-month periods ended June 30, 1999, options to
purchase 3,668,000 shares of Common Stock at an average exercise price of
$16.27 were excluded from the computation of diluted net loss per share as
the effect would have been antidilutive. This compares to the exclusion of
2,719,000 options at an average exercise price of $15.68 for the three-month
and six-month periods ended June 30, 1998. Options are anti-dilutive when the
Company has a net loss or when the exercise price of the stock option is
greater than the average market price of the Company's Common Stock.

(5) ACQUISITIONS

On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. (ISI), a privately held manufacturer of i-line and deep
ultra-violet reduction lithography systems. The Company accounted for this
acquisition based on the purchase method of accounting and allocated the
purchase price based on fair values of assets acquired as of the acquisition
date. As a result of this acquisition, the Company recognized an initial
charge for acquired in-process research and development (IPR&D) in the second
quarter of 1998 of $12.6 million. Based on the final purchase price, which
consisted of net cash consideration of approximately $19.2 million, $2.6
million for transaction costs and $8.9 million for assumed liabilities, the
Company adjusted the charge for acquired in-process research and development
in the fourth quarter of 1998, to a net $5.1 million. Based on the final
purchase price allocation, the excess cost over fair value of net assets was
$9.1 million, currently being amortized on a straight-line basis over a
period of three to seven years. The results of the acquired operations were
included from the date of acquisition.

The Company's management made certain assessments with respect to the
determination of all identifiable assets resulting from, or to be used in,
research and development activities as of the acquisition date. Each of these
activities was evaluated, by both interviews and data analysis, to determine
its state of development and related fair value. The Company's review
indicated that the IPR&D had not reached a state of technological feasibility
and the underlying technology had no alternative future use to the Company in
other research and development projects or otherwise. In the case of IPR&D,
fair values of the corresponding technologies were determined using an income
approach which included a discounted future earnings methodology. Under this
methodology, the value of the in-process technology is comprised of the total
present value of the anticipated net cash flows attributable to the
in-process project, discounted to net present value, taking into account the
uncertainty surrounding the successful development of the purchased IPR&D.

(6) COMPREHENSIVE LOSS

                                       7

<PAGE>

The Company adopted the Statement of Financial Accounting Standards No. 130 (FAS
130) "Reporting Comprehensive Income" in the first fiscal quarter of 1998. FAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. However it does not affect net income or total stockholders'
equity. The components of comprehensive loss are as follows:

<TABLE>
<CAPTION>
                                                       Three Months Ended June 30,         Six Months Ended June 30,
                                                     -----------------------------       ---------------------------
(Unaudited, in thousands)                                1999            1998                1999         1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>                <C>            <C>
Net loss.........................................       (1,074)        (15,364)             (3,603)      (15,003)
Accumulated other comprehensive income (loss)....
        Unrealized holding gain (loss) on
          available-for-sale securities..........       (1,083)            (66)             (2,100)           68
        Tax effect...............................           --              --                  --            --
--------------------------------------------------------------------------------------------------------------------
Comprehensive loss...............................      ($2,157)       ($15,430)            ($5,703)     ($14,935)
--------------------------------------------------------------------------------------------------------------------
</TABLE>

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

(7) COMPANY AND INDUSTRY INFORMATION

The Company adopted the Statement of Financial Accounting Standards No. 131
(FAS 131), "Disclosures about Segments of an Enterprise and Related
Information," on December 31, 1998. The new rule established standards for
public companies relating to the reporting of financial information about
operating segments. The Company operates in one business segment, which is
the manufacture and distribution of photolithography equipment to
manufacturers of integrated circuits, photomasks for the production of
integrated circuits, thin film heads and micromachined components.

                                       8

<PAGE>

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

OVERVIEW
Ultratech develops, manufactures and markets photolithography equipment
(steppers) designed to reduce the cost of manufacturing integrated circuits,
thin film heads for disk drives and micromachined components. The Company
supplies step-and-repeat systems based on one-to-one and reduction optical
technologies to customers located throughout the United States, Europe,
Asia/Pacific and Japan. These products range from low-cost systems for
high-volume manufacturing to advanced systems for cost-effective production
of leading-edge devices and for research and development applications.
Additionally, the Company manufactures and markets the UltraBeam "V" Model
electron beam pattern generation system based on vector-scan technology for
use in the development and production of photomasks for the integrated
circuits ("IC") industry.

On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. ("ISI"), a privately held manufacturer of i-line and deep
ultra-violet reduction lithography systems (the "Acquisition") for
approximately $19.2 million in cash, $2.6 million in transaction costs and
the assumption of certain liabilities.

The following discussion should be read in conjunction with the Company's
1998 Annual Report on Form 10-K, which is available upon request.

RESULTS OF OPERATIONS
The Company's operating results have fluctuated significantly in the past and
will continue to fluctuate significantly in the future. Such variability
depends upon a variety of factors, including substantial cyclicality in the
Company's target markets; various competitive factors including price-based
competition and competition from vendors employing other technologies; the
timing and terms of significant orders; lengthy sales cycles for the
Company's products; inventory and open purchase commitment reserve positions;
concentration of credit risk; the mix of products sold; lengthy development
cycles for new products; market acceptance of new products and enhanced
versions of the Company's products; delayed shipments to customers due to
customer configuration changes and other factors; acquisition activities
requiring the devotion of substantial management resources; lengthy
manufacturing cycles for the Company's products; the timing of new product
announcements and releases by the Company or its competitors; manufacturing
inefficiencies associated with the startup of new product introductions;
customer concentration; ability to volume produce systems and meet customer
requirements; patterns of capital spending by customers; product discounts;
changes in pricing by the Company, its competitors or suppliers; political
and economic instability throughout the world, in particular the Asia/Pacific
region; natural disasters; regulatory changes; and business interruptions
related to the Company's occupation of its facilities. The Company's gross
profit as a percentage of sales has been and will continue to be
significantly affected by a variety of factors, including inventory and open
purchase commitment reserve provisions; the rate of capacity utilization; the
mix of products sold; nonlinearity of shipments during the quarter; increased
competition in the Company's targeted markets; the introduction of new
products, which typically have higher manufacturing costs until manufacturing
efficiencies are realized and are typically discounted more than existing
products until the products gain market acceptance; the percentage of
international sales, which typically have lower gross margins than domestic
sales principally due to higher field service and support costs; and the
implementation of subcontracting arrangements.

The Company derives a substantial portion of its total net sales from sales
of a relatively small number of newly manufactured systems, which typically
range in price from $800,000 to $2.1 million for the Company's 1X steppers,
and $1.5 million to $4.0 million for the Company's reduction steppers.
Additionally, the Company's UltraBeam electron beam lithography system is
anticipated to sell in a range of $6.0 million to $9.0 million. As a result
of these high sale prices, the timing of recognition of revenue from a single
transaction has had and will continue to have a significant impact on the

                                       9

<PAGE>

Company's net sales and operating results. The Company's backlog at the
beginning of a period typically does not include all of the sales needed to
achieve the Company's objectives for that period. In addition, orders in
backlog are subject to cancellation, delay, deferral or rescheduling by a
customer with limited or no penalties. Consequently, the Company's net sales
and operating results for a period have been and will continue to be
dependent upon the Company obtaining orders for systems to be shipped in the
same period in which the order is received. The Company's business and
financial results for a particular period could be materially adversely
affected if an anticipated order for even one system is not received in time
to permit shipment during the particular period. Furthermore, a substantial
portion of the Company's net sales has historically been realized near the
end of each quarter. Accordingly, the failure to receive anticipated orders
or delays in shipments near the end of a particular quarter, due, for
example, to reschedulings, delays, deferrals or cancellations by customers,
additional customer configuration requirements, or to unexpected
manufacturing difficulties or delays in deliveries by suppliers due to their
long production lead times or otherwise, has caused and may continue to cause
net sales in a particular period to fall significantly below the Company's
expectations, which has and could continue to materially adversely affect the
Company's operating results for such period. In particular, the long
manufacturing cycles of the Company's Titan Wafer Stepper-Registered
Trademark- and Saturn Wafer Stepper-Registered Trademark-, and the Company's
newly acquired XLS advanced reduction stepper and 193nm small-field research
and development reduction stepper (both product lines were acquired through
the acquisition of certain assets and liabilities of ISI), and the long lead
time for lenses and other materials, could cause shipments of such products
to be delayed from one quarter to the next, which could materially adversely
affect the Company's financial condition and results of operations for a
particular quarter. Additionally, the Company has very limited experience in
the manufacture of its UltraBeam electron beam pattern generation systems.
The UltraBeam systems are extremely complex and the product has significantly
long manufacturing and sales cycles, which greatly increases the likelihood
of delays in shipments from one quarter to the next. Due to the high list
price for these systems, shipment delays would materially adversely affect
the Company's financial condition and results of operations for a particular
quarter if the shipment were delayed to the following quarter. Additionally,
the Company may experience difficulties in assimilating the operations
acquired in the Acquisition. (See " Additional Risk Factors: Development of
New Product Lines; Expansion of Operations; Assimilation of Acquired Product
Lines"). The impact of these and other factors on the Company's sales and
operating results in any future period cannot be forecast with certainty.

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

The Company presently expects that net sales for the three-month period
ending September 30, 1999 may be higher than net sales in the comparable
period in 1998. However, due to lack of order visibility, the Company can
give no assurance that it will be able to achieve or maintain its current
sales levels. The Company presently expects to recognize an operating loss
for the quarter ending September 30, 1999, and may recognize a net loss.
These losses may extend to future quarters due, in part, to the significant
level of planned research, development and engineering spending, relative to
anticipated sales; the current low rate of capacity utilization; and the
current backlog and order levels for the Company's products.

Certain of the statements contained in this report may be considered
forward-looking statements that may involve a number of risks and
uncertainties. In addition to the factors discussed herein, among other
factors that could cause actual results to differ materially include the
following: highly

                                      10

<PAGE>

competitive industry; difficulties in assimilating acquired operations;
international sales; development of new product lines; rapid technological
change; importance of timely product introductions; importance of the
Company's mix-and-match strategy; year 2000 compliance; future acquisitions;
expansion of the Company's product lines; dependence on key personnel; sole
or limited sources of supply; intellectual property matters; environmental
regulations; effects of certain anti-takeover provisions; volatility of stock
price; and the other risk factors listed from time to time in the Company's
SEC reports.

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

NET SALES
Net sales consist of revenue from system sales, spare parts sales, and
service. For the quarter ended June 30, 1999, net sales were $29.3 million,
an increase of 31% as compared with net sales of $22.4 million for the
comparable period in 1998. For the six-month period ended June 30, 1999, net
sales were $55.1 million, an increase of 10% as compared with net sales of
$50.2 million for the comparable period in 1998. Both the current quarter and
year-to-date increases, relative to the comparable periods in 1998, were
primarily attributed to improving conditions within the semiconductor
industry, which has resulted in higher capital spending levels, partially
offset by lower front-end equipment sales to the thin film head industry.
Overall, unit shipments for the three and six-month periods ended June 30,
1999 increased 54% and 17%, respectively, from the comparable periods in
1998, and the weighted-average selling price of all units sold also increased
in the respective 1999 periods, relative to the comparable periods in 1998.
Service revenue for the three and six-month periods ended June 30, 1999
increased 44% and 41%, respectively, primarily as a result of the acquisition
of ISI.

For the quarter ended June 30, 1999, international net sales were $19.7
million, as compared with $8.6 million for the comparable period in 1998. For
the six months ended June 30, 1999, international net sales were $31.3
million, as compared with $22.2 million for the comparable period in 1998.
International net sales represented 67% and 57% of total net sales for the
three and six-month periods ended June 30, 1999, respectively. This compares
to 38% and 44% for the comparable periods in 1998. The Company continues to
be cautious in its outlook for the Asian markets. The Company believes that
the severe currency and equity market fluctuations that have been experienced
recently by many of the Asian markets have resulted, and may continue to
result, in delays, deferrals and cancellations of orders of the Company's
products, particularly in the short-term, which may have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's operations in foreign countries are not generally
subject to significant exchange rate fluctuations, principally because sales
contracts for the Company's systems are generally denominated in U.S.
dollars. In Japan, however, orders are typically denominated in Japanese yen.
This may subject the Company to a higher degree of risk from currency
fluctuations. The Company attempts to mitigate this exposure through the use
of foreign exchange contracts; however, there can be no assurance of the
success of any such efforts. International sales expose the Company to a
number of additional risks, including fluctuations in the value of local
currencies relative to the U.S. dollar, which, in turn, impact the relative
cost of ownership of the Company's products. (See "Additional Risk Factors:
International Sales; Japanese Market").

The Company believes that its sales have been and may continue to be
adversely impacted by reduced capital capacity spending levels within the
semiconductor and thin film head industries. During 1997 and 1998, the
Company experienced a significant level of shipment delays and purchase order
restructuring by several of its customers, and also experienced purchase
order cancellations. There can be no assurance that this trend will not
continue in the future. Accordingly, the Company can give no assurance that
it will be able to achieve or maintain its current or prior level of sales.
Additionally, the thin film head industry is presently in the process of
transitioning from the production of magneto-resistive heads to giant
magneto-resistive heads. This transition could disrupt the flow of orders for
new equipment from the thin film head industry until, among other factors,
customer requirements are more fully

                                      11

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defined. The Company presently expects that net sales for the three-month
period ending September 30, 1999 may be higher than net sales in the
comparable period in 1998. However, due to lack of order visibility, the
Company can give no assurance that it will be able to achieve or maintain its
current sales levels.

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

GROSS PROFIT
The Company's gross profit as a percentage of net sales ("gross margin") was
38.6% for the quarter ended June 30, 1999, as compared with gross margin of
27.9% for the comparable period in 1998. On a comparative basis, gross margin
for the quarter ended June 30, 1999 was favorably impacted by higher weighted
average selling prices, the mix of products sold, higher rates of capacity
utilization and improved margins on service revenues. For the six-month
period ended June 30, 1999, gross margin was 36.4% of net sales, as compared
with 36.1% for the comparable period in 1998. This increase, as compared with
the comparable period in 1998, was primarily a result of higher
weighted-average selling prices.

The Company believes that gross margins for the second half of 1999 will
fluctuate. Intense competition in the markets the Company serves, and
continued low levels of capacity utilization may make it difficult for the
Company to increase or maintain its current gross margin percentages in the
near term. In 1998, the Company added capacity for the anticipated volume
production of several new products that are outside the Company's core
reflective and refractive optical technologies. In addition to the purchase
of significant levels of plant and equipment for these new products, the
commencement of production of the UltraBeam electron beam lithography system
has resulted and will continue to result in the purchase and retention of
significant levels of inventory to support manufacturing requirements, hiring
of additional production and manufacturing support personnel and the
incurrence of other related manufacturing overhead costs. (See "Additional
Risk Factors: Development of New Product Lines; Expansion of Operations;
Assimilation of Acquired Product Lines"). The purchase of additional
inventories will continue to result in a significantly higher risk of
obsolescence, which has required and may continue to require additional
inventory write-offs, which negatively impact gross margins. Additionally,
new products generally have lower gross margins until production and
after-sales efficiencies can be achieved. Should these new products,
including products recently acquired in the Acquisition, fail to develop or
generate significant market demand, the Company's business, financial
condition and results of operations would be materially adversely affected.

RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
The Company's research, development and engineering expenses were $6.8
million for the quarter ended June 30, 1999, as compared with $6.8 million
for the comparable period in 1998. For the six months ended June 30, 1999,
research, development, and engineering expenses were $13.3 million, as
compared with $14.0 million for the comparable period in 1998. The
year-to-date decline, as compared to the comparable period in 1998, was
primarily related to cost containment measures implemented during the second
half of 1998, partially offset by higher spending on the Company's newly
acquired reduction stepper family of products.

                                      12

<PAGE>

The Company continues to invest significant resources in the development and
enhancement of its UltraBeam lithography system and in the development of its
Verdant rapid thermal annealing/laser doping systems and technologies,
together with continuing expenditures for its 1X and reduction optical
products and technologies. The Company presently expects the absolute dollar
amount of research, development and engineering expenses for the quarter
ending September 30, 1999 may be flat to higher than the comparable period a
year ago. (See "Additional Risk Factors: Development of New Product Lines;
Expansion of Operations; Assimilation of Acquired Product Lines").

AMORTIZATION OF GOODWILL
Amortization of goodwill was $430,000 for the quarter ended June 30, 1999, as
compared with $34,000 for the comparable period in 1998. On a year-to-date
basis, amortization of goodwill was $737,000 for the six-month period ended
June 30, 1999, as compared with $72,000 for the comparable period in 1998.
The additional amortization expense was directly related to intangible assets
resulting from the Acquisition.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $6.8 million for the
quarter ended June 30, 1999, as compared with $6.3 million for the comparable
period in 1998. As a percentage of net sales, selling, general and
administrative expenses declined to 23.3% for the quarter ended June 30,
1999, as compared to 27.9% of net sales for the comparable period in 1998.
For the six months ended June 30, 1999, selling, general, and administrative
expenses were $13.1 million, as compared with $12.7 million for the
comparable period in 1998. As a percentage of net sales, selling, general,
and administrative expenses decreased to 23.8% for the six months ended June
30, 1999, as compared with 25.3% for the comparable period in 1998. Both the
current quarter and year-to-date increases in absolute dollars, as compared
with the comparable periods in 1998, were primarily due to higher sales,
service and support expenses typically associated with an increase in sales;
expenses associated with the reduction stepper operations acquired in June of
1998; and higher expenses in Japan, as a result of the establishment of a
direct sales force and demonstration facility. The Company presently
anticipates that selling, general and administrative expenses for the
remainder of 1999 may increase significantly, relative to pre-charge levels
for the comparable periods in 1998, due primarily to higher anticipated sales
and marketing expenses.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
During the quarter ended June 30, 1998, the Company completed the acquisition
of substantially all of the assets and the assumption of certain liabilities
of ISI, a privately held manufacturer of i-line and deep ultra-violet (DUV)
reduction lithography systems. As a result of this Acquisition, the Company
recognized a charge in the quarter ended June 30, 1998 for acquired
in-process research and development expense of $12.6 million, or $0.60 per
share, net of tax benefits.

INTEREST AND OTHER INCOME, NET
Interest and other income, net, which consists primarily of interest income,
was $1.8 million for the quarter ended June 30, 1999, as compared with $1.6
million for the comparable period in 1998. For the six months ended June 30,
1999, interest and other income, net, was $3.7 million, as compared with $3.3
million for the comparable period in 1998. Both the current quarter and
year-to-date increases, as compared with the comparable periods in 1998, were
primarily attributed to higher rates of interest as a direct result of
converting the Company's investment portfolio from municipal to fully taxable
securities.

TAX BENEFIT
The Company did not recognize an income tax benefit on its pre-tax loss for
the three and six-month periods ended June 30, 1999, due to uncertainty
related to the utilization of its net operating loss carryforward. During the
three and six month periods ended June 30, 1998, the Company recognized a tax
benefit of $2.6 million, and $3.0 million, respectively, primarily as a
result of the carry back of certain tax benefits.

                                      13

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $5.8 million for the six
months ended June 30, 1999, as compared with $10.7 million during the
comparable period in 1998. Positive cash flows from operating activities
during the six-month period ended June 30, 1999 were primarily attributed to
a reduction in inventories of $9.2 million, a tax refund of $7.7 million and
non-cash charges to income of $6.3 million, partially offset by an increase
in accounts receivable of $7.2 million, a reduction in accrued liabilities of
$4.2 million, a net loss of $3.6 million and a reduction in accounts payable
of $1.6 million.

The increase in accounts receivable, as compared with December 31, 1998, was
primarily attributed to a combination of higher sales levels and lower levels
of accounts receivable sales to third parties, partially offset by improved
collections. The Company sells certain of its accounts and leases receivable
in order to mitigate its credit risk and to enhance cash flow. Sales of
accounts receivable typically precede final customer acceptance of the
system. Among other terms and conditions, the agreements include provisions
that require the Company to repurchase receivables if certain conditions are
present including, but not limited to, disputes with the customer regarding
suitability of the product, and from time-to-time the Company has repurchased
certain accounts receivable in accordance with these terms. At June 30, 1999,
$5.3 million of sold accounts receivable and approximately $9.9 million of
sold leases receivable were outstanding to third-party financial
institutions. The Company may continue to attempt to mitigate the impact of
extended payment terms and non-linear shipments by selling up to a
substantial portion of its accounts receivable in the future. There can be no
assurance that this financing will be available on reasonable terms, or at
all.

The Company believes that because of the relatively long manufacturing cycle
of certain of its systems, particularly newer products, the Company's
inventories will continue to represent a significant portion of working
capital. Additionally, as of June 30, 1999, the Company had approximately
$4.7 million of net inventories and $7.0 million of net long-lived assets
related to several new product lines. As such, these assets may be subject to
a greater risk of impairment, which could materially adversely affect the
Company's operating results and financial condition.

During the six months ended June 30, 1999, the Company generated $0.1 million
of cash from its investing activities, as cash generated from a net reduction
in "available-for-sale" securities of $3.3 million was partially offset by a
cash investment of $3.2 million for capital expenditures.

Cash used in financing activities was $0.1 million during the six-month
period ended June 30, 1999, primarily a result of the repayment of a note
payable.

At June 30, 1999, the Company had working capital of $164.4 million. The
Company's principal source of liquidity at June 30, 1999 consisted of $146.9
million in cash, cash equivalents and short-term investments.

The development and manufacture of new lithography systems and enhancements
are highly capital-intensive. In order to be competitive, the Company must
continue to make significant expenditures for capital equipment, sales,
service, training and support capabilities; investments in systems,
procedures and controls; expansion of operations and research and
development, among many other items. The Company expects that anticipated
cash flows from operations and its cash, cash equivalents and short-term
investments will be sufficient to meet the Company's cash requirements for
the next twelve months. Beyond the next twelve months, the Company may
require additional equity or debt financing to address its working capital or
capital equipment needs. Additionally, the Company may in the future pursue
additional acquisitions of complementary product lines, technologies or
businesses. Future acquisitions by the Company may result in potentially
dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and
other intangible assets, which could materially adversely affect any Company
profitability. In addition,

                                      14

<PAGE>

acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies and products of the acquired
companies; the diversion of management's attention from other business
concerns; risks of entering markets in which the Company has no or limited
direct experience; and the potential loss of key employees of the acquired
company. In the event the Company acquires product lines, technologies or
businesses which do not complement the Company's business, or which otherwise
do not enhance the Company's sales or operating results, the Company may
incur substantial write-offs and higher recurring operating costs, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In the event that any such acquisition
does occur, there can be no assurance as to the effect thereof on the
Company's business or operating results. Additionally, the Company may
experience renewed interest in its equipment leasing program and this may
result in the further formation of significant long-term receivables, which,
in turn, would require the use of substantial amounts of working capital. The
formation of significant long-term receivables and the granting of extended
customer payment terms exposes the Company to additional risks, including
potentially higher customer concentration and higher potential operating
expenses relating to customer defaults. During the three-month periods ended
September 30, 1998 and December 31, 1998, the Company took significant
reserves against certain leases receivable, which are currently
non-performing. If additional defaults on lease receivables were to occur,
the Company's business, financial condition and results of operations would
be materially adversely affected. To the extent that the Company's financial
resources are insufficient to fund the Company's activities, additional funds
will be required. There can be no assurance that additional financing will be
available on reasonable terms, or at all.

YEAR 2000 READINESS DISCLOSURE:

Many currently installed computer systems and software products are coded to
accept only two digit entries in the attached date code field. Beginning in
the year 2000, these date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, in
less than six months, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" (Y2K) requirements.
The Company has provided an assessment, below, of the state of readiness of
its information and non-information technology systems, together with a
summary of the status of related testing, remediation and implementation. The
Company presently estimates that the total cost for the entire Y2K project
will approximate $1.0 million and that the remaining project cost is
approximately $100,000. The Company plans to fund these remaining costs from
cash generated by operations or from cash and short-term investments on hand.
However additional requirements may be identified and unscheduled costs may
be incurred as the project proceeds. Accordingly, there can be no assurance
that the Company, or its vendors, will be able to timely and cost-effectively
update its products to avoid Y2K date errors, and this may result in material
costs to the Company, including costs associated with detecting and fixing
such errors and costs incurred in litigation due to any such errors.

Many commentators have predicted that a significant amount of litigation will
arise out of year 2000 compliance issues and the Company is aware of several
such suits that are currently pending. Because of the unprecedented nature of
such litigation and the highly technical nature of the Company's products,
there can be no assurance that the Company will not be materially adversely
affected by claims related to Y2K compliance. Although the Company presently
believes that it has made required changes to the software in its products,
it believes that the most likely worst case scenario is from unknown impacts
to its customers' manufacturing processes, which could potentially adversely
impact product yields and throughput. In addition to possible litigation, the
Company could incur substantially higher product returns and warranty related
expenses, either of which could materially adversely affect the Company's
business, financial condition and results of operations. Additionally, the
Company's customers may be required to devote substantial financial resources
to their own internal Y2K audit and compliance. This may result in fewer
financial resources available to purchase the Company's products, fewer
system sales by the Company, and could have a material adverse affect on the
Company's business, financial condition and results of operations. The
Company believes that its own Y2K efforts

                                      15

<PAGE>

have resulted, and will continue to result in, a diversion of management and
financial resources, which has further resulted in the delay or deferral of
various information technology and engineering projects.

INFORMATION TECHNOLOGY SYSTEMS:
The Company has commenced, for all of its information systems, a Y2K
conversion project to address necessary code changes, testing, and
implementation and contingency plans. The Company has completed testing and
verification of its primary business/information system and has identified
the significant potential risks associated with Y2K. The Company believes it
has remedied these potential errors and has completed the related compliance
testing. The Company has also provided for contingency plans to further
minimize risks to its business system associated with Y2K.

Although the Company is not aware of any remaining material operational
issues or costs associated with preparing its internal systems for Y2K, there
can be no assurance that the Company will not experience serious
unanticipated negative consequences and/or material costs caused by
undetected errors or defects in technology used in its internal operating
systems, which are composed primarily of third party software and hardware
technology. Additionally, although the Company has made inquiries of its key
information technology vendors, and is in the process of collecting and
reviewing survey responses, the Company believes it will not be able to
obtain adequate assurances from all its key vendors. Even where assurances
are received from third parties, there remains a risk that failure of systems
and products of other companies on which the Company relies could have a
material adverse affect on the Company. Accordingly the Company continues to
assess the degree of risk to the Company and is preparing contingency plans.
The Company is presently working to minimize risk from vendors through
understanding and implementing necessary remediation and/or contingency
plans. There can be no assurance that such contingency plans will be adequate
and that the Company will not incur significant additional costs or business
interruptions in connection with such transition, either of which could have
a material adverse affect on the Company's business, financial condition and
results of operations.

NON-INFORMATION TECHNOLOGY SYSTEMS:
The Company has commenced, for all of its key vendors, physical plant and
software contained in the products it sells, a Y2K conversion project to
address necessary remediation, testing, implementation and contingency plans.
The Company believes it has identified and implemented the required changes
for its products' hardware and software components to attain Y2K readiness
and is currently working with customers to assist in understanding these
requirements. The Company has obligations to provide these modifications to
customers with systems under warranty or currently under service contract.
The Company has commenced the process of installing and testing these
upgrades at customer sites and presently expects this process to be completed
on a timely basis. In addressing customer inquiries regarding the Company's
Y2K readiness and in making inquiries of the Company's vendors, the Company
has adopted the Sematech process for investigating and responding to the Y2K
subject. This process includes a survey form, a readiness matrix and a
testing scenario.

Although the Company has made inquiries of its key physical plant and
materials vendors in order to assess their state of readiness, and is in the
process of collecting and reviewing survey responses, the Company believes it
will not be able to obtain adequate assurances from all its key vendors. Even
where assurances are received from third parties, there remains a risk that
failure of systems and products of other companies on which the Company
relies could have a material adverse affect on the Company. Accordingly the
Company continues to assess the degree of risk to the Company and is
preparing contingency plans. These contingency plans may result, among other
things, in the development of alternative suppliers and the purchase of
additional inventories. The Company is presently working to minimize risk
from vendors through understanding and implementing necessary remediation
and/or contingency plans. There can be no assurance that such contingency
plans will be adequate and that the Company will not incur significant
additional costs or business interruptions in connection with such
transition, either of which could have a material adverse affect on the
Company's business, financial condition and results of operations.

                                      16

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The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. There can be no guarantee that
these estimates will be achieved and actual results could differ materially
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all
relevant computer codes, the nature and amount of programming required to
upgrade or replace each of the affected programs, the rate and magnitude of
related labor and consulting costs and the success of the Company's external
customers and vendors in addressing the Y2K issue. The Company's evaluation
is ongoing and it expects that new and different information will become
available to it as that evaluation continues. Consequently, there is no
guarantee that all material elements will be Y2K ready in time.

ADOPTION OF THE EURO
The Company does not presently expect that introduction and use of the Euro
will materially affect the Company's foreign exchange and hedging activities
or the Company's use of derivative instruments. Management does not expect
that the introduction of the Euro will result in any material increase in
costs to the Company and all costs, if any, associated with the introduction
of the Euro will be expensed to operations as incurred. While the Company
will continue to evaluate the impact of the Euro introduction over time,
based on currently available information, management does not believe that
the introduction of the Euro currency will have a material adverse impact on
the Company's financial condition or overall trends in results of operations.

ADDITIONAL RISK FACTORS

CYCLICALITY OF SEMICONDUCTOR AND THIN FILM HEAD INDUSTRIES     The Company's
business depends in significant part upon capital expenditures by
manufacturers of semiconductors, photomasks and thin film head magnetic
recording devices, which in turn depend upon the current and anticipated
market demand for such devices and products utilizing such devices. The
semiconductor industry is highly cyclical and historically has experienced
recurring periods of oversupply. This has, from time to time, resulted in
significantly reduced demand for capital equipment including the systems
manufactured and marketed by the Company. The Company believes that markets
for new generations of semiconductors will also be subject to similar
fluctuations. Additionally, in 1997 and 1998 the Company experienced
cancellation of purchase orders, shipment delays and purchase order
restructuring by several of its customers and there can be no assurance that
this trend will not continue in the future. Accordingly, the Company can give
no assurance that it will be able to achieve or maintain its current level of
sales.

The Company attempts to mitigate the risk of cyclicality by participating in
both the semiconductor and thin film head markets, as well as diversifying
into new markets such as photolithography for micromachining and the
development of photomasks. Despite such efforts, when one or more of such
markets experiences a downturn or slowdown, the Company's net sales and
operating results would be materially adversely affected. The Company
presently expects that net sales for the three-month period ending September
30, 1999 may be higher than net sales in the comparable period in 1998.
However, due to lack of order visibility, the Company can give no assurance
that it will be able to achieve or maintain its current sales levels. The
Company presently expects to recognize an operating loss for the quarter
ending September 30, 1999, and may recognize a net loss. These losses may
extend to future quarters due, in part, to the significant level of planned
research, development and engineering spending relative to anticipated sales;
the current low rate of capacity utilization; and the current backlog and
order levels for the Company's products.

During 1998 and 1997, approximately 50% of the Company's net sales were
derived from sales to thin film head manufacturers and micromachining
customers. The thin film head industry is highly cyclical, which has
historically resulted in recurring periods of oversupply. The Company's
business and

                                      17

<PAGE>

operating results would be materially adversely affected by a further
downturn or slowdown in the thin film head market or by loss of market share.

HIGHLY COMPETITIVE INDUSTRY     The capital equipment industry in which the
Company operates is intensely competitive. A substantial investment is
required to install and integrate capital equipment into a semiconductor or
thin film head production line. The Company believes that once a device
manufacturer has selected a particular vendor's capital equipment, the
manufacturer generally relies upon that equipment for the specific production
line application and, to the extent possible, subsequent generations of
similar products. Accordingly, it is difficult to achieve significant sales
to a particular customer once another vendor's capital equipment has been
selected. The Company experiences intense competition worldwide from a number
of leading foreign and domestic stepper manufacturers, such as Nikon Inc.
("Nikon"), Canon Inc. ("Canon"), ASM Lithography, Ltd. ("ASML") and Silicon
Valley Group ("SVG"), Inc.'s Micralign products, all of which have
substantially greater financial, marketing, technical and other resources
than the Company. Nikon supplies a 1X stepper for use in the manufacture of
liquid crystal displays and Canon, Nikon and ASML offer reduction steppers
for thin film head fabrication. Additionally, the XLS reduction stepper
product line acquired by the Company from ISI competes directly with advanced
reduction steppers offered by Canon, Nikon and ASML. The Company believes
that future thin film head production will involve manufacturing steps that
require critical feature sizes. Although the reduction stepper product lines
acquired from ISI address critical feature sizes, additional development of
these product lines may be necessary to fully address the unique requirements
of thin film head manufacturing. ASML has recently announced its intent to
compete in the low-cost lithography market. In addition, ASML and Nikon have
each introduced an i-line step-and-scan system as a lower cost alternative to
the deep ultra-violet ("DUV") step-and-scan system for use on the less
critical layers. These systems are expected to compete with widefield
steppers, such as the Saturn and Titan families, for advanced mix-and-match
applications. The Company's UltraBeam "V" model electron beam pattern
generation system competes against systems produced by ETEC Systems, Inc.;
Hitachi, Ltd.; Leica Camera AG; and JEOL, Ltd. ("Japan Electron Optical
Laboratory"). In addition, the Company believes that the high cost of
developing new lithography tools has caused its competitors to collaborate
with customers and other parties in various areas such as research and
development, manufacturing and marketing, thereby resulting in a combined
competitive threat with significantly enhanced financial, technical and other
resources. The Company expects its competitors to continue to improve the
performance of their current products. These competitors have stated that
they will introduce new products with improved price and performance
characteristics that will compete directly with the Company's products. This
could cause a decline in sales or loss of market acceptance of the Company's
steppers, and thereby materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
enhancements to, or future generations of, competing products will not be
developed that offer superior cost of ownership and technical performance
features. The Company believes that to be competitive, it will require
significant financial resources in order to continue to invest in new product
development, features and enhancements, to introduce next generation stepper
systems on a timely basis, and to maintain customer service and support
centers worldwide. In marketing its products, the Company may also face
competition from vendors employing other technologies. In addition, increased
competitive pressure has led to intensified price-based competition,
resulting in lower prices and margins. This pressure has been caused, in
part, from the relative weakness of the Japanese yen versus the U.S. dollar.
Should these competitive trends continue, the Company's business, financial
condition and operating results would continue to be materially adversely
affected. There can be no assurance that the Company will be able to compete
successfully in the future.

Foreign IC manufacturers have a significant share of the worldwide market for
certain types of ICs for which the Company's systems are used. However, the
Japanese stepper manufacturers are well established in the Japanese stepper
market, and it is extremely difficult for non-Japanese lithography equipment
companies to penetrate the Japanese stepper market. To date, the Company has
not established itself as a major competitor in the Japanese equipment market
and there can be no assurance

                                      18

<PAGE>

that the Company will be able to achieve significant sales to Japanese
manufacturers in the future. (See "International Sales; Japanese Market").

DEVELOPMENT OF NEW PRODUCT LINES; EXPANSION OF OPERATIONS; ASSIMILATION OF
ACQUIRED PRODUCT LINES     Currently, the Company is devoting significant
resources to the development, introduction and commercialization of new
products and technologies that are outside the Company's historical core
businesses. During the remainder of 1999, the Company will continue to
develop these products and will continue to incur significant operating
expenses in the areas of research, development and engineering and general
and administrative costs in order to further develop and support these new
products. Additionally, gross profit margins and inventory levels may be
further adversely impacted in the future by costs associated with the initial
production of these new product lines. These costs include, but are not
limited to, additional manufacturing overhead, additional inventory
write-offs, costs associated with managing multiple sites and the
establishment of additional after-sales support organizations. Additionally,
there can be no assurance that operating expenses will not increase, relative
to sales, as a result of adding additional marketing and administrative
personnel, among other costs, to support the Company's new products. If the
Company is unable to achieve significantly increased net sales or its sales
fall below expectations, the Company's operating results will be materially
adversely affected until, among other factors, costs and expenses can be
reduced.

On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of ISI, a privately
held manufacturer of i-line and DUV reduction lithography systems (the
"Acquisition"). Acquisitions involve numerous risks, including difficulties
in the assimilation of the operations, technologies and products of the
acquired companies; diversion of management's attention from other business
concerns; risks of entering markets in which the Company has no or limited
direct experience; and the potential loss of key employees of the acquired
company. In the event the Company acquires product lines, technologies or
businesses which do not complement the Company's business, or which otherwise
do not enhance the Company's sales or operating results, the Company may
incur substantial write-offs and higher recurring operating costs, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Accordingly, there can be no assurance
as to the effect of the Acquisition on the Company's business, financial
condition or operating results. In conjunction with the Acquisition,
significant intangible assets were acquired. The creation of additional
intangible assets has the impact of increasing amortization expense, which
may continue to have a material adverse affect on the Company's results of
operations should significant sales for these newly acquired product lines
not materialize.

The Company has purchased significant levels of inventory and plant and
equipment for the anticipated volume production of the UltraBeam "V" Model
electron beam lithography system. To date, the Company has shipped one
UltraBeam system to a customer. The Company believes that any future success
of this product line is dependent, in large part, on the Company's ability to
further develop this system and the customers' ability to integrate this
highly technical product into their existing processes.

In December 1997, the Company terminated its distributor relationship with
Innotech, its Japan distributor. The Company expanded its operations in Japan
during 1998, by establishing a direct sales force, leasing additional
facilities and by making significant capital expenditures for sales and
applications support. Should additional gross profit on sales to the Japan
marketplace not be sufficient to fund these expanded operations, the
Company's business, financial condition and results of operations would be
materially adversely affected.

LENGTHY SALES CYCLE     Sales of the Company's systems depend, in significant
part, upon the decision of a prospective customer to increase manufacturing
capacity or to restructure current manufacturing facilities, either of which
typically involves a significant commitment of capital. In view of the
significant investment involved in a system purchase, the Company has
experienced and may continue to experience delays following initial
qualification of the Company's systems as a result of delays in a customer's
approval process. For this and other reasons, the Company's systems typically
have a lengthy sales cycle during which the Company may expend substantial
funds and management

                                      19

<PAGE>

effort in securing a sale. Lengthy sales cycles subject the Company to a
number of significant risks, including inventory obsolescence and
fluctuations in operating results, over which the Company has little or no
control.

CUSTOMER CONCENTRATION     Historically, the Company has sold a substantial
portion of its systems to a limited number of customers. Sales to one
customer accounted for approximately 25% and 14% of the Company's net sales
in 1998 and 1997, respectively. Additionally, in 1997, a second customer
accounted for approximately 10% of the Company's net sales. For the six
months ended June 30, 1999, sales to one customer accounted for approximately
18% of the Company's total net sales. The Company expects that sales to
relatively few customers will continue to account for a high percentage of
its net sales in the foreseeable future and believes that the Company's
financial results depend in significant part upon the success of these major
customers, and the Company's ability to meet their future capital equipment
needs. Although the composition of the group comprising the Company's largest
customers may vary from period to period, the loss of a significant customer
or any reduction in orders by any significant customer, including reductions
due to market, economic or competitive conditions in the semiconductor or
magnetic recording head industries or in the industries that manufacture
products utilizing integrated circuits or thin film heads, may have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's ability to maintain or increase its
sales in the future will depend, in part, upon its ability to obtain orders
from new customers as well as the financial condition and success of its
customers and the general economy, of which there can be no assurance. (See
"Cyclicality of Semiconductor and Thin Film Head Industries").

In addition to the business risks associated with the dependence on these
major customers, these significant customer concentrations have in the past
resulted, and currently result in significant concentrations of accounts
receivable and leases receivable. In particular, sales to a relatively few
customers in the thin film head industry currently make up a significant
portion of the Company's leases receivable. The formation of significant and
concentrated long-term receivables exposes the Company to additional risks,
including the risk of default by one or more customers representing a
significant portion of the Company's total receivables. During the three
month periods ended September 30 and December 31, 1998, the Company recorded
significant reserves against its trade accounts receivable and leases
receivable. If additional lease and accounts receivable reserves were to be
required, the Company's business, financial condition and results of
operations would be materially adversely affected.

IMPORTANCE OF MIX-AND-MATCH STRATEGY     A principal element of the Company's
strategy has been to sell its 1X lithography systems to advanced
semiconductor fabrication facilities for mix-and-match applications. This
strategy depends, in significant part, upon the recognition by semiconductor
manufacturers that costs can be reduced by using the Company's systems to
perform exposure on semiconductor process layers requiring feature sizes of
0.65 microns or greater and the willingness of such manufacturers to
implement processes to lower manufacturing costs. Many semiconductor
fabrication facilities have limited or no experience with integrating
lithography tools in the manner necessary for full implementation and
acceptance of a mix-and-match manufacturing strategy, and there can be no
assurance that semiconductor manufacturers will adopt such a strategy. The
Company has designed certain of its systems to operate in a compatible manner
with its i-line and DUV reduction steppers and its competitors' reduction
steppers and step-and-scan systems, which are used to process layers with
feature sizes below 0.65 microns. The successful implementation of the
Company's strategy, however, will result in a loss of sales by manufacturers
of reduction steppers and will cause these competitors to respond with lower
prices, productivity improvements or new technical designs for their systems
that may eliminate the need for the Company's steppers or make it difficult
for the Company's systems to attain compatibility with such systems. Also,
certain of the Company's competitors, which also manufacture widefield
systems, including Nikon and Canon, are shipping their own widefield
mix-and-match lithography systems. The introduction, development and sales of
such competitive systems could materially adversely affect the Company's
business, financial condition and results of operations.

                                      20

<PAGE>

To facilitate its mix-and-match strategy, the Company has developed and is
continuing to develop a family of products. In 1995, the Company commenced
shipment and volume production of the Titan Wafer Stepper and commenced
shipment of the Saturn Wafer Stepper. Additionally, during 1997 the Company
added multiple versions of its Titan and Saturn wafer steppers in order to
more fully address the needs of the mix-and-match market. As is typical with
newly introduced systems in the capital equipment industry, the Company has
experienced and may continue to experience technical or other difficulties
with its mix-and-match family of products. The Company believes that the
market acceptance and process verification combined with volume production of
the mix-and-match family of products is of critical importance to the
successful implementation of its mix-and-match strategy and its future
financial results. Recently, this market segment of the Company's business
has experienced a pronounced downturn due, in part, to the recent prior
cyclical downturn in the semiconductor industry and the strength of the U.S.
dollar in relationship to the Japanese yen. Additionally, the Company
believes that existing capital budgets of semiconductor manufacturers are
currently focusing primarily on technology buys, and not capacity additions.
This places the Company at a disadvantage, since its one-to-one optical
stepper product line address non-critical geometries. To the extent that the
mix-and-match family of products does not achieve or maintain significant
sales due to a continued cyclical downturn in the semiconductor industry;
technical, manufacturing or other difficulties associated with these
products; lack of customer acceptance; an inability to reduce the
significantly long manufacturing cycle of these products; an inability to
increase capacity for the production of the mix-and-match family of products;
direct competition from other widefield mix-and-match and i-line
step-and-scan systems from Nikon, Canon, and ASML, among others; or any other
reason, the Company's business, financial condition and results of operations
would be materially adversely affected. In addition, the increase in
mix-and-match stepper production has resulted and will continue to result in
higher inventory levels and operating expenses. Failure to achieve or
maintain significant sales of these steppers has led and could continue to
lead, among other things, to an increase in inventory obsolescence and an
increase in expenses without corresponding sales, both of which have and
could continue to have a material adverse affect on the Company's business,
financial condition and results of operations.

RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION
The semiconductor and magnetic recording head manufacturing industries are
subject to rapid technological change and new product introductions and
enhancements. The Company's ability to be competitive in these and other
markets will depend, in part, upon its ability to develop new and enhanced
systems and related software tools, and to introduce these systems and
related software tools at competitive prices and on a timely and
cost-effective basis to enable customers to integrate them into their
operations either prior to or as they begin volume product manufacturing. The
Company will also be required to enhance the performance of its existing
systems and related software tools. Any success of the Company in developing
new and enhanced systems and related software tools depends upon a variety of
factors, including product selection, timely and efficient completion of
product design, timely and efficient implementation of manufacturing and
assembly processes, product performance in the field and effective sales and
marketing. In particular, the Company has not yet fully defined the markets
and applications for the Titan Wafer Stepper Family and the Saturn Wafer
Stepper Family and is in the process of assimilating the product lines
acquired from ISI. Because new product development commitments must be made
well in advance of sales, new product decisions must anticipate both future
demand and the technology that will be available to supply that demand. There
can be no assurance that the Company will be successful in selecting,
developing, manufacturing and marketing new products and related software
tools or enhancing its existing products and related software tools. Any such
failure would materially adversely affect the Company's business, financial
condition and results of operations.

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

                                      21

<PAGE>

Company has very little experience in manufacturing its UltraBeam electron
beam lithography system. Due to the significant manufacturing cycle time
required for the production of this system, its lengthy sales cycle, lack of
adequate documentation for the product and the complex nature of this system,
delays in production and/or shipment have resulted and will continue to
result from time to time. Due to the high selling price of this system,
delays in shipments from one quarter to the next would have a material
adverse effect on the results of operations for that quarter. Additionally,
the Company is in the process of assimilating the operations acquired in the
Acquisition and developing related marketing and product development plans.
This has resulted and could continue to result in a delay of any eventual
volume production of the products acquired. (See "Development of New Product
Lines; Expansion of Operations; Assimilation of Acquired Product Lines").

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

INTERNATIONAL SALES; JAPANESE MARKET     International sales accounted for
approximately 47% and 33% of total net sales for the years 1998 and 1997,
respectively. During the six-month period ended June 30, 1999, international
sales accounted for approximately 57% of total net sales, as compared to 44%
for the comparable period in 1998. The Company anticipates that international
sales, which typically have lower gross margins than domestic sales,
principally due to higher field service and support costs, will continue to
account for a significant portion of total net sales. As a result, a
significant portion of the Company's sales will continue to be subject to
certain risks, including unexpected changes in regulatory requirements,
difficulty in satisfying existing regulatory requirements, exchange rate
fluctuations, tariffs and other barriers, political and economic instability,
difficulties in accounts receivable collections, natural disasters,
difficulties in staffing and managing foreign subsidiary and branch
operations and potentially adverse tax consequences. Although the Company
generally transacts its international sales in U.S. dollars, international
sales expose the Company to a number of additional risk factors, including
fluctuations in the value of local currencies relative to the U.S. dollar,
which, in turn, impact the relative cost of ownership of the Company's
products and may further impact the purchasing ability of its international
customers. In Japan, however, the Company's orders are typically denominated
in Japanese yen. This may subject the Company to a higher degree of risk from
currency fluctuations. The Company attempts to mitigate this exposure through
the use of foreign exchange contracts. The Company is also subject to the
risks associated with the imposition of legislation and regulations relating
to the import or export of semiconductors and magnetic recording head
products. The Company cannot predict whether quotas, duties, taxes or other
charges or restrictions will be implemented by the United States, Japan or
any other country upon the importation or exportation of the Company's
products in the future. There can be no assurance that any of these factors
or the adoption of restrictive policies will not have a material adverse
effect on the Company's business, financial condition and results of
operations. Additionally, the Company believes that the severe currency and
equity market fluctuations that have been experienced recently by many of the
Asian markets have resulted in the past, and may continue to result, in
delays, deferrals and cancellations of orders of the Company's products,
particularly in the short-term, which will have a material adverse effect on
the Company's business, financial condition and results of operations.

Although the Company has sold a number of its systems to Japanese thin film
head manufacturers, to date, the Company has made limited sales of its
systems to Japanese semiconductor manufacturers. The

                                      22

<PAGE>

Japanese semiconductor market segment is large, represents a substantial
percentage of the worldwide semiconductor manufacturing capacity, and is
difficult for foreign companies to penetrate. The Company is at a competitive
disadvantage with respect to Japanese semiconductor capital equipment
suppliers that have been engaged for some time in collaborative efforts with
Japanese semiconductor manufacturers, and currently dominate the Japanese
stepper market. The Company believes that increased penetration of the
Japanese market is critical to its financial results and intends to continue
to invest significant resources in Japan in order to meet this objective. As
part of its strategy to penetrate the Japanese market, in 1993, the Company
entered into a distribution agreement with Innotech Corporation, a local
distributor of products. This agreement was terminated in December 1997, and
the Company expanded its operations in Japan during 1998 by establishing a
direct sales force and creating sales and applications support organizations.
(See "Additional Risk Factors: Development of New Product Lines; Expansion of
Operations; Assimilation of Acquired Product Lines").

INTELLECTUAL PROPERTY RIGHTS     Although the Company attempts to protect its
intellectual property rights through patents, copyrights, trade secrets and
other measures, it believes that any success will depend more upon the
innovation, technological expertise and marketing abilities of its employees.
Nevertheless, the Company has a policy of seeking patents when appropriate on
inventions resulting from its ongoing research and development and
manufacturing activities. The Company owns various United States and foreign
patents, which expire on dates ranging from July 2000 to December 2017, and
has various United States and foreign patent applications pending. The
Company also has various registered trademarks and copyright registrations
covering mainly software programs used in the operation of its stepper
systems. The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that the
Company will be able to protect its technology adequately or that competitors
will not be able to develop similar technology independently. There can be no
assurance that any of the Company's pending patent applications will be
issued or that foreign intellectual property laws will protect the Company's
intellectual property rights. In addition, litigation may be necessary to
enforce the Company's patents, copyrights or other intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of
infringement. Such litigation could result in substantial costs and diversion
of resources and could have a material adverse effect on the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation. There can be no assurance that any patent issued
to the Company will not be challenged, invalidated or circumvented or that
the rights granted thereunder will provide competitive advantages to the
Company. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or,
if patents are issued to the Company, design around the patents issued to the
Company.

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

Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patents or any other
intellectual property rights, there can be no assurance that infringement
claims by third parties or claims for indemnification resulting from
infringement claims in the future will not be asserted, or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations, regardless
of the outcome

                                      23

<PAGE>

of any litigation. With respect to any such future claims, the Company may
seek to obtain a license under the third party's intellectual property
rights. There can be no assurance, however, that a license will be available
on reasonable terms or at all. The Company could decide, in the alternative,
to resort to litigation to challenge such claims. Such challenges could be
extremely expensive and time consuming and could materially adversely affect
the Company's business, financial condition and results of operations,
regardless of the outcome of any litigation.

SOLE OR LIMITED SOURCES OF SUPPLY     The Company procures certain of its
critical systems' components, subassemblies and services from a single
supplier or a limited group of suppliers in order to ensure overall quality
and timeliness of delivery. To date, the Company has been able to obtain
adequate services and supplies of components and subassemblies for its
systems in a timely manner. However, disruption or termination of certain of
these sources, due to year 2000 compliance issues or other factors, could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company is relying increasingly on outside
vendors to manufacture certain components of its products. The Company's
reliance on sole or a limited group of suppliers and the Company's increasing
reliance on subcontractors involve several risks, including a potential
inability to obtain an adequate supply of required components due to the
suppliers' failure or inability to provide such components in a timely
manner, or at all, and reduced control over pricing and timely delivery of
components. Although the timeliness, yield and quality of deliveries to date
from the Company's subcontractors have been acceptable, manufacture of
certain of these components and subassemblies is an extremely complex
process, and long lead-times are required. Any inability to obtain adequate
deliveries or any other circumstance that would require the Company to seek
alternative sources of supply or to manufacture such components internally
could delay the Company's ability to ship its products, which could damage
relationships with current and prospective customers and therefore would have
a material adverse effect on the Company's business, financial condition and
results of operations. (See "Year 2000 Readiness Disclosure").

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

During the last several years, the Company has experienced an increased level
of employee turnover. The Company believes that this increase has been due to
several factors, including: the recent prior semiconductor industry slowdown,
which resulted in planned reductions in the Company's workforce during the
fourth fiscal quarter of 1996 and the third fiscal quarter of 1998; an
expanding economy within the geographic area that the Company maintains its
principal business offices, making it more difficult for the Company to
retain its employees; and the declining value of stock options granted to
employees, relative to their total compensation, as a result of the full
vesting of options granted prior to the Company's initial public offering and
significant numbers of options granted at prices well in excess of the
current market value of the Company's stock. Additionally, the Company had
recently implemented various cost-saving measures, including additional
scheduled plant shutdowns and required time-off for its employees. Due to
these and other factors, the Company may continue to experience high levels
of employee turnover, which could adversely affect the Company's business,
financial condition and results of operations.

EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS     Certain provisions of the
Company's Certificate of Incorporation, equity incentive plans, Shareholder
Rights Plan, Bylaws and Delaware law

                                      24

<PAGE>

may discourage certain transactions involving a change in control of the
Company. In addition to the foregoing, the Company's classified board of
directors, the shareholdings of the Company's officers, directors and persons
or entities that may be deemed affiliates and the ability of the Board of
Directors to issue "blank check" preferred stock without further stockholder
approval could have the effect of delaying, deferring or preventing a change
in control of the Company and may adversely affect the voting and other
rights of holders of Common Stock.

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

                                      25

<PAGE>

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to Part II, Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk" in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and to the subheading "Derivative
instruments and hedging" in Item 8, "Financial Statements and Supplementary
Data", under the heading "Notes to Consolidated Financial Statement" of the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.

                                      26

<PAGE>

PART 2:           OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS                                      None.

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

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES.                       None.

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

     The following proposals were voted upon by the Company's stockholders at
     the Annual Stockholders' Meeting held on June 3, 1999.

     1.   The following persons were elected as directors of the Company to
          serve for a term ending upon the Annual Stockholders' Meeting
          indicated beside their respective names and until their successors are
          elected and qualified:
<TABLE>
<CAPTION>
                                   Terms Ending Upon the Annual
                                       Stockholders' Meeting               Votes for          Votes Withheld
                                ------------------------------------ ---------------------- --------------------
<S>                             <C>                                  <C>                    <C>
    Tommy D. George                            2001                       20,082,215              321,661
    Gregory Harrison                           2001                       20,077,448              326,428
    Kenneth Levy                               2001                       20,082,959              320,917
</TABLE>

     2.   A proposal to approve the amendment to the Company's Employee Stock
          Purchase Plan to increase the number of shares of Common Stock
          authorized for issuance over the term of the Purchase Plan by an
          additional 500,000 shares was approved by the vote of 18,541,614
          shares for, vote of 1,704,844 shares against, and 157,418 shares
          abstained.

     3.   A proposal to ratify the appointment of Ernst & Young LLP as the
          Company's independent auditors for the fiscal year ending December 31,
          1999 was approved by the vote of 20,243,524 shares for; 87,085 shares
          voted against the proposal and 73,267 shares abstained.

ITEM 5.           OTHER INFORMATION.

                  On June 1, 1999, Mr. Bruce Wright joined the Company as Senior
                  Vice President, Finance and Chief Financial Officer (CFO). Mr.
                  Wright is responsible for all aspects of finance, legal and
                  information services. Before he joined the Company, Mr. Wright
                  served as Executive Vice President, Finance and CFO of
                  Spectrian Corporation. From 1991 through 1997, Mr. Wright was
                  CFO of Tencor Instruments until its acquisition by KLA
                  Instruments Corporation in 1997, which formed KLA-Tencor
                  Corporation. Mr. Wright holds an MBA degree in Finance and
                  Operations Management from the Massachusetts Institute of
                  Technology, a BS degree in Mechanical Engineering from the
                  California Institute of Technology, and a BA degree in Physics
                  from Pomona College.

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

                  (a) EXHIBITS

                  Exhibit 10.3.1      1993 Stock option/Stock Issuance
                                      Plan (Amended and Restated as of January
                                      4, 1999).

                  Exhibit 10.15       Employment agreement between Registrant
                                      and Mr. Bruce R. Wright, Senior Vice
                                      President, Finance and Chief Financial
                                      Officer.

                  Exhibit 27          Financial Data Schedule

                  (b) REPORTS ON FORM 8-K

                  The Company did not file any reports on Form 8-K during the
                  three months ended June 30, 1999.

                                      27
<PAGE>

                                   SIGNATURES

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

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



Date:     August 12, 1999        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)

                                      28