** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**
| **(Mark One)** | ** ** | ** **                                                                                            |
|----------------|------------|-------------------------------------------------------------------------------------------------------|
| **x**          | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|           |       |                                                                                                  |
| ** **     | ** ** | **For the quarterly period  ended         July 1, 2006** |
|           |       |                                                                                                  |
| **o**          | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**    |

 

**Forthe transition periodfrom         to          **

**CommissionFile 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 telephonenumber, including area code      **(408) 321-8835**

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

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

Yes    x      No    o

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

 

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

Yes    o      No    x

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practical date:
| Class                          | ** ** | **Outstanding as of August 1, 2006** |
|--------------------------------|------------|--------------------------------------|
| common stock,  $.001 par value |       | 23,595,467                           |

 

 

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**ULTRATECH, INC.**

**INDEX**
| **PART I.**    | ** ** | **FINANCIAL  INFORMATION**                                                                                                   |   | 3      |   |
|----------------|------------|------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|           |       |                                                                                                                         |   |   |   |
| **Item  1.**   | ** ** | **Financial  Statements**                                                                                                    |   | 3      |   |
|           |       |                                                                                                                         |   |   |   |
|           |       | Condensed  Consolidated Balance Sheets as of July 1, 2006 and December 31,  2005                                   |   | 3      |   |
|           |       |                                                                                                                         |   |   |   |
|           |       | Condensed  Consolidated Statements of Operations for the three and six months ended  July 1, 2006 and July 2, 2005 |   | 4      |   |
|           |       |                                                                                                                         |   |   |   |
|           |       | Condensed  Consolidated Statements of Cash Flows for the six months ended July 1,  2006 and July 2, 2005           |   | 5      |   |
|           |       |                                                                                                                         |   |   |   |
|           |       | Notes to  Condensed Consolidated Financial Statements                                                                        |   | 6      |   |
|           |       |                                                                                                                         |   |   |   |
| **Item 2.**    | ** ** | **Management’s Discussion and Analysis of Financial  Condition and Results of Operations**                              |   | 14     |   |
|           |       |                                                                                                                         |   |   |   |
| **Item 3.**    | ** ** | **Quantitative and Qualitative Disclosures About Market  Risk**                                                              |   | 20     |   |
|           |       |                                                                                                                         |   |   |   |
| **Item 4.**    | ** ** | **Controls and Procedures**                                                                                                  |   | 20     |   |
|           |       |                                                                                                                         |   |   |   |
| **PART  II.**  | ** ** | **OTHER  INFORMATION**                                                                                                       |   | 21     |   |
|           |       |                                                                                                                         |   |   |   |
| **Item  1.**   | ** ** | **Legal  Proceedings**                                                                                                       |   | 21     |   |
|           |       |                                                                                                                         |   |   |   |
| **Item  1A.**  | ** ** | **Risk  Factors**                                                                                                            |   | 21     |   |
|           |       |                                                                                                                         |   |   |   |
| **Item 2.**    | ** ** | **Unregistered Sales of Equity Securities and Use of  Proceeds**                                                             |   | 27     |   |
|           |       |                                                                                                                         |   |   |   |
| **Item 3.**    | ** ** | **Defaults upon Senior Securities**                                                                                          |   | 27     |   |
|           |       |                                                                                                                         |   |   |   |
| **Item 4.**    | ** ** | **Submission of Matters to a Vote of Security Holders**                                                                      |   | 27     |   |
|           |       |                                                                                                                         |   |   |   |
| **Item  5.**   | ** ** | **Other  Information**                                                                                                       |   | 27     |   |
|           |       |                                                                                                                         |   |   |   |
| **Item 6.**    | ** ** | **Exhibits**                                                                                                                 |   | 28     |   |
|           |       |                                                                                                                         |   |   |   |
| **SIGNATURES** |       | 29                                                                                                                           |   |

 

2

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**PART I.   FINANCIAL INFORMATION**

**Item 1.    FinancialStatements**

**ULTRATECH, INC.CONDENSED CONSOLIDATED BALANCE SHEETS**
| ** **                                          | ** ** | **July 1,** | ** ** | **Dec. 31,** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-------------------|------------|
| **(In  thousands)**                                 | ** ** | **2006**         | ** ** | **2005***         | ** ** |
| ** **                                          | ** ** | **(Unaudited)**  | ** ** | ** **        | ** ** |
| ***ASSETS***                                        | ** ** | ** **       | ** ** | ** **        | ** ** |
| Current assets:                                     |       |             |       |              |       |
| Cash, cash  equivalents, and short-term investments |       | $                | 97,629     |              | $          | 141,067 |   |
| Accounts  receivable, net                           |       | 18,999           |       | 19,110            |       |
| Inventories                                         |       | 40,550           |       | 28,969            |       |
| Prepaid expenses  and other current assets          |       | 3,140            |       | 1,589             |       |
| Total current assets                                |       | 160,318          |       | 190,735           |       |
|                                                |       |             |       |              |       |
| Long-term investments                               |       | 50,069           |       | —            |       |
|                                                |       |             |       |              |       |
| Equipment and leasehold  improvements, net          |       | 21,178           |       | 25,117            |       |
|                                                |       |             |       |              |       |
| Demonstration  inventories                          |       | 4,686            |       | 3,367             |       |
|                                                |       |             |       |              |       |
| Other assets                                        |       | 2,929            |       | 3,090             |       |
|                                                |       |             |       |              |       |
| Total assets                                        |       | $                | 239,180    |              | $          | 222,309 |   |
|                                                |       |             |       |              |       |
| ***LIABILITIES  AND STOCKHOLDERS’ EQUITY***    |       |             |       |              |       |
| Current liabilities:                                |       |             |       |              |       |
| Notes payable                                       |       | $                | 9,800      |              | $          | 4,289 |   |
| Accounts payable                                    |       | 14,209           |       | 8,403             |       |
| Deferred product  and services income               |       | 4,694            |       | 1,970             |       |
| Other current  liabilities                          |       | 11,019           |       | 10,892            |       |
| Total current  liabilities                          |       | 39,722           |       | 25,554            |       |
|                                                |       |             |       |              |       |
| Other liabilities                                   |       | 7,355            |       | 7,805             |       |
|                                                |       |             |       |              |       |
| Stockholders’ equity                           |       | 192,103          |       | 188,950           |       |
|                                                |       |             |       |              |       |
| Total liabilities and stockholders’ equity     |       | $                | 239,180    |              | $          | 222,309 |   |

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

*See accompanying notes to unaudited condensedconsolidated financial statements*

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** **

**ULTRATECH, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **July 1,**                 | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| **(In  thousands, except per share amounts)**              | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales:                                                 |       |                             |       |                           |       |   |   |   |   |
| Products                                                   |       | $                                | 22,362     |                           | $          | 25,698 |   | $ | 53,771 |   | $ | 49,434 |   |
| Services                                                   |       | 3,581                            |       | 2,839                          |       | 7,116 |   | 5,937 |   |
| Licenses                                                   |       | 100                              |       | 289                            |       | 100 |   | 1,417 |   |
| Total net sales                                            |       | 26,043                           |       | 28,826                         |       | 60,987 |   | 56,788 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Cost of sales:                                             |       |                             |       |                           |       |   |   |   |   |
| Cost of products sold                                      |       | 11,821                           |       | 14,752                         |       | 30,937 |   | 28,144 |   |
| Cost of services                                           |       | 2,411                            |       | 2,385                          |       | 4,582 |   | 4,677 |   |
| Total cost of  sales                                       |       | 14,232                           |       | 17,137                         |       | 35,519 |   | 32,821 |   |
| Gross profit                                               |       | 11,811                           |       | 11,689                         |       | 25,468 |   | 23,967 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                                       |       |                             |       |                           |       |   |   |   |   |
| Research, development, and engineering                     |       | 6,350                            |       | 6,833                          |       | 12,503 |   | 14,336 |   |
| Selling, general, and administrative                       |       | 8,345                            |       | 8,196                          |       | 15,642 |   | 15,731 |   |
| Amortization of intangible assets                          |       | —                           |       | —                         |       | — |   | 95 |   |
| Operating loss                                             |       | (2,884                           | )          | (3,340                         | )          | (2,677 | ) | (6,195 | ) |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                           |       | (32                              | )          | (99                            | )          | (44 | ) | (190 | ) |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Interest and  other income, net                            |       | 1,712                            |       | 1,149                          |       | 3,229 |   | 2,063 |   |
| Income (loss)  before income tax                           |       | (1,204                           | )          | (2,290                         | )          | 508 |   | (4,322 | ) |
| Provision  (benefit) for income taxes                      |       | (28                              | )          | (296                           | )          | 102 |   | (432 | ) |
| Net income (loss)                                          |       | ($1,176                          | )          | ($1,994                        | )          | $ | 406 |   | ($3,890 | ) |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss) per share - basic:                      |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss)                                         |       | ($0.05                           | )          | ($0.08                         | )          | $ | 0.02 |   | ($0.16 | ) |
| Number of shares  used in per share computations - basic   |       | 23,927                           |       | 23,944                         |       | 23,879 |   | 23,912 |   |
| Net income  (loss) per share - diluted:                    |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss)                                         |       | ($0.05                           | )          | ($0.08                         | )          | $ | 0.02 |   | ($0.16 | ) |
| Number of shares used  in per share computations - diluted |       | 23,927                           |       | 23,944                         |       | 25,031 |   | 23,912 |   |
|                                                            |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

*See accompanying notes to unaudited condensedconsolidated financial statements*

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**ULTRATECH, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                                            | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                            | ** ** | **July 1,**               | ** ** | **July 2,** | ** ** |
| **(In  thousands)**                                                                                   | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| *Cash  flows from operating activities:*                                                              | * *   | * *                       | * *   | * * | * * |
| Net income  (loss)                                                                                    |       | $                              | 406        |   | $ | (3,890 | ) |
| Adjustments to  reconcile net income (loss) to net cash generated by (used in) operating  activities: | * *   | * *                       | * *   | * * | * * |
| Depreciation                                                                                          |       | 2,977                          |       | 3,326 |   |
| Amortization                                                                                          |       | 627                            |       | 760 |   |
| (Gain) loss on disposal of equipment                                                                  |       | (5                             | )          | 3 |   |
| Loss on sale of short-term investments                                                                |       | —                         |       | 8 |   |
| Stock-based compensation                                                                              |       | 960                            |       | 68 |   |
| Deferred income taxes                                                                                 |       | 170                            |       | (17 | ) |
| Changes in operating assets and liabilities:                                                          | * *   | * *                       | * *   | * * | * * |
| Accounts receivable                                                                                   |       | 111                            |       | 332 |   |
| Inventories                                                                                           |       | (9,186                         | )          | (1,606 | ) |
| Prepaid expenses and other current assets                                                             |       | (1,598                         | )          | (1,777 | ) |
| Demonstration inventory                                                                               |       | (1,853                         | )          | 855 |   |
| Other assets                                                                                          |       | 38                             |       | (288 | ) |
| Accounts payable                                                                                      |       | 5,806                          |       | (3,004 | ) |
| Deferred product and services income                                                                  |       | 2,724                          |       | 2,191 |   |
| Deferred license revenue                                                                              |       | —                         |       | (1,041 | ) |
| Other current liabilities                                                                             |       | 127                            |       | 1,164 |   |
| Other liabilities                                                                                     |       | (450                           | )          | 488 |   |
| Net cash generated  by (used in) operating activities                                                 |       | 854                            |       | (2,428 | ) |
|                                                                                                  | * *   | * *                       | * *   | * * | * * |
| *Cash  flows from investing activities:*                                                              | * *   | * *                       | * *   | * * | * * |
| Capital  expenditures                                                                                 |       | (1,507                         | )          | (3,676 | ) |
| Proceeds from  sale of fixed assets                                                                   |       | 79                             |       | — |   |
| Purchase of  securities                                                                               |       | (23,920                        | )          | (76,658 | ) |
| Proceeds from  sales and maturities of securities                                                     |       | 20,917                         |       | 69,685 |   |
| Net cash used in  investing activities                                                                |       | (4,431                         | )          | (10,649 | ) |
|                                                                                                  | * *   | * *                       | * *   | * * | * * |
| *Cash  flows from financing activities:*                                                              | * *   | * *                       | * *   | * * | * * |
| Proceeds from  notes payable                                                                          |       | 21,404                         |       | 66,235 |   |
| Repayment of  notes payable                                                                           |       | (15,893                        | )          | (67,538 | ) |
| Proceeds from  issuance of common stock                                                               |       | 2,639                          |       | 2,046 |   |
| Net cash  provided by financing activities                                                            |       | 8,150                          |       | 743 |   |
|                                                                                                  | * *   | * *                       | * *   | * * | * * |
| Net effect of  exchange rate changes on cash                                                          |       | (223                           | )          | 367 |   |
|                                                                                                  | * *   | * *                       | * *   | * * | * * |
| Net increase  (decrease) in cash and cash equivalents                                                 |       | 4,350                          |       | (11,967 | ) |
|                                                                                                  | * *   | * *                       | * *   | * * | * * |
| Cash and cash  equivalents at beginning of period                                                     |       | 36,344                         |       | 47,985 |   |
|                                                                                                  | * *   | * *                       | * *   | * * | * * |
| Cash and cash  equivalents at end of period                                                           |       | $                              | 40,694     |   | $ | 36,018 |   |
|                                                                                                  | * *   | * *                       | * *   | * * | * * |
| Supplemental  disclosures of cash flow information:                                                   | * *   | * *                       | * *   | * * | * * |
| Other non-cash change:                                                                                |       |                           |       |   |   |
| Systems  transferred from (to) inventory to (from) equipment and other assets                         |       | ($754)                         |       | $ | 1,723 |   |

 

*See accompanying notes to unaudited condensedconsolidated financial statements*

 

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**Ultratech, Inc.Notes to Condensed Consolidated Financial Statements(Unaudited)July 1, 2006**

**(1)  Description ofBusiness**

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

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

In evaluating the Company’sbusiness segments, we gave consideration to the Chief Executive Officer’s reviewof financial information and the organizational structure of our management.Based on this review, we concluded that, at the present time, resources areallocated and other financial decisions are made based on consolidatedfinancial information. Accordingly, we have determined that we operate in onebusiness segment, which is the manufacture and distribution of capitalequipment to manufacturers of integrated circuits and nanotechnologycomponents.

**(2)  Basis ofPresentation**

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

Operating results for thethree and-six month periods ended July 1, 2006 are not necessarilyindicative of the results that may be expected for the year endingDecember 31, 2006, or any future period.

**USE OF ESTIMATES**— The preparation of the financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities at the date of the consolidated financialstatements. By their nature, these estimates and judgments are subject to an inherentdegree of uncertainty. On an ongoing basis, management evaluates its estimates,including those related to inventories, warranty obligations, purchase ordercommitments, asset retirement obligations, bad debts, estimated useful lives offixed assets, asset impairment, income taxes, intangible assets, and contingenciesand litigation. Management bases its estimates on historical experience and onvarious other analyses and assumptions that are believed to be reasonable underthe circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions.

**IMPACT OF RECENTLY ISSUEDACCOUNTING STANDARDS**— In March 2006, the FASB issued SFASNo. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 156permits an entity to choose either the amortization method or the fair valuemethod for each class of separately recognized servicing assets and servicingliabilities. This statement is effective as of the beginning of an entity’sfirst fiscal year that begins after September 15, 2006, with earlier adoptionpermitted. The Company does not anticipate that the adoption of SFAS No. 156will have a material impact on its results of operations or statement offinancial position.

In February 2006, theFASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments.” SFAS No. 155 permits fair value re-measurement for anyhybrid financial instruments that contain an embedded derivative that otherwisewould require bifurcation. This statement is effective for all financialinstruments acquired or issued after the beginning of an entity’s first fiscalyear that begins after September 15, 2006. The Company does not anticipatethat the adoption of SFAS No. 155 will have a material impact on itsresults of operations or statement of financial position.

In November 2005, theFASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”),which provides guidance on determining when investments in certain debt andequity securities are considered impaired, whether that impairment isother-than-temporary, and on measuring such impairment loss. FSP 115-1 alsoincludes accounting considerations subsequent to the recognition of another-than temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments. FSP 115-1 is required to be applied to reporting periodsbeginning after December 15, 2005. During the quarter ended April 1,2006, the Company adopted 

6

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FSP FAS 115-1 andFAS 124-1. The adoption had no impact on the Company’s consolidatedstatements of operations for the first six months of 2006.

In June 2005, the FASBissued Statement No. 154, “Accounting Changes and Error Corrections”(SFAS 154), a replacement of APB Opinion No. 20, “Accounting Changes”,and Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.”SFAS 154 changes the requirements for the accounting for and the reportingof a change in accounting principle. Previously, most voluntary changes inaccounting principles required recognition by recording a cumulative effectadjustment within net income in the period of change. SFAS 154 requiresretrospective application to prior periods’ financial statements, unless it isimpracticable to determine either the specific period effects or the cumulativeeffect of the change. SFAS 154 is effective for accounting changes made infiscal years beginning after December 15, 2005. During the quarter endedApril 1, 2006, the Company adopted FAS 154. The adoption had noimpact on the Company’s consolidated financial statements for the three andsix-month periods ended July 1, 2006.

In July 2006 the FASB issued FIN 48 as an interpretationof FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”).This Interpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance withSFAS 109 and prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. This Interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. FIN 48 is effective forfiscal years beginning after December 15, 2006. We are still evaluatingwhat impact, if any, the adoption of this standard will have on our financialposition or results of operations.

**(3)  Stock-BasedCompensation**

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

Prior to January 1,2006, the Company accounted for its stock plans under the provisions ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (APB No. 25) and FASB Interpretation (FIN) No. 44, “Accountingfor Certain Transactions Involving Stock Compensation — an Interpretation ofAPB Opinion No. 25” (FIN No. 44) as permitted by Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation”(SFAS No. 123). No stock-based employee compensation was recognized in theCondensed Consolidated Statement of Operations under SFAS No. 123 as alloptions granted under the Company’s stock plans had an exercise price equal tothe market value of the underlying common stock on the date of grant. TheCompany adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment” (SFAS No. 123R), effectiveJanuary 1, 2006 using the modified prospective transition method. Underthat transition method, stock-based compensation expense recognized during thesix months ended July 1, 2006 includes: (a) stock options grantedprior to, but not yet vested as of, January 1, 2006, based on thegrant-date fair value estimated in accordance with the original provisions ofSFAS No. 123R, and (b) stock options and restricted stock unitsgranted subsequent to January 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS No. 123R. Under themodified prospective transition method, results for prior periods are notrestated.

As a result of adoptingSFAS 123R on January 1, 2006, and excluding the expense related to restrictedstock units which would have been included in the Company’s CondensedConsolidated Statements of Operations under the provisions of APB No. 25,the Company’s Condensed Consolidated Statements of Operations for the three andsix-month periods ended July 1, 2006 changed by the following amountscompared to what the Company would have reported had it continued to accountfor share-based compensation under APB No. 25:

|                                                                       | ** ** | **Impact of adoption of SFAS No. 123R** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **(In thousands, except per share amounts)** | ** ** | **Three Months  Ended July 1, 2006**              | ** ** | **Six Months Ended  July 1, 2006** | ** ** |
| Income from  continuing operations                                    |       | $                                                                     | (212       | ) | $ | (429 | ) |
| Income before  income taxes                                           |       | $                                                                     | (212       | ) | $ | (429 | ) |
| Net income                                                            |       | $                                                                     | (212       | ) | $ | (429 | ) |
| Earnings per  share - basic                                           |       | $                                                                     | (0.01      | ) | $ | (0.01 | ) |
| Earnings per share -  diluted                                         |       | $                                                                     | (0.01      | ) | $ | (0.01 | ) |

 

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

Prior to theadoption of SFAS 123R, the Company presented all tax benefits of deductionsresulting from the exercise of stock 

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options asoperating cash flows in the Condensed Consolidated Statement of Cash Flows.SFAS 123R requires cash flows resulting from tax benefits resulting fromdeductions in excess of the compensation cost recognized for those options(excess tax benefits) to be classified as financing cash flows. During thethree and six-month periods ended July 1, 2006, the excess tax benefitclassified as finance cash inflow that would have been classified as operatingcash inflow if the Company had not adopted SFAS 123R is immaterial.

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

| (In thousands, except per share amounts) | ** ** | **Three Months  Ended July 2,  2005** | ** ** | **Six Months  Ended July 2,  2005** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| Net loss as  reported                                             |       | $                                                    | (1,994     | )                                                  | $          | (3,890 | ) |
| Add:  Compensation expense recorded under APB No. 25, net of tax  |       | 68                                                   |       | 68                                                 |       |
| Deduct: SFAS No.  123R compensation expense, net of tax           |       | (504                                                 | )          | (3,187                                             | )          |
| Pro forma net  loss                                               |       | $                                                    | (2,430     | )                                                  | $          | (7,009 | ) |
|                                                              |       |                                                 |       |                                               |       |
| Net loss per  share - basic, as reported                          |       | $                                                    | (0.08      | )                                                  | $          | (0.16 | ) |
| Pro forma net  loss per share - basic                             |       | $                                                    | (0.10      | )                                                  | $          | (0.29 | ) |
|                                                              |       |                                                 |       |                                               |       |
| Net loss per  share - diluted, as reported                        |       | $                                                    | (0.08      | )                                                  | $          | (0.16 | ) |
| Pro forma net loss per  share - diluted                           |       | $                                                    | (0.10      | )                                                  | $          | (0.29 | ) |

 

The Companyrecognized stock-based compensation expense of $0.5 million and $1.0 million,respectively, during the three and six-month periods ended July 1, 2006including expenses related to restricted stock units which would have beenincluded in the Company’s Condensed Consolidated Statements of Operations underthe provisions of APB No. 25. Compensation cost capitalized as part ofinventory was immaterial during the three and six-month periods endedJuly 1, 2006. The total income tax benefit recognized in the Company’sCondensed Consolidated Statements of Operations during the three and six-monthperiods ended July 1, 2006 related to all stock-based compensation wasimmaterial.

Stock Options andRestricted Stock Units

Ultratech’s 1993Stock Option Plan/Stock Issuance Plan, as amended, and its 1998 SupplementalStock Option/Stock Issuance Plan, as amended (together with the 1993 StockOption Plan/Stock Issuance Plan, as amended, the “Plans”), provide for thegrant of qualified and non-qualified stock-based awards to eligible employees,consultants and advisors, and non-employee directors of the Company and itssubsidiaries. The Company believes that such awards better align the interestsof its employees with those of its shareholders. As of July 1, 2006, therewere a total of 1,013,315 shares reserved for future awards under the Plan.

The Companyanalyzed its stock-based compensation strategies prior to the adoption of SFASNo. 123R and made the decision to grant a combination of stock options andrestricted stock units rather than only stock options during the three andsix-month periods ended July 1, 2006. Option awards are generally grantedwith an exercise price equal to the market price of the Company’s stock on thedate of grant, expire ten years from the date of grant and currently generallyvest over approximately four years from the date of grant. Restricted stockunit awards generally vest over approximately three years from the date of grant.Certain stock options and restricted stock units provide for acceleratedvesting if there is a change in control (as defined in the respective Plan).The Company has a policy of settling employee stock option exercises andemployee stock issuances with newly issued shares of common stock.

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

8

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effect at the time ofgrant.

The fair value of theCompany’s stock options granted during the three and six-month periods endedJuly 1, 2006 and July 2, 2005 was estimated using the followingweighted-average assumptions:

|                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **July 1,**                 | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Expected life  (in years): stock options |       | 4.9                              |       | 3.8                            |       | 4.9 |   | 3.5 |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Risk-free  interest rate                 |       | 4.89                             | %          | 3.76                           | %          | 4.89 | % | 3.44 | % |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Volatility  factor                       |       | 0.53                             |       | 0.46                           |       | 0.53 |   | 0.51 |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Dividend yield                           |       | N/A                              |       | N/A                            |       | N/A |   | N/A |   |

 

A summary of stock option activity under the Plans asof July 1, 2006 and changes during the six months then ended is presented below:

| Options                                     | ** ** | **Shares (in  thousands)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic  Value (in  thousands)** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Outstanding at  December 31, 2005           |       | 6,444                           |       | 17.71                                   |       | —                                                            |       | —                                               |       |
| Granted                                     |       | 24                              |       | 20.76                                   |       | —                                                            |       | —                                               |       |
| Exercised                                   |       | (178                            | )          | 14.83                                   |       | —                                                            |       | —                                               |       |
| Forfeited or  expired                       |       | (76                             | )          | 25.13                                   |       | —                                                            |       | —                                               |       |
| Outstanding at  July 1, 2006                |       | 6,214                           |       | 17.71                                   |       | 6.5                                                               |       | $                                                    | 6,972      |   |
| Vested or  expected to vest at July 1, 2006 |       | 6,212                           |       | 17.71                                   |       | 6.5                                                               |       | $                                                    | 6,972      |   |
| Exercisable at July 1,  2006                |       | 5,976                           |       | 17.93                                   |       | 6.5                                                               |       | $                                                    | 6,059      |   |

 

Theweighted-average grant date fair value of options granted during the three andsix-month periods ended July 1, 2006 was $10.60 and $10.60, respectively. Thetotal intrinsic value of options exercised during the three and six-monthperiods ended July 1, 2006 was $0.1 million and $1.2 million,respectively. The fair value of restricted stock units is based upon theclosing trading price of the Company’s shares on the date of grant. The totalfair value of restricted stock units that vested during the six-month periodended July 1, 2006 was $0.1 million.

A summary of the statusof the Company’s restricted stock units as of July 1, 2006, and changes duringthe six months then ended is presented below:

| Nonvested Restricted Stock Units | ** ** | **Shares (in  thousands)** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------------|------------|
| Nonvested at  December 31, 2005                 |       | —                          |       | N/A                                                 |       |
| Granted                                         |       | 168                             |       | $                                                   | 19.20      |   |
| Vested                                          |       | (5                              | )          | $                                                   | 19.20      |   |
| Forfeited                                       |       | (6                              | )          | $                                                   | 19.20      |   |
| Nonvested at July 1,  2006                      |       | 157                             |       | $                                                   | 19.20      |   |

 

As of July 1, 2006,there was $2.8 million of total unrecognized compensation cost related tonon-vested share-based compensation arrangements granted under the plans. Thatcost is expected to be recognized over a weighted average period of 1.1 years.

Cash received from stockoption exercises was $0.2 million and $2.6 million, respectively,during the three and six-month periods ended July 1, 2006. The income taxbenefit realized from stock option exercises during the three and six-monthperiods ended July 1, 2006 was immaterial.

9

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

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

|                                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **July 1,**                 | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| **(In thousands, except per share amounts)** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Numerator:                                                            |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                                     |       | ($1,176                          | )          | ($1,994                        | )          | $ | 406 |   | ($3,890 | ) |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Denominator:                                                          |       |                             |       |                           |       |   |   |   |   |
| Denominator for basic net income per share                            |       | 23,927                           |       | 23,944                         |       | 23,879 |   | 23,912 |   |
| Effect of dilutive employee stock options                             |       | —                           |       | —                         |       | 1,152 |   | — |   |
| Denominator for diluted net income per share                          |       | 23,927                           |       | 23,944                         |       | 25,031 |   | 23,912 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss) per share - basic:                                 |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                                     |       | ($0.05                           | )          | ($0.08                         | )          | $ | 0.02 |   | ($0.16 | ) |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss) per share - diluted:                               |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                                     |       | ($0.05                           | )          | ($0.08                         | )          | $ | 0.02 |   | ($0.16 | ) |

 

For the three andsix-month periods ended July 1, 2006, options to purchase 6,214,415 and1,830,310 shares of common stock at an average exercise price of $17.71 and$25.20, respectively, were excluded from the computation of diluted net lossper share, as the effect would have been anti-dilutive. For the three andsix-month periods ended July 2, 2005, options to purchase 6,297,946 shares ofcommon stock at an average exercise price of $17.88 were excluded from thecomputation of diluted net loss per share, as the effect would have beenanti-dilutive. Options are anti-dilutive when we have a net loss or when theexercise price of the stock option is greater than the average market price ofour common stock during the period.

**(5)  Inventories**

Inventories consist ofthe following:

|                         | ** ** | **July 1,** | ** ** | **Dec. 31,** | ** ** |
|-------------------------|------------|------------------|------------|-------------------|------------|
| **(In thousands)** | ** ** | **2006**         | ** ** | **2005**          | ** ** |
| Raw materials           |       | $                | 14,124     |              | $          | 10,873 |   |
| Work-in-process         |       | 12,897           |       | 8,322             |       |
| Finished  products      |       | 13,529           |       | 9,774             |       |
|                    |       | $                | 40,550     |              | $          | 28,969 |   |

 

**(6)  Other Assets**

Other assets consist ofthe following:

|                                    | ** ** | **July 1,** | ** ** | **Dec. 31,** | ** ** |
|------------------------------------|------------|------------------|------------|-------------------|------------|
| **(In thousands)**            | ** ** | **2006**         | ** ** | **2005**          | ** ** |
| Deferred  compensation plan assets |       | $                | 1,956      |              | $          | 1,972 |   |
| Deferred income  taxes             |       | 151              |       | 274               |       |
| Other                              |       | 822              |       | 844               |       |
|                               |       | $                | 2,929      |              | $          | 3,090 |   |

 

**(7)  Line of Credit**

We have a line of creditagreement with a brokerage firm. Under the terms of this agreement, we mayborrow funds at a cost equal to the current Federal funds open rate plus 100basis points (approximately 6.25% as of July 1, 2006). Certain of ourcash, cash equivalents and investments secure borrowings outstanding under thisfacility. Funds are advanced to us under this facility based on pre-determinedadvance rates on the cash and securities held by us in this brokerage account. Thisagreement has no set expiration date and there are no loan covenants, otherthan the aforementioned collateral requirement. As of July 1, 2006,$9.8 million was 

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outstanding under thisfacility, with a related collateral requirement of approximately $13.1 millionof our cash, cash equivalents and investments.

**(8)  Other CurrentLiabilities**

Other current liabilitiesconsist of the following:

|                                                   | ** ** | **July 1,** | ** ** | **Dec. 31,** | ** ** |
|---------------------------------------------------|------------|------------------|------------|-------------------|------------|
| **(In thousands)**                           | ** ** | **2006**         | ** ** | **2005**          | ** ** |
| Salaries and  benefits                            |       | $                | 4,267      |              | $          | 3,723 |   |
| Warranty accrual                                  |       | 2,198            |       | 2,397             |       |
| Advance billings                                  |       | 671              |       | 854               |       |
| Income taxes  payable                             |       | 188              |       | 768               |       |
| Reserve for  losses on purchase order commitments |       | 230              |       | 406               |       |
| Accrued  taxes-other                              |       | 2,201            |       | 1,542             |       |
| Other                                             |       | 1,264            |       | 1,202             |       |
|                                              |       | $                | 11,019     |              | $          | 10,892 |   |

 

**Warranty Accrual**

We generally warrant ourproducts for a period of 12 months for new products, or 3 months forrefurbished products, from the date of customer acceptance for material andlabor to repair the product; accordingly, an accrual for the estimated cost ofthe warranty is recorded at the time the product is shipped. Extended warrantyterms, if granted, result in deferral of revenue equating to our standardpricing for similar service contracts. Recognition of the related warranty costis deferred until product revenue is recognized. Factors that affect ourwarranty liability include the number of installed units, historical andanticipated rates of warranty claims, and cost per claim. We periodicallyassess the adequacy of our recorded warranty liabilities and adjust the amountsas necessary. In 2005, the Company commenced volume shipments of itsunity-based lithography systems and commenced warranty coverage on several ofits laser annealing systems. As may occur with new product introductions, after-sales(warranty) costs were higher than anticipated. The Company believes itswarranty accrual, as of July 1, 2006, will be sufficient to satisfyoutstanding obligations as of that date.

Changesin our warranty accrual are as follows:
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **July 1,**                 | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| **(In  thousands)**                               | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance,  beginning of the period                 |       | $                                | 2,586      |                           | $          | 2,026 |   | $ | 2,397 |   | $ | 2,013 |   |
| Warranties  issued during the period              |       | 396                              |       | 741                            |       | 1,313 |   | 1,695 |   |
| Settlements made  during the period               |       | (1,152                           | )          | (1,019                         | )          | (2,270 | ) | (2,078 | ) |
| Changes in  liability for pre-existing warranties |       | 368                              |       | 163                            |       | 758 |   | 281 |   |
| Balance, end of the  period                       |       | $                                | 2,198      |                           | $          | 1,911 |   | $ | 2,198 |   | $ | 1,911 |   |

 

**Deferred Services Revenue**

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

Changes in our deferredservice revenue are as follows:
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **July 1,**                 | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| **(In  thousands)**                                    | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance, beginning  of the period                      |       | $                                | 3,213      |                           | $          | 1,352 |   | $ | 1,970 |   | $ | 1,332 |   |
| Service  contracts sold during the period              |       | 2,122                            |       | 2,128                          |       | 6,079 |   | 4,116 |   |
| Service contract  revenue recognized during the period |       | (2,626                           | )          | (1,920                         | )          | (5,340 | ) | (3,888 | ) |
| Balance, end of the  period                            |       | $                                | 2,709      |                           | $          | 1,560 |   | $ | 2,709 |   | $ | 1,560 |   |

 

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**(9)  Other Liabilities**

Other liabilities consistof the following:

|                                       | ** ** | **July 1,** | ** ** | **Dec. 31,** | ** ** |
|---------------------------------------|------------|------------------|------------|-------------------|------------|
| **(In thousands)**               | ** ** | **2006**         | ** ** | **2005**          | ** ** |
| Deferred rent                         |       | $                | 2,961      |              | $          | 3,157 |   |
| Deferred  compensation plan liability |       | 1,819            |       | 1,932             |       |
| Asset retirement  obligations         |       | 1,908            |       | 2,064             |       |
| Other                                 |       | 667              |       | 652               |       |
|                                  |       | $                | 7,355      |              | $          | 7,805 |   |

 

**(10)  Accumulated OtherComprehensive Income (Loss)**

The components ofaccumulated other comprehensive income (loss) are as follows:
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **July 1,**                 | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| **(In  thousands)**                                           | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  (loss)                                            |       | ($1,176                          | )          | ($1,994                        | )          | $ | 406 |   | ($3,890 | ) |
| Accumulated  other comprehensive income (loss):               |       |                             |       |                           |       |   |   |   |   |
| Unrealized gain (loss) on available-for-sale  securities      |       | (224                             | )          | 342                            |       | (629 | ) | 160 |   |
| Unrealized gain (loss) on foreign exchange forward  contracts |       | (99                              | )          | 178                            |       | (223 | ) | 367 |   |
| Comprehensive loss                                            |       | ($1,499                          | )          | ($1,474                        | )          | ($446 | ) | ($3,363 | ) |
|                                                               |            |                                  |            |                                |            |  |  |  |  |  |

 

Accumulated othercomprehensive income (loss) included in the condensed consolidated balancesheets is comprised of unrealized gains or losses on available-for-salesecurities and the effect of exchange rate changes on foreign exchange forwardcontracts, net of tax.

|                                                        | ** ** | **July 1,** | ** ** | **Dec. 31,** | ** ** |
|--------------------------------------------------------|------------|------------------|------------|-------------------|------------|
| **(In thousands)**                                | ** ** | **2006**         | ** ** | **2005**          | ** ** |
| Unrealized gains  (losses) on:                         |       |             |       |              |       |
| Available-for-sale investments                         |       | $                | (1,829     | )                 | $          | (1,200 | ) |
| Foreign exchange contracts                             |       | 91               |       | 314               |       |
| Accumulated other  comprehensive loss at end of period |       | $                | (1,738     | )                 | $          | (886 | ) |

 

**(11)  Stock RepurchaseProgram**

On September 19,2005, the Company’s Board of Directors authorized the repurchase of up to$30 million of its common stock in the open market at the then prevailingmarket prices during the period commencing September 19, 2005 throughSeptember 30, 2007. Through July 1, 2006, the Company had repurchased644,535 shares of its common stock at a total purchase price of$9.2 million. No shares were repurchased during the six-month period endedJuly 1, 2006.

**(12)  Employee BenefitPlans**

***Employee bonusplans***

We currently sponsor anexecutive incentive bonus plan that distributes employee awards based on theachievement of predetermined targets. We have recorded $0.2 million and$0.6 million of expenses under this bonus plan for the three and six-monthperiods ended July 1, 2006, respectively. There was no executive incentivebonus plan expense recognized during the three and six-month periods endedJuly 2, 2005.

***Employee savingsand retirement plans***

Ultratech sponsors a401(k) employee salary deferral plan that allows voluntary contributions by allfull-time employees of from 1% to 20% of their pretax earnings. Companycontributions made to this plan were $0.1 million and $0.2 millionfor the three and six-month periods ended July 1, 2006, respectively. Thecomparable contributions in 2005 were $0.1 million and $0.2 million,respectively. These Company contributions, limited to a maximum of $2,000 peryear per employee, generally become 20 percent vested at the end of anemployee’s first year of service from the date of hire with the Company, andvest 20 percent per year of service 

12

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thereafter until theybecome fully vested at the end of five years of service. The Company alsosponsors an executive non-qualified deferred compensation plan that allowsqualifying executives to defer current cash compensation.

**(13)  Contingencies**

**Legal Proceedings**

On February 29,2000, we filed lawsuits asserting patent infringement and related claimsagainst Nikon, Canon, and ASML in the U.S. District Court for the EasternDistrict of Virginia. In April 2000, we reached a settlement with Nikon, and inSeptember 2001, we reached a settlement with Canon. In the patent litigationagainst ASML, a jury trial was conducted during the three-month period endedJuly 2, 2005. The jury reached a verdict that the patent was infringed,but that the asserted claims of the patent were invalid. We filed a post-trialmotion for a new trial and for judgment as a matter of law in our favor. ASMLalso filed a motion for judgment as a matter of law seeking to invalidate threeof the asserted claims for lack of enablement and requested that the courtaward costs. On February 13, 2006, the Court denied our post-trialmotions, including the motion for a new trial, and entered judgment in favor ofASML invalidating three claims of the patent for lack of enablement. The Courtalso awarded ASML approximately $330,000 in costs. We have filed a notice ofappeal. ASML has filed a notice of cross-appeal.

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

In May 2006, the samecompany filed a state court lawsuit against us for malicious prosecution andabuse of process claiming that attorney’s fees, costs and other damages weredue based on the outcome of a federal patent litigation suit brought against itby us. We do not believe this new action has merit, particularly given thedenial by the federal court and the subsequent federal appellate court’saffirmation of any attorney’s fees payable to this company by us in the federalpatent litigation. We intend to vigorously defend against this action and toseek fees and/or sanctions against this company in relation thereto.

**(14)  Subsequent Event**

Subsequent to July 1,2006, in conjunction with the above-referenced share repurchase plan, we haverepurchased a total of 331,970 shares of common stock at a total purchase priceof $4.7 million.

 

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

Certain of the statementscontained herein, which are not historical facts and which can generally beidentified by words such as “anticipates”, “expects”, “intends”, “will”, “could”,“believes”, “estimates”, “continue”, and similar expressions, areforward-looking statements under Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, that involve risks and uncertainties, such as risks related to ourdependence on new product introductions and market acceptance of new productsand enhanced versions of our existing products; lengthy sales cycles, includingthe timing of system installations and acceptances; lengthy and costlydevelopment cycles for laser-processing and lithography technologies andapplications; integration, development and associated expenses of the laserprocessing operation; delays, deferrals and cancellations of orders by customers;cyclicality in the semiconductor and nanotechnology industries; pricingpressures and product discounts; high degree of industry competition;intellectual property matters; expiration of licensing arrangements, and theresulting adverse impact on our licensing revenues; changes to financialaccounting standards; changes in pricing by us, our competitors or suppliers;customer concentration; international sales; timing of new productannouncements and releases by us or our competitors; ability to volume producesystems and meet customer requirements; sole or limited sources of supply;ability and resulting costs to attract or retain sufficient personnel toachieve our targets for a particular period; dilutive effect of employee stockoption grants on net income per share, which is largely dependent upon usachieving and maintaining profitability and the market price of our stock; mixof products sold; rapid technological change and the importance of timelyproduct introductions; outcome of litigation; manufacturing variances andproduction levels; timing and degree of success of technologies licensed tooutside parties; product concentration and lack of product revenuediversification; inventory obsolescence; asset impairment; effects of certainanti-takeover provisions; announced and future acquisitions; volatility ofstock price; foreign government regulations and restrictions; businessinterruptions due to natural disasters or utility failures; environmentalregulations; and any adverse effects of terrorist attacks in the United Statesor elsewhere, or government responses thereto, or military actions in Iraq,Afghanistan and elsewhere, on the economy in general, or on our business inparticular. Due to these and additional factors, the statements, historicalresults and percentage relationships set forth below are not necessarilyindicative of the results of operations for any future period. Theseforward-looking statements are based on management’s current beliefs andexpectations, some or all of which may prove to be inaccurate, and which maychange. We undertake no obligation to revise or update any forward-lookingstatements to reflect any event or circumstance that may arise after the dateof this report.

**OVERVIEW**

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

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

On June 30, 2006 weentered into a non-binding letter of intent to purchase the assets of Oraxion,Inc. This purchase closed on July 26, 2006. Oraxion produced inspectionequipment for surface metrology and stress analysis for the semiconductorindustry.

**RESULTS OF OPERATIONS**

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

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

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tofall significantly below our expectations, which could materially adverselyaffect our operating results for that period. In particular, the longmanufacturing and acceptance cycles of our advanced packaging family of wafersteppers and laser thermal processing systems and the long lead time for lensesand other materials, could cause shipments and acceptances of such products tobe delayed from one quarter to the next, which could materially adverselyaffect our financial condition and results of operations for a particularquarter.

Additionally, theneed for continued expenditures for research and development, capitalequipment, ongoing training and worldwide customer service and support, amongother factors, will make it difficult for us to reduce our operating expenses.

# **Net sales**

## **SecondQuarter**

|                        | ** ** | **Three Months Ended** | ** ** | ** **       | ** ** | ** **         | ** ** |
|------------------------|------------|----------------------------------|------------|------------------|------------|--------------------|------------|
| ** **             | ** ** | **July 1,**                 | ** ** | **July 2,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
| **(In millions)** | ** ** | **2006**                         | ** ** | **2005**         | ** ** | **Change**         | ** ** | **Change** | ** ** |
| Sales of:              |       |                             |       |             |       |               |       |   |   |
| Products               |       | $                                | 22.3       |             | $          | 25.7               |       | ($3.3 | ) | -13 | % |
| Services               |       | 3.6                              |       | 2.8              |       | 0.7                |       | 26 | % |
| Licenses               |       | 0.1                              |       | 0.3              |       | (0.2               | )          | -65 | % |
| Total net sales        |       | $                                | 26.0       |             | $          | 28.8               |       | ($2.8 | ) | -10 | % |

 

Net sales consist ofrevenues from products (system sales, spare parts sales and upgrades), servicesand licensing of technologies. Product sales decreased 13% to $22.3 millionon a system unit volume decrease of 33% in the second quarter of 2006, comparedto the second quarter of 2005. The average selling prices of systems soldincreased 27% compared to the comparable year-ago period, resulting from ashift in product mix in favor of our new lithography platform products and awayfrom our legacy platform products.

On a product marketapplication basis, system sales to the semiconductor industry, primarily foradvanced packaging applications, were $14.2 million for the quarter endedJuly 1, 2006, a decrease of 7% when compared with system sales to thismarket in the second quarter of 2005. This decrease was due to a 7% decline insales to the advanced packaging markets.

System sales to thenanotechnology market were $3.7 million for the quarter ended July 1,2006, a decrease of 37% compared with sales of $6.0 million in the secondquarter of 2005. System sales to the nanotechnology market are highly dependenton customer capacity demand in the thin film head industry.

Revenues from servicesfor the second quarter of 2006 were $3.6 million, an increase of 26% overlast year’s second quarter, primarily as a result of an increase in servicecontract revenue.

Revenues from licenseswere $0.1 million in the quarter ended July 1, 2006 compared with$0.3 million in the comparable period a year ago. This decrease was aresult of the completion of the amortization period of prior-period proceedsfrom licensing agreements. Future revenues from licensing activities, if any,will be contingent upon the outcome of current litigation (see “LegalProceedings”), and upon existing and future licensing and royalty arrangements.The Company may not be successful in generating licensing revenues in thefuture and does not anticipate the recognition of significant levels oflicensing income during the remainder of 2006.

At July 1, 2006, wehad approximately $4.7 million of deferred product and services incomecompared to $2.0 million at December 31, 2005. Deferred incomerelated to our products is recognized upon satisfying the contractual obligationsfor installation and/or customer acceptance. Deferred service revenue isrecognized ratably over the contract period or as purchased services arerendered.

For the quarterended July 1, 2006, international net sales were $18.0 million, or 69% oftotal net sales compared with $22.1 million, or 77% of total net sales forthe second quarter of 2005. We expect sales to international customers torepresent a significant majority of our revenues during the remainder of 2006. Ourrevenue derived from sales in foreign countries is not generally subject tosignificant exchange rate fluctuations, principally because sales contracts forour systems are generally denominated in U.S. dollars. In Japan, however,orders are often denominated in Japanese yen. This subjects us to the risk ofcurrency fluctuations. We attempt to mitigate this risk by entering intoforeign currency forward exchange contracts for the period between when anorder is received and when it is recorded as revenue. After recording revenue, weuse various mechanisms, such as foreign currency forward exchange contracts andnatural hedges, to offset substantial portions of the gains or lossesassociated with our Japanese yen denominated receivables due to exchange ratefluctuations. We had approximately $4.1 million of Japanese yen denominatedreceivables at July 1, 2006. International sales expose us to a number ofadditional risks, including fluctuations in the value of local currenciesrelative to the U.S. dollar, which impact the relative cost of ownership of ourproducts and, thus, the customer’s willingness to purchase our product. (See “Item 1ARisk Factors: International Sales”).

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**Year-To-Date:**

|                        | ** ** | **Six Months Ended** | ** ** | ** **       | ** ** | ** **         | ** ** |
|------------------------|------------|--------------------------------|------------|------------------|------------|--------------------|------------|
| ** **             | ** ** | **July 1,**               | ** ** | **July 2,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
| **(In millions)** | ** ** | **2006**                       | ** ** | **2005**         | ** ** | **Change**         | ** ** | **Change** | ** ** |
| Sales of:              |       |                           |       |             |       |               |       |   |   |
| Products               |       | $                              | 53.8       |             | $          | 49.4               |       | $ | 4.3 |   | 9 | % |
| Services               |       | 7.1                            |       | 5.9              |       | 1.2                |       | 20 | % |
| Licenses               |       | 0.1                            |       | 1.4              |       | (1.3               | )          | -93 | % |
| Total net sales        |       | $                              | 61.0       |             | $          | 56.8               |       | $ | 4.2 |   | 7 | % |

 

Product sales increased 9% to $53.8 million. Theincrease was primarily a result of a 31% increase in the average selling pricesof systems sold, which was partially offset by a system unit volume decrease of17%. The increase in average selling prices was primarily the result of a shiftin product mix in favor of our new lithography and laser spike annealingproduct platforms and away from our legacy product platforms. On a marketsegment basis, the year-over-year increase in systems sales was a result ofhigher sales to the advanced packaging market ($8.5 million) and the laserthermal processing market ($3.1 million), partially offset by a decline insales to the nanotechnology market.

Revenues from servicesfor the first half of 2006 were $7.1 million, an increase of 20% over thefirst half of 2005, primarily as a result of increases in service contractrevenues. Revenues from licenses decreased by $1.3 million in the firsthalf of 2006, as compared to the first half of 2005. This decrease was a resultof the completion of the amortization period of prior-period proceeds fromlicensing agreements. Future revenues from licensing activities, if any, willbe contingent upon the outcome of current litigation (see “Legal Proceedings”),and upon existing and future licensing and royalty arrangements. The Companymay not be successful in generating licensing revenues in the future and doesnot anticipate the recognition of significant levels of licensing income duringthe remainder of 2006.

For the first half of 2006, international net saleswere $39.0 million, or 64% of total net sales, as compared with $42.9 million,or 75% of total net sales for the first half of 2005. For the first half of2006, as compared to the first half of 2005, sales to Europe declined$11.9 million, sales to Japan declined $2.9 million, sales to Taiwanincreased $6.1 million and sales to the “rest of Asia” increased$3.1 million.

**Gross profit**

## **SecondQuarter**

On a comparative basis,gross margins were 45.4% and 40.6% for the second quarters of 2006 and 2005,respectively. The 4.8 percentage point increase in gross margin wasprimarily due to more favorable pricing and mix of products sold (4.0 percentagepoints) and improved manufacturing and after-sales efficiencies (0.8 percentagepoints).

Exclusive of licensingrevenues, gross margins were 45.1% for the quarter ended July 1, 2006 ascompared with 39.9% for the same period in 2005. We believe disclosure of grossmargins without reference to licensing revenues provides additional appropriatedisclosure to allow comparison of our product and service gross margins overtime because there is little, if any, cost of sales associated with ourlicensing revenues. Future revenues from licensing activities, if any, will becontingent upon the outcome of current litigation (see “Legal Proceedings”),and upon existing and future licensing and royalty arrangements. The Companymay not be successful in generating licensing revenues in the future and doesnot anticipate the recognition of significant levels of licensing income duringthe remainder of 2006. Gross margins have been, and will continue to be,negatively impacted by the discontinuance of license revenue.

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

**Year-To-Date:**

Gross margins were 41.8% and 42.2% for the six-month periods endedJuly 1, 2006 and July 2, 2005, respectively. The 0.4 percentage pointdecline in gross margin was due to a less favorable mix of products sold(0.7 percentage points) and a decline in licensing revenues (0.6 percentagepoints), partially offset by improved manufacturing efficiencies (1.0 percentagepoint).

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**Operating expenses**

## **SecondQuarter**

Research, development andengineering expenses for the second quarter of 2006 were $6.4 million, ascompared to $6.8 million for the same period in 2005. The current quarterdecrease was primarily the result of lower spending associated with thedevelopment of our laser processing technologies.

Selling, general, and administrativeexpenses were $8.3 million for the second quarter of 2006, as comparedwith $8.2 million for the same quarter of 2005. As a percentage of netsales, selling, general, and administrative expenses increased to 32.0% in thequarter ended July 1, 2006, compared to 28.4% in the second quarter of 2005. Thisincrease, in dollar terms, was primarily due to increased hiring, marketing anddemonstration support costs associated with our laser processing product line($0.9 million); stock compensation expense (associated with theimplementation of FAS123R — $0.4 million), management incentive planexpenses ($0.2 million); partially offset by a decrease in legal costs relatedto our being a plaintiff in two patent infringement lawsuits in the secondquarter of 2005 ($1.5 million).

**Year-To-Date:**

Research, development andengineering expenses for the first half of 2006 were $12.5 million, ascompared to $14.3 million for the same period in 2005. The year-to-datedecrease was primarily the result of lower spending associated with thedevelopment of our laser processing technologies.

Selling, general, and administrativeexpenses were $15.6 million for the first half of 2006, as compared with$15.7 million for the same period in 2005. As a percentage of net sales,selling, general, and administrative expenses decreased to 25.6% in the sixmonths ended July 1, 2006, as compared to 27.7% in the first six months of2005. This decrease, in dollar terms, was primarily due to a decrease in legalcosts related to our being a plaintiff in two patent infringement lawsuits inthe first half of 2005 ($2.3 million); lower commission expense($0.5 million); partially offset by increased hiring, marketing anddemonstration support costs associated with our laser processing product line($1.2 million); increased stock compensation expense (associated with theimplementation of FAS123R — $0.8 million); higher management incentiveplan expense ($0.4 million); and increased administrative expense($0.3 million).

# **Interest and other income, net**

Interest and otherincome, net, which consists primarily of interest income, was $1.7 millionand $3.2 million for the second quarter and first half of 2006, respectively,as compared with $1.1 million and $2.1 million for the comparableperiods of 2005. This increase was primarily attributable to higher interestrates on our investments. We presently maintain an investment portfolio with aweighted-average maturity of approximately 1.3 years. As a result, changesin short-term interest rates have had, and will continue to have, a significantimpact on our interest income.

**Provision (benefit) for incometaxes**

For the three andsix-month periods ended July 1, 2006, we recorded an income tax provision of$0.0 million and $0.1 million, respectively, as compared to an incometax benefit of $0.3 million and $0.4 million for the comparableperiods in 2005. The tax expense recognized for the six months ended July 1,2006 resulted from our full-year forecast of an effective tax rate of approximately20% of pre-tax income. The year-ago tax benefit resulted from ourthen-forecasted effective tax rate of approximately 10% of pre-tax income forthe year ended December 31, 2005. The estimated effective tax rate of 20%for 2006 results primarily from foreign income taxes and the U.S. federalalternative minimum tax. This effective tax rate is substantially less than thestatutory rate because of available U.S. federal and state net operating losscarryforwards.

In October 2004, theUnited States enacted The American Jobs Creation Act of 2004 (the “Act”). TheAct provides for a three-year phase-out of current extraterritorial income tax(“ETI”) benefits and replaces ETI with a phased-in 9% domestic productionactivity deduction that will not be fully effective until 2010. We do not currentlyrealize ETI tax benefits. This provision of the Act is not expected to have amaterial effect on our results of operations or financial position in the nearfuture.

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

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

**Outlook**

The anticipated timing oforders, shipments and customer acceptances usually requires us to fill a numberof production slots in any given quarter in order to meet our sales targets. Ifwe are unsuccessful in our efforts to secure those production orders, or ifexisting production orders are delayed or cancelled, our results of operationswill be materially adversely impacted. Accordingly, we may not be able toachieve or maintain our current or prior level of sales. We presently expectthat net sales for the third quarter of 2006 may be in a range from flat to anincrease of up to 25%, sequentially, from the second quarter. For the fullyear, we believe we could see annual revenue growth of flat to an increase ofup to 15% over levels achieved in 2005.

Because our net sales aresubject to a number of risks, including risks associated with the introductionof our new laser processing product line, delays in customer acceptances,intense competition in the capital equipment industry, uncertainty relating tothe timing and market acceptance of our products, and the condition of themacro-economy and the semiconductor industry, we may not exceed or maintain ourcurrent or prior level of net sales for any period in the future. Additionally,we believe that the market acceptance and volume production of our advancedpackaging systems, laser processing systems and our nanotechnology systems areof critical importance to our future financial results. At July 1, 2006, thesecritical systems represented approximately 90% of our backlog. To the extentthat these products do not achieve or maintain significant sales due todifficulties involving manufacturing or engineering, the inability to reducethe current long manufacturing and customer acceptance cycles for theseproducts, competition, excess capacity in the semiconductor or nanotechnologydevice industries, or any other reason, our business, financial condition andresults of operations would be materially adversely affected.

We believe that grossmargin for the third quarter of 2006 will be between 41% and 42%. The finalgross margin achieved will depend heavily upon sales volumes and the resultingproduct mix. Should our sales not reach the level expected, we may incur ahigher risk of inventory obsolescence and excess purchase commitments and lowerutilization of our manufacturing infrastructure, which would materiallyadversely impact our results of operations. New products generally have lowergross margins until there is widespread market acceptance and until productionand after-sales efficiencies can be achieved. Should significant market demandfail to develop for our laser processing systems and our new advanced packagingofferings, our business, financial condition and results of operations would bematerially adversely affected. In addition, higher costs associated withextended manufacturing and customer acceptance periods on shipments of our newlaser processing products have had, and will continue to have, an adverseimpact on our gross margins. We believe that operating margin for the thirdquarter of 2006 may be in a range of (10%) to (20%) and that net income (loss)per share may be in the range of $0.00 to ($0.10) for the third quarter of2006.

For the year endingDecember 31, 2006, we believe that gross margin will be between 42% and43%, based on the projected product mix for the year. We believe that operatingmargin for the year ending December 31, 2006 may be in a range of 0% to(5%) and that net income per share may be in the range of $0.00 to $0.25.

**LIQUIDITY AND CAPITAL RESOURCES**

Net cash generated byoperating activities was $0.9 million for the six-month period ended July1, 2006, compared with net cash used in operating activities of $2.4 millionfor the comparable period in 2005. Net cash generated by operating activitiesduring the first six months of 2006 was primarily attributable to net income of$0.4 million; non-cash charges to income, principally for depreciation,amortization and stock-based compensation of $4.7 million; an increase inaccounts payable of $5.8 million; and an increase in deferred product andservices income of $2.7 million; partially offset by an increase ininventories of $9.2 million; an increase in demonstration inventory of$1.9 million; and an increase in prepaid expenses and other current assetsof $1.6 million.

We believe that becauseof the relatively long manufacturing cycle of certain of our systems,particularly newer products, our inventories will continue to represent asignificant and growing portion of working capital. Currently, we are devotingsignificant resources to the development, introduction and commercialization ofour laser processing system and to the development of our next generation 1Xlithography technologies. We currently intend to continue to incur significantoperating expenses in the areas of research, development and engineering,manufacturing, and selling, general and administrative costs in order tofurther develop, produce and support these new products. Additionally, grossprofit margins, inventory and capital equipment levels may be adverselyimpacted in the future by costs associated with the initial production of thelaser processing system and by future generations of our 1X wafer steppers. Thesecosts include, but are not limited to, additional manufacturing overhead, costsof demonstration systems and facilities and the establishment of additionalafter-sales support organizations. Additionally, there can be no assurance thatoperating expenses will not increase, relative to sales, as a result of addingtechnical, marketing and administrative personnel, among other costs, 

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to support our newproducts. If we are unable to achieve significantly increased net sales or ifour sales fall below expectations, our cash flow and operating results will bematerially adversely affected until, among other factors, costs and expensescan be reduced. Our failure to achieve our sales targets for these new productscould result in additional inventory write-offs and asset impairment charges,either or both of which could materially adversely impact our results ofoperations.

During the first half of2006, net cash used in investing activities was $4.4 million, attributableto net purchases of short and long-term investments of $3.0 million andcapital expenditures of $1.5 million, partially offset by proceeds from thesale of fixed assets of $0.1 million.

Net cash provided byfinancing activities was $8.2 million during the first half of 2006,attributable to net borrowings under our notes payable of $5.5 million and$2.6 million of proceeds received from the issuance of common stock underour employee stock option plans.

At July 1, 2006, wehad working capital of $120.6 million and long-term marketable securitiesof $50.1 million. Our principal sources of liquidity at July 1, 2006consisted of $87.8 million in cash, cash equivalents and short-terminvestments, net of outstanding borrowings under our line of credit, and $50.1 millionof long-term marketable securities. As of July 1, 2006, based upon recentoperating results and expectations of future operating income, the Companyclassified certain investment securities with remaining maturities of one yearor more as long-term investments. We have a line of credit agreement with abrokerage firm. Under the terms of this agreement, we may borrow funds at acost equal to the current Federal funds open rate plus 100 basis points (approximately6.25% as of July 1, 2006). Certain of our cash, cash equivalents andmarketable securities secure borrowings outstanding under this facility. Fundsare advanced to us under this facility in accordance with pre-determinedadvance rates based on the cash and securities held by us in this brokerageaccount. This agreement has no set expiration date and there are no loancovenants. As of July 1, 2006, $9.8 million was outstanding underthis facility, with a related collateral requirement of approximately$13.1 million of our cash, cash equivalents and investments.

On September 19,2005, our Board of Directors authorized the repurchase of up to $30 millionof our common stock in the open market at then prevailing market prices duringthe period commencing September 19, 2005 through September 30, 2007. ThroughJuly 1, 2006, we had repurchased 644,535 shares of our common stock at atotal purchase price of $9.2 million. No shares were repurchased duringthe six-month period ended July 1, 2006. During the quarter endingSeptember 30, 2006, significant levels of cash, cash equivalents andmarketable securities have been, and may continue to be, used to repurchase ourcommon stock in the open market (in conjunction with the above-referenced sharerepurchase plan). As of August 1, 2006, the Company had repurchased anadditional 331,970 shares of common stock at a total purchase price of $4.7 million.Any future repurchase of stock could have a significant impact on our cashposition.

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

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

**Foreign Currency**

As part of our overallstrategy to manage the level of exposure to the risk of foreign currencyexchange rate fluctuations, we attempt to hedge most of our Japanese yendenominated foreign currency exposures. We use foreign currency forwardcontracts to hedge the risk that unremitted Japanese yen denominated receiptsfrom customers, for actual or forecasted sales of equipment after receipt ofcustomer orders, may be adversely affected by changes in foreign currencyexchange rates. After recording revenue, we use various 

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mechanisms, such asforeign currency forward exchange contracts and natural hedges, to offsetsubstantial portions of the potential gains or losses associated with ourJapanese yen denominated assets and liabilities due to exchange ratefluctuations. At July 1, 2006, we had taken action to hedge approximately100% of these Japanese yen denominated exposures. In addition to natural hedgesresulting from having both assets and liabilities denominated in Japanese yen,we enter into foreign currency forward contracts that generally have maturitiesof nine months or less. We often close foreign currency forward contracts byentering into an offsetting contract. At July 1, 2006, we had contractsfor the sale of $9.2 million of foreign currencies at fixed rates ofexchange.

**Information Available on CompanyWeb-site**

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

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

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

**Interest Rate Risk**

Our exposure to marketrisk due to potential changes in interest rates relates primarily to ourinvestment portfolio, which consisted primarily of fixed interest rateinstruments as of July 1, 2006. We maintain an investment policy designed toensure the safety and preservation of our invested funds by limiting marketrisk and the risk of default.

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

**Foreign Currency Risk Management**

The majority of ourrevenue, expense and capital purchasing activities are transacted in U.S.dollars. However, we do enter into these transactions in other currencies,primarily Japanese yen. To protect against reductions in value and thevolatility of future cash flows caused by changes in currency exchange rates,we have established transaction and balance sheet hedging programs. We useforeign currency forward contracts to hedge the risk that unremitted Japaneseyen denominated receipts from customers for actual or forecasted sales ofequipment after receipt of customer orders may be adversely affected by changesin foreign currency exchange rates. After recording revenue, we use variousmechanisms, such as foreign currency forward exchange contracts and naturalhedges, to offset substantial portions of the potential gains or lossesassociated with our Japanese yen denominated assets and liabilities due toexchange rate fluctuations. At July 1, 2006, we had taken action to hedgeapproximately 100% of these Japanese yen denominated exposures. In addition tonatural hedges resulting from having both assets and liabilities denominated inJapanese yen, we enter into foreign currency forward contracts that generallyhave maturities of nine months or less. We often close foreign currency forwardcontracts by entering into an offsetting contract. At July 1, 2006, we hadcontracts for the sale of $9.2 million of Japanese yen at fixed rates ofexchange. Our hedging programs reduce, but do not always entirely eliminate,the impact of currency movements.

**Item 4.**                          Controlsand Procedures

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

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

**Changes in Internal Control Over Financial Reporting**

There were no changes inour internal controls over financial reporting during the quarter endedJuly 1, 2006 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

**PART II.**               OTHER INFORMATION

**Item 1.**                          LegalProceedings

On February 29,2000, we filed lawsuits asserting patent infringement and related claimsagainst Nikon, Canon, and ASML in the U.S. District Court for the EasternDistrict of Virginia. In April 2000, we reached a settlement with Nikon, and inSeptember 2001, we reached a settlement with Canon. In the patent litigationagainst ASML, a jury trial was conducted during the three-month period ended July 2,2005. The jury reached a verdict that the patent was infringed, but that theasserted claims of the patent were invalid. We filed a post-trial motion for anew trial and for judgment as a matter of law in our favor. ASML also filed amotion for judgment as a matter of law seeking to invalidate three of theasserted claims for lack of enablement and requested that the court awardcosts. On February 13, 2006, the Court denied our post-trial motions,including the motion for a new trial, and entered judgment in favor of ASMLinvalidating three claims of the patent for lack of enablement. The Court alsoawarded ASML approximately $330,000 in costs. We have filed a notice of appeal.ASML has filed a notice of cross-appeal.

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

In May 2006, the samecompany filed a state court lawsuit against us for malicious prosecution andabuse of process claiming that attorney’s fees, costs and other damages weredue based on the outcome of a federal patent litigation suit brought against itby us. We do not believe this new action has merit, particularly given thedenial by the federal court and the subsequent federal appellate court’saffirmation of any attorney’s fees payable to this company by us in the federalpatent litigation. We intend to vigorously defend against this action and toseek fees and/or sanctions against this company in relation thereto.

**Item 1A.**                 Risk Factors

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

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

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

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

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potential customer’sfabrication facility.

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

Sales of our systemsdepend, in significant part, upon the decision of a prospective customer toincrease manufacturing capacity or to restructure current manufacturingfacilities, either of which typically involves a significant commitment ofcapital. Many of our customers in the past have cancelled the development ofnew manufacturing facilities and have substantially reduced their capitalequipment budgets. In view of the significant investment involved in a systempurchase, we have experienced and may continue to experience delays followinginitial qualification of our systems as a result of delays in a customer’sapproval process. Additionally, we are presently receiving orders for systemsthat have lengthy delivery schedules, which may be due to longer productionlead times or a result of customers’ capacity scheduling requirements. Forthese and other reasons, our systems typically have a lengthy sales cycleduring which we may expend substantial funds and management effort in securinga sale. Lengthy sales cycles subject us to a number of significant risks,including inventory obsolescence and fluctuations in operating results, overwhich we have little or no control. In order to maintain or exceed our presentlevel of net sales, we are dependent upon obtaining orders for systems thatwill ship and be accepted in the current period. We may not be able to obtainthose orders.

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

Although we attempt toprotect our intellectual property rights through patents, copyrights, tradesecrets and other measures, we believe that our success will depend more uponthe innovation, technological expertise and marketing abilities of ouremployees. Nevertheless, we have a policy of seeking patents when appropriatefor inventions resulting from our ongoing research and development andmanufacturing activities. We own 104 United States and foreign patents, whichexpire on dates ranging from August 2006 to March 2024 and have 101 UnitedStates and foreign patent applications pending. In addition, we have variousregistered trademarks and copyright registrations covering mainly softwareprograms used in the operation of our systems. We also rely upon trade secretprotection for our confidential and proprietary information. We may not be ableto protect our technology adequately and competitors may be able to develop similartechnology independently. Our pending patent applications may not be issued andU.S. or foreign intellectual property laws may not protect our intellectualproperty rights. In addition, litigation may be necessary to enforce ourpatents, copyrights or other intellectual property rights, to protect our tradesecrets, to determine the validity and scope of the proprietary rights ofothers or to defend against claims of infringement. Such litigation hasresulted in, and in the future could result in, substantial costs and diversionof resources and could have a material adverse effect on our business,financial condition and results of operations, regardless of the outcome of thelitigation. Patents issued to us may be challenged, invalidated or circumventedand the rights granted thereunder may not provide competitive advantages to us.Furthermore, others may independently develop similar technology or products,or, if patents are issued to us, design around the patents issued to us. Invalidationof our patents related to those technologies could allow our competitors tomore effectively compete against us, which could result in decreased revenuefor us.

On February 29,2000, we filed lawsuits asserting patent infringement and related claimsagainst Nikon, Canon, and ASML in the U.S. District Court for the EasternDistrict of Virginia. In April 2000, we reached a settlement with Nikon, and inSeptember 2001, we reached a settlement with Canon. In the patent litigationagainst ASML, a jury trial was conducted during the three-month period endedJuly 2, 2005. The jury reached a verdict that the patent was infringed,but that the asserted claims of the patent were invalid. We filed a post-trialmotion for a new trial and for judgment as a matter of law in our favor. ASMLalso filed a motion for judgment as a matter of law seeking to invalidate threeof the asserted claims for lack of enablement and requested that the courtaward costs. On February 13, 2006, the Court denied our post-trialmotions, including the motion for a new trial, and entered judgment in favor ofASML invalidating three claims of the patent for lack of enablement. The Courtalso awarded ASML approximately $330,000 in costs. We have filed a notice ofappeal. ASML has filed a notice of cross-appeal.

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

In May 2006, the samecompany filed a state court lawsuit against us for malicious prosecution andabuse of process claiming that attorney’s fees, costs and other damages weredue based on the outcome of a federal patent litigation suit brought against itby us. We do not believe this new action has merit, particularly given thedenial by the federal court and the subsequent federal appellate court’saffirmation of any attorney’s fees payable to this company by us in the federalpatent litigation. We intend to vigorously defend against this action and toseek fees and/or sanctions against this company in relation thereto.

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

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

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

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

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

We experience competitionin advanced packaging from various proximity aligner companies such as SussMicrotec AG (Suss Microtec), projection companies such as Ushio, Inc.(Ushio), and reduction stepper companies such as Nikon Precision, Canon, andASML. While we believe that the use of reduction steppers is not easily adaptedfor thick resists utilized in the advanced packaging market, some devicemanufactures may consider this technology option. In nanotechnology, weexperience competition from proximity aligner companies, such as Suss Microtec,as well as other stepper manufacturers who have developed or are developingtools specifically designed for nanotechnology applications. We expect ourcompetitors to continue to improve the performance of their current productsand to introduce new products with improved price and performancecharacteristics. This could cause a decline in sales or loss of marketacceptance of our steppers in our served markets, and thereby materiallyadversely affect our business, financial condition and results of operations. Enhancementsto, or future generations of, competing products may be developed that offersuperior cost of ownership and technical performance features.

With respect to our laserannealing technologies, marketed under the LSA100 product name, the primarycompetition comes from companies such as Applied Materials, Inc. andDainippon Screen Manufacturing Co., LTD. Many of these companies offer productsutilizing rapid thermal processing, or RTP, which is the current prevailingmanufacturing technology. RTP does not prevent semiconductor devicemanufacturers from scaling the lateral dimensions of their transistors toobtain improved performance, but diffusion resulting from the time scalesassociated with RTP limits the vertical dimension of the junctions. Fasterannealing times result in shallower and more abrupt junctions and fastertransistors. We believe our annealing technology results in faster transistorsfor a given size. We believe that RTP manufacturers recognize the need toreduce thermal cycle times and are working toward this goal. In July 2000,we licensed certain rights to our then existing laser processing technology,with reservations, to a competing manufacturer of semiconductor equipment. Wepresently anticipate that this company will offer laser-annealing tools to thesemiconductor industry that will compete with our offerings.

Another potentialadvanced annealing solution utilizes flash lamp annealing technology, or FLA. Severalcompanies have published papers on annealing tools that incorporate flash lamptechnology in order to reduce annealing times and increase anneal temperatures.Developers of FLA technology claim to have overcome annealing difficulties atthe 65nm node. This technique, which employs xenon flash lamps, has shownimprovements over RTP in junction depth and sheet resistance, but we believeFLA will suffer from pattern-related non-uniformities and could require additional,costly processes to reduce the reflectivity of different areas within the chipor wafer. Our proprietary laser processing solution has been specificallydeveloped to provide junction annealing on near-instantaneous time-scales,while maintaining low sheet resistance. Laser spike annealing, the firstimplementation of laser processing, activates dopants in themicrosecond-to-millisecond time frame without melting. Our research indicatesthat, at temperatures just below the melting point of silicon, time durationsin the microsecond to millisecond range, are required to achieve fullactivation, and dopant diffusion is minimal.

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

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

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financial condition andoperating results may be materially adversely affected.

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

Historically, we havesold a substantial portion of our systems to a limited number of customers. Inthe second quarter and first half of 2006, our top five customers accounted for77% and 58% of our total system sales, respectively. In 2005, Intel Corporationaccounted for 13% of our net sales. We expect that sales to a relatively fewcustomers will continue to account for a high percentage of our net sales inthe foreseeable future and believe that our financial results depend insignificant part upon the success of these major customers and our ability tomeet their future capital equipment needs. Although the composition of thegroup comprising our largest customers may vary from period to period, the lossof a significant customer or any reduction in orders by a significant customer,including reductions 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, would likely have a material adverseeffect on our business, financial condition and results of operations. Ourability to maintain or increase our sales in the future depends, in part, onour ability to obtain orders from new customers as well as the financialcondition and success of our existing customers, the semiconductor andnanotechnology industries and the economy in general.

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

On a market applicationbasis, sales to the semiconductor industry, primarily for advanced packagingapplications, accounted for approximately 89% and 68% of system revenue for thefirst half of 2006 and 2005, respectively. During the first half of 2006 and2005, approximately 11% and 32%, respectively, of our systems revenue wasderived from sales to nanotechnology manufacturers, including micro systems,thin film head and optical device manufacturers. Our future operating resultsand financial condition would be materially adversely impacted by a downturn inany of these market segments, or by loss of market share in any of thesesegments. A growing portion of our backlog of system orders is comprised oflaser spike annealing tools. To date, we have limited experience with thistechnology. Should significant demand not materialize, due to technical,production, market, or other factors, our business, financial position andresults of operations would be materially adversely impacted.

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

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

**Weprocure some of our other critical systems’ components, subassemblies andservices from single outside suppliers or a limited group of outside suppliersin order to ensure overall quality and timeliness of delivery. Many of thesecomponents and subassemblies have significant production lead times. To date,we have been able to obtain adequate services and supplies of components andsubassemblies for our systems in a timely manner. However, disruption ortermination of certain of these sources could have a significant adverse impacton our ability to manufacture our systems. This, in turn, would have a materialadverse effect on our business, financial condition and results of operations. Ourreliance on a sole supplier or a limited group of suppliers and our reliance onsubcontractors involve several risks, including a potential inability to obtainan adequate supply of required components due to the suppliers’ failure orinability to provide such components in a timely manner, or at all, and reducedcontrol over pricing and timely delivery of components. Although thetimeliness, yield and quality of deliveries to date from our subcontractorshave been acceptable, manufacture of certain of these components andsubassemblies is an extremely complex process, and long lead-times are required.Any inability to obtain adequate deliveries or any other circumstance thatwould require us to seek alternative sources of supply or to manufacture suchcomponents internally could delay our ability to ship our products, which coulddamage relationships with current and prospective customers and have a materialadverse effect on our business, financial condition and results of operations.**

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

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

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

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

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

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

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

**Internationalsales accounted for approximately 64% and 75% of total net sales for the firsthalf of 2006 and 2005, respectively. International net sales accounted forapproximately 69% and 65% of total net sales for the years 2005 and 2004,respectively. We anticipate that international sales, which typically havelower gross margins than domestic sales, principally due to increasedcompetition and higher field service and support costs, will continue toaccount for a significant portion of total net sales. As a result, asignificant portion of our net sales will continue to be subject to certainrisks, including unexpected changes in regulatory requirements; difficulty insatisfying existing regulatory requirements; exchange rate fluctuations;tariffs and other barriers; political and economic instability; difficulties inaccounts receivable collections; natural disasters; difficulties in staffingand managing foreign subsidiary and branch operations; and potentially adversetax consequences.**

Although we generallytransact our international sales in U.S. dollars, international sales expose usto a number of additional risk factors, including fluctuations in the value oflocal currencies relative to the U.S. dollar, which, in turn, impact therelative cost of 

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ownership of our productsand may further impact the purchasing ability of our international customers. However,in Japan, we have direct sales operations and orders are often denominated inJapanese yen. This may subject us to a higher degree of risk from currencyfluctuations. We attempt to mitigate this exposure through the use of foreigncurrency forward exchange contracts. We are also subject to the risksassociated with the imposition of legislation and regulations relating to theimport or export of semiconductors and nanotechnology products. We cannotpredict whether the United States or any other country will implement changesto quotas, duties, taxes or other charges or restrictions upon the importationor exportation of our products. These factors, or the adoption of restrictivepolicies, may have a material adverse effect on our business, financialcondition and results of operations.

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

Our future operatingresults depend, in significant part, upon the continued contributions of keypersonnel, many of whom would be difficult to replace. Most of our employeesare employed “at will.” We have entered into employment agreements with only alimited number of our employees, including our Chief Executive Officer,President, Chief Financial Officer and Senior Vice President World-wide Salesand Customer Operations. Some of these agreements contain vesting accelerationand severance payment provisions that could result in significant costs orcharges to us should the employee be terminated without cause, die or have adisability. We do not maintain any life insurance on any of our key employees. Theloss of key personnel could have a material adverse effect on our business,financial condition and results of operations. In addition, our futureoperating results depend in significant part upon our ability to attract andretain other qualified management, manufacturing, technical, sales and supportpersonnel for our operations. There are only a limited number of persons withthe requisite skills to serve in these positions and it may become increasinglydifficult for us to hire such personnel over time. At times, competition forsuch personnel has been intense, particularly in the San Francisco Bay Areawhere we maintain our headquarters and principal operations. We may not besuccessful in attracting or retaining such personnel in the future. The failureto attract or retain such persons would materially adversely affect ourbusiness, financial condition and results of operations.

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

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

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

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

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

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**Our shareholder rightsplan, equity incentive plans, certain provisions of our Certificate ofIncorporation and Bylaws, and Delaware law may discourage third parties frompursuing a change of control transaction with us.**

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

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

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

As of July 1, 2006,we had issued and outstanding options to purchase approximately 6.2 millionshares of our common stock. Among other determinants, the market price of ourstock has a major bearing on the number of stock options outstanding that areincluded in the weighted-average shares used in determining our diluted netincome (loss) per share. During periods of extreme volatility, the impact ofhigher stock prices can have a materially dilutive effect on our net income pershare. Additionally,****options areexcluded from the calculation of earnings per share when we have a net loss orwhen the exercise price of the stock option is greater than the average marketprice of our common stock, as the impact of the stock options would beanti-dilutive.

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

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

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

None.

**Item 3.**                          DefaultsUpon Senior Securities.

None.

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

None.

**Item 5.**                          OtherInformation.

We have proactivelyestablished a special committee of our Board of Directors’ comprised solely ofindependent directors, to conduct a voluntary, Company-initiated review of ourhistorical stock option grants.  The goalof this review is to examine and assess the process and accounting treatmentrelating to option grants made from our Initial Public Offering in 1993 to thepresent.  The special committee hasretained independent counsel to assist it with this review.  We believe that the financial statementsincluded in the report on Form 10-Q fairly present in all material respects ourfinancial condition, results of operations, and cash flows for the periodspresented.  However, additional facts maycome to light once the review is complete and there can be no assurance that wewill not determine that we need to change our accounting treatment of stockoptions granted in prior periods, which may have material adverse effect on ourresults of operations for those periods or other periods.

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**Item 6.**                          Exhibits

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

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

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

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** **

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|        |   |           | ** ** | ** ** |   | **ULTRATECH, INC.** |
|--------|--------|----------------|------------|------------|--------|---------------------|
|   |   |           |       |       |   | (Registrant)        |
|   |   |           |       |       |   |                |   |   |
| Date:  |   | August 9, 2006 |       |       |   | By:                 |   | /s/Bruce R. Wright |
|   |   |           |       |       |   |                |   | Bruce R. Wright |
|   |   |           |       |       |   |                |   | Senior Vice President, Finance and Chief Financial |
|   |   |           |       |       |   |                |   | Officer (Duly Authorized Officer and Principal |
|   |   |           |       |       |   |                |   | Financial and Accounting Officer) |

 

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

 

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