**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**
| **(Mark One)** |
|----------------|
| **x**          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |
| ** **     | **For the quarterly period  ended         September 30, 2006** |
|           |   |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom         to**

**Commission FileNumber      0-22248**

**ULTRATECH, INC.**

(Exact name of registrant as specified in its charter)

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

 

Registrant’stelephone 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) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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    o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large  accelerated filer  o | Accelerated filer  x | Non-accelerated filer  o |
|---------------------------------------|--------------------------------|------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    o      No    x

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practical date:

| Class                          | ** ** | **Outstanding as of October 27, 2006** |
|--------------------------------|------------|----------------------------------------|
| common stock,  $.001 par value |       | 23,191,472                             |

 

 

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**ULTRATECH, INC.**

**INDEX**
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                                   | 3      |
|----------------|-----------------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                        |   |
| **Item 1.**    | **Financial Statements**                                                                                                    | 3      |
|           |                                                                                                                        |   |
|           | Condensed Consolidated Balance Sheets as of September  30, 2006 and December 31, 2005                                  | 3      |
|           |                                                                                                                        |   |
|           | Condensed Consolidated Statements of Operations for  the three and nine months ended September 30, 2006 and October 1, 2005 | 4      |
|           |                                                                                                                        |   |
|           | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2006 and October 1, 2005          | 5      |
|           |                                                                                                                        |   |
|           | Notes to Condensed Consolidated Financial Statements                                                                        | 6      |
|           |                                                                                                                        |   |
| **Item 2.**    | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                             | 13     |
|           |                                                                                                                        |   |
| **Item 3.**    | **Quantitative  and Qualitative Disclosures About Market Risk**                                                             | 20     |
|           |                                                                                                                        |   |
| **Item 4.**    | **Controls and  Procedures**                                                                                                | 20     |
|           |                                                                                                                        |   |
| **PART II.**   | **OTHER INFORMATION**                                                                                                       | 21     |
|           |                                                                                                                        |   |
| **Item 1.**    | **Legal Proceedings**                                                                                                       | 21     |
|           |                                                                                                                        |   |
| **Item 1A.**   | **Risk Factors**                                                                                                            | 21     |
|           |                                                                                                                        |   |
| **Item 2.**    | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                            | 28     |
|           |                                                                                                                        |   |
| **Item 3.**    | **Defaults upon  Senior Securities**                                                                                        | 28     |
|           |                                                                                                                        |   |
| **Item 4.**    | **Submission of  Matters to a Vote of Security Holders**                                                                    | 28     |
|           |                                                                                                                        |   |
| **Item 5.**    | **Other Information**                                                                                                       | 29     |
|           |                                                                                                                        |   |
| **Item 6.**    | **Exhibits**                                                                                                                | 29     |
|           |                                                                                                                        |   |
| **SIGNATURES** | 30                                                                                                                          |

 

2

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**PART I.   FINANCIAL INFORMATION**

**Item1.    Financial Statements**

**ULTRATECH, INC.CONDENSED CONSOLIDATED BALANCE SHEETS**
| ** **                                          | ** **   | **Sept. 30,** | ** **   | **Dec. 31,** | ** **   |
|-----------------------------------------------------|--------------|--------------------|--------------|-------------------|--------------|
| **(In thousands)**                             | ** **   | **2006**           | ** **   | **2005***         | ** **   |
| ** **                                          | ** **   | **(Unaudited)**    | ** **   | ** **        | ** **   |
| ***ASSETS***                                        |         |               |         |              |         |
| Current assets:                                     |         |               |         |              |         |
| Cash, cash  equivalents, and short-term investments |         | $                  | 90,522       |              | $            | 141,067 |   |
| Accounts  receivable, net                           |         | 16,877             |         | 19,110            |         |
| Inventories                                         |         | 38,003             |         | 28,969            |         |
| Prepaid expenses  and other current assets          |         | 2,504              |         | 1,589             |         |
| Total current assets                                |         | 147,906            |         | 190,735           |         |
|                                                |         |               |         |              |         |
| Long-term investments                               |         | 48,060             |         | —            |         |
|                                                |         |               |         |              |         |
| Equipment and leasehold  improvements, net          |         | 21,465             |         | 25,117            |         |
|                                                |         |               |         |              |         |
| Demonstration  inventories                          |         | 5,177              |         | 3,367             |         |
|                                                |         |               |         |              |         |
| Other assets                                        |         | 3,141              |         | 3,090             |         |
|                                                |         |               |         |              |         |
| Total assets                                        |         | $                  | 225,749      |              | $            | 222,309 |   |
|                                                |         |               |         |              |         |
| ***LIABILITIES  AND STOCKHOLDERS’ EQUITY***    | *** *** | *** ***       | *** *** | *** ***      | *** *** |
| Current liabilities:                                |         |               |         |              |         |
| Notes payable                                       |         | $                  | 9,840        |              | $            | 4,289 |   |
| Accounts payable                                    |         | 11,156             |         | 8,403             |         |
| Deferred product  and services income               |         | 4,933              |         | 1,970             |         |
| Other current  liabilities                          |         | 12,286             |         | 10,892            |         |
| Total current  liabilities                          |         | 38,215             |         | 25,554            |         |
|                                                |         |               |         |              |         |
| Other liabilities                                   |         | 7,273              |         | 7,805             |         |
|                                                |         |               |         |              |         |
| Stockholders’ equity                           |         | 180,261            |         | 188,950           |         |
|                                                |         |               |         |              |         |
| Total liabilities and stockholders’ equity     |         | $                  | 225,749      |              | $            | 222,309 |   |

 

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*                    TheBalance Sheet as of December 31, 2005 has been derived from the auditedfinancial statements at that date.

*See accompanying notes to unaudited condensedconsolidated financial statements*

3

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**ULTRATECH, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **Sept. 30,**               | ** ** | **Oct. 1,**                | ** ** | **Sept. 30,** | ** ** | **Oct. 1,** | ** ** |
| **(In thousands, except per share amounts)** | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales:                                                            |       |                             |       |                            |       |   |   |   |   |
| Products                                                              |       | $                                | 30,017     |                            | $          | 26,782 |   | $ | 83,788 |   | $ | 76,216 |   |
| Services                                                              |       | 3,826                            |       | 3,567                           |       | 10,942 |   | 9,504 |   |
| Licenses                                                              |       | 100                              |       | —                          |       | 200 |   | 1,417 |   |
| Total net sales                                                       |       | 33,943                           |       | 30,349                          |       | 94,930 |   | 87,137 |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Cost of sales:                                                        |       |                             |       |                            |       |   |   |   |   |
| Cost of products sold                                                 |       | 18,713                           |       | 15,083                          |       | 49,650 |   | 43,227 |   |
| Cost of services                                                      |       | 2,780                            |       | 2,252                           |       | 7,362 |   | 6,929 |   |
| Total cost of  sales                                                  |       | 21,493                           |       | 17,335                          |       | 57,012 |   | 50,156 |   |
| Gross profit                                                          |       | 12,450                           |       | 13,014                          |       | 37,918 |   | 36,981 |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Operating  expenses:                                                  |       |                             |       |                            |       |   |   |   |   |
| Research, development, and engineering                                |       | 7,146                            |       | 5,956                           |       | 19,649 |   | 20,292 |   |
| Selling, general, and administrative                                  |       | 8,872                            |       | 7,272                           |       | 24,514 |   | 23,003 |   |
| Amortization of intangible assets                                     |       | —                           |       | —                          |       | — |   | 95 |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Operating loss                                                        |       | (3,568                           | )          | (214                            | )          | (6,245 | ) | (6,409 | ) |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Interest expense                                                      |       | (95                              | )          | (117                            | )          | (139 | ) | (307 | ) |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Interest and  other income, net                                       |       | 1,545                            |       | 1,364                           |       | 4,774 |   | 3,427 |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Income (loss)  before income tax                                      |       | (2,118                           | )          | 1,033                           |       | (1,610 | ) | (3,289 | ) |
| Provision for  income taxes                                           |       | 450                              |       | 838                             |       | 552 |   | 406 |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                                                    |       | $                                | (2,568     | )                               | $          | 195 |   | $ | (2,162 | ) | $ | (3,695 | ) |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss) per share - basic:                                 |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                                                    |       | $                                | (0.11      | )                               | $          | 0.01 |   | $ | (0.09 | ) | $ | (0.15 | ) |
| Number of shares  used in per share computations - basic              |       | 23,477                           |       | 24,129                          |       | 23,747 |   | 23,985 |   |
| Net income  (loss) per share - diluted:                               |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                                                    |       | $                                | (0.11      | )                               | $          | 0.01 |   | $ | (0.09 | ) | $ | (0.15 | ) |
| Number of shares used  in per share computations - diluted            |       | 23,477                           |       | 25,067                          |       | 23,747 |   | 23,985 |   |

 

*See accompanying notes to unaudited condensedconsolidated financial statements*

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**ULTRATECH, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                       | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | **Sept. 30,**              | ** ** | **Oct. 1,** | ** ** |
| **(In thousands)**                                                          | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| *Cash flows from operating  activities:*                                         | * *   | * *                        | * *   | * * | * * |
| Net loss                                                                         |       | $                               | (2,162     | ) | $ | (3,695 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                            |       |   |   |
| Depreciation                                                                     |       | 4,498                           |       | 4,949 |   |
| Amortization                                                                     |       | 892                             |       | 916 |   |
| Gain on disposal  of equipment                                                   |       | (5                              | )          | (7 | ) |
| Loss on sale of  short-term investments                                          |       | —                          |       | 8 |   |
| Stock-based  compensation                                                        |       | 1,431                           |       | 68 |   |
| Deferred income  taxes                                                           |       | 172                             |       | 52 |   |
| Changes in  operating assets and liabilities:                                    |       |                            |       |   |   |
| Accounts  receivable                                                             |       | 2,233                           |       | 7,644 |   |
| Inventories                                                                      |       | (9,826                          | )          | (5,502 | ) |
| Taxes receibable                                                                 |       | —                          |       | 476 |   |
| Prepaid expenses  and other current assets                                       |       | (961                            | )          | (362 | ) |
| Demonstration  inventory                                                         |       | (208                            | )          | 221 |   |
| Other assets                                                                     |       | (162                            | )          | (389 | ) |
| Accounts payable                                                                 |       | 2,753                           |       | (356 | ) |
| Deferred product  and services income                                            |       | 2,963                           |       | 185 |   |
| Deferred license  revenue                                                        |       | —                          |       | (1,041 | ) |
| Other current  liabilities                                                       |       | 1,394                           |       | 2,032 |   |
| Other liabilities                                                                |       | (532                            | )          | 303 |   |
| Net cash provided by  operating activities                                       |       | 2,480                           |       | 5,502 |   |
|                                                                             |       |                            |       |   |   |
| *Cash flows from investing  activities:*                                         | * *   | * *                        | * *   | * * | * * |
| Capital expenditures                                                             |       | (2,538                          | )          | (5,024 | ) |
| Proceeds from sale of  fixed assets                                              |       | 79                              |       | — |   |
| Purchase of investments                                                          |       | (33,355                         | )          | (89,338 | ) |
| Proceeds from sales and  maturities of investments                               |       | 37,438                          |       | 78,990 |   |
| Net cash provided by  (used in) investing activities                             |       | 1,624                           |       | (15,372 | ) |
|                                                                             |       |                            |       |   |   |
| *Cash flows from financing  activities:*                                         | * *   | * *                        | * *   | * * | * * |
| Proceeds from notes  payable                                                     |       | 52,865                          |       | 79,119 |   |
| Repayment of notes  payable                                                      |       | (47,314                         | )          | (83,158 | ) |
| Proceeds from issuance  of common stock                                          |       | 2,639                           |       | 4,848 |   |
| Repurchase of common  stock                                                      |       | (10,766                         | )          | — |   |
| Net cash provided by  (used in) financing activities                             |       | (2,576                          | )          | 809 |   |
|                                                                             |       |                            |       |   |   |
| Net effect of exchange  rate changes on cash and cash equivalents                |       | (100                            | )          | 448 |   |
|                                                                             |       |                            |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                            |       | 1,428                           |       | (8,613 | ) |
|                                                                             |       |                            |       |   |   |
| Cash and cash  equivalents at beginning of period                                |       | 36,344                          |       | 47,985 |   |
|                                                                             |       |                            |       |   |   |
| Cash and cash  equivalents at end of period                                      |       | $                               | 37,772     |   | $ | 39,372 |   |
|                                                                             |       |                            |       |   |   |
| Supplemental  disclosures of cash flow information:                              |       |                            |       |   |   |
| Other non-cash  activities                                                       |       | $                               | 797        |   | $ | 1,777 |   |
| Systems transferred  from (to) inventory to (from) equipment and other assets    |       |                            |       |   |   |

 

*See accompanying notes to unaudited condensedconsolidated financial statements*

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**Ultratech,Inc.Notes to Condensed Consolidated Financial Statements(Unaudited)September 30, 2006**

**(1)  Descriptionof Business**

Ultratech, Inc.(referred to as “Ultratech,” the “Company” and “we”) develops, manufactures andmarkets photolithography and laser thermal processing equipment formanufacturers of integrated circuits and nanotechnology components locatedthroughout North America, Europe, Japan, Taiwan and the rest of Asia.

We supply step-and-repeatphotolithography systems based on one-to-one imaging technology. Within theintegrated circuits industry, we target the market for advanced packagingapplications. Within the nanotechnology industry, our target markets includethin film head magnetic recording devices, ink jet print heads, laser diodes andLEDs (light emitting diodes). Our laser thermal processing equipment istargeted at advanced annealing applications within the semiconductor industry.

In evaluating the Company’sbusiness segments, we gave consideration to the Chief Executive Officer’sreview of financial information and the organizational structure of ourmanagement. Based on this review, we concluded that, at the present time,resources are allocated and other financial decisions are made based on ourconsolidated financial information. Accordingly, we have determined that weoperate in one business segment, which is the manufacture and distribution ofcapital equipment to manufacturers of integrated circuits and nanotechnologycomponents.

**(2)  Basis ofPresentation**

We have prepared theunaudited condensed consolidated financial statements in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand footnotes required by U.S. generally accepted accounting principles forcomplete financial statements. In the opinion of management, all adjustments,consisting of only normal recurring adjustments considered necessary for fair presentation,have been included.

Operating results for thethree and nine month periods ended September 30, 2006 are not necessarilyindicative of the results that may be expected for the year endingDecember 31, 2006, or any future period.

**USE OF ESTIMATES**— The preparation of the financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and the relateddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements. By their nature, these estimates and judgments aresubject to an inherent degree of uncertainty. On an ongoing basis, managementevaluates its estimates, including those related to inventories, warrantyobligations, purchase order commitments, asset retirement obligations, baddebts, estimated useful lives of fixed assets, asset impairment, income taxes,intangible assets, contingencies and litigation. Management bases its estimateson historical experience and on various other analyses and assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

**IMPACT OF RECENTLY ISSUEDACCOUNTING STANDARDS**— In March 2006, the FinancialAccounting Standards Board (FASB) issued Statement of Financial AccountingStandards (SFAS) No. 156, *Accounting for Servicingof Financial Assets,*which permits an entity to choose either theamortization method or the fair value method for each class of separatelyrecognized servicing assets and servicing liabilities. This statement iseffective as of the beginning of an entity’s first fiscal year that beginsafter September 15, 2006, with earlier adoption permitted. The Company does notanticipate that the adoption of SFAS No. 156 will have a material impact on itsresults of operations or statement of financial position.

In February 2006, theFASB issued SFAS No. 155, *Accounting for CertainHybrid Financial Instruments*, which permits fair valuere-measurement for any hybrid financial instruments that contain an embeddedderivative that otherwise would require bifurcation. This statement iseffective for all financial instruments acquired or issued after the beginningof an entity’s first fiscal year that begins after September 15, 2006. TheCompany does not anticipate that the adoption of SFAS No. 155 will have amaterial impact on its results of operations or statement of financialposition.

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In July 2006, the FASB issued Financial InterpretationNumber (FIN) 48, *Accounting for Uncertaintyin Income Taxes*(FIN 48) as an interpretation of SFAS No. 109, *Accounting for Income Taxes* . This Interpretation clarifiesthe accounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS 109 and prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. This Interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition. FIN 48 is effective for fiscal years beginningafter December 15, 2006. We are still evaluating what impact, if any, theadoption of this standard will have on our financial position or results ofoperations.

**(3)  Stock-BasedCompensation**

The Company has adoptedstock plans that provide for the grant to employees of stock-based awards,including stock options and restricted stock units. In addition, these planspermit the grant of non-statutory stock-based awards to be paid to consultantsand outside directors.

Prior to January 1,2006, the Company accounted for its stock plans under the provisions ofAccounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (APB No. 25) and FIN No. 44,*Accounting for Certain Transactions Involving StockCompensation* — an Interpretation of APB Opinion No. 25 aspermitted by SFAS No. 123, *Accounting for Stock-BasedCompensation*. No stock-based employee compensation was recognized inthe Condensed Consolidated Statement of Operations under SFAS No. 123 asall options granted under the Company’s stock plans had an exercise price equalto the market value of the underlying common stock on the date of grant. TheCompany adopted SFAS No. 123 (revised 2004), *Share-BasedPayment* (SFAS No. 123R), effective January 1, 2006 usingthe modified prospective transition method. Under that transition method,stock-based compensation expense recognized during the nine months endedSeptember 30, 2006 includes: (a) stock options granted prior to, but notyet vested as of, January 1, 2006, based on the grant-date fair valueestimated in accordance with the original provisions of SFAS No. 123, and(b) stock options and restricted stock units granted subsequent toJanuary 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS No. 123R. Under the modifiedprospective transition method, results for prior periods are not restated.

As a result of adoptingSFAS No. 123R on January 1, 2006, and excluding the expense relatedto restricted stock units which would have been included in the Company’sCondensed Consolidated Statements of Operations under the provisions of APBNo. 25, the Company’s Condensed Consolidated Statements of Operations forthe three and nine-month periods ended September 30, 2006 changed by thefollowing amounts compared to what the Company would have reported had itcontinued to account for share-based compensation under APB No. 25:
|                                                                       | ** ** | **Impact of adoption of SFAS No. 123R** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **(In thousands, except per share amounts)** | ** ** | **Three Months  Ended Sept. 30,  2006**                | ** ** | **Nine Months Ended  Sept. 30, 2006** | ** ** |
| Loss before  income taxes                                             |       | $                                                                     | (208       | ) | $ | (637 | ) |
| Net loss                                                              |       | $                                                                     | (208       | ) | $ | (637 | ) |
| Net loss per  share - basic                                           |       | $                                                                     | (0.01      | ) | $ | (0.03 | ) |
| Net loss per share -  diluted                                         |       | $                                                                     | (0.01      | ) | $ | (0.03 | ) |

 

Theestimated fair value of the Company’s stock-based awards, less expectedforfeitures, is amortized over the awards’ vesting period using a single grantapproach on a ratable basis for awards granted after the adoption of SFASNo. 123R and using a multiple grant approach on a straight-line basis forawards granted prior to the adoption of SFAS No. 123R.

Prior to theadoption of SFAS No. 123R, the Company presented all tax benefits ofdeductions resulting from the exercise of stock options as operating cash flowsin the Condensed Consolidated Statement of Cash Flows. SFAS No.123Rrequires cash flows resulting from tax benefits resulting from deductions inexcess of the compensation cost recognized for those options (excess taxbenefits) to be classified as financing cash flows. During the three andnine-month periods ended September 30, 2006, the excess tax benefit classifiedas finance cash inflow that would have been classified as operating cash inflowif the Company had not adopted SFAS No. 123R is immaterial.

The modified prospectivetransition method of SFAS No. 123R requires the presentation of pro formainformation for periods presented prior to the adoption of SFAS No. 123Rregarding net income (loss) and net income (loss) per share as if the Companyhad accounted for its stock plans under the fair value method of SFASNo. 123R. For pro forma purposes, fair value of stock options wasestimated using the Black-Scholes option valuation model and amortized using amultiple grant approach on a straight-line basis. The 

7

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fair value of all of theCompany’s stock-based awards was estimated assuming no expected dividends andusing estimates of expected life, volatility and risk-free interest rate at thetime of grant. The following table illustrates the effect on net income (loss)and net income (loss) per share if the Company had accounted for its stockplans under the fair value method of accounting under SFAS No. 123R:
| (In thousands, except per share amounts) | ** ** | **Three Months  Ended Oct. 1,  2005** | ** ** | **Nine Months  Ended Oct. 1,  2005** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net income  (loss) as reported                                    |       | $                                                    | 195        |                                                | $          | (3,695 | ) |
| Add:  Compensation expense recorded under APB No. 25, net of tax  |       | —                                               |       | 68                                                  |       |
| Deduct: SFAS No.  123R compensation expense, net of tax           |       | (2,941                                               | )          | (6,128                                              | )          |
| Pro forma net  loss                                               |       | $                                                    | (2,746     | )                                                   | $          | (9,755 | ) |
|                                                              |       |                                                 |       |                                                |       |
| Net income  (loss) per share - basic, as reported                 |       | $                                                    | 0.01       |                                                | $          | (0.15 | ) |
| Pro forma net  loss per share - basic                             |       | $                                                    | (0.11      | )                                                   | $          | (0.41 | ) |
|                                                              |       |                                                 |       |                                                |       |
| Net income  (loss) per share - diluted, as reported               |       | $                                                    | 0.01       |                                                | $          | (0.15 | ) |
| Pro forma net loss per  share - diluted                           |       | $                                                    | (0.11      | )                                                   | $          | (0.41 | ) |

 

The Companyrecognized stock-based compensation expense of $0.5 and $1.4 million,respectively, during the three and nine-month periods ended September 30, 2006including expenses related to restricted stock units which would have beenincluded in the Company’s Condensed Consolidated Statements of Operations underthe provisions of APB No. 25. Compensation cost capitalized as part ofinventory was immaterial during the three and nine-month periods endedSeptember 30, 2006. The total income tax benefit recognized in the Company’sCondensed Consolidated Statements of Operations during the three and nine-monthperiods ended September 30, 2006 related to all stock-based compensation wasimmaterial.

Stock Options andRestricted Stock Units

Ultratech’s 1993 StockOption Plan/Stock Issuance Plan, as amended, and its 1998 Supplemental StockOption/Stock Issuance Plan, as amended, provide for the grant of qualified andnon-qualified stock-based awards to eligible employees, consultants andadvisors, and non-employee directors of the Company and its subsidiaries. TheCompany believes that such awards better align the interests of its employeeswith those of its shareholders. As of September 30, 2006, there were atotal of 1,014 thousand shares reserved for future awards under these Plans.

The Companyanalyzed its stock-based compensation strategies prior to the adoption of SFASNo. 123R and made the decision to grant a combination of stock options andrestricted stock units rather than only stock options during the three andnine-month periods ended September 30, 2006. Option awards are generallygranted with an exercise price equal to the market price of the Company’s stockon the date of grant, expire ten years from the date of grant and currentlygenerally vest over approximately four years from the date of grant. Restrictedstock unit awards generally vest over approximately three years from the dateof grant. Certain stock options and restricted stock units provide foraccelerated vesting if there is a change in control (as defined in therespective Plan). The Company has a policy of settling employee stock optionexercises and employee stock issuances with newly issued shares of commonstock.

The fair value of theCompany’s stock options was estimated using a Black-Scholes option valuationmodel. This model requires the input of highly subjective assumptions,including expected stock price volatility and the estimated life of each award.The fair value of these stock options was estimated utilizing estimates ofdividend yield, expected life, expected volatility and risk-free interest rateat the time of grant. The Company has assumed expected dividends of zero overthe expected life of the grants. The Company uses historical exercise andpost-vesting forfeiture data, vesting characteristics, and the contractual termof the grant to estimate expected life. The Company uses historical volatilityof the Company’s stock and implied market volatility from traded options on theCompany’s stock as a basis for calculating expected volatility. As theremaining maturity for the traded options analyzed was between six and twelvemonths, the Company determined that it should not rely solely on implied marketvolatility for calculating expected volatility. The risk-free rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of grant.

8

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The fair value of theCompany’s stock options granted during the three and nine-month periods endedSeptember 30, 2006 and October 1, 2005 was estimated using the followingweighted-average assumptions:
|                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **Sept. 30,**               | ** ** | **Oct. 1,**                | ** ** | **Sept. 30,** | ** ** | **Oct. 1,** | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Expected life  (in years): stock options |       | 4.7                              |       | 3.9                             |       | 4.7 |   | 3.7 |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Risk-free  interest rate                 |       | 5.06                             | %          | 3.92                            | %          | 5.02 | % | 3.67 | % |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Volatility  factor                       |       | 0.56                             |       | 0.45                            |       | 0.55 |   | 0.48 |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Dividend yield                           |       | —                           |       | —                          |       | — |   | — |   |

 

A summary of stock option activity under the Plans asof September 30, 2006 and changes during the nine months then ended ispresented below:
| Options                                           | ** ** | **Shares (in  thousands)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic  Value (in  thousands)** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Outstanding at  December 31, 2005                 |       | 6,444                           |       | $                                       | 17.71      |                                                              | —     |                                                 | —     |   |
| Granted                                           |       | 105                             |       | $                                       | 15.26      |                                                              | —     |                                                 | —     |   |
| Exercised                                         |       | (178                            | )          | $                                       | 14.82      |                                                              | —     |                                                 | —     |   |
| Forfeited or  expired                             |       | (158                            | )          | $                                       | 21.81      |                                                              | —     |                                                 | —     |   |
| Outstanding at  September 30, 2006                |       | 6,213                           |       | $                                       | 17.65      |                                                              | 6.3        |                                                 | $          | 1,469 |   |
|                                              |       |                            |       |                                    |       |                                                              |       |                                                 |       |
| Vested or  expected to vest at September 30, 2006 |       | 6,205                           |       | $                                       | 17.65      |                                                              | 6.3        |                                                 | $          | 1,469 |   |
| Exercisable at  September 30, 2006                |       | 5,967                           |       | $                                       | 17.87      |                                                              | 6.3        |                                                 | $          | 1,107 |   |

 

The weighted-averagegrant date fair value of options granted during the three and nine-monthperiods ended September 30, 2006 was $7.04 and $7.87, respectively. The totalintrinsic value of options exercised during the three and nine-month periodsended September 30, 2006 was $0.0 and $1.2 million, respectively. The fairvalue of restricted stock units is based upon the closing trading price of theCompany’s shares on the date of grant. The total fair value of restricted stockunits that vested during the nine-month period ended September 30, 2006 was$0.1 million.

A summary of the statusof the Company’s restricted stock units as of September 30, 2006, and changesduring the nine months then ended is presented below:
| Nonvested Restricted Stock Units | ** ** | **Shares (in  thousands)** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|-----------------------------------------------------|------------|
| Nonvested at  December 31, 2005                 |       | —                     |       | N/A                                                 |       |
| Granted                                         |       | 168                        |       | $                                                   | 19.20      |   |
| Vested                                          |       | (5                         | )          | $                                                   | 19.20      |   |
| Forfeited                                       |       | (6                         | )          | $                                                   | 19.20      |   |
| Nonvested at  September 30, 2006                |       | 157                        |       | $                                                   | 19.20      |   |

 

As of September 30, 2006,there were $2.8 million of total unrecognized compensation cost related tonon-vested share-based compensation arrangements granted under the Plans. Thatcost is expected to be recognized over a weighted average period of 1.2 years.

Cash received from stockoption exercises was $0.0 and $2.6 million, respectively, during the three andnine-month periods ended September 30, 2006. The income tax benefit realizedfrom stock option exercises during the three and nine-month periods endedSeptember 30, 2006 was immaterial.

9

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** (4)  Net Income (Loss) Per Share**

The following sets forththe computation of basic and diluted net income (loss) per share:
|                                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **Sept. 30,**               | ** ** | **Oct. 1,**                | ** ** | **Sept. 30,** | ** ** | **Oct. 1,** | ** ** |
| **(In thousands, except per share amounts)** | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Numerator:                                                            |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                     |       | $                                | (2,568     | )                               | $          | 195 |   | $ | (2,162 | ) | $ | (3,695 | ) |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Denominator:                                                          |       |                             |       |                            |       |   |   |   |   |
| Denominator for basic net income per share                            |       | 23,477                           |       | 24,129                          |       | 23,747 |   | 23,985 |   |
| Effect of dilutive employee stock options                             |       | —                           |       | 938                             |       | — |   | — |   |
| Denominator for diluted net income per share                          |       | 23,477                           |       | 25,067                          |       | 23,747 |   | 23,985 |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss) per share - basic:                                 |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                     |       | $                                | (0.11      | )                               | $          | 0.01 |   | $ | (0.09 | ) | $ | (0.15 | ) |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss) per share - diluted:                               |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                                                    |       | $                                | (0.11      | )                               | $          | 0.01 |   | $ | (0.09 | ) | $ | (0.15 | ) |

 

For the three andnine-month periods ended September 30, 2006, options to purchase 6,213,456shares of common stock at an average exercise price of $17.65 were excludedfrom the computation of diluted net loss per share, as the effect would havebeen anti-dilutive. For the three and nine-month periods ended October 1, 2005,options to purchase 2,494,092 shares and 6,390,646 shares of common stock at anaverage exercise price of $24.22 and $17.96 were excluded from the computationof diluted net loss per share, as the effect would have been anti-dilutive. Optionsare anti-dilutive when we have a net loss or when the exercise price of thestock option is greater than the average market price of our common stockduring the period.

**(5)  Inventories**

Inventories consist ofthe following:
|                         | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
|-------------------------|------------|--------------------|------------|-------------------|------------|
| **(In thousands)** | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Raw materials           |       | $                  | 15,534     |              | $          | 10,873 |   |
| Work-in-process         |       | 14,209             |       | 8,322             |       |
| Finished  products      |       | 8,260              |       | 9,774             |       |
|                    |       | $                  | 38,003     |              | $          | 28,969 |   |

 

**(6)  Other Assets**

Other assets consist ofthe following:
|                                    | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
|------------------------------------|------------|--------------------|------------|-------------------|------------|
| **(In thousands)**            | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Deferred  compensation plan assets |       | $                  | 1,988      |              | $          | 1,972 |   |
| Deferred income  taxes             |       | 148                |       | 274               |       |
| Other                              |       | 1,005              |       | 844               |       |
|                               |       | $                  | 3,141      |              | $          | 3,090 |   |

 

10

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**(7)  Lineof Credit**

We have a line of creditagreement with a brokerage firm. Under the terms of this agreement, we mayborrow funds at a cost equal to the current Federal funds open rate plus 100basis points (approximately 6.25% as of September 30, 2006). Certain of ourcash, cash equivalents and investments secure borrowings outstanding under thisfacility. Funds are advanced to us under this facility based on pre-determinedadvance rates on the cash and securities held by us in this brokerage account.This agreement has no set expiration date and there are no loan covenants,other than the aforementioned collateral requirement. As of September 30, 2006,$9.8 million was outstanding under this facility, with a relatedcollateral requirement of approximately $13.1 million of our cash, cashequivalents and investments.

**(8)  Other CurrentLiabilities**

Other current liabilitiesconsist of the following:
|                                                   | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| **(In thousands)**                           | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Salaries and  benefits                            |       | $                  | 5,597      |              | $          | 3,723 |   |
| Warranty accrual                                  |       | 2,742              |       | 2,397             |       |
| Advance billings                                  |       | 528                |       | 854               |       |
| Income taxes  payable                             |       | 422                |       | 768               |       |
| Reserve for  losses on purchase order commitments |       | 399                |       | 406               |       |
| Accrued  taxes-other                              |       | 1,670              |       | 1,542             |       |
| Other                                             |       | 928                |       | 1,202             |       |
|                                              |       | $                  | 12,286     |              | $          | 10,892 |   |

 

**Warranty Accrual**

We generally warrant ourproducts for a period of 12 months for new products, or 3 months forrefurbished products, from the date of customer acceptance for material andlabor to repair the product; accordingly, an accrual for the estimated cost ofthe warranty is recorded at the time the product is shipped. Extended warrantyterms, if granted, result in deferral of revenue equating to our standardpricing for similar service contracts. Recognition of the related warranty costis deferred until product revenue is recognized. Factors that affect ourwarranty liability include the number of installed units, historical andanticipated rates of warranty claims, and cost per claim. We periodicallyassess the adequacy of our recorded warranty liabilities and adjust the amountsas necessary. In 2005, the Company commenced volume shipments of itsunity-based lithography systems and commenced warranty coverage on several ofits laser annealing systems. As may occur with new product introductions,warranty costs were higher than anticipated. The Company believes its warrantyaccrual, as of September 30, 2006, will be sufficient to satisfy outstandingobligations as of that date.

Changesin our warranty accrual are as follows: 
|                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **Sept. 30,**               | ** ** | **Oct. 1,**                | ** ** | **Sept. 30,** | ** ** | **Oct. 1,** | ** ** |
| **(In thousands)**                           | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance,  beginning of the period                 |       | $                                | 2,198      |                            | $          | 1,911 |   | $ | 2,397 |   | $ | 2,013 |   |
| Warranties  issued during the period              |       | 1,535                            |       | 473                             |       | 2,848 |   | 2,168 |   |
| Settlements made  during the period               |       | (1,529                           | )          | (827                            | )          | (3,799 | ) | (2,905 | ) |
| Changes in  liability for pre-existing warranties |       | 538                              |       | 79                              |       | 1,296 |   | 360 |   |
| Balance, end of the  period                       |       | $                                | 2,742      |                            | $          | 1,636 |   | $ | 2,742 |   | $ | 1,636 |   |

 

**Deferred Services Revenue**

Deferred services revenueis included in the deferred product and services income line on the condensedconsolidated balance sheets. We sell service contracts for which revenue isdeferred and recognized ratably over the contract period, for time basedservice contracts, or as service hours are delivered, for contracts based on apurchased quantity of hours.

Changes in our deferredservice revenue are as follows:

11

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|                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **Sept. 30,**               | ** ** | **Oct. 1,**                | ** ** | **Sept. 30,** | ** ** | **Oct. 1,** | ** ** |
| **(In thousands)**                                | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance,  beginning of the period                      |       | $                                | 2,709      |                            | $          | 1,560 |   | $ | 1,970 |   | $ | 1,332 |   |
| Service  contracts sold during the period              |       | 2,288                            |       | 2,162                           |       | 8,367 |   | 6,278 |   |
| Service contract  revenue recognized during the period |       | (2,448                           | )          | (2,293                          | )          | (7,788 | ) | (6,181 | ) |
| Balance, end of the  period                            |       | $                                | 2,549      |                            | $          | 1,429 |   | $ | 2,549 |   | $ | 1,429 |   |

 

**(9)  Other Liabilities**

Other liabilities consistof the following:
|                                       | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|-------------------|------------|
| **(In thousands)**               | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Deferred rent                         |       | $                  | 2,849      |              | $          | 3,157 |   |
| Deferred  compensation plan liability |       | 1,951              |       | 1,932             |       |
| Asset retirement  obligations         |       | 1,946              |       | 2,064             |       |
| Other                                 |       | 527                |       | 652               |       |
|                                  |       | $                  | 7,273      |              | $          | 7,805 |   |

 

**(10)  Accumulated OtherComprehensive Loss**

The components ofaccumulated other comprehensive loss are as follows:
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **Sept. 30,**               | ** ** | **Oct. 1,**                | ** ** | **Sept. 30,** | ** ** | **Oct. 1,** | ** ** |
| **(In thousands)**                                       | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  (loss)                                            |       | $                                | (2,568     | )                               | $          | 195 |   | $ | (2,162 | ) | $ | (3,695 | ) |
| Accumulated  other comprehensive income loss:                 |       |                             |       |                            |       |   |   |   |   |
| Unrealized gain (loss) on available-for-sale  securities      |       | 898                              |       | (609                            | )          | 269 |   | (769 | ) |
| Unrealized gain (loss) on foreign exchange forward  contracts |       | 123                              |       | 81                              |       | (100 | ) | 448 |   |
| Comprehensive loss                                            |       | $                                | (1,547     | )                               | $          | (333 | ) | $ | (1,993 | ) | $ | (4,016 | ) |

 

Accumulated othercomprehensive income (loss) included in the condensed consolidated balancesheets is comprised of unrealized gains or losses on available-for-salesecurities and the effect of exchange rate changes on foreign exchange forwardcontracts, net of tax.
|                                                        | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| **(In thousands)**                                | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Unrealized gains  (losses) on:                         |       |               |       |              |       |
| Available-for-sale investments                         |       | $                  | (931       | )                 | $          | (1,200 | ) |
| Foreign exchange contracts                             |       | 214                |       | 314               |       |
| Accumulated other  comprehensive loss at end of period |       | $                  | (717       | )                 | $          | (886 | ) |

 

**(11)  StockRepurchase Program**

On September 19,2005, the Company’s Board of Directors authorized (stock repurchaseauthorization date) the repurchase of up to $30 million of its commonstock in the open market at the then prevailing market prices during the periodcommencing September 19, 2005 through September 30, 2007. ThroughSeptember 30, 2006, the Company had repurchased 1,386,580 shares of its commonstock at a total purchase price of $20 million since the stock repurchaseauthorization date. The Company repurchased 742,045 shares at a total purchaseprice of $10.8 million during the quarter ended September 30, 2006.

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**(12)  Employee BenefitPlans**

***Employee bonusplans***

We currently sponsor anexecutive incentive bonus plan that distributes employee awards based on theachievement of predetermined targets. We have recorded ($0.1) million and$0.5 million of expenses under this bonus plan for the three andnine-month periods ended September 30, 2006. There was no executive incentivebonus plan expense recognized during the three and nine-month periods endedSeptember 30, 2005.

***Employee savingsand retirement plans***

Ultratech sponsors a401(k) employee salary deferral plan that allows voluntary contributions by allfull-time employees of from 1% to 20% of their pretax earnings. Companycontributions made to this plan were $0.1 million and $0.3 millionfor the three and nine-month periods ended September 30, 2006, respectively.The comparable contributions in 2005 were $0.1 million and$0.3 million, respectively. These Company contributions, limited to amaximum of $2,000 per year per employee, generally become 20 percentvested at the end of an employee’s first year of service from the date of hirewith the Company, and vest 20 percent per year of service thereafter untilthey become fully vested at the end of five years of service. The Company alsosponsors an executive non-qualified deferred compensation plan that allowsqualifying executives to defer current cash compensation.

**(13)  Contingencies**

**Legal Proceedings **

On February 29, 2000, we filed lawsuits asserting patentinfringement and related claims against Nikon, Canon, and ASML in the U.S.District Court for the Eastern District of Virginia. In April 2000, we reacheda settlement with Nikon, and in September 2001, we reached a settlement withCanon. The case against ASML was later transferred to the U.S. District Court forthe Northern District of California and tried before a jury in June and July of2005. The jury reached a verdict that the patent was infringed, but that theasserted claims of the patent were invalid. We filed a post-trial motion for anew trial and for judgment as a matter of law in our favor. ASML also filed amotion for judgment as a matter of law seeking to invalidate three of theasserted claims for lack of enablement and requested that the court awardcosts. On February 13, 2006, the Court denied our post-trial motions,including the motion for a new trial, and entered judgment in favor of ASMLinvalidating three claims of the patent for lack of enablement. The Court alsoawarded ASML approximately $330,000 in costs. We have filed an appeal with theFederal Circuit Court of Appeals, and filed our opening appellate brief onAugust 30, 2006. ASML has filed a notice of cross-appeal. ASML’s openingappellate brief is due on November 22, 2006.

 

On July 11, 2003, wefiled a lawsuit against a Southern California company asserting infringement ofcertain claims related to U.S. patent No. 5,621,813 in the U.S. DistrictCourt in and for the Northern District of California. On May 17, 2005, thedistrict court found the subject patent to be invalid. We appealed thatdecision, but, in March 2006, the Federal Circuit upheld the district court’sruling. 

In May 2006, the samecompany filed a state court lawsuit against us for malicious prosecution andabuse of process claiming that attorney’s fees, costs and other damages weredue based on the outcome of a federal patent litigation suit brought against itby us. We do not believe this new action has merit, particularly given thedenial by the federal court and the subsequent federal appellate court’saffirmation of the order denying the award of any attorney’s fees payable tothis company by us in the federal patent litigation. We filed a motion to havethe state court complaint dismissed under California’s anti-SLAPP and demurrerstatutes. Nonetheless the state court has preliminarily stated that it woulddeny our motion to dismiss. In such event, we intend to appeal and otherwisevigorously defend against this action and to seek fees and/or sanctions againstthis company in relation thereto.

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

Certain of the statementscontained herein, which are not historical facts and which can generally beidentified by words such as “anticipates”, “expects”, “intends”, “will”,“could”, “believes”, “estimates”, “continue”, and similar expressions, areforward-looking statements under Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, that involve risks and uncertainties, such as risks related to ourdependence on new product introductions and market acceptance of new productsand enhanced versions of our existing products; lengthy sales cycles, includingthe timing of system installations and acceptances; lengthy and costly developmentcycles for laser-processing and lithography technologies and applications;integration, development and associated expenses of the laser processingoperation; delays, deferrals and cancellations of orders by customers;cyclicality in the semiconductor and nanotechnology industries; pricingpressures and product discounts; high degree of industry competition;intellectual property matters; expiration of licensing arrangements, and theresulting adverse impact on our licensing revenues; changes to financialaccounting standards; changes in pricing by us, our competitors or suppliers;customer

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concentration;international sales; timing of new product announcements and releases by us orour competitors; ability to volume produce systems and meet customerrequirements; sole or limited sources of supply; ability and resulting costs toattract or retain sufficient personnel to achieve our targets for a particularperiod; dilutive effect of employee stock option grants on net income pershare, which is largely dependent upon us achieving and maintainingprofitability and the market price of our stock; mix of products sold; rapidtechnological change and the importance of timely product introductions;outcome of litigation; manufacturing variances and production levels; timingand degree of success of technologies licensed to outside parties; productconcentration and lack of product revenue diversification; inventoryobsolescence; asset impairment; effects of certain anti-takeover provisions;announced and future acquisitions; volatility of stock price; foreigngovernment regulations and restrictions; business interruptions due to naturaldisasters or utility failures; environmental regulations; and any adverseeffects of terrorist attacks in the United States or elsewhere, or governmentresponses thereto, or military actions in Iraq, Afghanistan, North Korea andelsewhere, on the economy in general, or on our business in particular. Due tothese and additional factors, the statements, historical results and percentagerelationships set forth below are not necessarily indicative of the results ofoperations for any future period. These forward-looking statements are based onmanagement’s current beliefs and expectations, some or all of which may proveto be inaccurate, and which may change. We undertake no obligation to revise orupdate any forward-looking statements to reflect any event or circumstance thatmay arise after the date of this report.

**OVERVIEW**

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

We supply step-and-repeatphotolithography systems based on one-to-one imaging technology. Within theintegrated circuits industry, we target the market for advanced packagingapplications. Within the nanotechnology industry, our target markets includethin film head magnetic recording devices, ink jet print heads, laser diodesand LEDs (light emitting diodes). Our laser thermal processing equipment istargeted at advanced annealing applications within the semiconductor industry.

**RESULTS OF OPERATIONS**

We derive a substantialportion of our total net sales from sales of a relatively small number of newlymanufactured systems, which typically range in price from $1.2 million to$5.0 million. As a result of these high sale prices, the timing andrecognition of revenue from a single transaction has had and most likely willcontinue to have a significant impact on our net sales and operating resultsfor any particular period.

Ourbacklog at the beginning of a period typically does not include all of thesales needed to achieve our sales objectives for that period. In addition,orders in backlog are subject to cancellation, shipment or customer acceptancedelays, and deferral or rescheduling by a customer with limited or no penaltiesto the customer. Consequently, our net sales and operating results for a periodhave been and will continue to be dependent upon our obtaining orders forsystems to be shipped and accepted in the same period in which the order isreceived. Our business and financial results for a particular period could bematerially adversely affected if an anticipated order for even one system isnot received in time to permit shipment and customer acceptance during thatperiod. Furthermore, a substantial portion of our shipments has historicallyoccurred near the end of each quarter. Delays in installation and customeracceptance due, for example, to our inability to successfully demonstrate theagreed-upon specifications or criteria at the customer’s facility, or to thefailure of the customer to permit installation of the system in the agreed upontime, may cause net sales in a particular period to fall significantly belowour expectations, which may materially adversely affect our operating resultsfor that period. This risk is especially applicable in connection with theintroduction and initial sales of a new product line. Additionally, the failureto receive anticipated orders or delays in shipments due, for example, torescheduling, delays, deferrals or cancellations by customers, additionalcustomer configuration requirements, or to unexpected manufacturingdifficulties or delays in deliveries by suppliers due to their long productionlead times or otherwise, have caused and may in the future cause net sales in aparticular period to fall significantly below our expectations, which couldmaterially adversely affect our operating results for that period. Inparticular, the long manufacturing and acceptance cycles of our advancedpackaging family of wafer steppers and laser thermal processing systems and thelong lead time for lenses and other materials, could cause shipments andacceptances of such products to be delayed from one quarter to the next, whichcould materially adversely affect our financial condition and results ofoperations for a particular quarter.

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# **Net sales**

## **ThirdQuarter**

|                        | ** ** | **Three Months Ended** | ** ** | ** **       | ** ** | ** **         | ** ** |
|------------------------|------------|----------------------------------|------------|------------------|------------|--------------------|------------|
| ** **             | ** ** | **Sept. 30,**               | ** ** | **Oct. 1,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
| **(In millions)** | ** ** | **2006**                         | ** ** | **2005**         | ** ** | **Change**         | ** ** | **Change** | ** ** |
| Sales of:              |       |                             |       |             |       |               |       |   |   |
| Products               |       | $                                | 30.0       |             | $          | 26.8               |       | $ | 3.2 |   | 12 | % |
| Services               |       | 3.8                              |       | 3.6              |       | 0.3                |       | 7 | % |
| Licenses               |       | 0.1                              |       | —           |       | 0.1                |       | 100 | % |
| Total net sales        |       | $                                | 33.9       |             | $          | 30.3               |       | $ | 3.6 |   | 12 | % |

 

Net sales consist ofrevenues from products (system sales, spare parts sales and upgrades), servicesand licensing of technologies. Product sales increased 12% to$30.0 million on a system unit volume decrease of 10% in the third quarterof 2006, compared to the third quarter of 2005. The average selling prices ofsystems sold increased 22% compared to the comparable year-ago period,resulting from a shift in product mix in favor of our new laser processingproducts and away from our legacy platform products.

On a product marketapplication basis, system sales to the semiconductor industry, primarily foradvanced packaging and laser  processingapplications, were $25.6 million for the quarter ended September 30, 2006,an increase of 19% when compared with system sales to this market in the thirdquarter of 2005. This increase was due to a $12.8 million increase in sales tothe laser processing markets offset by a decrease of $9.9 million to theadvanced packaging markets.

System sales to thenanotechnology market were $0.1 million for the quarter ended September 30,2006, a decrease of 95% compared with sales of $1.9 million in the thirdquarter of 2005. System sales to the nanotechnology market are highly dependenton customer capacity demand in the thin film head industry.

Revenues from servicesfor the third quarter of 2006 were $3.8 million, an increase of 7% over lastyear’s third quarter, primarily as a result of an increase in servicecontracts.

Revenues from licenseswere $0.1 million in the quarter ended September 30, 2006 compared with$0.0 million in the comparable period a year ago. This increase was aresult of recognizing licensing revenue from one customer during the quarterended September 30, 2006 comparing to the completion of the amortization periodof prior-period proceeds from licensing agreements during the third quarter of2005. Future revenues from licensing activities, if any, will be contingentupon the outcome of current litigation (see “Legal Proceedings”), and uponexisting and future licensing and royalty arrangements. The Company may not besuccessful in generating licensing revenues in the future and does notanticipate the recognition of significant levels of licensing income during theremainder of 2006.

At September 30, 2006, wehad approximately $4.9 million of deferred product and services incomecompared to $2.0 million at December 31, 2005. Deferred incomerelated to our products is recognized upon satisfying the contractual obligationsfor installation and/or customer acceptance. Deferred service revenue isrecognized ratably over the contract period or as purchased services arerendered.

For the quarterended September 30, 2006, international net sales were $24.0 million, or 71% oftotal net sales compared with $20.4 million, or 67% of total net sales forthe third quarter of 2005. We expect sales to international customers torepresent a significant majority of our revenues during the remainder of 2006.Our revenue derived from sales in foreign countries is not generally subject tosignificant exchange rate fluctuations, principally because sales contracts forour systems are generally denominated in U.S. dollars. In Japan, however,orders are often denominated in Japanese yen. This subjects us to the risk ofcurrency fluctuations. We attempt to mitigate this risk by entering intoforeign currency forward exchange contracts for the period between when anorder is received and when it is recorded as revenue. After recording revenue,we use various mechanisms, such as foreign currency forward exchange contractsand natural hedges, to offset substantial portions of the gains or lossesassociated with our Japanese yen denominated receivables due to exchange ratefluctuations. We had approximately $4.6 million of Japanese yendenominated receivables at September 30, 2006. International sales expose us toa number of additional risks, including fluctuations in the value of localcurrencies relative to the U.S. dollar, which impact the relative cost of ownershipof our products and, thus, the customer’s willingness to purchase our product.(See “Item 1A Risk Factors: International Sales”).

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**Year-To-Date:**
|                        | ** ** | **Nine Months Ended** | ** ** | ** **       | ** ** | ** **         | ** ** |
|------------------------|------------|---------------------------------|------------|------------------|------------|--------------------|------------|
| ** **             | ** ** | **Sept. 30,**              | ** ** | **Oct. 1,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
| **(In millions)** | ** ** | **2006**                        | ** ** | **2005**         | ** ** | **Change**         | ** ** | **Change** | ** ** |
| Sales of:              |       |                            |       |             |       |               |       |   |   |
| Products               |       | $                               | 83.8       |             | $          | 76.2               |       | $ | 7.6 |   | 10 | % |
| Services               |       | 10.9                            |       | 9.5              |       | 1.4                |       | 15 | % |
| Licenses               |       | 0.2                             |       | 1.4              |       | (1.2               | )          | -86 | % |
| Total net sales        |       | $                               | 94.9       |             | $          | 87.1               |       | $ | 7.8 |   | 9 | % |

 

Product sales increased 10% to $83.8 million forthe nine months ended September 30, 2006 as compared to the same period in2005. The increase was primarily a result of a 28% increase in the averageselling prices of systems sold, which was partially offset by a system unitvolume decrease of 15%. The increase in average selling prices was primarilythe result of a shift in product mix in favor of our new laser processingproducts and away from our legacy product platforms. On a market segment basis,the year-over-year increase in systems sales was primarily due to higher salesto the laser processing market ($15.9 million) offset by a decline insales to the nanotechnology market ($10.1 million). 

Revenues from services increased 15% from 2005 levels,primarily as a result of increases in service contracts. Revenues from licensesdecreased by $1.2 million in the first three quarters of 2006, as comparedto the same period of 2005. This decrease was a result of the completion of theamortization period of prior-period proceeds from licensing agreements. Futurerevenues from licensing activities, if any, will be contingent upon the outcomeof current litigation (see “Legal Proceedings”), and upon existing and futurelicensing and royalty arrangements. The Company may not be successful ingenerating licensing revenues in the future and does not anticipate therecognition of significant levels of licensing income during the remainder of2006.

For the first three quarters of 2006, internationalnet sales were $63.0 million, or 67% of total net sales, as compared with$63.3 million, or 73% of total net sales for the comparable period of2005. For the first three quarters of 2006, as compared to the same period of2005, sales to Europe declined $13.1 million, sales to Japan increased$8.5 million, sales to Taiwan increased $2.8 million and sales to the“rest of Asia” declined $1.0 million.

**Gross profit**

## **ThirdQuarter**

On a comparative basis,gross margins were 36.7% and 42.9% for the third quarters of 2006 and 2005,respectively. The 6.2 percentage point decrease in gross margin wasprimarily due to less favorable mix of products sold (5.8. percentagepoints) and declined manufacturing and after-sales efficiencies (0.4 percentagepoints).

Exclusive of licensingrevenues, gross margins were 36.5% for the quarter ended September 30, 2006 ascompared with 42.9% for the same period in 2005. We believe disclosure of grossmargins without reference to licensing revenues provides additional appropriatedisclosure to allow comparison of our product and service gross margins overtime because there is little, if any, cost of sales associated with ourlicensing revenues. Future revenues from licensing activities, if any, will becontingent upon the outcome of current litigation (see “Legal Proceedings”),and upon existing and future licensing and royalty arrangements. The Companymay not be successful in generating licensing revenues in the future and doesnot anticipate the recognition of significant levels of licensing income duringthe remainder of 2006. Gross margins have been, and will continue to be,negatively impacted by the discontinuance of license revenue.

Our gross profit as a percentage of sales has been andmost likely will continue to be significantly affected by a variety of factors,including the introduction of new products, which typically have highermanufacturing costs until manufacturing efficiencies are realized and which aretypically discounted more than existing products until the products gain marketacceptance; the mix of products sold; the rate of capacity utilization;writedown of inventory and open purchase commitments; technology support andlicensing revenues, which have little or no associated cost of sales; productdiscounts, pricing and competition in our targeted markets; non-linearity ofshipments during the quarter which can result in manufacturing inefficiencies;the percentage of international sales, which typically have lower gross marginsthan domestic sales principally due to higher field service and support costs;and start-up costs and inefficiencies associated with the implementation ofsubcontracting arrangements.

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**Year-To-Date:**

Gross margins were 39.9% and 42.4% for the nine-month periods endedSeptember 30, 2006 and October 1, 2005, respectively. The 2.5 percentagepoint decline in gross margin was due to a less favorable mix of products sold(1.3 percentage points) and a decline in licensing revenues(1.7 percentage points), partially offset by improved manufacturingefficiencies (0.5 percentage point).

**Operating expenses**

## **ThirdQuarter**

Research, development andengineering expenses for the third quarter of 2006 were $7.1 million, ascompared to $6.0 million for the same period in 2005. The increase wasprimarily the result of higher spending associated with the development of ourlaser processing technologies in the current quarter.

Selling, general, andadministrative expenses were $8.9 million for the third quarter of 2006,as compared with $7.3 million for the same quarter of 2005. As apercentage of net sales, selling, general, and administrative expensesincreasedto 26.2% in thequarter ended September 30, 2006, compared to 24.0% in the third quarter of2005. This increase, in dollar terms, was primarily due to increased hiring,marketing and demonstration support costs associated with our laser processingproduct line ($1.1 million) and stock compensation expense (associatedwith the implementation of SFAS No. 123R and compensation expenses related tothe restricted stock units— $0.4 million). 

**Year-To-Date:**

Research, development andengineering expenses for the first three quarters of 2006 were$19.6 million, as compared to $20.3 million for the same period in2005. The year-to-date decrease was primarily the result of lower spendingassociated with the development of our laser processing technologies during thefirst nine months of 2006 as compared to the comparable period ended October 1,2005.

Selling, general, andadministrative expenses were $24.5 million for the first three quarters of2006, as compared with $23.0 million for the same period in 2005. As apercentage of net sales, selling, general, and administrative expensesdecreasedto 25.9% in thenine months ended September 30, 2006, as compared to 26.4% for the same periodin 2005. This increase, in dollar terms, was primarily due to increased hiring,marketing and demonstration support costs associated with our laser processingproduct line ($3.3 million); increased stock compensation expense(associated with the implementation of SFAS No. 123R and compensation expensesrelated to the restricted stock units — $1.2 million); higher managementincentive plan expense ($0.4 million); partially offset by decreased legalcosts related to our being a plaintiff in two patent infringement lawsuits inthe first half of 2005 ($2.5 million); lower commission expense($0.5 million); and lower bad debt expenses ($0.3 million).

# **Interest and other income, net**

Interest and otherincome, net, which consists primarily of interest income, was $1.5 millionand $4.8 million for the third quarter and first nine months of 2006,respectively, as compared with $1.4 million and $3.4 million for thecomparable periods of 2005. This increase was primarily attributable to higherinterest rates on our investments. We presently maintain an investment portfoliowith a weighted-average maturity of approximately 1.25 years. As a result,changes in short-term interest rates have had, and will continue to have, asignificant impact on our interest income.

**Provision (benefit) for incometaxes**

For the three and nine-monthperiods ended September 30, 2006, we recorded an income tax provision of$0.5 million and $0.6 million, respectively, as compared to an incometax expense of $0.8 million and $0.4 million for the comparableperiods in 2005. The tax expense recognized for the nine months ended September30, 2006, primarily resulted from the foreign income taxes applicable to ourforecast of foreign pre-tax income expected for the year. Since the Company iscurrently operating at a loss on a consolidated basis, there are no U.S.federal or state taxes anticipated for the year. The year-ago tax expenseresulted from our then-forecasted foreign income taxes and certain federal andstate taxes for the year ended December 31, 2005.

Income tax estimates canbe affected by whether or not, and within which jurisdictions, future earningswill occur and how and when cash is repatriated to the United States, combinedwith other aspects of an overall income tax strategy. Additionally, taxingjurisdictions could retroactively disagree with our tax treatment of certainitems, and some historical transactions have income tax effects going forward.Accounting rules require these future effects to be evaluated usingcurrent laws, rules and regulations, each of which can change at any time andin an unpredictable manner. We believe we have adequately provided for anyreasonably foreseeable outcome related to these matters, and we do notanticipate any material earnings impact from their ultimate resolutions.

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Each quarter we assessthe likelihood that we will be able to recover our deferred tax assets. Weconsider all available evidence, both positive and negative, includinghistorical levels of income, expectations and risks associated with estimatesof future taxable income and ongoing prudent and feasible tax planningstrategies in assessing the need for the valuation allowance. As a result ofour analysis of all available evidence, we concluded that it is more likelythan not that our net deferred tax assets will not be realized, with theexception of the Japanese deferred tax asset which we do expect to realize andhas been recorded in the accounts. Therefore, we continue to provide a fullvaluation allowance against net deferred tax assets outside of Japan. Weclosely monitor all available evidence, and may release some or all of thevaluation allowance in future periods.

**Outlook**

The anticipated timing oforders, shipments and customer acceptances usually requires us to fill a numberof production slots in any given quarter in order to meet our sales targets. Ifwe are unsuccessful in our efforts to secure those production orders, or ifexisting production orders are delayed or cancelled, our results of operationswill be materially adversely impacted. Accordingly, we may not be able to achieveor maintain our current or prior level of sales. We presently expect that netsales for the quarter ending December 31, 2006 may be in a range from 8% to 10%decrease, sequentially, from the third quarter of 2006. 

Because our net sales aresubject to a number of risks, including risks associated with the introductionof our new laser processing product line, delays in customer acceptances,intense competition in the capital equipment industry, uncertainty relating tothe timing and market acceptance of our products, and the condition of themacro-economy and the semiconductor industry, we may not exceed or maintain ourcurrent or prior level of net sales for any period in the future. Additionally,we believe that the market acceptance and volume production of our advancedpackaging systems, laser processing systems and our nanotechnology systems areof critical importance to our future financial results. At September 30, 2006,these critical systems represented approximately 89% of our backlog. To theextent that these products do not achieve or maintain significant sales due todifficulties involving manufacturing or engineering, the inability to reducethe current long manufacturing and customer acceptance cycles for theseproducts, competition, excess capacity in the semiconductor or nanotechnologydevice industries, or any other reason, our business, financial condition andresults of operations would be materially adversely affected.

We believe that grossmargin for the fourth quarter of 2006 will be in a range of 38% to 39%. Thefinal gross margin achieved will depend heavily upon sales volumes and theresulting product mix. Should our sales not reach the level expected, we mayincur a higher risk of inventory obsolescence and excess purchase commitmentsand lower utilization of our manufacturing infrastructure, which wouldmaterially adversely impact our results of operations. New products generallyhave lower gross margins until there is widespread market acceptance and untilproduction and after-sales efficiencies can be achieved. Should significantmarket demand fail to develop for our laser processing systems and our newadvanced packaging offerings, our business, financial condition and results ofoperations would be materially adversely affected. In addition, higher costsassociated with extended manufacturing and customer acceptance periods onshipments of our new laser processing products have had, and will continue tohave, an adverse impact on our gross margins. We believe that operating marginfor the fourth quarter of 2006 may be in a range of (11%) to (15%) and that netincome (loss) per share may be in the range of ($0.10) to ($0.15) for thefourth quarter of 2006.

**LIQUIDITY ANDCAPITAL RESOURCES**

Net cash provided by operating activities was$2.5 million for the first nine months ended September 30, 2006, comparedwith net cash provided by operating activities of $5.5 million for thecomparable period in 2005. Net cash provided by operating activities during thefirst nine months of 2006 was primarily attributable to non-cash charges to netloss, principally for depreciation, amortization, and stock-based compensationof $7.0 million; an increase in deferred product and services income of $3.0million; an increase in accounts payable of $2.8 million; a decrease inaccounts receivable of $2.2 million; and an increase in other currentliabilities of $1.4 million; offset by a net loss of $2.2 million; an increasein inventories of $9.8 million; an increase in prepaid expenses and other currentassets of $1.0 million  a decrease inother liabilities of $0.5 million; and an increase in demonstration inventoriesand other assets of $0.4 million. 

We believe that becauseof the relatively long manufacturing cycle of certain of our systems, particularlynewer products, our inventories will continue to represent a significant andgrowing portion of working capital. Currently, we are devoting significantresources to the development, introduction and commercialization of our laserprocessing system and to the development of our next generation 1X lithographytechnologies. We currently intend to continue to incur significant operatingexpenses in the areas of research, development and engineering, manufacturing,and selling, general and administrative costs in order to further develop,produce and support these new products. Additionally, gross profit margins,inventory and capital equipment levels may be adversely impacted in the futureby costs associated with the initial production of the laser processing systemand by future generations of our 1X wafer steppers. These costs include, butare not limited to, additional manufacturing overhead, costs of demonstrationsystems and facilities and the establishment of additional after-sales supportorganizations. Additionally, there can be no assurance that operating expenseswill not increase, relative to sales, as a result of adding technical,marketing and administrative personnel, among other costs, to support our newproducts. If we are unable to achieve significantly increased net sales or ifour sales fall below expectations, our cash flow and operating results will bematerially adversely affected until, among other factors, costs and expensescan be reduced.

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Our failure to achieveour sales targets for these new products could result in additional inventorywrite-offs and asset impairment charges, either or both of which couldmaterially adversely impact our results of operations.

During the first nine months of 2006, net cashprovided by investing activities was $1.6 million, attributable to netproceeds of short and long-term investments of $4.1 million and proceedsfrom the sale of fixed assets of $0.1 million, offset by capitalexpenditures of $2.6 million.

Net cash used in financing activities was$2.6 million during the first nine months of 2006, attributable torepurchase of common stock of $10.8 million, offset by net proceeds under ournotes payable of $5.6 million, and $2.6 million of proceeds receivedfrom the issuance of common stock under our employee stock option plans.

At September 30, 2006, wehad working capital of $109.7 million and long-term investments of$48.1 million. Our principal sources of liquidity at September 30, 2006consisted of $80.7 million in cash, cash equivalents and short-terminvestments, net of outstanding borrowings under our line of credit, and$48.1 million of long-term investments. As of September 30, 2006, basedupon recent operating results and expectations of future operating income, theCompany classified certain investment securities with remaining maturities ofone year or more as long-term investments. We have a line of credit agreementwith a brokerage firm. Under the terms of this agreement, we may borrow fundsat a cost equal to the current Federal funds open rate plus 100 basis points(approximately 6.25% as of September 30, 2006). Certain of our cash, cashequivalents and marketable securities secure borrowings outstanding under thisfacility. Funds are advanced to us under this facility in accordance withpre-determined advance rates based on the cash and securities held by us inthis brokerage account. This agreement has no set expiration date and there areno loan covenants other than a collateral requirement. As of September 30,2006, $9.8 million was outstanding under this facility, with a relatedcollateral requirement of approximately $13.1 million of our cash, cashequivalents and investments.

On September 19,2005, our Board of Directors authorized the repurchase of up to$30 million of our common stock in the open market at then prevailingmarket prices during the period commencing September 19, 2005 throughSeptember 30, 2007. Through September 30, 2006, we had repurchased1,386,580 shares of our common stock at a total purchase price of $20 million.We repurchased 742,045 shares at a total purchase price of $10.8 million duringthe quarter ended September 30, 2006.  Any future repurchase of stock could have a significant impact on ourcash position.

The development andmanufacture of new lithography and laser-based systems and enhancements arehighly capital-intensive. In order to be competitive, we believe we mustcontinue to make significant expenditures for capital equipment; sales,service, training and support capabilities; systems, procedures and controls;and expansion of operations and research and development, among many otheritems. We expect that cash generated from operations and our cash, cashequivalents and short-term investments will be sufficient to meet our cashrequirements for at least the next twelve months. However, in the near-term, wemay continue to utilize existing and future lines of credit, and other sourcesof financing, in order to maintain our present levels of cash, cash equivalentsand investments. Beyond the next twelve months, we may require additionalequity or debt financing to address our working capital or capital equipmentneeds. In addition, we may seek to raise equity or debt capital at any timethat we deem market conditions to be favorable. Additional financing, ifneeded, may not be available on reasonable terms, or at all.

We may in the futurepursue acquisitions of complementary product lines, technologies or businesses.Future acquisitions may result in potentially dilutive issuances of equitysecurities, the incurrence of debt and contingent liabilities and amortizationexpenses and impairment charges related to goodwill and other intangibleassets, which could materially adversely affect our financial condition andresults of operations. In addition, acquisitions involve numerous risks,including difficulties in the assimilation of the operations, technologies,personnel and products of the acquired companies; the diversion of management’sattention from other business concerns; risks of entering markets in which wehave limited or no direct experience; and the potential loss of key employeesof the acquired company. In the event we acquire product lines, technologies orbusinesses which do not complement our business, or which otherwise do notenhance our sales or operating results, we may incur substantial write-offs andhigher recurring operating costs, which could have a material adverse effect onour business, financial condition and results of operations. In the event thatany such acquisition does occur, there can be no assurance as to the effectthereof on our business or operating results.

**Foreign Currency**

As part of our overallstrategy to manage the level of exposure to the risk of foreign currencyexchange rate fluctuations, we attempt to hedge most of our Japanese yendenominated foreign currency exposures. We use foreign currency forwardcontracts to hedge the risk that unremitted Japanese yen denominated receiptsfrom customers, for actual or forecasted sales of equipment after receipt of customerorders, may be adversely affected by changes in foreign currency exchangerates. After recording revenue, we use various mechanisms, such as foreigncurrency forward exchange contracts and natural hedges, to offset substantialportions of the potential gains or losses associated with our Japanese yendenominated assets and liabilities due to exchange rate fluctuations. AtSeptember 30, 2006, we had taken action to hedge approximately 100% of theseJapanese yen denominated exposures. In addition to natural hedges resultingfrom having both assets and liabilities denominated in Japanese yen, we enterinto foreign currency forward contracts that generally have maturities of ninemonths or less. We often close foreign currency forward contracts by enteringinto an offsetting contract. At September 30, 2006, we had contracts for thesale and purchase of $18.1 million and $0.3 million, respectively, of foreigncurrencies at fixed rates of exchange.

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**Information Available on CompanyWeb-site**

Ultratech’s web-site islocated at *www.ultratech.com*. We make available,free of charge through our web-site, our annual report on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K (andamendments to those reports), as soon as reasonably practicable after suchreports are filed electronically with the SEC. We have adopted a Code of Ethicsfor our principal executive officer, principal financial officer, principalaccounting officer or controller, or persons performing similar functions. Wehave posted this Code of Ethics on our web-site. Any future amendments to thisCode will also be posted on our web-site.

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

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

**Interest Rate Risk**

Our exposure to marketrisk due to potential changes in interest rates relates primarily to ourinvestment portfolio, which consisted primarily of fixed interest rateinstruments as of September 30, 2006. We maintain an investment policy designedto ensure the safety and preservation of our invested funds by limiting marketrisk and the risk of default.

Certain of our cash, cashequivalents and short and long-term investments serve as collateral for a lineof credit we maintain with a brokerage firm. The line of credit is used forliquidity purposes, mitigating the need to liquidate investments in order tomeet our current operating cash requirements.

**Foreign Currency Risk Management**

The majority of ourrevenue, expense and capital purchasing activities are transacted in U.S.dollars. However, we do enter into these transactions in other currencies,primarily Japanese yen. To protect against reductions in value and thevolatility of future cash flows caused by changes in currency exchange rates,we have established transaction and balance sheet hedging programs. We useforeign currency forward contracts to hedge the risk that unremitted Japaneseyen denominated receipts from customers for actual or forecasted sales ofequipment after receipt of customer orders may be adversely affected by changesin foreign currency exchange rates. After recording revenue, we use variousmechanisms, such as foreign currency forward exchange contracts and naturalhedges, to offset substantial portions of the potential gains or lossesassociated with our Japanese yen denominated assets and liabilities due toexchange rate fluctuations. At September 30, 2006, we had taken action to hedgeapproximately 100% of these Japanese yen denominated exposures. In addition tonatural hedges resulting from having both assets and liabilities denominated inJapanese yen, we enter into foreign currency forward contracts that generallyhave maturities of nine months or less. We often close foreign currency forwardcontracts by entering into an offsetting contract. At September 30, 2006, wehad contracts for the sale and purchase of $18.1 million and $0.3 million,respectively, of Japanese yen at fixed rates of exchange. Our hedging programsreduce, but do not always entirely eliminate, the impact of currency movements.

**Item4.**                          Controlsand Procedures

We conducted anevaluation of the effectiveness of the design and operation of our disclosure controlsand procedures, as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as of the endof the period covered by this report (the “Evaluation Date”). Based upon theevaluation, our principal executive officer and principal financial officerconcluded that, as of the Evaluation Date, our disclosure controls andprocedures were effective and ensure that information required to be disclosedby us in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms. Disclosure controlsand procedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is accumulated and communicated to managementto allow timely decisions regarding required disclosure. In designing andevaluating the disclosure controls and procedures, our management recognizesthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives.Management is further required to apply judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

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**Changes in Internal Control Over Financial Reporting**

There were no changes inour internal controls over financial reporting during the quarter endedSeptember 30, 2006 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

**PARTII.**               OTHERINFORMATION

**Item1.**                          LegalProceedings

On February 29,2000, we filed lawsuits asserting patent infringement and related claimsagainst Nikon, Canon, and ASML in the U.S. District Court for the EasternDistrict of Virginia. In April 2000, we reached a settlement with Nikon, and inSeptember 2001, we reached a settlement with Canon. The case against ASML waslater transferred to the U.S. District Court for the Northern District ofCalifornia and tried before a jury in June and July of 2005. The jury reached averdict that the patent was infringed, but that the asserted claims of thepatent were invalid. We filed a post-trial motion for a new trial and forjudgment as a matter of law in our favor. ASML also filed a motion for judgmentas a matter of law seeking to invalidate three of the asserted claims for lackof enablement and requested that the court award costs. On February 13,2006, the Court denied our post-trial motions, including the motion for a newtrial, and entered judgment in favor of ASML invalidating three claims of thepatent for lack of enablement. The Court also awarded ASML approximately$330,000 in costs. We have filed an appeal with the Federal Circuit Court ofAppeals, and filed our opening appellate brief on August 30, 2006. ASML hasfiled a notice of cross-appeal. ASML’s opening appellate brief is due on November22, 2006.

On July 11, 2003, wefiled a lawsuit against a Southern California company asserting infringement ofcertain claims related to U.S. patent No. 5,621,813 in the U.S. DistrictCourt in and for the Northern District of California. On May 17, 2005, thedistrict court found the subject patent to be invalid. We appealed thatdecision, but, in March 2006, the Federal Circuit upheld the district court’sruling. 

In May 2006, the samecompany filed a state court lawsuit against us for malicious prosecution andabuse of process claiming that attorney’s fees, costs and other damages weredue based on the outcome of a federal patent litigation suit brought against itby us. We do not believe this new action has merit, particularly given thedenial by the federal court and the subsequent federal appellate court’saffirmation of the order denying the award of any attorney’s fees payable tothis company by us in the federal patent litigation. We filed a motion to havethe state court complaint dismissed under California’s anti-SLAPP and demurrerstatutes. Nonetheless the state court has preliminarily stated that it woulddeny our motion to dismiss. In such event, we intend to appeal and otherwisevigorously defend against this action and to seek fees and/or sanctions againstthis company in relation thereto.

**Item1A.**                 RiskFactors

*Inaddition to risks described in the foregoing discussions, the following risksapply to our business and us*:

**We currently spend, andexpect to continue to spend, significant resources to develop, introduce andcommercialize our laser processing systems and AP wafer stepper products, andwe may not be successful in achieving or increasing sales of these products.**

Currently, we aredevoting significant resources to the development, introduction andcommercialization of our laser products as well as our lithography wafersteppers. We intend to continue to develop these products and technologiesduring 2006, and will continue to incur significant operating expenses in theareas of research, development and engineering, manufacturing and general andadministrative costs in order to develop, produce and support these newproducts. Additionally, gross profit margins and inventory levels may befurther adversely impacted in the future by costs associated with the initialproduction of our laser processing systems and by future generations of our1X-lithography systems. Introduction of new products generally involves higherinstallation costs and product performance uncertainties that could delay customeracceptance of our systems, resulting in a delay in recognizing revenueassociated with those systems and a reduction in gross margins. These costsinclude, but are not limited to, additional manufacturing overhead, additionalinventory write-offs, costs of demonstration systems and facilities, and costsassociated with the establishment of additional after-sales supportorganizations. Additionally, operating expenses may increase, relative tosales, as a result of adding additional marketing and administrative personnel,among other costs, to support our new products. If we are unable to achievesignificantly increased net sales or if our sales fall below expectations, ouroperating results will be materially adversely affected.

Our ability to commercializeour laser processing technologies depends on our ability to demonstrate amanufacturing-worthy tool. We do not presently have in-house capability tofabricate devices. As a result, we rely on partnering with semiconductorcompanies to develop the anneal process. The development of new processtechnologies is largely dependent upon our ability to interest potentialcustomers in working on joint process development. Our ability to delivertimely solutions is also limited by wafer turnaround at the potentialcustomer’s fabrication facility.

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**Our sales cycle is typically lengthy and involves asignificant commitment of capital by our customers, which has subjected us, andis likely to continue to subject us, to delays in customer acceptance of ourproducts and other risks, any of which could adversely impact our results ofoperations by, among other things, delaying recognition of revenue with respectto those orders and resulting in increased installation, qualification andsimilar costs.**

Sales of our systemsdepend, in significant part, upon the decision of a prospective customer toincrease manufacturing capacity or to restructure current manufacturingfacilities, either of which typically involves a significant commitment ofcapital. Many of our customers in the past have cancelled the development ofnew manufacturing facilities and have substantially reduced their capitalequipment budgets. In view of the significant investment involved in a systempurchase, we have experienced and may continue to experience delays followinginitial qualification of our systems as a result of delays in a customer’sapproval process. Additionally, we are presently receiving orders for systemsthat have lengthy delivery schedules, which may be due to longer production leadtimes or a result of customers’ capacity scheduling requirements. For these andother reasons, our systems typically have a lengthy sales cycle during which wemay expend substantial funds and management effort in securing a sale. Lengthysales cycles subject us to a number of significant risks, including inventoryobsolescence and fluctuations in operating results, over which we have littleor no control. In order to maintain or exceed our present level of net sales,we are dependent upon obtaining orders for systems that will ship and beaccepted in the current period. We may not be able to obtain those orders.

**The semiconductorindustry historically has been highly cyclical and has experienced periods ofoversupply, which has in turn affected the market for semiconductor equipmentsuch as ours and which could adversely affect our results of operations duringsuch periods.**

**Our**business depends in significant part upon capital expenditures by**manufacturers of semiconductors, advanced packagingsemiconductors and nanotechnology components, including thin film head magneticrecording devices, which in turn depend upon the current and anticipated marketdemand for such devices and products utilizing such devices. The semiconductorindustry historically has been highly cyclical and has experienced recurringperiods of oversupply. This has, from time to time, resulted in significantlyreduced demand for capital equipment including the systems manufactured andmarketed by us. We believe that markets for new generations of semiconductorsand semiconductor packaging will also be subject to similar fluctuations. Ourbusiness and operating results would be materially adversely affected bydownturns or slowdowns in the semiconductor packaging market or by loss of marketshare. Accordingly, we may not be able to achieve or maintain our current orprior level of sales. We attempt to mitigate the risk of cyclicality byparticipating in multiple markets including semiconductor, semiconductorpackaging, and nanotechnology sectors, as well as diversifying into new marketssuch as laser-based annealing for implant activation and other applications.Despite such efforts, when one or more of such markets experiences a downturnor a situation of excess capacity, our net sales and operating results arematerially adversely affected.

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

Although we attempt toprotect our intellectual property rights through patents, copyrights, tradesecrets and other measures, we believe that our success will depend more uponthe innovation, technological expertise and marketing abilities of ouremployees. Nevertheless, we have a policy of seeking patents when appropriatefor inventions resulting from our ongoing research and development andmanufacturing activities. We own 109 United States and foreign patents, whichexpire on dates ranging from November 2006 to December 2024 and have 97 UnitedStates and foreign patent applications pending. In addition, we have variousregistered trademarks and copyright registrations covering mainly softwareprograms used in the operation of our systems. We also rely upon trade secretprotection for our confidential and proprietary information. We may not be ableto protect our technology adequately and competitors may be able to developsimilar technology independently. Our pending patent applications may not beissued and U.S. or foreign intellectual property laws may not protect ourintellectual property rights. In addition, litigation may be necessary toenforce our patents, copyrights or other intellectual property rights, toprotect our trade secrets, to determine the validity and scope of theproprietary rights of others or to defend against claims of infringement. Suchlitigation has resulted in, and in the future could result in, substantialcosts and diversion of resources and could have a material adverse effect onour business, financial condition and results of operations, regardless of theoutcome of the litigation. Patents issued to us may be challenged, invalidatedor circumvented and the rights granted thereunder may not provide competitiveadvantages to us. Furthermore, others may independently develop similartechnology or products, or, if patents are issued to us, design around thepatents issued to us. Invalidation of our patents related to those technologiescould allow our competitors to more effectively compete against us, which couldresult in decreased revenue for us.

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On February 29,2000, we filed lawsuits asserting patent infringement and related claimsagainst Nikon, Canon, and ASML in the U.S. District Court for the EasternDistrict of Virginia. In April 2000, we reached a settlement with Nikon, and inSeptember 2001, we reached a settlement with Canon. The case against ASML waslater transferred to the U.S. District Court for the Northern District ofCalifornia and tried before a jury in June and July of 2005. The jury reached averdict that the patent was infringed, but that the asserted claims of thepatent were invalid. We filed a post-trial motion for a new trial and forjudgment as a matter of law in our favor. ASML also filed a motion for judgmentas a matter of law seeking to invalidate three of the asserted claims for lackof enablement and requested that the court award costs. On February 13,2006, the Court denied our post-trial motions, including the motion for a newtrial, and entered judgment in favor of ASML invalidating three claims of thepatent for lack of enablement. The Court also awarded ASML approximately$330,000 in costs. We have filed an appeal with the Federal Circuit Court ofAppeals, and filed our opening appellate brief on August 30, 2006. ASML hasfiled a notice of cross-appeal. ASML’s opening appellate brief is due onNovember 22, 2006.

On July 11, 2003, wefiled a lawsuit against a Southern California company asserting infringement ofcertain claims related to U.S. patent No. 5,621,813 in the U.S. DistrictCourt in and for the Northern District of California. On May 17, 2005, thedistrict court found the subject patent to be invalid. We appealed thatdecision, but, in March 2006, the Federal Circuit upheld the district court’sruling. 

In May 2006, the samecompany filed a state court lawsuit against us for malicious prosecution andabuse of process claiming that attorney’s fees, costs and other damages weredue based on the outcome of a federal patent litigation suit brought against itby us. We do not believe this new action has merit, particularly given thedenial by the federal court and the subsequent federal appellate court’saffirmation of the order denying the award of any attorney’s fees payable tothis company by us in the federal patent litigation. We filed a motion to havethe state court complaint dismissed under California’s anti-SLAPP and demurrerstatutes. Nonetheless the state court has preliminarily stated that it woulddeny our motion to dismiss. In such event, we intend to appeal and otherwisevigorously defend against this action and to seek fees and/or sanctions againstthis company in relation thereto. 

We believe that theoutcome of these matters will not be material to our business financialcondition or results of operations. 

We have from time to timebeen notified of claims that we may be infringing intellectual property rightspossessed by third parties.

Infringement claims bythird parties or claims for indemnification resulting from infringement claimsmay be asserted in the future and such assertions could materially adverselyaffect our business, financial condition and results of operations, regardlessof the outcome of any litigation. With respect to any such future claims, wemay seek to obtain a license under the third party’s intellectual propertyrights. However, a license may not be available on reasonable terms or at all.We could decide, in the alternative, to resort to litigation to challenge suchclaims. Such challenges could be expensive and time consuming and couldmaterially adversely affect our business, financial condition and results ofoperations, regardless of the outcome of any litigation.

**We operate in a highly competitive industry in whichcustomers are required to invest substantial resources in each product, whichmakes it difficult to achieve significant sales to a particular customer onceanother vendor’s equipment has been purchased by that customer.**

The capital equipmentindustry in which we operate is intensely competitive. A substantial investmentis required to install and integrate capital equipment into a semiconductor,semiconductor packaging or nanotechnology device production line. We believethat once a device manufacturer or packaging subcontractor has selected aparticular supplier’s capital equipment, the manufacturer generally relies uponthat equipment for the specific production line application and, to the extentpossible, subsequent generations of similar products. Accordingly, it isdifficult to achieve significant sales to a particular customer once anothersupplier’s capital equipment has been selected.

We experience competitionin advanced packaging from various proximity aligner companies such as SussMicrotec AG (Suss Microtec), projection companies such as Ushio, Inc.(Ushio), and reduction stepper companies such as Nikon Precision, Canon, andASML. While we believe that the use of reduction steppers is not easily adaptedfor thick resists utilized in the advanced packaging market, some devicemanufactures may consider this technology option. In addition, front end lithographycompanies could develop a lithography solution specifically targeted for theadvanced packaging market, which could potentially affect Ultratech’s marketshare. In nanotechnology, we experience competition from proximity alignercompanies, such as Suss Microtec, as well as other stepper manufacturers whohave developed or are developing tools specifically designed for nanotechnologyapplications. We expect our competitors to continue to improve the performanceof their current products and to introduce new products with improved price andperformance characteristics. This could cause a decline in sales or loss ofmarket acceptance of our steppers in our served markets, and thereby materiallyadversely affect our business, financial condition and results of operations.Enhancements to, or future generations of, competing products may be developedthat offer superior cost of ownership and technical performance features.

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With respect to our laserannealing technologies, marketed under the LSA100 product name, the primarycompetition comes from companies such as Applied Materials, Inc. andDainippon Screen Manufacturing Co., LTD. Many of these companies offer productsutilizing rapid thermal processing, or RTP, which is the current prevailing manufacturingtechnology. RTP does not prevent semiconductor device manufacturers fromscaling the lateral dimensions of their transistors to obtain improvedperformance, but diffusion resulting from the time scales associated with RTPlimits the vertical dimension of the junctions. Faster annealing times resultin shallower and more abrupt junctions and faster transistors. We believe ourannealing technology results in faster transistors for a given size. We believethat RTP manufacturers recognize the need to reduce thermal cycle times and areworking toward this goal. In July 2000, we licensed certain rights to ourthen existing laser processing technology, with reservations, to a competingmanufacturer of semiconductor equipment. We presently anticipate that this companywill offer laser-annealing tools to the semiconductor industry that willcompete with our offerings.

Another potentialadvanced annealing solution utilizes flash lamp annealing technology, or FLA.Several companies have published papers on annealing tools that incorporateflash lamp technology in order to reduce annealing times and increase annealtemperatures. Developers of FLA technology claim to have overcome annealingdifficulties at the 65nm node. This technique, which employs xenon flash lamps,has shown improvements over RTP in junction depth and sheet resistance, but webelieve FLA will suffer from pattern-related non-uniformities and could requireadditional, costly processes to reduce the reflectivity of different areaswithin the chip or wafer. Our proprietary laser processing solution has beenspecifically developed to provide junction annealing on near-instantaneoustime-scales, while maintaining low sheet resistance. Laser spike annealing, thefirst implementation of laser processing, activates dopants in themicrosecond-to-millisecond time frame without melting. Our research indicatesthat, at temperatures just below the melting point of silicon, time durationsin the microsecond to millisecond range, are required to achieve full activation,and dopant diffusion is minimal.

Additionally, competitionto our laser processing products may come from other laser annealing tools,including those presently being used by the flat panel display industry tore-crystallize silicon. Manufacturers of these tools may try to extend the useof their technologies to semiconductor device applications.

We believe that in orderto be competitive, we will need to continue to invest significant financialresources in new product development, new features and enhancements to existingproducts, the introduction of new stepper systems in our served markets on atimely basis, and maintaining customer service and support centers worldwide.In marketing our products, we may also face competition from vendors employingother technologies. In addition, increased competitive pressure has led tointensified price-based competition in certain of our markets, resulting inlower prices and margins. Should these competitive trends continue, ourbusiness, financial condition and operating results may be materially adverselyaffected.

**We sell our products primarily to a limited number ofcustomers and to customers in a limited number of industries, which subjects usto increased risks related to the business performance of our customers, andtherefore their need for our products, and the business cycles of the marketsinto which we sell.**

Historically, we havesold a substantial portion of our systems to a limited number of customers. Inthe third quarter and first nine months of 2006, our top five customersaccounted for 81.4% and 41.7% of our total system sales, respectively. In 2005,Intel Corporation accounted for 13% of our net sales. We expect that sales to arelatively few customers will continue to account for a high percentage of ournet sales in the foreseeable future and believe that our financial resultsdepend in significant part upon the success of these major customers and ourability to meet their future capital equipment needs. Although the compositionof the group comprising our largest customers may vary from period to period,the loss of a significant customer or any reduction in orders by a significantcustomer, including reductions due to market, economic or competitiveconditions in the semiconductor, semiconductor packaging or nanotechnologyindustries or in the industries that manufacture products utilizing integratedcircuits, thin film heads or other nanotechnology components, would likely havea material adverse effect on our business, financial condition and results ofoperations. Our ability to maintain or increase our sales in the futuredepends, in part, on our ability to obtain orders from new customers as well asthe financial condition and success of our existing customers, thesemiconductor and nanotechnology industries and the economy in general.

In addition to thebusiness risks associated with dependence on a few major customers, thesesignificant customer concentrations have in the past resulted in significantconcentrations of accounts receivable. These significant and concentratedreceivables expose us to additional risks, including the risk of default by oneor more customers representing a significant portion of our total receivables.If we were required to take additional accounts receivable reserves, ourbusiness, financial condition and results of operations would be materiallyadversely affected.

On a market applicationbasis, sales to the semiconductor industry, primarily for advanced packagingapplications, accounted for approximately 93% and 76% of system revenue for thefirst three quarters of 2006 and 2005, respectively. During the first threequarters of 2006 and 2005, approximately 7% and 24%, respectively, of oursystems revenue was derived from sales to nanotechnology manufacturers, includingmicro systems, thin film head and optical device manufacturers. Our futureoperating results

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and financial conditionwould be materially adversely impacted by a downturn in any of these marketsegments, or by loss of market share in any of these segments. A growingportion of our backlog of system orders is comprised of laser spike annealingtools. To date, we have limited experience with this technology. Shouldsignificant demand not materialize, due to technical, production, market, orother factors, our business, financial position and results of operations wouldbe materially adversely impacted.

**We rely on a limited number of outside suppliers andsubcontractors to manufacture certain components and subassemblies, and onsingle or a limited group of outside suppliers for certain materials for ourproducts, which could result in our inability to obtain an adequate supply ofrequired components due to the suppliers’ failure or inability to provide suchcomponents in a timely manner, or at all, and reduced control over pricing andtimely delivery of components and materials, any of which could adverselyaffect our results of operations.**

**Ourmanufacturing activities consist of assembling and testing components andsubassemblies, which are then integrated into finished systems. We rely on alimited number of outside suppliers and subcontractors to manufacture certaincomponents and subassemblies. We order one of the most critical components ofour technology, the glass for our 1X lenses, from external suppliers. We designthe 1X lenses and provide the lens specifications and the glass to othersuppliers, who then grind and polish the lens elements. We then assemble andtest the optical 1X lenses.**

**Weprocure some of our other critical systems’ components, subassemblies andservices from single outside suppliers or a limited group of outside suppliersin order to ensure overall quality and timeliness of delivery. Many of thesecomponents and subassemblies have significant production lead times. To date, wehave been able to obtain adequate services and supplies of components andsubassemblies for our systems in a timely manner. However, disruption ortermination of certain of these sources could have a significant adverse impacton our ability to manufacture our systems. This, in turn, would have a materialadverse effect on our business, financial condition and results of operations.Our reliance on a sole supplier or a limited group of suppliers and ourreliance on subcontractors involve several risks, including a potentialinability to obtain an adequate supply of required components due to thesuppliers’ failure or inability to provide such components in a timely manner,or at all, and reduced control over pricing and timely delivery of components.Although the timeliness, yield and quality of deliveries to date from oursubcontractors have been acceptable, manufacture of certain of these componentsand subassemblies is an extremely complex process, and long lead-times arerequired. Any inability to obtain adequate deliveries or any other circumstancethat would require us to seek alternative sources of supply or to manufacturesuch components internally could delay our ability to ship our products, whichcould damage relationships with current and prospective customers and have amaterial adverse effect on our business, financial condition and results ofoperations.**

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

**Thesemiconductor and nanotechnology manufacturing industries are subject to rapidtechnological change and new product introductions and enhancements. Ourability to be competitive in these and other markets will depend, in part, uponour ability to develop new and enhanced systems and related software tools, andto introduce these systems and related software tools at competitive prices andon a timely and cost-effective basis to enable customers to integrate them intotheir operations either prior to or as they begin volume product manufacturing.We will also be required to enhance the performance of our existing systems andrelated software tools. Our success in developing new and enhanced systems andrelated software tools depends upon a variety of factors, including productselection, timely and efficient completion of product design, timely andefficient implementation of manufacturing and assembly processes, productperformance in the field and effective sales and marketing. Because new productdevelopment commitments must be made well in advance of sales, new productdecisions must anticipate both future demand and the technology that will beavailable to meet that demand. We may not be successful in selecting,developing, manufacturing or marketing new products and related software toolsor enhancing our existing products and related software tools. Any such failurewould materially adversely affect our business, financial condition and resultsof operations.**

Because of the largenumber of components in our systems, significant delays can occur between asystem’s introduction and our commencement of volume production of suchsystems. We have experienced delays from time to time in the introduction of,and technical and manufacturing difficulties with, certain of our systems andenhancements and related software features and options, and may experiencedelays and technical and manufacturing difficulties in future introductions orvolume production of new systems or enhancements and related software featuresand options.

We may encounteradditional technical, manufacturing or other difficulties that could furtherdelay future introductions or volume production of systems or enhancements. Ourinability to complete the development or meet the technical specifications ofany of our systems or enhancements and related software tools, or our inabilityto manufacture and ship these systems or enhancements and related softwaretools in volume and in time to meet the requirements for manufacturing thefuture generation of semiconductor or nanotechnology devices would materiallyadversely affect our business, financial condition and results of operations.In addition, we may incur substantial unanticipated costs to ensure thefunctionality and reliability of our products early in the products’ lifecycles. If new products have reliability or quality problems, reduced orders orhigher manufacturing costs, delays in customer acceptance, revenue recognitionand collecting accounts receivable and additional service and warranty expensesmay result. Any of such events may materially adversely affect our business,financial condition and results of operations.

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**A substantial portion ofour sales is outside of the United States, which subjects us to risks relatedto customer service, installation, foreign economic and political stability,uncertain regulatory and tax rules, and foreign exchange rate fluctuations, allof which make it more difficult to operate our business.**

**Internationalsales accounted for approximately 67% and 73% of total net sales for the firstthree quarters of 2006 and 2005, respectively. International net salesaccounted for approximately 69% and 65% of total net sales for the years 2005and 2004, respectively. We anticipate that international sales, which typicallyhave lower gross margins than domestic sales, principally due to increasedcompetition and higher field service and support costs, will continue toaccount for a significant portion of total net sales. As a result, asignificant portion of our net sales will continue to be subject to certainrisks, including unexpected changes in regulatory requirements; difficulty insatisfying existing regulatory requirements; exchange rate fluctuations;tariffs and other barriers; political and economic instability; difficulties inaccounts receivable collections; natural disasters; difficulties in staffingand managing foreign subsidiary and branch operations; and potentially adversetax consequences.**

Although we generallytransact our international sales in U.S. dollars, international sales expose usto a number of additional risk factors, including fluctuations in the value oflocal currencies relative to the U.S. dollar, which, in turn, impact therelative cost of ownership of our products and may further impact thepurchasing ability of our international customers. However, in Japan, we havedirect sales operations and orders are often denominated in Japanese yen. Thismay subject us to a higher degree of risk from currency fluctuations. Weattempt to mitigate this exposure through the use of foreign currency forwardexchange contracts. We are also subject to the risks associated with theimposition of legislation and regulations relating to the import or export ofsemiconductors and nanotechnology products. We cannot predict whether theUnited States or any other country will implement changes to quotas, duties,taxes or other charges or restrictions upon the importation or exportation ofour products. These factors, or the adoption of restrictive policies, may havea material adverse effect on our business, financial condition and results ofoperations.

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

Our future operatingresults depend, in significant part, upon the continued contributions of keypersonnel, many of whom would be difficult to replace. Most of our employeesare employed “at will.” We have entered into employment agreements with only alimited number of our employees, including our Chief Executive Officer, ChiefFinancial Officer and Senior Vice President World-wide Sales and CustomerOperations. Some of these agreements contain vesting acceleration and severancepayment provisions that could result in significant costs or charges to usshould the employee be terminated without cause, die or have a disability. Wedo not maintain any life insurance on any of our key employees. The loss of keypersonnel could have a material adverse effect on our business, financialcondition and results of operations. In addition, our future operating results dependin significant part upon our ability to attract and retain other qualifiedmanagement, manufacturing, technical, sales and support personnel for ouroperations. There are only a limited number of persons with the requisiteskills to serve in these positions and it may become increasingly difficult forus to hire such personnel over time. At times, competition for such personnelhas been intense, particularly in the San Francisco Bay Area where we maintainour headquarters and principal operations. We may not be successful inattracting or retaining such personnel in the future. The failure to attract orretain such persons would materially adversely affect our business, financialcondition and results of operations.

**Changes in financialaccounting standards or policies in the past have affected, and in the futuremay affect, our reported results of operations.**

We prepare our financialstatements in conformity with accounting principles generally accepted in theUnited States, or U.S. GAAP. These principles are subject to interpretation bythe Financial Accounting Standards Board (FASB), the American Institute ofCertified Public Accountants (AICPA), the Securities and Exchange Commission(SEC) and various bodies formed to interpret and create appropriate accountingpolicies. A change in those policies can have a significant effect on ourreported results and may affect our reporting of transactions completed beforea change is announced.

Accounting policiesaffecting many aspects of our business, including rules relating torevenue recognition, off-balance sheet transactions, employee stock options,restructurings, asset disposals and asset retirement obligations, intangibleassets, derivative and other financial instruments, and in-process research anddevelopment charges, have recently been revised or are under review. Changes tothose rules or the questioning of how we interpret or implement thoserules may have a material adverse effect on our reported financial resultsor on the way we conduct business. In addition, our preparation of financialstatements in accordance with U.S. GAAP requires that we make estimates andassumptions that affect the recorded amounts of assets and liabilities,disclosure of those assets and liabilities at the date of the financialstatements and the recorded amounts of expenses during the reporting period. A changein the facts and circumstances surrounding those estimates could result in achange to our estimates and could impact our future operating results.

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**Changes in securities laws and listing standards, inparticular those that have resulted from the passage of the Sarbanes-Oxley Actof 2002 and related rules and regulations, have increased our legal andfinancial costs. We expect to continue to spend significant resources to complywith these requirements.**

The Sarbanes-Oxley Act of2002 required changes in our corporate governance, public disclosure andcompliance practices. The number of rules and regulations applicable to ushas increased, and will continue to increase, our legal and financialcompliance costs and has made some activities more difficult, such as requiringstockholder approval of new option plans. In addition, we have incurred, andexpect to continue to incur, significant costs in connection with compliancewith Section 404 of the Sarbanes-Oxley Act regarding internal controlsover financial reporting. We incurred significant costs to achieve initialcompliance with Section 404, and we expect ongoing annual costs tomaintain compliance to also be substantial. We also expect these developmentsto make it more difficult and more expensive to obtain director and officerliability insurance, and we may be required to accept reduced coverage or incursubstantially higher costs to obtain coverage. These developments could make itmore difficult for us to attract and retain qualified members of our board ofdirectors, particularly to serve on our audit committee, and qualifiedexecutive officers. In addition, in connection with our Section 404certification process, we may identify from time to time deficiencies in ourinternal controls. Any material weakness or deficiency in our internal controlsover financial reporting could materially and negatively impact our reportedfinancial results and the market price of our stock could significantlydecline. Additionally, adverse publicity related to the disclosure of amaterial weakness or deficiency in internal controls over financial reportingcould have a negative impact on our reputation, business and stock price.

**Our shareholder rightsplan, equity incentive plans, licensing agreements, certain provisions of ourCertificate of Incorporation and Bylaws, and Delaware law may discourage thirdparties from pursuing a change of control transaction with us.**

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

**Our stock price hasexperienced significant volatility in the past and we expect this to continuein the future as a result of many factors, some of which could be unrelated toour operating performance. Such volatility can have a major impact on thenumber of shares subject to outstanding stock options that are included in calculatingour earnings per share.**

We believe that factorssuch as announcements of developments related to our business, fluctuations inour operating results, a shortfall in revenue or earnings, changes in analysts’expectations, general conditions in the semiconductor and nanotechnologyindustries or the worldwide or regional economies, sales of our securities intothe marketplace, changes in the regulatory environment, an outbreak orescalation of hostilities, announcements of technological innovations or newproducts or enhancements by us or our competitors, developments in patents orother intellectual property rights and developments in our relationships withour customers and suppliers could cause the price of our common stock tofluctuate, perhaps substantially. The market price of our common stock hasfluctuated significantly in the past and we expect it to continue to experiencesignificant fluctuations in the future, including fluctuations that may beunrelated to our performance.

As of September 30,2006, we had issued and outstanding options to purchase approximately6.2 million shares of our common stock. Among other determinants, themarket price of our stock has a major bearing on the number of stock optionsoutstanding that are included in the weighted-average shares used indetermining our diluted net income (loss) per share. During periods of extremevolatility, the impact of higher stock prices can have a materially dilutiveeffect on our net income per share. Additionally,****optionsare excluded from the calculation of earnings per share when we have a net lossor when the exercise price of the stock option is greater than the averagemarket price of our common stock, as the impact of the stock options would beanti-dilutive.

**Our results of operationsand business could be adversely affected by wars and other military action, aswell as terrorist attacks and threats and government responses thereto,especially if any such actions were directed at us or our facilities orcustomers.**

Terrorist attacks in theUnited States and elsewhere, government responses thereto, and military actionsin Iraq, Afghanistan and elsewhere, may disrupt our operations or those of ourcustomers and suppliers and may affect the availability of materials needed tomanufacture our products or the means to transport those materials tomanufacturing facilities and finished products to customers. In addition, anyof these events could increase volatility in the United States and worldfinancial markets, which may depress the price of our common stock and maylimit the capital resources available to us or our customers or suppliers,which could result in decreased orders from customers, less favorable financingterms from suppliers, and scarcity or increased costs of materials andcomponents of our products. Additionally, terrorist attacks directly upon usmay significantly disrupt our ability to conduct our business. Any of theseoccurrences could have a significant impact on our operating results, revenuesand costs and may result in increased volatility of the market price of ourcommon stock.

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

OnAugust 15, 2006, we issued 2,000 shares of our common stock in anunregistered, private placement under Section 4(2) of the SecuritiesAct of 1933 to SEMI Foundation, a non-profit organization, to support theirefforts to educate youth interested in science and math about careeropportunities in the semiconductor industry.

Thefollowing table sets forth our repurchases of our securities during the fiscalquarter ended September 30, 2006:
| **Period**        | ** ** | **Total number of  shares purchased** | ** ** | **Average price  paid per share** | ** ** | **Total number of shares  purchased as part of  publicly announced  program (1)** | ** ** | **Maximum  dollar value of  shares that may  yet be  purchased  under the  program** | ** ** |
|-------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** ** | ** **                                           | ** ** | ** **                                       | ** ** | ** **                                                                                                                | ** ** | **(in thousands)**                                                                                            | ** ** |
| 7/2/06 - 7/29/06  |       | 260,670                                              |       | 14.19                                            |       | 260,670                                                                                                                   |       | $                                                                                                                  | 17,114     |   |
| 7/30/06 - 8/26/06 |       | 481,375                                              |       | 14.74                                            |       | 481,375                                                                                                                   |       | $                                                                                                                  | 10,017     |   |
| 8/27/06 - 9/30/06 |       | —                                               |       | —                                           |       | —                                                                                                                    |       | $                                                                                                                  | 10,017     |   |
| Total             |       | 742,045                                              |       | 14.55                                            |       | 742,045                                                                                                                   |       |                                                                                                               |       |

 

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(1)We announced on September 19, 2005 that our Board of Directors authorized therepurchase of up to $30 million of our common stock in the open market duringthe period commencing September 19, 2005 through September 30, 2007.

**Item3.**                          DefaultsUpon Senior Securities.

None.

**Item4.**                          Submissionof Matters to a Vote of Security Holders.

The following proposals were voted upon bythe Company’s stockholders at the Company’s Annual Stockholders’ Meeting heldon July 18, 2006.

 

1.                                       The following persons were elected asdirectors of the Company to serve for a term ending upon the AnnualStockholders’ Meeting indicated beside their respective names and until theirsuccessors are elected and qualified:

 
|                       | ** ** | **Terms Ending Upon the  Annual Stockholders’  Meeting** | ** ** | **Votes for** | ** ** | **Votes withheld** | ** ** |
|-----------------------|------------|-----------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
|                  |       |                                                                              |       |               |       |                    |       |
| Arthur W. Zafiropoulo |       | 2008                                                                              |       | 20,941,300         |       | 943,240                 |       |
| Joel F. Gemunder      |       | 2008                                                                              |       | 20,481,523         |       | 1,403,017               |       |
| Nicholas Konidaris    |       | 2008                                                                              |       | 21,029,940         |       | 854,600                 |       |
| Rick Timmins          |       | 2008                                                                              |       | 21,048,140         |       | 836,400                 |       |

 

2.                                       Aproposal to ratify the appointment of Ernst & Young LLP as the Company’sindependent registered public accounting firm for the fiscal year endingDecember 31, 2006 was approved by the vote of 21,868,218 shares for; 8,318shares against; and 8,003 shares abstained.

 

Theproposals above are described in detail in the Company’s definitive proxystatement filed with the SEC on April 28, 2006 for the Annual Stockholders’Meeting held on July 18, 2006.

28

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**Item5.**                          OtherInformation.

As previously disclosed, we proactivelyestablished a special committee of our Board of Directors comprised solely ofindependent directors to conduct a voluntary, Company-initiated review of ourhistorical stock option grants from our initial public offering in 1993 to thepresent. The special committee retained independent counsel to assist it withthis review. The special committee has completed its review and concluded therewere no material accounting issues or backdating or other inappropriatemanipulation regarding the issuance and pricing of stock options. Based onthese findings, we have determined that no adjustments to previously filedfinancial statements are required.

 

**Item6.**                          Exhibits
| 31.1   | Certification of Chief Executive Officer required  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                              |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                            |
| 31.2   | Certification of Chief Financial Officer required  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                              |
|   |                                                                                                                                                                                            |
| 32.1   | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

29

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**SIGNATURES**

 

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

 
|        |   |             | ** ** | ** ** |   | **ULTRATECH, INC.** |
|--------|--------|------------------|------------|------------|--------|---------------------|
|   |   |             |       |       |   | (Registrant)        |
|   |   |             |       |       |   |                |   |   |
| Date:  |   | November 2, 2006 |       |       |   | By:                 |   | /s/Bruce R. Wright |
|   |   |             |       |       |   |                |   | Bruce R. Wright |
|   |   |             |       |       |   |                |   | Senior Vice President, Finance and Chief Financial |
|   |   |             |       |       |   |                |   | Officer (Duly Authorized Officer and Principal |
|   |   |             |       |       |   |                |   | Financial and Accounting Officer) |

 

30

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**EXHIBIT INDEX**
| 31.1   |   | Certification of Chief Executive Officer required  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                       |
| 31.2   |   | Certification of Chief Financial Officer required  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                         |
|   |   |                                                                                                                                                                                       |
| 32.1   |   | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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