**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM  10-Q**

 
| **(Mark One)**                     |   |                                                                                                                                                                                                                           |
|------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                         |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                   |
|                               |   |                                                                                                                                                                                                                           |
|                               |   | **For the Quarterly  period ended June 28, 2003**                                                                                                                                                                              |
|                               |
| **o**                              |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                  |
|                               |   |                                                                                                                                                                                                                           |
|                               |   | **For the transition period from                   to                 ** |
|                               |
| **Commission File Number 0-22248** |

 

| **ULTRATECH,  INC.**                                                        |
|-----------------------------------------------------------------------------|
| (Exact name of registrant as specified in  its charter)                     |
|                                                                        |
| **DELAWARE**                                                                |   | **94-3169580** |
| (State or other jurisdiction of  incorporation or organization)             |   | (I.R.S. Employer Identification No.) |
|                                                                        |   |   |
| **3050 Zanker Road, San Jose, California**                                  |   | **95134** |
| (Address of principal executive offices)                                    |   | (Zip Code) |
|                                                                        |   |   |
| Registrant’s telephone number, including  area code **(408) 321-8835** |

 

**Ultratech Stepper, Inc.**

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

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

 

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

 

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

 

 

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

 
| **Class**                      |   | **Outstanding  as of July 29, 2003** |
|--------------------------------|--------|--------------------------------------|
| common  stock, $.001 par value |   | 22,866,136                           |

 

 

----

 

**ULTRATECH,INC.**

 

**INDEX**

 
| **PART 1.**                       | **FINANCIAL INFORMATION**                                                                                           |   |   |
|-----------------------------------|---------------------------------------------------------------------------------------------------------------------|--------|--------|
|                              |                                                                                                                |   |   |
| **Item 1.**                       | **Condensed Consolidated Financial Statements**                                                                     |   |   |
|                              |                                                                                                                |   |   |
|                              | Condensed Consolidated Balance Sheets as of  June 28, 2003 and December 31, 2002                                    |   | 3      |
|                              |                                                                                                                |   |   |
|                              | Condensed Consolidated Statements of  Operations for the three and six months ended June 28, 2003 and June 29, 2002 |   | 4      |
|                              |                                                                                                                |   |   |
|                              | Condensed Consolidated Statements of Cash  Flows for the six months ended June 28, 2003 and June 29, 2002           |   | 5      |
|                              |                                                                                                                |   |   |
|                              | Notes to Condensed Consolidated Financial  Statements                                                               |   | 6      |
|                              |                                                                                                                |   |   |
| **Item 2.**                       | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations**                     |   | 12     |
|                              |                                                                                                                |   |   |
| **Item 3.**                       | **Quantitative and Qualitative Disclosures  About Market Risk**                                                     |   | 29     |
|                              |                                                                                                                |   |   |
| **Item 4.**                       | **Controls and Procedures**                                                                                         |   | 29     |
|                              |                                                                                                                |   |   |
| **PART 2.**                       | **OTHER INFORMATION**                                                                                               |   |   |
|                              |                                                                                                                |   |   |
| **Item 1.**                       | **Legal Proceedings**                                                                                               |   | 31     |
|                              |                                                                                                                |   |   |
| **Item 2.**                       | **Changes in Securities and Use of Proceeds**                                                                       |   | 31     |
|                              |                                                                                                                |   |   |
| **Item 3.**                       | **Defaults upon Senior Securities**                                                                                 |   | 31     |
|                              |                                                                                                                |   |   |
| **Item 4.**                       | **Submission of Matters to a Vote of Security  Holders**                                                            |   | 31     |
|                              |                                                                                                                |   |   |
| **Item 5.**                       | **Other Information**                                                                                               |   | 31     |
|                              |                                                                                                                |   |   |
| **Item 6.**                       | **Exhibits and Reports on Form 8-K**                                                                                |   | 32     |
|                              |                                                                                                                |   |   |
| **SIGNATURES AND CERTIFICATIONS** |                                                                                                                | 33     |

 

2

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**PART 1****.                FINANCIAL INFORMATION**

**Item 1.    Condensed Consolidated Financial Statements**

 

**ULTRATECH, INC.**

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

 
| **(In thousands)**                                  |   | **June 28,  2003**  |        | **Dec. 31,  2002*** |   |
|-----------------------------------------------------|--------|---------------------|-------------|---------------------|--------|
|                                                |   | **(Unaudited****)** |        |                |   |
| ***ASSETS***                                        |   |                |        |                |   |
|                                                |   |                |        |                |   |
| Current  assets:                                    |   |                |        |                |   |
| Cash,  cash equivalents, and short-term investments |   | **$**               | **159,279** |                | $      | 157,529 |   |
| Accounts  receivable                                |   | **14,490**          |        | 12,870              |   |
| Inventories                                         |   | **20,327**          |        | 25,182              |   |
| Income  taxes receivable                            |   | **—**          |        | 1,179               |   |
| Prepaid  expenses and other current assets          |   | **2,288**           |        | 1,627               |   |
| Total  current assets                               |   | **196,384**         |        | 198,387             |   |
|                                                |   |                |        |                |   |
| Equipment  and leasehold improvements, net          |   | **17,747**          |        | 19,090              |   |
|                                                |   |                |        |                |   |
| Intangible  assets, net                             |   | **667**             |        | 858                 |   |
|                                                |   |                |        |                |   |
| Demonstration  inventories, net                     |   | **3,438**           |        | 2,208               |   |
|                                                |   |                |        |                |   |
| Other  assets                                       |   | **1,865**           |        | 1,823               |   |
|                                                |   |                |        |                |   |
| Total  assets                                       |   | **$**               | **220,101** |                | $      | 222,366 |   |
|                                                |   |                |        |                |   |
| ***LIABILITIES AND STOCKHOLDERS’ EQUITY***     |   |                |        |                |   |
|                                                |   |                |        |                |   |
| Current  liabilities:                               |   |                |        |                |   |
| Notes  payable                                      |   | **$**               | **6,888**   |                | $      | 9,769 |   |
| Accounts  payable                                   |   | **9,087**           |        | 6,719               |   |
| Deferred  product and services income               |   | **6,095**           |        | 6,293               |   |
| Deferred  license income                            |   | **6,607**           |        | 8,463               |   |
| Other  current liabilities                          |   | **13,775**          |        | 14,983              |   |
| Total  current liabilities                          |   | **42,452**          |        | 46,227              |   |
|                                                |   |                |        |                |   |
| Other  liabilities                                  |   | **3,848**           |        | 4,385               |   |
|                                                |   |                |        |                |   |
| Stockholders’  equity                          |   | **173,801**         |        | 171,754             |   |
|                                                |   |                |        |                |   |
| Total  liabilities and stockholders’ equity    |   | **$**               | **220,101** |                | $      | 222,366 |   |

 

Notes:

 

----

* The Balance Sheet as of  Dec. 31, 2002 has been derived from the audited financialstatements at that date. 

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

3

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**ULTRATECH, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME**

**(UNAUDITED)**

 
|                                                       |   | **Three Months Ended** |       | **Six Months Ended** |   |
|------------------------------------------------------------|--------|------------------------|------------|----------------------|--------|
| **(In thousands, except per share  amounts)**              |   | **June 28,  2003**     |       | **June 29,  2002**   |   | **June 28,  2003** |   | **June 29,  2002** |   |
| Net  sales:                                                |   |                   | ** ** |                 |   |   |   |   |   |
| Products                                                   |   | **$**                  | **21,206** | ** **           | $      | 16,615 |   | **$** | **39,842** | ** ** | $ | 31,494 |   |
| Services                                                   |   | **2,630**              | ** ** | 3,166                |   | **5,066** | ** ** | 5,611 |   |
| Licenses                                                   |   | **928**                | ** ** | 928                  |   | **1,856** | ** ** | 3,389 |   |
| Total net  sales                                           |   | **$**                  | **24,764** | ** **           | $      | 20,709 |   | **$** | **46,764** | ** ** | $ | 40,494 |   |
|                                                       |   |                   |       |                 |   |   |   |   |   |
| Cost of  sales:                                            |   |                   | ** ** |                 |   |   | ** ** |   |   |
| Cost of  products sold                                     |   | **11,901**             | ** ** | 11,092               |   | **24,181** | ** ** | 21,140 |   |
| Cost of  services                                          |   | **1,779**              | ** ** | 2,275                |   | **3,365** | ** ** | 4,080 |   |
| Cost of  inventory writedown                               |   | **(619**               | **)**      | —               |   | **(619** | **)** | — |   |
| Cost of  discontinued products                             |   | **(121**               | **)**      | —               |   | **(121** | **)** | — |   |
| Total  cost of sales                                       |   | **12,940**             | ** ** | 13,367               |   | **26,806** | ** ** | 25,220 |   |
| Gross  profit                                              |   | **$**                  | **11,824** | ** **           | $      | 7,342 |   | **$** | **19,958** | ** ** | $ | 15,274 |   |
|                                                       |   |                   |       |                 |   |   |   |   |   |
| Operating  expenses:                                       |   |                   | ** ** |                 |   |   | ** ** |   |   |
| Research,  development, and engineering                    |   | **5,583**              | ** ** | 5,904                |   | **10,174** | ** ** | 11,732 |   |
| Amortization  of intangible assets                         |   | **95**                 | ** ** | 95                   |   | **190** | ** ** | 190 |   |
| Selling,  general, and administrative                      |   | **5,160**              | ** ** | 5,823                |   | **10,266** | ** ** | 11,904 |   |
| Restructure  of operations                                 |   | **(114**               | **)**      | —               |   | **(114** | **)** | — |   |
| Operating  income (loss)                                   |   | **$**                  | **1,100**  | ** **           | $      | (4,480 | ) | **$** | **(558** | **)** | $ | (8,552 | ) |
| Interest  expense                                          |   | **(57**                | **)**      | (12                  | )      | **(123** | **)** | (15 | ) |
| Interest  and other income, net                            |   | **1,121**              | ** ** | 1,615                |   | **2,172** | ** ** | 3,268 |   |
| Income  (loss) before tax                                  |   | **$**                  | **2,164**  | ** **           | $      | (2,877 | ) | **$** | **1,491** | ** ** | $ | (5,299 | ) |
| Income  taxes (benefit)                                    |   | **135**                | ** ** | (1,218               | )      | **445** | ** ** | (1,218 | ) |
| Net  income (loss)                                         |   | **$**                  | **2,029**  | ** **           | $      | (1,659 | ) | **$** | **1,046** | ** ** | $ | (4,081 | ) |
|                                                       |   |                   |       |                 |   |   |   |   |   |
| Earnings  per share - basic:                               |   |                   | ** ** |                 |   |   | ** ** |   |   |
| Net  income (loss)                                         |   | **$**                  | **0.09**   | ** **           | $      | (0.07 | ) | **$** | **0.05** | ** ** | $ | (0.18 | ) |
| Number of  shares used in per share calculations - basic   |   | **22,783**             | ** ** | 22,574               |   | **22,743** | ** ** | 22,544 |   |
|                                                       |   |                   |       |                 |   |   |   |   |   |
| Earnings  per share - diluted:                             |   |                   | ** ** |                 |   |   | ** ** |   |   |
| Net  income (loss)                                         |   | **$**                  | **0.09**   | ** **           | $      | (0.07 | ) | **$** | **0.05** | ** ** | $ | (0.18 | ) |
| Number of  shares used in per share calculations - diluted |   | **23,381**             | ** ** | 22,574               |   | **23,030** | ** ** | 22,544 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

4

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**ULTRATECH, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                       |   | **Six Months Ended** |       |
|------------------------------------------------------------|--------|----------------------|------------|
| **(In  thousands)**                                        |   | **June 28,  2003**   |       | **June 29,  2002** |   |
|                                                       |   |                 |       |   |   |
| **Cash  flows from operating activities:**                 |   |                 |       |   |   |
| Net income (loss)                                          |   | **$**                | **1,046**  |   | $ | (4,081 | ) |
| Charges to income not  affecting cash                      |   | **4,846**            |       | 4,597 |   |
| Net effect of changes  in operating assets and liabilities |   | **544**              |       | (2,356 | ) |
| Net cash generated by  (used in) operating activities      |   | **6,436**            |       | (1,840 | ) |
|                                                       |   |                 |       |   |   |
| **Cash  flows from investing activities:**                 |   |                 |       |   |   |
| Capital expenditures                                       |   | **(2,220**           | )          | (3,002 | ) |
| Net decrease (increase)  in available-for-sale securities  |   | **2,346**            |       | (7,095 | ) |
| Net cash generated by  (used in) investing activities      |   | **126**              |       | (10,097 | ) |
|                                                       |   |                 |       |   |   |
| **Cash  flows from financing activities:**                 |   |                 |       |   |   |
| Net proceeds from  (repayment of) notes payable            |   | **(2,945**           | )          | 3,110 |   |
| Proceeds from issuance  of Common Stock                    |   | **971**              |       | 1,848 |   |
| Net cash provided by  (used in) financing activities       |   | **(1,974**           | )          | 4,958 |   |
|                                                       |   |                 |       |   |   |
| Net effect of exchange  rate changes on cash               |   | **19**               |       | (47 | ) |
|                                                       |   |                 |       |   |   |
| Net increase (decrease)  in cash and cash equivalents      |   | **4,607**            |       | (7,026 | ) |
|                                                       |   |                 |       |   |   |
| Cash and cash  equivalents at beginning of period          |   | **18,178**           |       | 62,729 |   |
|                                                       |   |                 |       |   |   |
| Cash and cash  equivalents at end of period                |   | **$**                | **22,785** |   | $ | 55,703 |   |

 

*See accompanying notes tocondensed consolidated financial statements*

 

5

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**Ultratech,Inc.**

**Notesto Condensed Consolidated Financial Statements**

**(Unaudited)**

**June28, 2003**

**(1)  Description of Business**

 

Ultratech, Inc. develops, manufactures and marketsphotolithography and laser thermal processing equipment for manufacturers of integratedcircuits and nanotechnology components located throughout North America,Europe, Japan and the rest of Asia.

 

The Company supplies step-and-repeat photolithography systems based onone-to-one imaging technology. Markets for the Company’s photolithographyproducts include advanced packaging and the manufacture of variousnanotechnology components, including thin film head magnetic recording devices,optical networking devices, laser diodes and colored LED’s.

 

In evaluating its business segments, the Company gave consideration tothe Chief Executive Officer’s review of financial information and theorganizational structure of the Company’s management. Based on this review, theCompany concluded that, at the present time, resources are allocated and otherfinancial decisions are made based, primarily, on consolidated financialinformation. Accordingly, the Company has determined that it operates in onebusiness segment, which is the manufacture and distribution of capitalequipment to manufacturers of integrated circuits and nanotechnologycomponents.

 

**(2) Summary of Significant AccountingPolicies**

 

BASIS OF PRESENTATION - The unaudited condensed consolidated financialstatements have been prepared by the Company in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments considered necessary for fairpresentation have been included.

 

Operating results for the three and six-month periods ended June 28,2003 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2003, or any future period.

 

USE OF ESTIMATES – The preparation of the financial statements andrelated disclosures, in conformity with accounting principles generallyaccepted in the United States, requires management to make estimates andjudgments that affect the reported amounts in the financial statements andaccompanying notes. On an ongoing basis, management evaluates its estimates,including those related to inventories, warranty obligations, purchase ordercommitments, bad debts, income taxes, intangible assets, restructuring andcontingencies and litigation. Management bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

REVENUE RECOGNITION – In November 2002, the Emerging Task Force issuedEITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”.EITF 00-21 addresses how to account for arrangements that may involve deliveryor performance of multiple products, services and/or rights to use assets, andwhen and, if so, how an arrangement involving multiple deliverables should bedivided into separate units of accounting. It does not change otherwise applicable revenue recognition criteria. Itapplies to arrangements entered into in fiscal periods beginning after June 15,2003, with early adoption permitted.

 

Under the provisions of EITF 00-21, separate units of accounting existif all of the following criteria are met: the item has value on a standalonebasis; there is objective and reliable evidence of fair value; delivery ofundelivered items is probable and in control of the Company; and considerationallocable to delivered item is not contingent on delivery of additional items.

 

In response to EITF 00-21, the Company has reviewed its arrangementsinvolving multiple deliverables. The Company has concluded that the adoption ofEITF 00-21 has no effect on its current revenue recognition policy. Althoughapplication of EITF 00-21 results in the identification of separate accountingunits, e.g. the system and its installation, the Company believes that allelements of SAB 101 are not met at the time of shipment. Therefore, revenuerecognition for systems must be delayed until all elements of SAB 101 are met,generally upon acceptance of the system.

 

Accordingly, the Company recognizes revenues on system sales when thecontractual obligation for installation (if any) has been satisfied, orinstallation is substantially complete, and/or customer acceptance

 

6

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provisions have lapsed, provided collections of the related receivableare probable. In the event of a delay in the installation of our productscaused by the customer, we may seek acceptance of the system and warrantycommencement after shipment and transfer of title, but prior to completion ofinstallation. Revenue recorded as a result of these customer acceptances isreduced by an amount representing the fair-value of installation services. In theseinstances, revenue is recorded only if the product has met productspecifications prior to shipment and management deems that no significantuncertainties as to product performance exist. The Company generally recognizesrevenue from spare parts sales upon shipment. The Company sells servicecontracts for which revenue is recognized ratably over the contract period. TheCompany recognizes revenue from licensing and technology support agreementsratably over the contract period, or the estimated useful life of the licensedtechnologies, whichever is shorter.

 

BASIC AND DILUTED NET LOSS PER SHARE - The following sets forth thecomputation of basic and diluted net loss per share:

 
|                                                     |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|----------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Unaudited, in thousands, except  per share amounts)** |   | **June 28,  2003**      |   | **June 29,  2002**    |   | **June 28,  2003** |   | **June 29,  2002** |   |
|                                                     |   |                    |   |                  |   |   |   |   |   |
| Numerator:                                               |   |                    |   |                  |   |   |   |   |   |
| Net income (loss)                                        |   | $                       | 2,029  |                  | $      | (1,659 | ) | $ | 1,046 |   | $ | (4,081 | ) |
|                                                     |   |                    |   |                  |   |   |   |   |   |
| Denominator:                                             |   |                    |   |                  |   |   |   |   |   |
| Denominator for basic earnings per share                 |   | 22,783                  |   | 22,574                |   | 22,743 |   | 22,544 |   |
| Effect of dilutive employee stock options                |   | 598                     |   | —                |   | 287 |   | — |   |
| Denominator for diluted earnings per share               |   | 23,381                  |   | 22,574                |   | 23,030 |   | 22,544 |   |
|                                                     |   |                    |   |                  |   |   |   |   |   |
| Earnings per share - basic:                              |   |                    |   |                  |   |   |   |   |   |
| Net income (loss)                                        |   | $                       | 0.09   |                  | $      | (0.07 | ) | $ | 0.05 |   | $ | (0.18 | ) |
|                                                     |   |                    |   |                  |   |   |   |   |   |
| Earnings per share - diluted:                            |   |                    |   |                  |   |   |   |   |   |
| Net income (loss)                                        |   | $                       | 0.09   |                  | $      | (0.07 | ) | $ | 0.05 |   | $ | (0.18 | ) |

 

For the three and six-month periods ended June 28, 2003, options topurchase 1,518,000 and 3,833,000 shares of Common Stock at an average exerciseprice of $22.22 and $17.29, respectively, were excluded from the computation ofdiluted net loss per share, as the effect would have been anti-dilutive. Forthe three and six-month periods ended June 29, 2002, options to purchase4,683,000 shares of Common Stock at an average exercise price of $16.58 wereexcluded from the computation of diluted net loss per share, as the effectwould have been anti-dilutive. Options are anti-dilutive when the Company has anet loss or when the exercise price of the stock option is greater than theaverage market price of the Company’s Common Stock.

 

STOCK-BASED COMPENSATION - On December 31, 2002, the FASB issuedStatement of Financial Accounting Standards No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure*”*(SFAS 148).  SFAS 148 amends FASB Statement No. 123,“Accounting for Stock-Based Compensation”, to provide alternative methods oftransition to the fair value method of accounting for stock-based employeecompensation.  In addition, SFAS 148amends the disclosure provisions of Statement 123 to require disclosure in thesummary of significant accounting policies of the effects of an entity’saccounting policy with respect to stock-based employee compensation on reportednet income and earnings per share in annual and interim financialstatements.  SFAS 148 is effective forfiscal years ending after December 15, 2002, with earlier application permitted.

 

At June 28, 2003, the Company had several stock-based employeecompensation plans, including stock option plans and an employee stock purchaseplan. The Company accounts for these plans under the intrinsic value method. Nostock option-based employee compensation cost is reflected in net income(loss), as all options granted under those plans had an exercise price equal tothe market value of the

 

7

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underlying common stock on the date of grant. The following tableillustrates the effect on net loss and earnings per share if the Company hadapplied the fair value recognition method.

 
|                                                                                                                                   |   | **Three  months ended** |   | **Six months  ended** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **In thousands, except per share  amounts**                                                                                            |   | **June 28,  2003**      |   | **June 29,  2002**    |   | **June 28,  2003** |   | **June 29,  2002** |   |
| Net income (loss) as reported                                                                                                          |   | $                       | 2,029  |                  | $      | (1,659 | ) | $ | 1,046 |   | $ | (4,081 | ) |
| Total stock-based employee compensation expense,  determined under fair value based method for all awards, net of related tax  effects |   | $                       | (2,054 | )                     | $      | (3,070 | ) | $ | (4,231 | ) | $ | (5,566 | ) |
| Pro forma net loss                                                                                                                     |   | $                       | (25    | )                     | $      | (4,729 | ) | $ | (3,185 | ) | $ | (9,647 | ) |
|                                                                                                                                   |   |                    |   |                  |   |   |   |   |   |
| Net income (loss) per share - basic, as reported                                                                                       |   | $                       | 0.09   |                  | $      | (0.07 | ) | $ | 0.05 |   | $ | (0.18 | ) |
| Pro forma net loss per share - basic                                                                                                   |   | $                       | (0.00  | )                     | $      | (0.21 | ) | $ | (0.14 | ) | $ | (0.43 | ) |
|                                                                                                                                   |   |                    |   |                  |   |   |   |   |   |
| Net income (loss) per share - diluted, as reported                                                                                     |   | $                       | 0.09   |                  | $      | (0.07 | ) | $ | 0.05 |   | $ | (0.18 | ) |
| Pro forma net loss per share - diluted                                                                                                 |   | $                       | (0.00  | )                     | $      | (0.22 | ) | $ | (0.14 | ) | $ | (0.44 | ) |

 

**(3) Inventories**

 

Inventories consist of the following:

 
| **(In thousands)** |   | **June 28,  2003** |   | **Dec. 31,  2002** |   |
|--------------------|--------|--------------------|--------|--------------------|--------|
|               |   | **(Unaudited)**    |   |               |   |
| Raw materials      |   | $                  | 10,102 |               | $      | 12,094 |   |
| Work-in-process    |   | 9,161              |   | 10,289             |   |
| Finished products  |   | 1,064              |   | 2,799              |   |
|               |   | $                  | 20,327 |               | $      | 25,182 |   |

 

**(4) Notes Payable andLetter of Credit**

 

The Company has a line of credit agreement with a brokerage firm. Underthe terms of this agreement, the Company may borrow funds at a cost equal tothe current Federal funds rate plus 100 basis points (2.00% as of June 28,2003). Certain of the Company’s cash, cash equivalents and short-terminvestments secure borrowings outstanding under this facility. Funds areadvanced to the Company under this facility based on pre-determined advancerates on the cash and securities held by the Company in this brokerage account.This agreement has no set expiration date and there are no loan covenants. Asof June 28, 2003, $6.6 million was outstanding under this facility, with arelated collateral requirement of approximately $9.5 million of the Company’scash, cash equivalents and short-term investments.

 

In June 2003, the Company replaced a credit facility requiring $2.0million of restricted cash with a credit facility requiring $4.0 million incompensating balances, consisting of the Company’s cash, cash equivalents andshort-term investments. The requirement for this credit facility results fromcontractual provisions of a lease for certain of the Company’s facilities,wherein the Company is required to supply the landlord with a $2.0 millionletter of credit.

 

**(5) Other CurrentLiabilities**

 

Other current liabilities consist of the following:

 

8

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|                                             |   | **June 28,  2003** |   | **Dec. 31,  2002** |   |
|--------------------------------------------------|--------|--------------------|--------|--------------------|--------|
| **(In thousands)**                               |   | **(Unaudited)**    |   |               |   |
| Salaries and benefits                            |   | $                  | 3,230  |               | $      | 3,247 |   |
| Warranty reserves                                |   | 1,615              |   | 1,462              |   |
| Advance billings                                 |   | 1,105              |   | 1,024              |   |
| Income taxes payable                             |   | 847                |   | 440                |   |
| Accrued restructuring cost                       |   | 1,838              |   | 2,558              |   |
| Reserve for losses on purchase order commitments |   | 1,310              |   | 2,120              |   |
| Other                                            |   | 3,830              |   | 4,132              |   |
|                                             |   | $                  | 13,775 |               | $      | 14,983 |   |

 

***Warranty reserves***

 

The Company generally warrants its products for a period of 12 monthsfrom the date of customer acceptance for material and labor to repair theproduct; accordingly, a provision for the estimated cost of the warranty isrecorded at the time revenue is recognized. Extended warranty terms, ifgranted, result in deferral of revenue approximating the Company’s standardpricing for similar service contracts. The Company estimates the costs that maybe incurred under its basic limited warranty and records a liability in theamount of such costs at the time the product is shipped. Recognition of therelated warranty cost is deferred until product revenue is recognized. Factorsthat affect the Company’s warranty liability include the number of installedunits, historical and anticipated rates of warranty claims, and cost per claim.The Company periodically assesses the adequacy of its recorded warrantyliabilities and adjusts the amounts as necessary.

 

Changes in the Company’s product liability are as follows:

 
|                                |   | **Three  months ended** |   | **Six months  ended** |   |
|-------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **In thousands**                    |   | **June 28,  2003**      |   | **June 29,  2002**    |   | **June 28,  2003** |   | **June 29,  2002** |   |
| Balance, beginning of the period    |   | $                       | 1,689  |                  | $      | 1,681 |   | $ | 1,462 |   | $ | 1,895 |   |
| Warranties issued during the period |   | 853                     |   | 875                   |   | 1,843 |   | 1,504 |   |
| Settlements made during the period  |   | (927                    | )      | (1,379                | )      | (1,690 | ) | (2,222 | ) |
| Balance, end of the period          |   | $                       | 1,615  |                  | $      | 1,177 |   | $ | 1,615 |   | $ | 1,177 |   |

 

**(6) Deferred Rent**

 

In 2002, in conjunction with a $3.2 million sale/leaseback transaction,the Company recorded a deferred rent credit equal to the excess of the saleproceeds over the adjusted basis in the equipment sold. During the three-yearterm of this agreement, the deferred rent credit will be amortized as an offsetto rent expense. At June 28, 2003, credits of $0.7 million and $0.6 millionrepresenting the short-term and long-term portions of deferred rent,respectively, were carried as liabilities on the Company’s condensedconsolidated balance sheets.

 

For the three-month period ended December 31, 2002, as part of theCompany’s review of its lease commitments, certain matters were identifiedrelated to prior financial reporting periods that necessitated the recording ofadditional expenses. Such matters were related to (i) the extension of theCompany’s lease of its headquarters building in November 1999 and (ii) thelease of an additional building in March 2000. The Company does not believethese amounts are material to the periods in which they should have beenrecorded. Had this adjustment been recorded in the proper periods, the impactfor the three and six-month periods ended June 30, 2002 would be an increase tothe net loss of $0.1 million and $0.2 million ($0.00 and $0.01 per share),respectively.

 

9

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**(7)****ReportingComprehensive Income (Loss)**

 

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

 
|                                                          |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|---------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **(Unaudited, in thousands)**                                 |   | **June 28,  2003**      |   | **June 29,  2002**    |   | **June 28,  2003** |   | **June 29,  2002** |   |
| Net income (loss)                                             |   | $                       | 2,029  |                  | $      | (1,659 | ) | $ | 1,046 |   | $ | (4,081 | ) |
| Accumulated other comprehensive income (loss)                 |   |                    |   |                  |   |   |   |   |   |
| Unrealized gain (loss) on available-for-sale  securities      |   | 111                     |   | 267                   |   | (69 | ) | (734 | ) |
| Unrealized gain (loss) on foreign exchange forward  contracts |   | 24                      |   | 19                    |   | 19 |   | (47 | ) |
| Tax effect                                                    |   | —                  |   | —                |   | — |   | — |   |
| Comprehensive income (loss)                                   |   | $                       | 2,164  |                  | $      | (1,373 | ) | $ | 996 |   | $ | (4,862 | ) |

 

Accumulated other comprehensive income presented in the accompanyingcondensed consolidated balance sheets consists entirely of accumulatedunrealized gains or losses on available-for-sale securities and the effect ofexchange rate changes on foreign exchange forward contracts. The unrealizedgain on available-for-sale securities is not currently adjusted for incometaxes, as a result of the Company’s operating loss carry forward.  Accumulated other comprehensive incomeconsists of the following:

 
| **In thousands:**                                               |   | **June 28,  2003** |   | **Dec. 31,  2002** |   |
|-----------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|
| Unrealized gains (losses) on:                                   |   |               |   |               |   |
| Available-for-sale investments                                  |   | $                  | 1,834  |               | $      | 1,903 |   |
| Foreign exchange contracts                                      |   | —             |   | (19                | )      |
| Accumulated other comprehensive income (loss) at  end of period |   | $                  | 1,834  |               | $      | 1,884 |   |

 

**(8) Restructure ofOperations**

 

In September 2002, in response to worsening conditions in thesemiconductor industry in particular, and the general economy as a whole, theCompany decided to reduce its workforce by approximately 15% and to cease orsuspend activities related to certain engineering and administrativeinitiatives. As a result of this decision, the Company recognized arestructuring charge of $4.3 million, or $0.19 per share for the three-monthperiod ended September 30, 2002. The Company reduced this charge by $0.2million during the three-month period ended December 31, 2002, primarily as aresult of canceling its plans to exit a certain building and an adjustment ofits international severance costs. Of the total net charge for the year endedDecember 31, 2002 of $4.1 million, the cash component included employeeseverance costs of $0.9 million, contract termination fees of $0.2 million andfacility closure costs of $0.1 million. The non-cash component of this chargeincluded $2.5 million of impairment to the carrying value of equipment andleasehold improvements and $0.3 million of impairment to prepaid expenses andother current assets.

 

As of June 28, 2003, there was no accrued but unpaid amount of theserestructuring costs. Cash components of accrued restructuring costs, andamounts charged against the plan for the six-month period then ended, relativeto the September 2002 restructure of operations, were as follows:

 

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| **(in millions)**        |   | **Balance at  Dec. 31, 2002** |   | **Expenditures** |   | **Balance at  June  28, 2003** |   |
|--------------------------|--------|-------------------------------|--------|------------------|--------|--------------------------------|--------|
|                     |   |                          |   |             |   |                           |   |
| Facility closure costs   |   | $                             | 0.1    |             | $      | (0.1                           | )      | $ | — |   |
| Employee severance costs |   | 0.1                           |   | (0.1             | )      | —                         |   |
| Other costs              |   | 0.2                           |   | (0.2             | )      | —                         |   |
| Total                    |   | $                             | 0.4    |             | $      | (0.4                           | )      | $ | — |   |

 

In September 2001, the Company reached a decision to consolidate itsmanufacturing operations and eliminate approximately 20% of its workforce. As aresult of this decision, the Company recognized a restructuring charge of $12.0million, or $0.54 per share (diluted) in the quarter ended September 30, 2001.Additionally, the Company recognized restructuring charges of $0.3 million, or$0.01 per share (diluted) in the quarter ended December 31, 2001, primarilyrelated to employee severance costs of $0.6 million (from additional personnelactions) and higher fixed asset disposal costs of $0.4 million, partiallyoffset by revised facility closure and other cost estimates of $0.7 million. Ofthe full-year charge of $12.3 million, non-cash components included a $4.1million impairment charge for intangible assets related to the Company’s XLSreduction product platform acquired in 1998 and a $1.5 million impairmentcharge for fixed assets disposed of in conjunction with the consolidation ofmanufacturing facilities. The cash components of this charge included $4.0million for estimated expenditures related to the closure of facilities, $2.5million for employee severance costs and $0.1 million of other restructuringcosts. As of March 29, 2003, the amount of restructuring costs accrued butunpaid was $2.0 million.

 

Cash components of accrued restructuring costs as of June 28, 2003, andamounts charged against the plan for the six-month period then ended, relativeto the September 2001 restructure of operations, were as follows:

 
| **(in millions)**        |   | **Balance at  Dec. 31, 2002** |   | **Expenditures** |   | **Balance at  June  28, 2003** |   |
|--------------------------|--------|-------------------------------|--------|------------------|--------|--------------------------------|--------|
|                     |   |                          |   |             |   |                           |   |
| Employee severance costs |   | $                             | — |             | $      | —                         |   | $ | — |   |
| Facility closure costs   |   | 2.2                           |   | (0.4             | )      | 1.8                            |   |
| Other costs              |   | —                        |   | —           |   | —                         |   |
| Total                    |   | $                             | 2.2    |             | $      | (0.4                           | )      | $ | 1.8 |   |

 

11

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**Item2.   Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**OVERVIEW**

 

Certain of the statements contained herein may be consideredforward-looking statements under Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended,that involve risks and uncertainties, such as integration and development ofthe laser thermal processing operation; cyclicality in the nanotechnology andsemiconductor industries; delays, deferrals and cancellations of orders bycustomers; pricing pressures; competition; lengthy sales cycles, including thetiming of system acceptances; ability to volume produce systems and meet customerrequirements; mix of products sold; , rapid technological change and theimportance of timely product introductions; dependence on new productintroductions and commercial success of any new products; sole or limitedsources of supply; international sales; customer concentration; manufacturinginefficiencies and absorption levels; expiration of technology support andlicensing arrangements, and the resulting adverse impact on the Company’slicensing revenues; timing and degree of success of technologies licensed tooutside parties; product concentration and lack of product revenuediversification; lengthy development cycles for advanced lithographytechnologies and applications; inventory obsolescence; asset impairment;ability and resulting costs to attract or retain sufficient personnel toachieve the Company’s targets for a particular period; future acquisitions;changes to financial accounting standards; intellectual property matters;environmental regulations; effects of certain anti-takeover provisions;volatility of stock price; and any adverse effects of terrorist attacks in theUnited States or elsewhere, or government responses thereto, or militaryactions in Iraq, Afghanistan and elsewhere, on the economy, in general, or onour business in particular. Such risks and uncertainties are described in theCompany’s filings with the SEC, including the company’s Annual Report on Form10-K for the year ended December 31, 2002.

 

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

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The Company’s discussion and analysis of its financial condition andresults of operations are based upon the Company’s consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these consolidatedfinancial statements requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities at the date of theconsolidated financial statements. By their nature, these estimates andjudgments are subject to an inherent degree of uncertainty. On an on-goingbasis, the Company evaluates its estimates, including those related toinventories, warranty obligations, purchase order commitments, bad debts,income taxes, intangible assets, restructuring and contingencies andlitigation. Management bases its estimates and judgments on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

The Company believes the following critical accounting policies affectits more significant judgments and estimates used in the preparation of itsconsolidated financial statements. The Company has reviewed these policies withits Audit Committee.

 

**Revenue Recognition**

 

In November 2002, the Emerging Task Force issued EITF 00-21,“Accounting for Revenue Arrangements with Multiple Deliverables”. EITF 00-21addresses how to account for arrangements that may involve delivery orperformance of multiple products, services and/or rights to use assets, andwhen and, if so, how an arrangement involving multiple deliverables should bedivided into separate units of accounting. It does

 

12

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not change otherwise applicable revenue recognition criteria. It appliesto arrangements entered into in fiscal periods beginning after June 15, 2003,with early adoption permitted.

 

Under the provisions of EITF 00-21, separate units of accounting existif all of the following criteria are met: the item has value on a standalonebasis; there is objective and reliable evidence of fair value; delivery ofundelivered items is probable and in control of the Company; and considerationallocable to delivered item is not contingent on delivery of additional items.

 

In response to EITF 00-21, the Company has reviewed its arrangementsinvolving multiple deliverables. In response to EITF 00-21, the Company hasreviewed its arrangements involving multiple deliverables. The Company hasconcluded that the adoption of EITF 00-21 has no effect on its current revenuerecognition policy. Although application of EITF 00-21 results in theidentification of separate accounting units, e.g. the system and itsinstallation, the Company believes that all elements of SAB 101 are not met atthe time of shipment. Therefore, revenue recognition for systems must bedelayed until all elements of SAB 101 are met, generally upon acceptance of thesystem.

 

Accordingly, the Company recognizes product revenue when thecontractual obligation for installation (if any) has been satisfied, orinstallation is substantially complete, and/or customer acceptance provisionshave lapsed, provided collections of the related receivable are probable. Inthe event of a delay in the installation of our products caused by the customer,we may seek acceptance of the system and warranty commencement after shipmentand transfer of title, but prior to completion of installation. Revenuerecorded as a result of these customer acceptances is reduced by an amountrepresenting the fair-value of installation services. In these instances,revenue is recorded only if the product has met product specifications prior toshipment and management deems that no significant uncertainties as to productperformance exist. Costs incurred for shipping and handling are included incost of sales.

 

Revenue from spare parts sales is generally recognized upon shipment.Deferred income related to service revenue is recognized ratably over the lifeof the related service contract. Deferred income relative to the Company’slicensing activities is recognized over the estimated useful life of thelicensed technologies, or the contract period of any technology transfersupport arrangements.

 

**Inventories and Purchase Order Commitments**

 

The Company estimates and reserves for the effects on inventory andpurchase order commitments of obsolescence and unrealizable carrying valuesbased upon estimates of future demand for its products and market conditions.The Company presently records reserves for inventories and purchase ordercommitments in excess of 12 months of production demand (18 months for certainlong lead-time items). Due to the cyclical nature of the Company’s business,during periods of declining demand for the Company’s products, the Companyrecords reserves for inventories and purchase order commitments in excess of an18 month production demand (24 months for certain long lead-time items). Shouldactual production demand differ from management’s estimates, revisions toinventory write-downs and purchase order commitment reserves would be required.

 

**Warranty Obligations**

 

The Company provides for the estimated cost of its product warrantiesat the time revenue is recognized. The Company’s warranty obligation isaffected by product failure rates, material usage rates and the efficiency bywhich the product failure is corrected. Should actual product failure rates,material usage rates and labor efficiencies differ from the Company’sestimates, revisions to the estimated warranty liability would be required.

 

**Bad Debt**

 

The Company maintains an allowance for estimated losses resulting fromthe inability of its customers to make required payments. If the financialcondition of the Company’s customers were to deteriorate, or even a singlecustomer was otherwise unable to make payments, additional allowances may berequired. The average selling price of the Company’s systems is in excess of$1.5 million. Accordingly, a single customer default could have a materialadverse effect on the Company’s results of operations.

 

**Deferred Taxes**

 

The Company records a valuation allowance to reduce its deferred taxassets to the amount that is more likely than not to be realized. Based on theuncertainty of future pre-tax income, the Company has presently fully reservedits deferred tax assets. In the event the Company was to determine that itwould be able to realize its deferred tax assets in the future, an adjustmentto the deferred tax asset valuation reserve would increase income in the periodsuch determination was made.

 

13

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The following discussion should be read in conjunction with theCompany’s 2002 Annual Report on Form 10-K, which is available from the Companyupon request.

 

**RESULTS OF OPERATIONS**

 

Factors that have caused results to fluctuate significantly in the pastand most likely will continue to significantly impact results in the future,and could cause actual results to differ materially, include the following:cyclicality in the Company’s served markets; delays, deferrals andcancellations of orders by customers; customer concentration; high degree ofindustry competition; market acceptance of new products and enhanced versionsof the Company’s existing products; lengthy and costly development cycles forlithography and laser thermal processing technologies and applications;integration and development of laser thermal processing operations; mix ofproducts sold; timing of new product announcements and releases by the Companyor its competitors; expiration of technology support and licensingarrangements, and the resulting adverse impact on the Company’s licensingrevenues; product discounts; changes in pricing by the Company, its competitorsor suppliers; timing and degree of success of technologies licensed to outside parties;product concentration and lack of product revenue diversification; outcome oflitigation; lengthy sales and manufacturing cycles and the pattern of capitalspending by customers, including the timing of system acceptances; inventoryobsolescence; manufacturing inefficiencies and the ability to volume producesystems; the ability and resulting costs to attract or retain sufficientpersonnel to achieve the Company’s targets for a particular period; dilutiveeffect of employee stock option grants on net income per share, which islargely dependent upon the Company attaining profitability and the market priceof the Company’s stock; sole or limited sources of supply; international sales;rapid technological change and the importance of timely product introductions;future acquisitions; changes to financial accounting standards; intellectualproperty matters; environmental regulations; any adverse effects of worldwideterrorist attacks on the economy in general or on our business in particular;political and economic instability throughout the world; business interruptionsdue to natural disasters or utility failures; and regulatory changes; and theother risk factors listed in this filing and other Company filings with theSEC. In addition, the recent outbreak of SARS may have an adverse affect onbusiness activities, particularly in Asia, which could adversely affect theCompany’s business. The Company undertakes no obligation to update any of itsdisclosures to reflect such future events.

 

The Company derives a substantial portion of its total net sales fromsales of a relatively small number of newly manufactured systems, whichtypically range in price from $1.0 million to $3.6 million for the Company’s 1Xsteppers. As a result of these high sale prices, the timing and recognition ofrevenue from a single transaction has had and most likely will continue to havea significant impact on the Company’s net sales and operating results for anyparticular period.

 

The Company’s backlog at the beginning of a period typically does notinclude all of the sales needed to achieve the Company’s sales objectives forthat period. In addition, orders in backlog are subject to cancellation,shipment or customer acceptance delays, and deferral or rescheduling by acustomer with limited or no penalties. Consequently, the Company’s net salesand operating results for a period have been and will continue to be dependentupon the Company obtaining orders for systems to be shipped and accepted in thesame period in which the order is received. The Company’s business andfinancial results for a particular period could be materially adverselyaffected if an anticipated order for even one system is not received in time topermit shipment and customer acceptance during that period. Furthermore, asubstantial portion of the Company’s shipments has historically been realizednear the end of each quarter. Delays in installation and customer acceptancedue, for example, to the inability of the Company to successfully demonstratethe agreed-upon specifications or criteria at the customer’s facility, or tothe failure of the customer to permit installation of the system in the agreedupon time, may cause net sales in a particular period to fall significantlybelow the Company’s expectations, which may materially adversely affect theCompany’s operating results for that period. Additionally, the failure toreceive 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 continue to cause net sales in aparticular period to fall significantly below the Company’s expectations,materially adversely affecting the Company’s operating results for that period.In particular, the long manufacturing cycles of the Company’s Saturn Spectrumfamily of wafer steppers, laser thermal processing systems and the long leadtime for lenses and other materials, could cause shipments of such products tobe delayed from

 

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one quarter to the next, which could materially adversely affect theCompany’s financial condition and results of operations for a particularquarter.

 

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

 

The following table illustrates the results of Ultratech,Inc., expressed as a percentage of net sales:

 
|                                    |   | **Three Months Ended** |       | **Six Months Ended** |   |
|-----------------------------------------|--------|------------------------|------------|----------------------|--------|
|                                    |   | **June 28,  2003**     |       | **June 29,  2002**   |   | **June 28,  2003** |   | **June 29,  2002** |   |
| Net  sales:                             |   |                   | ** ** |                 |   |   | ** ** |   |   |
| Products                                |   | **85.6**               | **%**      | 80.2                 | %      | **85.2** | **%** | 77.8 | % |
| Services                                |   | **10.6**               | **%**      | 15.3                 | %      | **10.8** | **%** | 13.9 | % |
| Licenses                                |   | **3.7**                | **%**      | 4.5                  | %      | **4.0** | **%** | 8.4 | % |
| Total net  sales                        |   | **100.0**              | **%**      | 100.0                | %      | **100.0** | **%** | 100.0 | % |
|                                    |   |                   |       |                 |   |   |   |   |   |
| Cost of  sales:                         |   |                   | ** ** |                 |   |   | ** ** |   |   |
| Cost of  products sold                  |   | **48.1**               | **%**      | 53.6                 | %      | **51.7** | **%** | 52.2 | % |
| Cost of  services                       |   | **7.2**                | **%**      | 11.0                 | %      | **7.2** | **%** | 10.1 | % |
| Cost of  inventory writedown            |   | **(2.5**               | **)%**     | 0.0                  | %      | **(1.3** | **)%** | 0.0 | % |
| Cost of  discontinued products          |   | **(0.5**               | **)%**     | 0.0                  | %      | **(0.3** | **)%** | 0.0 | % |
| Total  cost of sales                    |   | **52.3**               | **%**      | 64.5                 | %      | **57.3** | **%** | 62.3 | % |
| Gross  profit                           |   | **47.7**               | **%**      | 35.5                 | %      | **42.7** | **%** | 37.7 | % |
|                                    |   |                   |       |                 |   |   |   |   |   |
| Operating  expenses:                    |   |                   | ** ** |                 |   |   | ** ** |   |   |
| Research,  development, and engineering |   | **22.5**               | **%**      | 28.5                 | %      | **21.8** | **%** | 29.0 | % |
| Amortization  of intangible assets      |   | **0.4**                | **%**      | 0.5                  | %      | **0.4** | **%** | 0.5 | % |
| Selling,  general, and administrative   |   | **20.8**               | **%**      | 28.1                 | %      | **22.0** | **%** | 29.4 | % |
| Restructure  of operations              |   | **(0.5**               | **)%**     | 0.0                  | %      | **(0.2** | **)%** | 0.0 | % |
| Operating  expenses                     |   | **43.3**               | **%**      | 57.1                 | %      | **43.9** | **%** | 58.8 | % |
| Operating  income (loss)                |   | **4.4**                | **%**      | (21.6                | )%     | **(1.2** | **)%** | (21.1 | )% |
| Interest  expense                       |   | **(0.2**               | **)%**     | (0.1                 | )%     | **(0.3** | **)%** | (0.0 | )% |
| Interest  and other income, net         |   | **4.5**                | **%**      | 7.8                  | %      | **4.6** | **%** | 8.1 | % |
| Income  (loss) before tax               |   | **8.7**                | **%**      | (13.9                | )%     | **3.2** | **%** | (13.1 | )% |
| Income  taxes (benefit)                 |   | **0.5**                | **%**      | (5.9                 | )%     | **1.0** | **%** | (3.0 | )% |
|                                    |   |                   |       |                 |   |   |   |   |   |
| Net  income (loss)                      |   | **8.2**                | **%**      | (8.0                 | )%     | **2.2** | **%** | (10.1 | )% |

 

**Net sales**

 

Net sales consist ofrevenues from system sales, spare parts sales, service and licensing oftechnologies. For the three months ended June 28, 2003, net sales were $24.8million, an increase of 20% as compared with $20.7 million for the comparableperiod in 2002. System sales, a component of product sales, increased 30%, to$18.9 million, on a unit volume increase of 30%. The weighted-average sellingprices of systems sold decreased 4%, due primarily to the impact of refurbishedsystem sales. Geographically, the increase in unit volumes was primarilyattributable to a 300% increase in Taiwan, driven by demand for bump processingtools. On a market segment basis, the increase in unit volumes was primarilyattributable to demand from bump processing customers. The Company believesthat a significant portion of its system sales will continue to be derived frombump processing customers, including bump-processing customers from Japan.

 

On a product marketapplication basis, system sales to the semiconductor industry were $13.0million for the three months ended June 28, 2003, an increase of 32% ascompared with system sales of $9.9 million for the comparable period in 2002.This increase was due primarily to a 75% increase in demand from

 

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bump processingcustomers. System sales to the nanotechnology market were $5.8 million for thethree months ended June 28, 2003, an increase of 25% as compared with systemsales of $4.7 million for the comparable period in 2002, primarily as a resultof increased demand from thin film head customers.

 

Spare part sales, acomponent of product sales, increased 12%, to $2.3 million for the three monthsended June 28, 2003, as compared to $2.1 million in the comparable period in2002. This increase was primarily a result of the 30% unit volume increase insystem sales and the accompanying spare parts sales on those systems.

 

Revenues from serviceswere $2.6 million for the three months ended June 28, 2003, a decrease of 17%as compared with $3.2 million for the comparable period in 2002. This decreasewas primarily a result of lower revenues from system relocations and lowerservice contract revenues related to reduction steppers.

 

Revenues from licensingand licensing support arrangements were $0.9 million for the three months endedJune 28, 2003, as compared with $0.9 million for the comparable period in 2002.The Company presently anticipates that revenues from licensing and licensingsupport arrangements will be approximately $0.9 million per quarter for theremainder of 2003.

 

For the three monthsended June 28, 2003, international net sales were $15.9 million, or 64% oftotal net sales, as compared with $13.7 million, or 66% of total net sales forthe comparable period in 2002. The Company’s operations in foreign countriesare not generally subject to significant exchange rate fluctuations,principally because sales contracts for the Company’s systems are generally denominatedin U.S. dollars. In Japan, however, orders are often denominated in Japaneseyen. This subjects the Company to the risk of currency fluctuations. TheCompany attempts to mitigate this exposure through the use of foreign exchangecontracts; however, there can be no assurance of the success of any suchefforts. International sales expose the Company to a number of additionalrisks, including fluctuations in the value of local currencies relative to theU.S. dollar, which, in turn, impact the relative cost of ownership of theCompany’s products. (See “Additional Risk Factors: International Sales”).

 

At June 28, 2003, theCompany had approximately $9.7 million of deferred revenue resulting fromproducts shipped but not yet installed and accepted, as compared with $10.5million at December 31, 2002 and $0.0 million at June 29, 2002. Deferredproduct and services income, which represents deferred revenue less relatedmanufacturing and warranty costs, was $6.1 million at June 28, 2003, ascompared with $6.3 million at December 31, 2002 and $0.6 million at June 29,2002. Deferred license income decreased by $0.9 million during the three-monthperiod ended June 28, 2003, to $6.6 million, as a result of amortization ofproceeds received in prior periods.

 

Deferred income relatedto the Company’s products is recognized upon satisfying the contractualobligations for installation (if any) and/or customer acceptance. Deferredincome related to service revenue is recognized over the life of the relatedservice contract. Deferred income relative to the Company’s licensingactivities is recognized over the estimated useful life of the licensedtechnologies, or the period of any technology transfer support arrangements.Amortization of license income results in current period license revenue.

 

For the six months endedJune 28, 2003, net sales were $46.8 million, an increase of 15% from the $40.5million achieved during the comparable period in 2002. System sales increased28%, to $34.8 million, on a unit volume increase of 29%. The weighted-averageselling prices of systems sold increased 5%, as compared to the year-agoperiod, due primarily to a lower proportion of refurbished systems sold. Forthe six months ended June 28, 2003, international net sales were $28.4 million,or 61% of total net sales, as compared with $21.1 million, or 52% of total netsales for the comparable period in 2002. Geographically, the increase in unitvolumes was attributable to a 150% increase in Taiwan and a 60% increase inJapan. On a market segment basis, the increase in unit volumes was primarilyattributable to an increase in demand from semiconductor-packaging customers.Spare part sales increased 16%, to $5.1 million, primarily as a result of the29% unit volume increase in system sales and the accompanying spare parts saleson those systems. Revenues from services declined 10%, to $5.1 million,primarily as a result of lower revenues from system relocations and lowerservice contract revenues related to reduction steppers.  Revenues from licensing and licensingsupport arrangements declined to $1.9 million, as compared with $3.4 million inthe comparable period in 2002, as a result of a technology support agreementthat expired in February 2002.

 

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The anticipated timing ofshipments and customer acceptances will require the Company to fill a number ofproduction slots in the current and subsequent quarters in order to meet itsnear-term sales targets. If the Company is unsuccessful in its efforts tosecure those production orders, or if existing production orders are delayed orcancelled, its results of operations will be materially adversely impacted inthe near-term. Accordingly, the Company can give no assurance that it will beable to achieve or maintain its current or prior level of sales.

 

The Company expects thatnet sales for the quarter ending September 27, 2003 may be higher than netsales for the comparable period in 2002, and may be flat to slightly higherthan net sales for the three-month period ended June 28, 2003.

 

Because the Company’s netsales are subject to a number of risks, including intense competition in thecapital equipment industry, uncertainty relating to the timing and marketacceptance of the Company’s products, the condition of the macro-economy andthe semiconductor industry and the other risks described herein, the Companymay not exceed or maintain its current or prior level of net sales for anyperiod in the future. Additionally, the Company believes that the marketacceptance and volume production of its Saturn Spectrum 3e, its300mm offerings, its laser thermal processing systems and its 1000 seriesfamily of wafer steppers, are of critical importance to its future financialresults. To the extent that these products do not achieve significant sales dueto difficulties involving manufacturing or engineering, the inability to reducethe current long manufacturing cycles for these products, competition, excesscapacity in the semiconductor or nanotechnology device industries, customeracceptances, or any other reason, the Company’s business, financial conditionand results of operations would be materially adversely affected.

 

**Gross profit**

 

The Company’s grossprofit as a percentage of net sales, or gross margin, was 47.7% for the threemonths ended June 28, 2003, as compared with 35.5% for the comparable period in2002. Excluding the impact of special benefits (described below), gross marginfor the three months ended June 28, 2003 was 44.8%, as compared with 35.5% forthe comparable period in 2002. On a year-to-date basis, gross margin was 42.7%for the six months ended June 28, 2003, as compared with 37.7% for thecomparable period in 2002. Excluding the impact of special benefits (describedbelow), gross margin for the six months ended June 28, 2003 was 41.1%, ascompared to 37.7% for the comparable period in 2002. Both the current quarterand year-to-date improvements in gross margin, as compared to the comparableperiods in 2002, were primarily due to an improvement in model mix (includingimproved margin on refurbished system sales), improved warranty results andlower inventory reserves. On a year-to-date basis, the improvement in grossmargin was partially offset by the impact of lower licensing revenues, whichhave no related cost of sales. Exclusive of licensing revenues, licensingsupport revenues and special charges, gross margin was 42.6% and 38.7% for thethree and six-month periods ended June 28, 2003, as compared with 32.4% and 32%for the comparable periods in 2002, respectively.

 

The Company has includedthe information presented above, with respect to gross margin without theaffect of special charges and licensing and licensing support revenues, becauseit believes this information is helpful to a stockholder’s understanding of theCompany’s operating results.

 

During the three-monthperiod ended June 28, 2003, the Company recognized special benefits from thereversal of certain purchase order commitment and inventory reserves. Thesebenefits totaled $0.7 million. The Company presently records reserves forinventories and purchase order commitments in excess of 12 months of productiondemand (18 months for certain long lead-time items). Based on the Company’scurrent expectations with respect to market demand for its products, theCompany may recognize further reserve reversals during the second half of 2003.

 

The Company’s grossprofit as a percentage of sales has been and most likely will continue to besignificantly affected by a variety of factors, including the mix of productssold; inventory and open purchase commitment reserve provisions; the rate ofcapacity utilization; product discounts and competition in the Company’stargeted markets; technology support and licensing revenues, which have little,if any, associated cost of sales; non-linearity of shipments during thequarter; 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 percentage of international sales, which typically have lowergross margins than domestic sales principally due to higher field service andsupport costs; and the implementation of subcontracting arrangements.

 

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The Company believes thatgross margin for the quarter ending September 27, 2003 may be higher ascompared to the comparable period in 2002, and may be flat to slightly higherthan gross margin for the quarter ended June 28, 2003, exclusive of specialcharges.

 

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 the Company’s Verdant laser thermalprocessing system, the Company’s business, financial condition and results ofoperations would be materially adversely affected.

 

**Research, development and engineering expenses**

 

The Company’s research,development, and engineering expenses were $5.6 million for the three monthsended June 28, 2003, as compared to $5.9 million for the comparable period in2002. On a year-to-date basis, research, development, and engineering expenseswere $10.2 million, as compared with $11.7 million for the comparable period in2002. Both the current quarter and year-to-date declines in spending, relativeto the year-ago periods, were primarily attributable to the discontinuance ofthe Company’s advanced reduction stepper platforms and to other cost reductionmeasures implemented in the second half of 2002, partially offset by increasedspending on the Company’s laser thermal processing technologies.

 

The Company continues toinvest significant resources in the development and enhancement of its laserthermal processing systems and technologies, and its 1X optical products andrelated technologies, including its next generation platform for its 1X opticalproducts. The Company presently expects that, as a result of the Company’srestructuring of operations in September 2002, and as a result of overheadabsorption relative to the production of laser thermal processing systems forcustomers, the absolute dollar amount of research, development and engineeringexpenses for the quarter ending September 27, 2003 will be lower than expensesincurred for the comparable period in 2002. Additionally, research, developmentand engineering expenses for the quarter ending September 27, 2003 may be lowerthan levels incurred during the three-month period ended June 28, 2003,primarily as a result of overhead absorption relative to the production oflaser thermal processing systems for customers.

 

**Amortization of intangible assets**

 

Amortization ofintangible assets was $0.1 million and $0.2 million for the three and six-monthperiods, respectively, ended June 28, 2003 and June 29, 2002.

 

**Selling, general and administrative expenses**

 

Selling, general, andadministrative expenses were $5.2 million for the three-month period ended June28, 2003, as compared with $5.8 million for the comparable period in 2002. As apercentage of net sales, selling, general, and administrative expensesdecreased to 20.8%, as compared with 28.1% in the year-ago period. For thesix-month period ended June 28, 2003, selling, general and administrativeexpenses were $10.3 million, as compared with $11.9 million for the comparableperiod in 2002. As a percentage of net sales, selling, general andadministrative expenses decreased to 22.0%, as compared with 29.4% in theyear-ago period. These year-over-year declines, in absolute dollars, wereprimarily attributable to cost containment measures implemented in the secondhalf of 2002.

 

The Company presentlyanticipates that selling, general and administrative expenses for thethree-month period ending September 27, 2003 will be higher than the comparableperiod in 2002, and significantly higher than the three-month period ended June28, 2003. This anticipated increase is due, primarily, to higher selling expenses(resulting from higher anticipated sales levels), and administrativeinitiatives, resulting from compliance efforts associated with theSarbanes-Oxley Act of 2002.

 

**Interest and other income, net**

 

Interest and otherincome, net, which consists primarily of interest income, was $1.1 million and$2.2 million for the three and six-month periods ended June 28, 2003,respectively. This compares with $1.6 million and $3.3 million for thecomparable three and six-month periods in 2002, respectively. Both the currentquarter and year-to-date declines in interest and other income, net, wereprimarily attributable to significantly lower interest rates and to loweraverage invested balances.

 

The Company presentlymaintains an investment portfolio with a weighted-average maturity of less thanone year. Consequently, changes in short-term interest rates have a majorimpact on the Company’s interest

 

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income. Future changesare expected to have a similar impact. The Company presently expects thatinterest and other income, net, for the three-month period ending September 27,2003, will be significantly lower than levels achieved in the comparable periodin 2002, primarily as a result of lower interest rates, and will also be lowerthan levels achieved for the three-month period ended June 28, 2003.

 

**Income tax expense**

 

For the three andsix-month periods ended June 28, 2003, the Company recorded an income taxprovision of $0.1 million and $0.4 million, respectively. These provisions areprimarily related to taxable income in Japan, for which there is nocorresponding net operating loss carry-forward benefit. The Company did notrecognize a tax benefit for the three and six-month periods ended June 29,2002, and did not recognize a domestic tax benefit for the three and six-monthperiods ended June 28, 2003, due to uncertainty related to the utilization ofits federal net operating loss carry-forward.

 

The Company anticipatesthat it will recognize income tax expense during the remainder of 2003,primarily as a result of foreign income taxes. However, the Company believesthat the tax rate in 2003 will be substantially less than the statutory rate,primarily as a result of available federal net operating loss carry-forwards.

 

Incometaxes can be affected by estimates of whether, and within which jurisdictions,future earnings will occur and how and when cash is repatriated to the UnitedStates, combined with other aspects of an overall income tax strategy.Additionally, taxing jurisdictions could retroactively disagree with theCompany’s tax treatment of certain items, and some historical transactions haveincome tax effects going forward. Accounting rules require these future effectsto be evaluated using current laws, rules and regulations, each of which canchange at any time and in an unpredictable manner. The Company believes it hasadequately provided for any reasonably foreseeable outcome related to thesematters, and it does not anticipate any material earnings impact from theirultimate resolutions.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Net cash generated byoperating activities was $6.4 million for the six months ended June 28, 2003,as compared with net cash used in operations of $1.8 million for the comparableperiod in 2002. Net cash generated by operating activities during the sixmonths ended June 28, 2003 was primarily attributable to net income of $1.0million, non-cash charges to income of $4.8 million and a net change inoperating assets and liabilities of $0.5 million. The $0.5 million net changein operating assets and liabilities was primarily a result of a decline ininventories of $4.7 million, an increase in accounts payable of $2.4 millionand a decline in income taxes receivable of $1.2 million, partially offset by adecrease in deferred licensing revenue of $1.9 million, an increase in accountsreceivable of $1.6 million, an increase in long-term demonstration inventoriesof $1.6 million, a decrease in other current liabilities of $1.2 million and anincrease in prepaid expenses and other current assets of $0.7 million.

 

The Company believes thatbecause of the relatively long manufacturing cycle of certain of its systems,particularly newer products, the Company’s inventories will continue torepresent a significant portion of working capital. Currently, the Company isdevoting significant resources to the development, introduction andcommercialization of its laser thermal processing system and to the developmentof its next generation platform of its 1X lithography technologies. The Companycurrently intends to continue to develop these products and technologies duringthe remainder of 2003, and will continue to incur significant operatingexpenses in the areas of research, development and engineering, manufacturingand general and administrative costs in order to further develop, produce andsupport these new products. Additionally, gross profit margins, inventory andcapital equipment levels may be further adversely impacted in the future bycosts associated with the initial production of the laser thermal processingsystem and by future generations of the Company’s 1X wafer steppers. Thesecosts include, but are not limited to, additional manufacturing overhead, costsof demonstration systems and facilities, costs associated with managingmultiple sites 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 additionalmarketing and administrative personnel, among other costs, to support theCompany’s new products. If the Company is unable to achieve significantlyincreased net sales or if its sales fall below expectations, the Company’s cashflow and operating results will be materially adversely affected until, amongother factors, costs and expenses can be reduced. The failure of the Company toachieve its sales targets for these new

 

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products could result inadditional inventory write-offs and asset impairment charges, either of whichcould materially adversely impact the Company’s results of operations.

 

During the six monthsended June 28, 2003, net cash provided by investing activities was $0.1million, attributable to a net reduction in available-for-sale securities of$2.3 million, partially offset by capital expenditures of $2.2 million. In June2003, the Company replaced a credit facility requiring $2.0 million ofrestricted cash with a credit facility requiring $4.0 million in compensatingbalances, consisting of the Company’s cash, cash equivalents and short-terminvestments. This generated $2.0 million of positive cash flow from investingactivities during the quarter, offsetting a similar use of cash during thethree-month period ended March 29, 2003. The requirement for this creditfacility results from contractual provisions of a lease for certain of theCompany’s facilities, wherein the Company is required to supply the landlordwith a $2.0 million letter of credit.

 

Net cash used infinancing activities was $2.0 million during the six-month period ended June28, 2003, attributable to net repayments of notes payable of $2.9 million,partially offset by $1.0 million in proceeds received from the issuance ofCommon Stock under the Company’s employee stock purchase and stock optionplans.

 

At June 28, 2003, theCompany had working capital of $153.9 million. The Company’s principal sourceof liquidity at June 28, 2003 consisted of $159.3 million in cash, cashequivalents and short-term investments.

 

The Company hasapproximately $7.5 million of retained earnings in its foreign subsidiaries.Possible adverse tax consequences associated with repatriating these funds mayeffectively restrict their use to cash requirements in those specificjurisdictions.

 

During 2002, the Companyreceived proceeds of $3.2 million in conjunction with a sale/leasebacktransaction. To provide additional security to the lessor, the Company granteda security interest in certain of its other equipment having a net book valueof approximately $1.0 million at June 28, 2003. The Company recorded a deferredrent credit equal to the excess of the sale proceeds over the adjusted basis inthe equipment sold. During the three-year term of this agreement, the deferredrent credit will be amortized as an offset to rental expense. At June 28, 2003,credits of $0.7 million and $0.6 million representing the short-term andlong-term portions of deferred rent, respectively, were carried as liabilitieson the Company’s balance sheet.

 

In September 2002, theCompany entered into a line of credit agreement with a brokerage firm. Underthe terms of this agreement, the Company may borrow funds at a cost equal tothe current Federal funds rate plus 100 basis points (2.00% as of June 28,2003). Certain of the Company’s cash, cash equivalents and short-terminvestments secure borrowings outstanding under this facility. Funds areadvanced to the Company under this facility based on pre-determined advancerates on the cash and securities held by the Company in this brokerage account.This agreement has no set expiration date and there are no loan covenants. Asof June 28, 2003, $6.6 million was outstanding under this facility, with arelated collateral requirement of approximately $9.5 million of the Company’scash, cash equivalents and short-term investments.

 

In January 2003, theCompany’s Board of Directors authorized the purchase of up to 5.0 millionshares of the Company’s Common Stock at prevailing market prices. As of August1, 2003, the Company had not elected to repurchase shares under thisarrangement. Should the Company decide to acquire its own shares in the openmarket, potentially large amounts of the Company’s cash, cash equivalents andshort-term investments would be required.

 

The Company’s off-balancesheet transactions consist of certain financial guarantees, both expressed andimplied, related to product liability, infringement of intellectual propertyand latent product defects. Other than liabilities recorded pursuant to knownproduct defects, at June 28, 2003, the Company did not record a liabilityassociated with these guarantees, as the Company has little or no history ofcosts associated with such indemnification requirements.

 

The following summarizesthe Company’s contractual obligations at June 28, 2003, and the effect suchobligations are expected to have on its liquidity and cash flows in futureperiods:

 

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| **(in millions)**                                       |   | **Total** |   | **Less than  1 year** |   | **1-3 years** |   | **After  3 years** |   |
|---------------------------------------------------------|--------|-----------|--------|-----------------------|--------|---------------|--------|--------------------|--------|
| Notes payable obligations                               |   | $         | 6.8    |                  | $      | 6.8           |   | $                  | — |   | $ | — |   |
| Non-cancelable capitalized lease obligations            |   | 0.1       |   | 0.1                   |   | —        |   | —             |   |
| Non-cancelable operating lease obligations -  equipment |   | 2.4       |   | 1.2                   |   | 1.2           |   | —             |   |
| Non-cancelable operating lease obligations -  buildings |   | 30.3      |   | 3.6                   |   | 8.1           |   | 18.6               |   |
| Long-term vendor accounts payable                       |   | 0.9       |   | 0.7                   |   | 0.2           |   | —             |   |
| Total contractual cash obligations                      |   | $         | 40.5   |                  | $      | 12.4          |   | $                  | 9.5    |   | $ | 18.6 |   |

 

At June 28, 2003, theCompany had open purchase order commitments of approximately $18 million,primarily related to the purchase of inventories, equipment and leaseholdimprovements. The Company records reserves for purchase order commitments itdeems in excess of normal operating requirements (see “Critical AccountingPolicies and Estimates”).

 

The development andmanufacture of new lithography systems and enhancements are highlycapital-intensive. In order to be competitive, the Company believes it 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. The Company expects that its cash, cash equivalents and short-terminvestments will be sufficient to meet the Company’s cash requirements for atleast the next twelve months. However, in the near-term, the Company maycontinue to utilize existing and future lines of credit, and other sources offinancing, in order to maintain its present levels of cash, cash equivalentsand short-term investments. Beyond the next twelve months, the Company mayrequire additional equity or debt financing to address its working capital orcapital equipment needs. In addition, the Company may seek to raise equity ordebt capital at any time that it deems market conditions to be favorable.Additional financing, if needed, may not be available on reasonable terms, orat all.

 

The Company may in thefuture pursue additional acquisitions of complementary product lines,technologies or businesses. Future acquisitions by the Company may result inpotentially dilutive issuances of equity securities, the incurrence of debt andcontingent liabilities and amortization expenses and impairment charges relatedto goodwill and other intangible assets, which could materially adverselyaffect the Company’s financial condition and results of operations. Inaddition, acquisitions involve numerous risks, including difficulties in theassimilation of the operations, technologies, personnel and products of theacquired companies; the diversion of management’s attention from other businessconcerns; risks of entering markets in which the Company has limited or nodirect experience; and the potential loss of key employees of the acquiredcompany. In the event the Company acquires product lines, technologies orbusinesses which do not complement the Company’s business, or which otherwisedo not enhance the Company’s sales or operating results, the Company may incursubstantial write-offs and higher recurring operating costs, which could have amaterial adverse effect on the Company’s business, financial condition andresults of operations. In the event that any such acquisition does occur, therecan be no assurance as to the effect thereof on the Company’s business oroperating results.

 

**Foreign currency**

 

The Company uses foreignexchange contracts to hedge the risk that unremitted Japanese yen denominatedreceipts from customers for actual or forecasted sales of equipment afterreceipt of customer purchase orders may be adversely affected by changes inforeign currency exchange rates. As part of its overall strategy to manage thelevel of exposure to the risk of foreign currency exchange rate fluctuations,the Company attempts to hedge most of these Japanese yen denominated foreigncurrency exposures anticipated over the ensuing twelve-month period. At June28, 2003, the Company had hedged approximately 75% of these Japanese yendenominated exposures. To hedge this exposure, the Company used foreignexchange forward contracts that generally have maturities of nine months orless. The Company often closes foreign exchange sale contracts by purchasing anoffsetting purchase contract. At June 28, 2003, the Company had contracts forthe sale of $2.8 million of foreign currencies at fixed rates.

 

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**ADDITIONAL RISKFACTORS**

 

*In addition to risks described in the foregoing discussions,the following risks apply to the Company and its business:*

 

**Cyclicality of Semiconductor and Nanotechnology Industries**TheCompany’s business depends in significant part upon capital expenditures by******manufacturers ofsemiconductors, bumped semiconductors and nanotechnology components, includingthin film head magnetic recording devices, which in turn depend upon thecurrent and anticipated market demand for such devices and products utilizingsuch devices. The semiconductor industry historically has been highly cyclicaland has experienced recurring periods of oversupply. This has, from time totime, resulted in significantly reduced demand for capital equipment includingthe systems manufactured and marketed by the Company. The semiconductorindustry, which includes the semiconductor-packaging sector, is presently experiencinga severe downturn. The Company also believes that markets for new generationsof semiconductors and semiconductor packaging will also be subject to similarfluctuations. The Company’s business and operating results would be materiallyadversely affected by continued downturns or slowdowns in the semiconductorpackaging market or by loss of market share. Accordingly, the Company can giveno assurance that it will be able to achieve or maintain its current or priorlevel of sales.

 

The Company attempts tomitigate the risk of cyclicality by participating in multiple markets includingsemiconductor, semiconductor packaging, thin film head and other nanotechnologysectors, as well as diversifying into new markets such as photolithography foroptical networking (a nanotechnology application) and laser-based thermalannealing for implant activation and other applications. Despite such efforts,when one or more of such markets experiences a downturn or a situation ofexcess capacity, such as is presently occurring in the semiconductor,semiconductor packaging, optical networking and thin film head markets, theCompany’s net sales and operating results are materially adversely affected.

 

During 2002 and 2001,approximately 20% and 33%, respectively, of the Company’s net sales werederived from sales to nanotechnology manufacturers, including micro systems,thin film heads and optical networking devices. During the first six months of2003, approximately 27% of the Company’s net sales were derived from sales to nanotechnologymanufacturers.

 

**Highly CompetitiveIndustry        **Thecapital equipment industry in which the Company operates is intenselycompetitive. A substantial investment is required to install and integratecapital equipment into a semiconductor, semiconductor packaging ornanotechnology device production line. The Company believes that once a devicemanufacturer or packaging subcontractor has selected a particular vendor’scapital equipment, the manufacturer generally relies upon that equipment for thespecific production line application and, to the extent possible, subsequentgenerations of similar products. Accordingly, it is difficult to achievesignificant sales to a particular customer once another vendor’s capitalequipment has been selected. The Company experiences intense competitionworldwide from a number of leading stepper manufacturers, such as Nikon Inc.(“Nikon”), Canon, Inc. (“Canon”) and ASM Lithography (“ASML”), all of whichhave substantially greater financial, marketing and other resources than theCompany. Nikon supplies a 1X stepper for use in the manufacture of liquidcrystal displays and Canon, Nikon and ASML offer reduction steppers for thinfilm head fabrication. With respect to the semiconductor packaging andnanotechnology markets, the Company experiences competition from variousproximity aligner companies such as Suss Microtec AG.

 

ASML, Canon and Nikonhave each introduced i-line step-and-scan system as a lower cost alternative tothe deep ultra-violet (DUV) step-and-scan system for use on the less criticallayers. These systems compete with wide-field steppers, such as the Company’sSaturn and Titan steppers, for advanced mix-and-match applications. Inaddition, the Company believes that the high cost of developing new lithographytools has increasingly caused its competitors to collaborate with customers andother parties in various areas such as research and development, manufacturingand marketing, or to acquire other competitors, thereby resulting in a combinedcompetitive threat with significantly enhanced financial, technical and otherresources.

 

The Company expects itscompetitors to continue to improve the performance of their current productsand to introduce new products with improved price and performance characteristicsthat will also compete directly with the Company’s products. This could cause adecline in sales or loss of market acceptance of the Company’s steppers, andthereby materially adversely affect the Company’s business, financial conditionand results of operations. There can be no assurance that enhancements to, orfuture generations

 

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of, competing productswill not be developed that offer superior cost of ownership and technicalperformance features.

 

The Company believes thatto be competitive, it will require significant financial resources in order tocontinue to invest in new product development, features and enhancements, tointroduce next generation stepper systems on a timely basis, and to maintaincustomer service and support centers worldwide. In marketing its products, theCompany may also face competition from vendors employing other technologies. Inaddition, increased competitive pressure has led to intensified price-basedcompetition in certain of the Company’s markets, resulting in lower prices andmargins. Should these competitive trends continue, the Company’s business,financial condition and operating results would continue to be materiallyadversely affected. There can be no assurance that the Company will be able tocompete successfully in the future.

 

With respect to theCompany’s laser annealing technologies, marketed under the Verdant productname, the primary competition comes from rapid thermal annealing (“RTA”), whichis the current manufacturing technology. RTA does not limit semiconductordevice manufacturers from scaling their transistors to obtain improvedperformance. However, improved annealing technology results in fastertransistors for a given size. RTA manufacturers recognize the need to reducethermal cycle times and are working toward this goal. Several companies havepublished papers on their prototype annealing tools that incorporate flash lamptechnology in order to reduce annealing times and increase anneal temperatures.The Company believes these tools are presently in the development phase.Additionally, competition to the Verdant products may come from other laserannealing tools, including those presently being used by the flat panel displayindustry to crystallize amorphous silicon. Manufacturers of these tools may tryto extend the use of their technologies to semiconductor device applications.In July 2000, the Company licensed its then existing laser annealingtechnology, with reservations, to a manufacturer of semiconductor equipment.The Company presently anticipates this company will offer laser-annealing toolsto the semiconductor industry that will compete with the Company’s offerings.

 

Foreign integratedcircuit manufacturers have a significant share of the worldwide market forcertain types of integrated circuits for which the Company’s systems are used.The Japanese stepper manufacturers are well established in the Japanese steppermarket, and it is extremely difficult for non-Japanese lithography equipmentcompanies to penetrate this market. Although the Company has experienced recentsuccess in the introduction of its Saturn Spectrum family of wafer steppersinto the Japanese marketplace, to date the Company has not established itselfas a major competitor in the Japanese equipment market and there can be noassurance that the Company will be able to achieve significant sales toJapanese manufacturers in the future.

 

**Development of New Product Lines; Expansion of Operations**Currently,the Company is devoting significant resources to the development, introductionand commercialization of its laser thermal processing systems and toenhancements and future versions of its Saturn Spectrum 3e andSaturn Spectrum 300e2 wafer steppers and related platforms. TheCompany intends to continue to develop these products and technologies during2003, and will continue to incur significant operating expenses in the areas ofresearch, development and engineering, manufacturing and general andadministrative costs in order to further 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 its Verdant laser thermal processing systems and by futuregenerations of its 1X-lithography systems. These costs include, but are notlimited to, additional manufacturing overhead, additional inventory write-offs,costs of demonstration systems and facilities, costs associated with managingmultiple sites 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 additionalmarketing and administrative personnel, among other costs, to support theCompany’s new products. If the Company is unable to achieve significantlyincreased net sales or if its sales fall below expectations, the Company’soperating results will be materially adversely affected.

 

The Company’s ability tocommercialize its laser annealing, or laser thermal processing technologies,depends on its ability to demonstrate a manufacturing-worthy tool. The Companydoes not presently have in-house capability to fabricate devices. As a result,the Company must rely on partnering with companies to develop the laser annealprocess. The development of new process technologies is largely dependent uponthe Company’s ability to interest potential customers in working on jointprocess development. The

 

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Company’s ability todeliver timely solutions is also limited by wafer turnaround at the potentialcustomer’s fabrication facility.

 

**Lengthy Sales Cycles      **Salesof the Company’s systems depend, in significant part, upon the decision of aprospective customer to increase manufacturing capacity or to restructurecurrent manufacturing facilities, either of which typically involves asignificant commitment of capital. Many of the Company’s customers have cancelledthe development of new manufacturing facilities and have substantially reducedtheir capital equipment budgets. In view of the significant investment involvedin a system purchase, the Company has experienced and may continue toexperience delays following initial qualification of the Company’s systems as aresult of delays in a customer’s approval process. Additionally, the Company ispresently receiving orders for systems that have lengthy delivery schedules,which may be due to longer production lead times or a result of customers’capacity scheduling requirements. In order to maintain or exceed the Company’spresent level of net sales, the Company is dependent upon obtaining orders forsystems that will ship and be accepted in the current period. There can be noassurance that the Company will be able to obtain those orders. For these andother reasons, the Company’s systems typically have a lengthy sales cycleduring which the Company may expend substantial funds and management effort insecuring a sale. Lengthy sales cycles subject the Company to a number ofsignificant risks, including inventory obsolescence and fluctuations inoperating results, over which the Company has little or no control.

 

**Customer and MarketConcentrations      **Historically,the Company has sold a substantial portion of its systems to a limited numberof customers. For the six-month period ended June 28, 2003, five customersaccounted for approximately 65% of the Company’s system revenue. In 2002, IntelCorporation accounted for 19% and Sumitomo Chemical Company, Ltd. accounted for10% of the Company’s total net sales.

 

At June 28, 2003, onecustomer accounted for 40% of the Company’s system backlog. Cancellation,deferrals or rescheduling of orders by this customer would have a materialadverse impact on the Company’s future results of operations.

 

During 2002, the Companyexperienced significant levels of order cancellations, delays and deferrals. Inparticular, the Company has removed from backlog a significant number of systemsfrom a single customer because delivery may be deferred beyond one year.Company policy requires that orders with delivery dates beyond one year beexcluded from reportable backlog.

 

The Company expects thatsales to a relatively few customers will continue to account for a highpercentage of its net sales in the foreseeable future and believes that theCompany’s financial results depend in significant part upon the success ofthese major customers and the Company’s ability to meet their future capitalequipment needs. Although the composition of the group comprising the Company’slargest customers may vary from period to period, the loss of a significantcustomer or any reduction in orders by any significant customer, includingreductions due to market, economic or competitive conditions in thesemiconductor, semiconductor packaging or nanotechnology industries or in theindustries that manufacture products utilizing integrated circuits, thin filmheads or other nanotechnology components, may have a material adverse effect onthe Company’s business, financial condition and results of operations. TheCompany’s ability to maintain or increase its sales in the future depends, inpart, on its ability to obtain orders from new customers as well as the financialcondition and success of its existing customers, the semiconductor andnanotechnology industries and the economy in general.

 

In addition to thebusiness risks associated with dependence on major customers, these significantcustomer concentrations have in the past resulted in significant concentrationsof accounts receivable. These significant and concentrated receivables exposethe Company to additional risks, including the risk of default by one or morecustomers representing a significant portion of the Company’s totalreceivables. If the Company were required to take additional accountsreceivable reserves, its business, financial condition and results ofoperations would be materially adversely affected.

 

On a market applicationbasis, sales to semiconductor packaging customers accounted for approximately71% of system revenue for the six-month period ended June 28, 2003, and 53% ofsystem revenue for the year ended December 31, 2002. The Company’s futureresults of operations and financial position would be materially adverselyimpacted by further downturns in this market segment, or by loss of marketshare.

 

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**Rapid Technological Change; Importance of Timely ProductIntroduction**

 

The semiconductor andnanotechnology manufacturing industries are subject to rapid technologicalchange and new product introductions and enhancements. The Company’s ability tobe competitive in these and other markets will depend, in part, upon itsability to develop new and enhanced systems and related software tools, and tointroduce these systems and related software tools at competitive prices and ona timely and cost-effective basis to enable customers to integrate them intotheir operations either prior to or as they begin volume product manufacturing.The Company will also be required to enhance the performance of its existingsystems and related software tools. Any success of the Company in developingnew and enhanced systems and related software tools depends upon a variety offactors, including product selection, timely and efficient completion ofproduct design, timely and efficient implementation of manufacturing andassembly processes, product performance in the field and effective sales andmarketing. Because new product development commitments must be made well inadvance of sales, new product decisions must anticipate both future demand andthe technology that will be available to supply that demand. There can be noassurance that the Company will be successful in selecting, developing,manufacturing or marketing new products and related software tools or enhancingits existing products and related software tools. Any such failure wouldmaterially adversely affect the Company’s business, financial condition andresults of operations.

 

Because of the largenumber of components in the Company’s systems, significant delays can occurbetween a system’s introduction and the commencement by the Company of volumeproduction of such systems. The Company has experienced delays from time totime in the introduction of, and technical and manufacturing difficulties with,certain of its systems, product enhancements and related software tools, andmay experience delays and technical and manufacturing difficulties in future introductionsor volume production of new systems, product enhancements and related softwaretools.

 

The Company may encounteradditional technical, manufacturing or other difficulties that could furtherdelay future introductions or volume production of systems or enhancements. TheCompany’s inability to complete the development or meet the technicalspecifications of any of its systems or enhancements and related softwaretools, or its inability to manufacture and ship these systems or enhancementsand related software tools in volume and in time to meet the requirements formanufacturing the future generation of semiconductor or nanotechnology deviceswould materially adversely affect the Company’s business, financial conditionand results of operations. In addition, the Company may incur substantialunanticipated costs to ensure the functionality and reliability of its productsearly in the products’ life cycles. If new products have reliability or qualityproblems, reduced orders or higher manufacturing costs, delays in collectingaccounts receivable and additional service and warranty expenses may result.Any of such events may materially adversely affect the Company’s business,financial condition and results of operations.

 

**Intellectual Property Rights      **Althoughthe Company attempts to protect its intellectual property rights throughpatents, copyrights, trade secrets and other measures, it believes that anysuccess will depend more upon the innovation, technological expertise andmarketing abilities of its employees. Nevertheless, the Company has a policy ofseeking patents when appropriate on inventions resulting from its ongoingresearch and development and manufacturing activities.  The Company owns various United States andforeign patents, which expire on dates ranging from March 2004 to May 2021 andhas various United States and foreign patent applications pending. The Companyalso has various registered trademarks and copyright registrations coveringmainly software programs used in the operation of its stepper systems. TheCompany also relies upon trade secret protection for its confidential andproprietary information. There can be no assurance that the Company will beable to protect its technology adequately or that competitors will not be ableto develop similar technology independently. There can be no assurance that anyof the Company’s pending patent applications will be issued or that U.S. orforeign intellectual property laws will protect the Company’s intellectualproperty rights. In addition, litigation may be necessary to enforce theCompany’s patents, copyrights or other intellectual property rights, to protectthe Company’s trade secrets, to determine the validity and scope of theproprietary rights of others or to defend against claims of infringement.  Such litigation could result in substantialcosts and diversion of resources and could have a material adverse effect onthe Company’s business, financial condition and results of operations, regardlessof the outcome of the litigation. Patents issued to the Company may bechallenged, invalidated or circumvented and the rights granted thereunder maynot provide competitive advantages to the Company. Furthermore, others mayindependently develop similar products, duplicate the Company’s products or, ifpatents are issued to the Company, design around the patents issued to theCompany. Additionally, the Company presently has several agreements in force tolicense certain of its technologies. Challenges to, or invalidation of, patents

 

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related to thosetechnologies would expose the Company to the risk of forfeiture of revenues andfurther risk of damage claims.

 

On February 29, 2000, inthe U.S. District Court of Virginia, the Company filed patent infringementlawsuits against Nikon, Canon and ASML. In April 2000, the Company reached asettlement with Nikon and in September 2001, the Company reached a settlementwith Canon. The patent litigation case against ASML is ongoing. The Court hasmade a preliminary determination that ASML does not infringe the patent. TheCompany has filed an appeal against this preliminary determination of theCourt. On October 12, 2001, the Company was sued in the District Court inMassachusetts for alleged infringement of certain patents owned by SiliconValley Group, Inc. (“SVG”), a company acquired by ASML. The Company is in theprocess of defending against this claim and believes the claim is withoutmerit.

 

With the exception of theSVG claim, there are no pending lawsuits against the Company regardinginfringement claims with respect to any existing patent or any otherintellectual property right. However, the Company has from time to time beennotified of claims that it may be infringing intellectual property rightspossessed by third parties. Some of the Company’s customers have receivednotices of infringement from Technivision Corporation and the Lemelson Medical,Education and Research Foundation, Limited Partnership alleging that themanufacture of certain semiconductor products and/or the equipment used tomanufacture those semiconductor products infringes certain issued patents. TheCompany has been notified by certain of these customers that the Company may beobligated to defend or settle claims that the Company’s products infringe anyof such patents and, in the event it is subsequently determined that thecustomer infringes any of such patents, they intend to seek reimbursement fromthe Company for damages and other expenses resulting from this matter.

 

Infringement claims bythird parties or claims for indemnification resulting from infringement claimsmay be asserted in the future and such assertions, if proven to be true, maymaterially adversely affect the Company’s business, financial condition andresults of operations, regardless of the outcome of any litigation. Withrespect to any such future claims, the Company may seek to obtain a licenseunder the third party’s intellectual property rights. However, a license maynot be available on reasonable terms or at all. The Company could decide, inthe alternative, to resort to litigation to challenge such claims. Suchchallenges could be expensive and time consuming and could materially adverselyaffect the Company’s business, financial condition and results of operations,regardless of the outcome of any litigation.

 

**Sole or Limited Sources ofSupply      **The Company reliesheavily on outside suppliers and subcontractors to manufacture certaincomponents and subassemblies in an attempt to maximize the Company’s availablemanufacturing capacity. The Company orders one of the most critical componentsof its technology, the glass for its 1X lenses, from suppliers on purchaseorders. The Company designs the 1X lenses and provides the lens specifications toother suppliers that grind the lens elements. The Company then assembles andtests the optical 1X lenses in its metrology laboratory.  The Company has recorded the criticalparameters of each of its optical lenses sold since 1982, and believes thatsuch information enables it to supply lenses to its customers that match thecharacteristics of its customers’ existing lenses.

 

In addition to glass, theCompany procures many of its other critical systems’ components, subassembliesand services from single outside suppliers or a limited group of outsidesuppliers in order to ensure overall quality and timeliness of delivery. Manyof these components and subassemblies have significant production lead times.To date, the Company has been able to obtain adequate services and supplies ofcomponents and subassemblies for its systems in a timely manner.  However, disruption or termination ofcertain of these sources could result in a significant adverse impact on theCompany’s ability to manufacture its systems. This, in turn, would have amaterial adverse effect on the Company’s business, financial condition andresults of operations. The Company’s reliance on sole or a limited group ofsuppliers and the Company’s increasing reliance on subcontractors involve severalrisks, including a potential inability to obtain an adequate supply of requiredcomponents due to the suppliers’ failure or inability to provide suchcomponents in a timely manner, or at all, and reduced control over pricing.Although the timeliness, yield and quality of deliveries to date from theCompany’s subcontractors have been acceptable, manufacture of certain of thesecomponents and subassemblies is an extremely complex process, and longlead-times are required. Any inability to obtain adequate deliveries or anyother circumstance that would require the Company to seek alternative sourcesof supply or to manufacture such components internally could delay theCompany’s ability to ship its products, which could damage

 

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relationships withcurrent and prospective customers and have a material adverse effect on theCompany’s business, financial condition and results of operations.

 

**International Sales      **Internationalnet sales accounted for approximately 48% and 51% of total net sales for theyears 2002 and 2001, respectively. For the six months ended June 28, 2003,international net sales accounted for approximately 61% of total net sales, ascompared with 52% for the comparable period in 2002. The Company anticipatesthat international sales, which typically have lower gross margins thandomestic sales, principally due to increased competition and higher fieldservice and support costs, will continue to account for a significant portionof total net sales. As a result, a significant portion of the Company’s netsales will continue to be subject to certain risks, including the current SARSoutbreak in Asia, which could delay or curtail installation and acceptance ofthe Company’s systems in those areas impacted; dependence on outside salesrepresentative organizations; unexpected changes in regulatory requirements;difficulty in satisfying existing regulatory requirements; exchange ratefluctuations; tariffs and other barriers; political and economic instability;difficulties in accounts receivable collections; natural disasters;difficulties in staffing and managing foreign subsidiary and branch operations;and potentially adverse tax consequences.

 

Although the Companygenerally transacts its international sales in U.S. dollars, internationalsales expose the Company to a number of additional risk factors, includingfluctuations in the value of local currencies relative to the U.S. dollar,which, in turn, impact the relative cost of ownership of the Company’s productsand may further impact the purchasing ability of its international customers.However, in Japan, the Company has direct sales operations and orders are oftendenominated in Japanese yen. This may subject the Company to a higher degree ofrisk from currency fluctuations. The Company attempts to mitigate this exposurethrough the use of foreign exchange contracts. The Company is also subject to the risks associated with the impositionof legislation and regulations relating to the import or export ofsemiconductors and nanotechnology products. The Company cannot predict whether the United States, Japan or any othercountry will implement changes to quotas, duties, taxes or other charges orrestrictions upon the importation or exportation of the Company’s products.These factors, or the adoption of restrictive policies, may have a materialadverse effect on the Company’s business, financial condition and results ofoperations.

 

**Dependence on KeyPersonnel      **The Company’sfuture operating results depend, in significant part, upon the continuedcontributions of key personnel, many of whom would be difficult to replace. Fewof such persons have an employment agreement with the Company. The Company doesnot maintain any life insurance on any of its key persons.  The loss of key personnel could have amaterial adverse effect on the business, financial condition and results ofoperations of the Company.  In addition,the Company’s future operating results depend in significant part upon itsability to attract and retain other qualified management, manufacturing,technical, sales and support personnel for its operations. There are only alimited number of persons with the requisite skills to serve in these positionsand it may become increasingly difficult for the Company to hire such personnelover time. At times, competition for such personnel has been intense,particularly in the San Francisco Bay Area where the Company maintains itsheadquarters and principal operations, and there can be no assurance that theCompany will be successful in attracting or retaining such personnel. Thefailure to attract or retain such persons would materially adversely affect theCompany’s business, financial condition and results of operations.

 

**Changes to Financial Accounting Standards May Affect theCompany’s Reported Results of Operations      **TheCompany prepares its financial statements to conform with generally acceptedaccounting principles, or GAAP. These principles are subject to interpretationby the American Institute of Certified Public Accountants, the SEC and variousbodies formed to interpret and create appropriate accounting policies.  A change in those policies can have asignificant effect on the Company’s reported results and may affect itsreporting of transactions completed before a change is announced.

 

Accounting policiesaffecting many other aspects of our business, including rules relating torevenue recognition, off-balance sheet transactions, employee stock options,restructurings, asset disposals, intangible assets, derivatives, financialinstruments and in-process research and development charges, have recently beenrevised or are under review. Changes to those rules or the questioning ofcurrent practices may have a material adverse effect on the Company’s reportedfinancial results or on the way it conducts business.  In addition, the Company’s preparation of financial statements inaccordance with GAAP requires that it make estimates and assumptions thataffect the recorded amounts of assets and liabilities,

 

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disclosure of thoseassets and liabilities at the date of the financial statements and the recordedamounts of expenses during the reporting period.  A change in the facts and circumstances surrounding thoseestimates could result in a change to the Company’s estimates and could impactits future operating results.

 

**Effects of Certain Anti-Takeover Provisions      **Certain provisions of the Company’sCertificate of Incorporation, equity incentive plans, Shareholder Rights Plan,licensing agreements, Bylaws and Delaware law may discourage certaintransactions involving a change in control of the Company.  In addition to the foregoing, the Company’sclassified board of directors, the shareholdings of the Company’s officers,directors and persons or entities that may be deemed affiliates and the abilityof the Board of Directors to issue “blank check” preferred stock withoutfurther stockholder approval could have the effect of delaying, deferring orpreventing a change in control of the Company and may adversely affect thevoting and other rights of holders of Common Stock.

 

**Volatility ofStock Price and Dilutive Impact of Employee Stock Options****      **TheCompany believes that factors such as announcements of developments related tothe Company’s business, fluctuations in the Company’s operating results, ashortfall in revenue or earnings, changes in analysts’ expectations, generalconditions in the semiconductor and nanotechnology industries or the worldwideor regional economies, sales of securities of the Company into the marketplace,an outbreak or escalation of hostilities, announcements of technologicalinnovations or new products or enhancements by the Company or its competitors,developments in patents or other intellectual property rights and developmentsin the Company’s relationships with its customers and suppliers could cause theprice of the Company’s Common Stock to fluctuate, perhaps substantially. Themarket price of the Company’s Common Stock may continue to experiencesignificant fluctuations in the future, including fluctuations that may beunrelated to theCompany’s performance.

 

As of July 29, 2003, theCompany had issued and outstanding options to purchase approximately 5.8million shares of its Common Stock. Among other determinants, the market priceof the Company’s stock has a major bearing on the number of stock optionsoutstanding that are included in the weighted-average shares used indetermining the Company’s net income (loss) per share. During periods ofextreme volatility, the impact of higher stock prices can have a materiallydilutive effect on the Company’s net income per share (diluted).****Additionally,options are excluded from the calculation of net income (loss) per share whenthe Company has a net loss or when the exercise price of the stock option isgreater than the average market price of the Company’s Common Stock, as theimpact of the stock options would be anti-dilutive.

 

**Terrorist Attacks and Threats, Government ResponsesThereto,and Military Actions May Negatively Impact All Aspects of Our Operations,Revenues, Costs and Stock Price****      **Terrorist attacks in the United Statesand elsewhere, government responses thereto, and military actions in Iraq, Afghanistanand elsewhere, may disrupt our operations or those of our customers andsuppliers and may affect the availability of materials needed to manufactureour products or the means to transport those materials to manufacturingfacilities and finished products to customers. In addition, any of these eventscould increase volatility in the United States and world financial marketswhich may depress the price of the Company’s Common Stock and may limit thecapital resources available to the Company or its customers or suppliers, whichcould result in decreased orders from customers, less favorable financing termsfrom suppliers, and scarcity or increased costs of materials and components ofour products. Any of these occurrences could have a significant impact on ouroperating results, revenues and costs and may result in increased volatility ofthe market price of our Common Stock.

 

**Environmental Regulations      **TheCompany is subject to a variety of governmental regulations relating to theuse, storage, discharge, handling, emission, generation, manufacture anddisposal of toxic or other hazardous substances used to manufacture theCompany’s systems.  The Company believesthat it is currently in compliance in all material respects with suchregulations and that it has obtained all necessary environmental permits toconduct its business. Nevertheless, the failure to comply with current orfuture regulations could result in substantial fines being imposed on theCompany, suspension of production, alteration of the manufacturing process orcessation of operations. Such regulations could require the Company to acquireexpensive remediation equipment or to incur substantial expenses to comply withenvironmental regulations. Any failure by the Company to control the use,disposal or storage of, or adequately restrict the discharge of, hazardous ortoxic substances could subject the Company to significant liabilities.

 

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**Information Available on Company Web-site**

 

The Company’s web-site islocated at www.ultratech.com. The Company makes available, free of charge,through its web-site, its annual report on Form 10-K, quarterly reports on Form10-Q, Form 4 filings and current reports on Form 8-K (and amendments to those reports),as soon as reasonably practicable after such reports are filed with the SEC.

 

**Item3.****                              Quantitativeand Qualitative Disclosures about Market Risk**

 

Reference is made to Part II, Item 7A, “Quantitative and QualitativeDisclosures About Market Risk” in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2002 and to the subheading “Derivative Instrumentsand Hedging” in Item 8, “Financial Statements and Supplementary Data”, underthe heading “Notes to Consolidated Financial Statement” of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2002.

 

**Foreign Currency Risk Management**

Foreign exchangecontracts are used primarily by the Company to hedge the risk that unremittedJapanese yen denominated receipts, for actual or forecasted sales of equipment,may be adversely affected by changes in foreign currency exchange rates afterreceipt of customer purchase orders. As part of its overall strategy to managethe level of exposure to currency exchange rate fluctuations, the Companyattempts to hedge most of these Japanese yen denominated foreign currencyexposures anticipated over the ensuing twelve-month period. At June 28, 2003,the Company had taken action to hedge approximately 75% of these Japanese yendenominated exposures. To hedge this exposure, the Company used foreignexchange contracts that generally have maturities of nine months or less. TheCompany often closes foreign exchange sale contracts by purchasing anoffsetting purchase contract.

 

The Company records theseforeign exchange contracts at fair value in its consolidated balance sheet andthe related gains or losses on these contracts are deferred in stockholders’equity (as a component of comprehensive income). These deferred gains andlosses are recognized in income, as a component of revenue, in the period inwhich the sales being hedged are received and recognized in income. However, tothe extent that any of these contracts are not considered to be perfectlyeffective in offsetting the change in the value of the sales being hedged, anychanges in fair value relating to the ineffective portion of these contractsare immediately recognized in income. These amounts were not material to theperiods presented.

 

Gains and losses onforeign exchange contracts that are not designated as hedges are included as acomponent of interest and other income, net, in the Company’s consolidatedstatement of operations.

 

At June 28, 2003, the Company had contracts for the sale of $2.8million of Japanese Yen at fixed rates. The Company had less than $0.1 millionof deferred gains on foreign exchange contracts at June 28, 2003.

 

**Item4.****                              Controlsand Procedures**

 

Based on theirevaluation, as of a date within 90 days of the filing of this Form 10-Q, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthe Company’s disclosure controls and procedures (as defined in Rules 13a-14and 15d-14 under the Securities Exchange Act of 1934) are effective. There havebeen no significant changes in internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported, within the time periods specified in the SEC’s rulesand forms. Disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required to bedisclosed in our reports filed or submitted under the Securities Exchange Actof 1934, as amended, is accumulated and communicated to management to allowtimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, our management recognizes that any controlsand procedures, no matter how well designed

 

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and operated, can provideonly reasonable assurance of achieving the desired control objectives.Management is further required to apply judgement in evaluating the cost-benefitrelationship of possible controls and procedures.

 

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| **PART 2****:** |   | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                            |
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| **Item 1****.** |   | **Legal Proceedings.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                            |
|            |   | On February 29, 2000, in the U.S. District Court of Virginia, the  Company filed patent infringement lawsuits against Nikon, Canon and ASML. In  April 2000, the Company reached a settlement with Nikon and in September  2001, the Company reached a settlement with Canon. The patent litigation  against ASML is ongoing. The Court has made a preliminary determination that  ASML does not infringe the patent. The Company has filed an appeal against  this preliminary determination of the Court. On October 12, 2001, the Company  was sued in the District Court in Massachusetts for alleged infringement of  certain patents owned by Silicon Valley Group, Inc. (“SVG”), a company  acquired by ASML. The Company is in the process of defending against this  claim and believes the claim is without merit. |   |                                                                                                                                                                                                                                                                                                                                                                                            |
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| **Item 2****.** |   | **Changes in  Securities and Use of Proceeds.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | None.                                                                                                                                                                                                                                                                                                                                                                                           |
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| **Item 3****.** |   | **Defaults upon  Senior Securities.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | None.                                                                                                                                                                                                                                                                                                                                                                                           |
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| **Item 4****.** |   | **Submission of  Matters to a Vote of Security Holders.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                                                                                                                                                                                            |
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|            |   | The following proposals were voted upon by the Company’s stockholders  at the Company’s Annual Stockholders’ Meeting held on June 5, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                                                                                                                                                                                            |
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|            |   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | The following persons were elected as directors of the Company to  serve for a term ending upon the Annual Stockholders’ Meeting indicated  beside their respective names and until their successors are elected and  qualified:                                                                                                                                                           |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **Terms  Ending Upon the  Annual Stockholders’ Meeting**                                                                                                                                                                                                                                                                                                                                   |   | **Votes for** |   | **Votes  withheld** |   |   |   |
|            |   | Thomas D. George                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 2005                                                                                                                                                                                                                                                                                                                                                                                            |   | 20,218,706 |   | 193,795 |   |   |   |
|            |   | Kenneth Levy                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 2005                                                                                                                                                                                                                                                                                                                                                                                            |   | 13,586,424 |   | 6,826,077 |   |   |   |
|            |   | Dennis R. Raney                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 2005                                                                                                                                                                                                                                                                                                                                                                                            |   | 20,217,376 |   | 195,125 |   |   |   |
|            |   | Vincent F. Sollitto                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 2005                                                                                                                                                                                                                                                                                                                                                                                            |   | 19,944,196 |   | 468,305 |   |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |   |
|            |   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | A proposal to ratify the appointment of Ernst & Young LLP as the  Company’s independent auditors for the fiscal year ending December 31, 2003  was approved by the vote of 20,058,057 shares for; 331,040 shares against;  and 23,404 shares abstained.                                                                                                                                |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|            |   | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | A proposal to approve an amendment to the Company’s Amended and  Restated Certificate of Incorporation to change the name of the Company to  “Ultratech, Inc.” was approved by the vote of 20,373,967 shares for; 31,506  shares against; and 7,028 shares abstained.                                                                                                            |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|            |   | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | A proposal to approve an amendment to the Company’s 1993 Stock  Option/Stock Issuance Plan, to increase the number of shares subject to options  granted to non-employee directors each year pursuant to the automatic grant  program in effect under the Plan to 8,000 shares, was approved by the vote of  10,377,031 shares for; 9,981,019 shares against; and 54,451 shares abstained. |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
| **Item 5****.** |   | **Other Information.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                            |
|            |   | On July 22, 2003, the Company amended its bylaws to change the  maximum number of directors to eight, from the previous maximum of nine.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                                            |
|                 |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |        |                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| **Item 6****.** |   | **Exhibits and  Reports on Form 8-K**                                                                                                                                                                                                                                                                                                                                                          |   |                                                                                                                                                                              |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                              |
|            |   | **(a) Exhibits**                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                              |
|            |   | 3.1                                                                                                                                                                                                                                                                                                                                                                                            |   | Amended and Restated Certificate of Incorporation of the Company,  filed October 6, 1993.                                                                                         |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                              |   |   |
|            |   | 3.1.1                                                                                                                                                                                                                                                                                                                                                                                          |   | Certificate of Amendment of the Amended and Restated Certificate of  Incorporation of the Company, filed May 17, 1995.                                                            |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                              |   |   |
|            |   | 3.1.2                                                                                                                                                                                                                                                                                                                                                                                          |   | Certificate of Amendment of the Amended and Restated Certificate of  Incorporation of the Company, filed June 17, 1998.                                                           |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                              |   |   |
|            |   | 3.1.3                                                                                                                                                                                                                                                                                                                                                                                          |   | Certificate of Amendment of the Amended and Restated Certificate of  Incorporation of the Company, filed June 20, 2003.                                                           |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                              |   |   |
|            |   | 3.2                                                                                                                                                                                                                                                                                                                                                                                            |   | Bylaws of the Company, as amended.                                                                                                                                                |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                              |   |   |
|            |   | 99.1                                                                                                                                                                                                                                                                                                                                                                                           |   | Certifications 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. |   |   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                              |   |   |
|            |   | **(b) Reports on Form  8-K**                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                              |
|            |   | Current Reports on Form 8-K, dated May 22, 2003 and June 19, 2003,  were filed during the quarter ended June 28, 2003, reporting updates to the  Company’s quarterly teleconference guidance. A Current Report on Form 8-K,  dated April 17, 2003 was filed during the quarter ended June 28, 2003,  reporting the Company’s quarterly results for the period ended March 29,  2003. |   |                                                                                                                                                                              |

 

32

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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 theundersigned thereunto duly authorized.

 
| **ULTRATECH, INC.** |
|---------------------|
| (Registrant)        |
|                |
|                |
| Date:               | August 1, 2003 | 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) |

 

33

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**CERTIFICATIONS**

 

I, Arthur Zafiropoulo, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Ultratech,Inc.;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) Designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) Evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) Presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) All significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officers and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

Date: August 1, 2003

 
|   | /s/ Arthur Zafiropoulo  |   |
|--------|-------------------------|--------|
|   | Arthur Zafiropoulo      |
|   | Chief Executive Officer |

 

34

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I, Bruce Wright, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Ultratech,Inc.;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) Designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) Evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) Presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internal controls;and

 

6. The registrant’s other certifying officers and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

Date: August 1, 2003

 

 
|   | /s/ Bruce Wright        |   |
|--------|-------------------------|--------|
|   | Bruce Wright            |
|   | Chief Financial Officer |

 

35

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**EXHIBITINDEX**

 
| 3.1    |   | Amended and Restated Certificate of Incorporation of the Company,  filed October 6, 1993.                                                                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                              |
| 3.1.1  |   | Certificate of Amendment of the Amended and Restated Certificate of  Incorporation of the Company, filed May 17, 1995.                                                            |
|   |   |                                                                                                                                                                              |
| 3.1.2  |   | Certificate of Amendment of the Amended and Restated Certificate of  Incorporation of the Company, filed June 17, 1998.                                                           |
|   |   |                                                                                                                                                                              |
| 3.1.3  |   | Certificate of Amendment of the Amended and Restated Certificate of  Incorporation of the Company, filed June 20, 2003.                                                           |
|   |   |                                                                                                                                                                              |
| 3.2    |   | Bylaws of the Company, as amended.                                                                                                                                                |
|   |   |                                                                                                                                                                              |
| 99.1   |   | Certifications 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. |

 

36

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