e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-22248

ULTRATECH, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		94-3169580
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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


Class	Outstanding as of July 26, 2007
common stock, $.001 par value		23,310,977

ULTRATECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,			July 1,			June 30,			July 1,
(In thousands, except per share amounts)	2007			2006			2007			2006
Net sales:
Products	$	26,296		$	22,362		$	49,803		$	53,771
Services		3,615			3,581			7,476			7,116
Licenses		100			100			100			100

Total net sales		30,011			26,043			57,379			60,987

Cost of sales:
Cost of products sold		14,413			11,821			28,873			30,937
Cost of services		2,422			2,411			4,530			4,582

Total cost of sales		16,835			14,232			33,403			35,519

Gross profit		13,176			11,811			23,976			25,468
Operating expenses:
Research, development, and engineering		5,836			6,350			11,800			12,503
Selling, general, and administrative		7,561			8,345			16,863			15,642

Operating loss		(221	)		(2,884	)		(4,687	)		(2,677	)

Interest expense		(138	)		(32	)		(471	)		(44	)
Interest and other income, net		1,446			1,712			3,115			3,229

Income (loss) before income tax		1,087			(1,204	)		(2,043	)		508
Provision (benefit) for income taxes		67			(28	)		182			102


Net income (loss)	$	1,020		$	(1,176	)	$	(2,225	)	$	406


Net income (loss) per share — basic	$	0.04		$	(0.05	)	$	(0.10	)	$	0.02
Number of shares used in per share computations — basic		23,368			23,927			23,395			23,879

Net income (loss) per share — diluted	$	0.04		$	(0.05	)	$	(0.10	)	$	0.02
Number of shares used in per share computations — diluted		23,467			23,927			23,395			25,031

See accompanying notes to unaudited condensed consolidated financial statements

ULTRATECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended
	June 30,			July 1,
(In thousands)	2007			2006
Cash flows from operating activities:
Net income (loss)	$	(2,225	)	$	406
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		3,090			2,977
Amortization		428			627
Accretion of asset retirement obligations		74			108
(Gain) loss on disposal of equipment		4			(5	)
Stock-based compensation		761			960
Deferred income taxes		—			170
Changes in operating assets and liabilities:
Accounts receivable		(1,833	)		111
Inventories		2,220			(9,186	)
Prepaid expenses and other current assets		118			(1,598	)
Demonstration inventory		—			(1,853	)
Other assets		1,257			38
Accounts payable		(3,404	)		5,806
Deferred product and services income		3,294			2,724
Other current liabilities		(675	)		127
Other liabilities		(1,261	)		(558	)

Net cash provided by operating activities		1,848			854


Cash flows from investing activities:
Capital expenditures		(384	)		(1,507	)
Proceeds from sale of fixed assets		—			79
Purchase of investments		(16,756	)		(23,920	)
Proceeds from sales and maturities of investments		24,559			20,917

Net cash provided by (used in) investing activities		7,419			(4,431	)


Cash flows from financing activities:
Proceeds from notes payable		17,570			21,404
Repayment of notes payable		(14,839	)		(15,893	)
Proceeds from issuance of common stock		1,018			2,639
Tax benefit from stock options		2			—

Net cash provided by financing activities		3,751			8,150


Net effect of exchange rate changes on cash and cash equivalents		(134	)		(223	)

Net increase in cash and cash equivalents		12,884			4,350

Cash and cash equivalents at beginning of period		23,883			36,344


Cash and cash equivalents at end of period	$	36,767		$	40,694


Supplemental disclosures of cash flow information:
Other non-cash activities:
Systems transferred to inventory from equipment and other assets	($	1,503	)	($	754	)

See accompanying notes to unaudited condensed consolidated financial statements

Ultratech, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

(1) Description of Business

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

We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuits industry, we target the market for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, laser diodes and light emitting diodes (LEDs). Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry.

In evaluating our business segments, we gave consideration to the Chief Executive Officer’s review of financial information and the organizational structure of our management. Based on this review, we concluded that, at the present time, resources are allocated and other financial decisions are made based on our consolidated financial information. Accordingly, we have determined that we operate in one business segment, which is the manufacture and distribution of capital equipment to manufacturers of integrated circuits and nanotechnology components.

(2) Basis of Presentation

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

Our fiscal period ends on the Saturday closest to month-end. All references to the quarter refer to our fiscal quarter. Our fiscal quarters covered by this report ended on June 30, 2007 and July 1, 2006.

Operating results for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007 or any future period.

USE OF ESTIMATES — The preparation of the financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our estimates, including those related to inventories, warranty obligations, purchase order commitments, asset retirement obligations, bad debts, estimated useful lives of fixed assets, asset impairment, income taxes, intangible assets, contingencies and litigation. We base our estimates on historical experience and on various other analyses and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS — In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157), which replaces the different definitions of fair value in the accounting literature with a single definition. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for fair-value measurements already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, with earlier adoption encouraged. We are currently in the process of determining the impact, if any, of adopting the provisions of SFAS No. 157 on our results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (SFAS No. 159), provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. We are currently in the process of determining the impact of adopting the provisions of SFAS No. 159 on our results of operations or statement of financial position.

(3) Stock-Based Compensation

Stock-based compensation expense recognized under SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), for employees and directors and the effect on our Condensed Consolidated Statements of Operations were as follows:


	Three Months Ended				Six Months Ended
	June 30,		July 1,		June 30,		July 1,
(In thousands)	2007		2006		2007		2006
Cost of Sales	$	50	$	37	$	83	$	69
Research, development, and engineering		78		62		156		108
Selling, general and administrative expenses		274		388		522		783

Total stock-based compensation expense		402		487		761		960
Tax benefit related to stock-based compensation expense		—		—		—		—

Net effect on net loss	$	402	$	487	$	761	$	960

Effect on net income (loss) per basic and diluted share	$	0.02	$	0.02	$	0.03	$	0.04

Compensation cost capitalized as part of inventory was immaterial during each of the three- and six-month periods ended June 30, 2007 and July 1, 2006.

Our 1993 Stock Option Plan/Stock Issuance Plan, as amended, and our 1998 Supplemental Stock Option/Stock Issuance Plan, as amended, provide for the grant of qualified and non-qualified stock-based awards to our eligible employees, consultants and advisors and non-employee directors. We believe that such awards better align the interests of our employees with those of our stockholders. As of June 30, 2007, there were a total of 1.8 million shares reserved for future awards under these Plans.

We used the following weighted-average assumptions to estimate the fair value of our stock options granted during the three- and six-month periods ended June 30, 2007 and July 1, 2006:


	Three Months Ended					Six Months Ended
	June 30,		July 1,			June 30,			July 1,
	2007		2006			2007			2006
Expected life (in years)		*		4.94			4.94			4.94
Risk-free interest rate		*		4.89	%		4.80	%		4.89	%
Volatility factor		*		0.53			0.48			0.53
Dividend yield		*		—			—			—


*		Not presented as we did not grant any stock options during the three-month period ended June 30, 2007.

(4) Net Income (Loss) Per Share

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


	Three Months Ended					Six Months Ended
	June 30,		July 1,			June 30,			July 1,
(In thousands, except per share amounts)	2007		2006			2007			2006
Numerator:
Net income (loss)	$	1,020	$	(1,176	)	$	(2,225	)	$	406
Denominator:
Denominator for basic net income (loss) per share		23,368		23,927			23,395			23,879
Effect of dilutive employee stock options and restricted stock units		99		—			—			1,152

Denominator for diluted net income per share		23,467		23,927			23,395			25,031


Net income (loss) per share — basic:
Net income (loss)	$	0.04	($	0.05	)	($	0.10	)	$	0.02


Net income (loss) per share — diluted:
Net income (loss)	$	0.04	($	0.05	)	($	0.10	)	$	0.02

For the three- and six-month periods ended June 30, 2007, options to purchase 4.7 million and 5.7 million shares of common stock, respectively, were excluded from the computation of diluted net income (loss) per share, as the effect would have been anti-dilutive, compared to 6.3 million and 1.8 million, respectively, in the corresponding periods of 2006. In addition, for the three and six months ended June 30, 2007, restricted stock units for 0.1 million shares of common stock were excluded from the computation as well, compared to 0.1 million and zero shares in the corresponding periods of 2006. Options and restricted stock units are anti-dilutive when we have a net loss or when the exercise price and the average unrecognized compensation cost of the stock option or restricted stock unit is greater than the average market price of our common stock during the period.

(5) Inventories

Inventories consist of the following:


	June 30,		December 31,
(In thousands)	2007		2006
Raw materials	$	20,065	$	18,067
Work-in-process		14,231		9,952
Finished products		2,969		12,969

	$	37,265	$	40,988

(6) Notes Payable

We have a line of credit agreement with a brokerage firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds open rate plus 100 basis points (approximately 6.25% as of June 30, 2007). Certain of our cash, cash equivalents and investments secure borrowings outstanding under this facility, but we are not restricted in the use of those assets. Funds are advanced to us under this facility based on pre-determined advance rates on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants, other than the aforementioned collateral requirement. As of June 30, 2007, $9.7 million was outstanding under this facility, with a related collateral requirement of approximately $12.9 million of our cash, cash equivalents and investments.

(7) Other Current Liabilities

Other current liabilities consist of the following:


	June 30,		December 31,
(In thousands)	2007		2006
Salaries and benefits	$	2,966	$	3,632
Warranty accrual		2,218		2,264
Advance billings		2,580		2,713
Income taxes payable		171		876
Accrued taxes-other		2,579		2,076
Reserve for losses on purchase order commitments		686		623
Other		1,830		1,814

	$	13,030	$	13,998

Warranty Accrual

We generally warrant our products for a period of 12 months for new products, or three months for refurbished products, from the date of customer acceptance for material and labor to repair the product; accordingly, an accrual for the estimated cost of the warranty is recorded at the time the product is shipped. Extended warranty terms, if granted, result in deferral of revenue equating to our standard pricing for similar service contracts. Recognition of the related warranty cost is deferred until product revenue is recognized. Factors that affect our warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. We believe our warranty accrual, as of June 30, 2007, will be sufficient to satisfy outstanding obligations as of that date. Changes in our warranty accrual are as follows:


	Three Months Ended						Six Months Ended
	June 30,			July 1,			June 30,			July 1,
(In thousands)	2007			2006			2007			2006
Balance, beginning of the period	$	2,378		$	2,586		$	2,264		$	2,397
Warranties issued during the period		786			396			1,847			1,313
Settlements made during the period		(673	)		(1,152	)		(1,692	)		(2,270	)
Changes in liability for pre-existing warranties		(273	)		368			(201	)		758

Balance, end of the period	$	2,218		$	2,198		$	2,218		$	2,198

Deferred Services Revenue

We sell service contracts for which revenue is deferred and recognized ratably over the contract period for time based service contracts, or as service hours are delivered for contracts based on a purchased quantity of hours. Changes in our deferred service revenue are as follows:


	Three Months Ended						Six Months Ended
	June 30,			July 1,			June 30,			July 1,
(In thousands)	2007			2006			2007			2006
Balance, beginning of the period	$	2,295		$	3,213		$	2,444		$	1,970
Service contracts sold during the period		1,275			2,122			2,395			6,079
Service contract revenue recognized during the period		(876	)		(2,626	)		(2,145	)		(5,340	)

Balance, end of the period	$	2,694		$	2,709		$	2,694		$	2,709

(8) Other Liabilities

Other liabilities consist of the following:


	June 30,		December 31,
(In thousands)	2007		2006
Deferred rent	$	2,482	$	2,737
Deferred compensation		1,146		2,160
Long-term income taxes payable		267		—
Asset retirement obligation		2,056		1,982
Postretirement medical obligation		709		701

	$	6,660	$	7,580

(9) Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss is comprised of the following items, net of tax:


	June 30,			December 31,
(In thousands)	2007			2006
Unrealized gains (losses) on:
Available-for-sale investments	$	(835	)	$	(847	)
Foreign exchange forward contracts		(1	)		132
Change in minimum postretirement medical obligation		(181	)		(200	)

Accumulated other comprehensive loss at end of period	$	(1,017	)	$	(915	)

(10) Exit Activities

Changes in our accrued severance and benefits charges are as follows:


	Balance at							Balance at							Balance at
	December 31,							March 31,							June 30,
(In thousands)	2006		Expenses		Payments			2007		Expenses		Payments			2007
Severance and benefits (fourth quarter 2006)	$	918	$	—	$	(330	)	$	588	$	—	$	(173	)	$	415
Severance and benefits (first quarter 2007)		—		727		(480	)		247		—		(247	)		—
Severance and benefits (second quarter 2007)		—		—		—			—		493		(179	)		314

Total	$	918	$	727	$	(810	)	$	835	$	493	$	(599	)	$	729

In the second quarter of 2007, as a continuing effort to reduce company-wide expenses since the fourth quarter of 2006, we eliminated an additional eight full-time positions, three in the United States and five internationally. Pursuant to the provisions of FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, during the second quarter of 2007, we recorded severance and benefits charges totaling $0.5 million related to this plan as selling, general and administrative expenses. As of June 30, 2007, the remaining balance of $0.7 million related to severance and benefit payments incurred during 2006 and 2007 will be fully paid by the second quarter of 2008. We recorded severance and benefits charges totaling $1.2 million during the first six months of 2007. Out of this $1.2 million, $0.9 million was recorded as selling, general and administrative expenses, $0.2 million as cost of sales, and the remaining $0.1 million as research, development, and engineering expenses.

(11) Stock Repurchase Program

In September 2005, our Board of Directors authorized the repurchase of up to $30.0 million of our common stock in the open market at the then prevailing market prices during the period commencing September 2005 through September 2007. We did not repurchase any shares of our common stock during the first six months of 2007. Through June 30, 2007 we had repurchased 1.4 million shares of our common stock at a total purchase price of $20.0 million since September 2005.

(12) Employee Benefit Plans

Employee bonus plans

We currently sponsor an executive incentive bonus plan that distributes employee awards based on the achievement of predetermined targets. We did not record any expense under this bonus plan for the three- and six-month periods ended June 30, 2007 compared to $0.2 million and $0.4 million for the three- and six-month periods ended July 1, 2006, respectively.

Employee savings and retirement plans

We sponsor a 401(k) employee salary deferral plan that allows voluntary contributions by all full-time employees of from 1% to 20% of their pretax earnings. Our contributions made to this plan were $0.1 million for each of the three-month periods ended June 30, 2007 and July 1, 2006, respectively, and $0.2 million for each of the six-month periods then ended. Our contributions, limited to a maximum of $2,000 per year per employee, generally become 20 percent vested at the end of an employee’s first year of service from the date of hire, and vest 20 percent per year of service thereafter until they become fully vested at the end of five years of service. We also sponsor an executive non-qualified deferred compensation plan (the “Plan”) that allows qualifying executives to defer current cash compensation. As of June 30, 2007, Plan assets, representing the cash surrender value of life insurance policies held by us and liabilities were approximately $1.1 million each, respectively, and were included in our Consolidated Balance Sheets under the captions “other assets” and “other liabilities.” In conjunction with this Plan, the related expense for both quarters ended June 30, 2007 and July 1, 2006 was immaterial.

Postretirement benefits

We have committed to providing lifetime post-retirement medical and dental benefits to the Chief Executive Officer and Chief Financial Officer and their spouses, commencing after retirement. These medical and dental benefits are similar to the benefits provided to all full-time employees while employed by us, except that we are paying the entire cost of the postretirement benefits. During the first quarter of 2007, we amended and restated the employment agreement with our Chief Financial Officer to provide him and his spouse retirement health benefits in the event of a change of control or sale of the Company or in the event that he retires when he is at least 62 years old and has served as an executive officer for 10 consecutive years. We recorded net periodic benefit costs of $13,000 and $26,000 for the three- and six-month periods ended June 30, 2007, respectively. We recorded net periodic benefit costs of $11,000 and $22,000 for the three- and six-month periods ended July 1, 2006, respectively. These expenses included interest cost and amortization of prior service cost.

(13) Income Taxes

In accordance with the adoption of FASB Financial Interpretation Number (FIN) 48, Accounting for Uncertainty in Income Taxes (FIN 48), we have unrecognized tax benefits of $2.8 million as of January 1, 2007. We continue to recognize interest and penalties as a component of income tax provision and have accrued $55,000 for these items as of January 1, 2007. The implementation of FIN 48 as of January 1, 2007 resulted in a decrease of $20,000 to the liability for uncertain tax positions and a decrease to accumulated deficit of $27,000. All other adjustments required upon adoption of FIN 48 were to the deferred tax accounts with an offsetting adjustment to the valuation allowance.

If we are able to eventually recognize these uncertain tax positions, $2.5 million of the unrecognized benefit would reduce the effective tax rate. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. We anticipate an increase to the unrecognized tax benefits during fiscal 2007 applicable to research and development tax credits and foreign tax exposures. While the increase cannot be estimated at this time, the change is not expected to be material to the fiscal 2007 financial statements.

We are subject to federal and state tax examinations for years 1999 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2000 and forward. There are no tax examinations currently in progress.

(14) Contingencies

Legal Proceedings

On February 29, 2000, we filed lawsuits asserting patent infringement and related claims against Nikon, Canon and ASML in the U.S. District Court for the Eastern District of Virginia. In April 2000, we reached a settlement with Nikon, and in September 2001, we reached a settlement with Canon. In the patent litigation against ASML, after transfer to the U.S. District Court for the Northern District of California, a jury trial was conducted during the second quarter of 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-trial motion for a new trial and for judgment as a matter of law in our favor. ASML also filed a motion for judgment as a matter of law seeking to invalidate three of the asserted claims for lack of enablement and requested that the Court award costs. On February 13, 2006, the Court denied our post-trial motions, including the motion for a new trial, and entered judgment in favor of ASML invalidating three claims of the patent for lack of enablement. The Court also awarded ASML approximately $330,000 in costs. We filed an appeal with the Federal Circuit Court of Appeals, and filed our opening appellate brief on August 31, 2006. Although ASML originally filed a notice of cross-appeal, ASML subsequently withdrew its cross appeal and the Court entered an order to that effect on December 8, 2006. ASML’s opening appellate brief was filed on December 6, 2006, and our reply brief was filed on January 12, 2007. The case was argued on May 11, 2007. On May 14, 2007, the Federal Circuit Court of Appeals affirmed the jury’s verdict and the District Court’s February 13, 2006 Order in favor of ASML.

On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement of certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for the Northern District of California. On May 17, 2005, the court found the subject patent to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees. Neither side appealed the rulings by the Federal Circuit, and they are final.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of a federal patent litigation suit described above. We do not believe this new action has merit, particularly given the denial by the federal court of that company’s request to be awarded attorneys’ fees payable by us in the patent litigation and the subsequent federal appellate court’s affirmation of the order denying any such award. We filed a motion to have the state court complaint dismissed under California’s anti-strategic lawsuit against public participation, or anti-SLAPP, and demurrer statutes. The anti-SLAPP statute is aimed at striking lawsuits that are brought in order to quash an individual’s constitutional rights to free speech or seeking redress of grievances (i.e. filing suit). The state court granted the anti-SLAPP motion as to the abuse of process claim, but denied it as to the malicious prosecution claim. We have appealed the decision denying the anti-SLAPP motion as to the malicious prosecution claim, and briefing thereon shall commence in October 2007.

On March 7, 2007, a stockholder filed a stockholder derivative lawsuit against us and certain of our current and former directors, officers and employees in the U.S. District Court for the Northern District of California. The lawsuit asserted claims for violations of federal and state securities laws and for breach of fiduciary duty, unjust enrichment and other claims related to the alleged backdating of stock option grants between 1996 and 2003. On May 11, 2007, this lawsuit was consolidated with an essentially identical action filed by another stockholder, also in the Northern District of California. The lawsuits were voluntarily dismissed by the plaintiffs without prejudice by a stipulation and order entered by the Court on June 11, 2007.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain of the statements contained herein, which are not historical facts and which can generally be identified by words such as “anticipates”, “expects”, “intends”, “will”, “could”, “believes”, “estimates”, “continue”, and similar expressions, are forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, such as risks related to our dependence on new product introductions and market acceptance of new products and enhanced versions of our existing products; lengthy sales cycles, including the timing of system installations and acceptances; lengthy and costly development cycles for laser-processing and lithography technologies and applications; integration, development and associated expenses of the laser processing operation; delays, deferrals and cancellations of orders by customers; cyclicality in the semiconductor and nanotechnology industries; pricing pressures and product discounts; high degree of industry competition; intellectual property matters; expiration of licensing arrangements, and the resulting adverse impact on our licensing revenues; changes to financial accounting standards; changes in pricing by us, our competitors or suppliers; customer concentration; international sales; timing of new product announcements and releases by us or our competitors; ability to volume produce systems and meet customer requirements; sole or limited sources of supply; ability and resulting costs to attract or retain

sufficient personnel to achieve our targets for a particular period; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon us achieving and maintaining profitability and the market price of our stock; mix of products sold; rapid technological change and the importance of timely product introductions; outcome of litigation; manufacturing variances and production levels; timing and degree of success of technologies licensed to outside parties; product concentration and lack of product revenue diversification; inventory obsolescence; asset impairment; effects of certain anti-takeover provisions; announced and future acquisitions; volatility of stock price; foreign government regulations and restrictions; business interruptions due to natural disasters or utility failures; environmental regulations; and any adverse effects of terrorist attacks in the United States or elsewhere, or government responses thereto, or military actions in Iraq, Afghanistan, North Koera and elsewhere, on the economy in general, or on our business in particular. Due to these and additional factors, the statements, historical results and percentage relationships set forth below are not necessarily indicative of the results of operations for any future period. These forward-looking statements are based on management’s current beliefs and expectations, some or all of which may prove to be inaccurate, and which may change. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.

OVERVIEW

We develop, manufacture and market photolithography and laser thermal processing equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Japan, Taiwan and the rest of Asia.

RESULTS OF OPERATIONS

We derive a substantial portion of our total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $1.2 million to $5.6 million. As a result of these high sale prices, the timing and recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on our net sales and operating results for any particular period.

Our backlog at the beginning of a period typically does not include all of the sales needed to achieve our sales objectives for that period. In addition, orders in backlog are subject to cancellation, shipment or customer acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. Consequently, our net sales and operating results for a period have depended and will continue to depend on our obtaining orders for systems to be shipped and accepted in the same period in which the order is received. Our business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and customer acceptance during that period. Furthermore, a substantial portion of our shipments have historically occurred near the end of the quarter. Delays in installation and customer acceptance due, for example, to our inability to successfully demonstrate the agreed-upon specifications or criteria at the customer’s facility, or to the failure of the customer to permit installation of the system in the agreed upon timeframe, may cause net sales in a particular period to fall significantly below our expectations, which may materially and adversely affect our operating results for that period. This risk is especially applicable to the introduction and initial sales of a new product line. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to rescheduling, delays, deferrals or cancellations by customers, additional customer configuration requirements, or to unexpected manufacturing difficulties or delays in deliveries by suppliers due to their long production lead times or otherwise, have caused and may continue to cause net sales in a particular period to fall significantly below our expectations, materially adversely affecting our operating results for that period. In particular, the long manufacturing and acceptance cycles of our advanced packaging family of wafer steppers and laser thermal processing systems and the long lead time for lenses and other materials, could cause shipments and acceptances of such products to be delayed from one quarter to the next, which could materially adversely affect our financial condition and results of operations for a particular quarter.

Additionally, the need for continued expenditures for research and development, capital equipment, ongoing training and worldwide customer service and support, among other factors, will make it difficult for us to reduce our operating expenses in a particular period if we fail to achieve our net sales goals for the period.

Net Sales

Second Quarter


	Three Months Ended
	June 30,		July 1,		Amount of		Percentage
(In millions)	2007		2006		Change		Change
Sales of:
Products	$	26.3	$	22.3	$	4.0		18	%
Services		3.6		3.6		0.0		0	%
Licenses		0.1		0.1		0.0		0	%

Total net sales	$	30.0	$	26.0	$	4.0		15	%

Net sales consist of revenues from products (system sales, spare parts sales and upgrades), services and licensing of technologies. Product sales increased 18% to $26.3 million, compared to $22.3 million in the corresponding quarter of 2006, primarily due to a system unit volume increase of 12.5% and an increase in average selling prices of 7.7%, resulting from a continuing shift in product mix in favor of our new laser processing products and away from our legacy platform products.

On a product market application basis, system sales to the semiconductor industry, primarily for advanced packaging and laser processing applications, were $16.2 million for the quarter ended June 30, 2007, an increase of 13.6% when compared with system sales of $14.2 million to this market in the corresponding quarter of 2006. This increase was due to a $3.7 million increase in sales to the laser processing markets offset by a decrease of $1.7 million to the advanced packaging markets.

System sales to the nanotechnology market were $5.6 million for the quarter ended June 30, 2007, an increase of 50.0% compared with sales of $3.7 million in the corresponding quarter of 2006. System sales to the nanotechnology market are highly dependent on customer capacity demand in the industries we serve, including thin film heads, automotive MEMS, LED/laser diodes, and ink jet print heads.

Revenues from services and licensing activities for the second quarter of 2007 remained at the same level as the corresponding quarter of 2006, at $3.6 million and $0.1 million, respectively. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing and royalty arrangements. We may not be successful in generating licensing revenues in the future and do not anticipate the recognition of significant levels of licensing income during the remainder of 2007.

At June 30, 2007, we had approximately $6.2 million of deferred product and services income compared to $3.0 million at December 31, 2006. Deferred product income is recognized as revenue upon satisfying the contractual obligations for installation and/or customer acceptance. Deferred services income is recognized as revenue ratably over the contract period or as purchased services are rendered.

For the quarter ended June 30, 2007, international net sales were $18.1 million, or 60.2% of total net sales, compared with $17.1 million, or 65.7% of total net sales for the second quarter of 2006. We expect sales to international customers will continue to represent a significant majority of our revenues during the remainder of 2007. Our revenue derived from sales in foreign countries is not generally subject to significant exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, however, orders are often denominated in Japanese yen. This subjects us to the risk of currency fluctuations. We attempt to mitigate this risk by entering into foreign currency forward exchange contracts for the period between when an order is received and when it is recorded as revenue. After recording revenue, we use various mechanisms, such as foreign currency forward exchange contracts and natural hedges, to offset substantial portions of the gains or losses associated with our Japanese yen denominated receivables due to exchange rate fluctuations. We had approximately $4.0 million of Japanese yen denominated receivables at June 30, 2007. International sales expose us to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which impact the relative cost of ownership of our products and, thus, the customer’s willingness to purchase our product. (See “Item 1A Risk Factors: International Sales”).

Year-To-Date


	Six Months Ended
	June 30,		July 1,		Amount of			Percentage
(In millions)	2007		2006		Change			Change
Sales of:
Products	$	49.8	$	53.8	$	(4.0	)		-7	%
Services		7.5		7.1		0.4			6	%
Licenses		0.1		0.1		0.0			0	%

Total net sales	$	57.4	$	61.0	$	(3.6	)		-6	%

Product sales decreased 7% to $49.8 million for the six months ended June 30, 2007 as compared to the same period in 2006. The decrease was primarily attributable to a system unit volume decrease of 15.8% partially offset by a 7.5% increase in the average selling prices of systems sold. The increase in average selling prices was primarily the result of a shift in product mix in favor of our new laser processing products and away from our legacy product platforms. On a market segment basis, the year-over-year decrease in systems sales was primarily attributable to a $14.5 million decline in sales to the packaging market, which was offset partially by an $8.3 million and $1.3 million increase in sales to the laser thermal processing market and nanotechnology market, respectively.

Revenues from services in the first six months of 2007 increased 6% from the comparable period of 2006, primarily as a result of increases in service contracts. Revenues from licensing activities remained the same in the first six months of 2007 as compared to the same period of 2006. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing and royalty arrangements. We may not be successful in generating licensing revenues in the future and do not anticipate the recognition of significant levels of licensing income during the remainder of 2007.

For the first six months of 2007, international net sales were $37.3 million, or 68.0% of total net sales, as compared with $37.3 million, or 61.2% of total net sales, for the comparable period of 2006. For the first six months of 2007, as compared to the same period of 2006, sales to Europe increased $6.8 million, sales to Japan increased $13.6 million, sales to Taiwan decreased $6.6 million and sales to the rest of Asia declined $12.1 million.

Gross Profit

On a comparative basis, gross margins were 43.9% and 45.4% for the second quarter of 2007 and 2006, respectively. This decrease in percentage was primarily due to difference in product mix and higher manufacturing overhead costs resulting from lower plant utilization during the first six months of 2007 compared to the corresponding period in 2006. These higher manufacturing overhead costs were partially offset by our continuing effort to reduce company-wide expenses since the fourth quarter of 2006 and lower warranty and installation costs related to our laser spike annealing systems compared to the corresponding quarter of 2006 as we became more efficient since the introduction of our laser spike annealing systems to the market in December 2005. Gross margins remained at 41.8% for each of the six-month periods ended June 30, 2007 and July 1, 2006.

Our gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including the following: the introduction of new products, which typically have higher manufacturing costs until manufacturing efficiencies are realized and which are typically discounted more than existing products until the products gain market acceptance; the mix of products sold; the rate of capacity utilization; write-down of inventory and open purchase commitments; product discounts, pricing and competition in our targeted markets; non-linearity of shipments during the quarter which can result in manufacturing inefficiencies; and the percentage of international sales, which typically have lower gross margins than domestic sales principally due to higher field service and support costs.

Operating Expenses

Second Quarter


	Three Months Ended
	June 30,		July 1,		Amount of			Percentage
(In millions)	2007		2006		Change			Change
Research, development, and engineering	$	5.8	$	6.4	$	(0.6	)		-9	%
Selling, general, and administrative		7.6		8.3		(0.7	)		-8	%

Total operating expenses	$	13.4	$	14.7	$	(1.3	)		-9	%

Research, development and engineering expenses for the second quarter of 2007 were $5.8 million, as compared to $6.4 million for the same period in 2006. The decrease was primarily due to lower salaries and benefits expenses of $0.7 million resulting from workforce reductions from our continuing effort to reduce company-wide expense since the fourth quarter of 2006. This reduction was offset in part by an increase of $0.1 million for the development of the laser spike anneal system used for 65nm and other next-generation devices.

Selling, general, and administrative expenses were $7.6 million for the second quarter of 2007, as compared with $8.3 million for the same quarter of 2006. As a percentage of net sales, selling, general, and administrative expenses decreased to 25.2% in the quarter ended June 30, 2007, compared to 32.0% in the same quarter of 2006. This decrease was primarily due to our continuing effort to reduce company-wide expenses of $0.3 million, no accrual for the management incentive plan as compared to an accrual of $0.2 million in the second quarter of 2006, and lower salaries and benefits expenses of $0.7 million resulting from workforce reductions discussed above, which was partially offset by severance and benefit charges of $0.5 million recorded during the second quarter of 2007.

Year-To-Date


	Six Months Ended
	June 30,		July 1,		Amount of			Percentage
(In millions)	2007		2006		Change			Change
Research, development, and engineering	$	11.8	$	12.5	$	(0.7	)		-6	%
Selling, general, and administrative		16.9		15.6		1.3			8	%

Total operating expenses	$	28.7	$	28.1	$	0.6			2	%

Research, development and engineering expenses for the first six months of 2007 were $11.8 million as compared to $12.5 million for the same period in 2006. The year-to-date decrease was primarily the result of workforce reductions and our continuing effort to reduce company-wide expenses.

Selling, general, and administrative expenses were $16.9 million for the first six months of 2007 as compared with $15.6 million for the same period in 2006. As a percentage of net sales, selling, general, and administrative expenses increased to 29.4% in the six months ended June 30, 2007 as compared to 25.6% for the same period in 2006. This increase, in dollar terms, was primarily due to increase in customer service expenses of $0.5 million for customer support services provided during the first half of 2007 in connection with our laser spike annealing systems, additional accounting-related fees of $0.5 million and legal fees of $0.3 million, and increases in severance and benefit charges of $0.9 million, which were offset partially by the reduction in salaries and benefits expenses of $0.5 million in connection with workforce reductions and no accrual for the management incentive plan as compared to an accrual of $0.4 million for the first six months of 2006.

Interest and Other Income, Net

Interest and other income, net, which consists primarily of interest income, was $1.4 million and $3.1 million for the three and six months ended 2007 as compared with $1.7 million and $3.2 million for the comparable periods of 2006, respectively. This decrease was primarily attributable to lower interest income due to lower cash and investment balances during the second quarter and first half of 2007 compared to the same periods of 2006. As of June 30, 2007, the weighted-average maturity of our investment portfolio was approximately 1.0 year. As a result, changes in short-term interest rates have had, and will continue to have, a significant impact on our interest income.

Provision (Benefit) for Income Taxes

For the three- and six-month periods ended June 30, 2007, we recorded an income tax provision of $67,000 and $182,000, respectively, as compared to an income tax benefit of $28,000 and an income tax provision of $102,000 for the comparable periods in

2006. The income tax provision recognized for the six months ended June 30, 2007 and July 1, 2006 resulted primarily from foreign income taxes and the U.S. federal alternative minimum tax.

Income tax estimates can be affected by whether and within which jurisdictions future earnings will occur and how and when cash is repatriated to the United States, as well as other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters, and we do not anticipate any material earnings impact from their ultimate resolution.

Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. As a result of our analysis of all available evidence, we concluded that it is more likely than not that our net deferred tax assets will not be realized, with the exception of the Japan, Taiwan and certain Texas deferred tax assets which we do expect to realize and which have been recorded in the accounts. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan, Taiwan and Texas. We closely monitor all available evidence, and may release some or all of the valuation allowance in future periods.

In accordance with the adoption of FASB Financial Interpretation Number (FIN) 48, Accounting for Uncertainty in Income Taxes (FIN 48) effective January 1, 2007, we have unrecognized tax benefits of $2.8 million as of January 1, 2007. We continue to recognize interest and penalties as a component of income tax expense and have accrued $55,000 for these items as of January 1, 2007. The implementation of FIN 48 resulted in a decrease of $20,000 to the liability for uncertain tax positions and a decrease to accumulated deficit of $27,000. All other adjustments required upon adoption of FIN 48 were to the deferred tax accounts with an offsetting adjustment to the valuation allowance.

We are subject to federal and state tax examination for years 1999 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2000 and forward. There are no tax examinations currently in progress.

Outlook

The anticipated timing of orders, shipments and customer acceptances usually requires that we fill a number of production slots in any given quarter in order to meet our sales targets. If we are unsuccessful in our efforts to secure those production orders, or if existing production orders are delayed or cancelled, our results of operations will be materially adversely impacted. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We presently expect net sales for the third quarter of 2007 to be slightly less than the net sales reported in second quarter of 2007. For the full year of 2007, we believe total net sales will be about the same as the amount reported for 2006.

Because our net sales are subject to a number of risks, including risks associated with the market acceptance of our new laser processing product line, delays in customer acceptance, intense competition in the capital equipment industry, uncertainty relating to the timing and market acceptance of our products, and the condition of the macro-economy and the semiconductor industry and the other risks described in this report and in our Annual Report on Form 10-K for the year ended December 31, 2006, we may not exceed or even maintain our current or prior level of net sales for any period in the future. Additionally, we believe that the market acceptance and volume production of our advanced packaging systems, laser processing systems and our 1000 Platform steppers are of critical importance to our future financial results. At June 30, 2007, these critical systems represented approximately 82.6% of our backlog. To the extent that these products do not achieve or maintain significant sales due to difficulties involving manufacturing or engineering, the inability to reduce the current long manufacturing cycles for these products, competition, excess capacity in the semiconductor or nanotechnology device industries, or for any other reason, our business, financial condition and results of operations would be materially adversely affected.

We believe that gross margin for the third quarter of 2007 will be about the same as for the second quarter of 2007. However, gross margin for the full year of 2007 is expected to improve compared to 2006. The final gross margin achieved in any quarter will depend heavily

upon sales volumes and the resulting product mix. Should our sales not reach the level expected, we may incur a higher risk of inventory obsolescence and excess purchase commitments and lower utilization of our manufacturing infrastructure, which would materially adversely impact our results of operations. New products generally have lower gross margins until there is widespread market acceptance and until production and after-sales efficiencies can be achieved. Should significant market demand fail to develop for our laser processing systems and our new advanced packaging offerings, our business, financial condition and results of operations would be materially adversely affected. In addition, higher costs associated with extended manufacturing and customer acceptance periods on shipments of our laser processing products have had, and will continue to have, an adverse impact on our gross margins. As our company-wide cost cutting initiatives take full effect, we anticipate operating expenses for the full year of 2007 will be a few million dollars less than the amount in 2006. For the full year of 2007, we believe our operating cash flow will continue to be positive.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $1.8 million for the six months ended June 30, 2007, compared with net cash provided by operating activities of $0.9 million for the comparable period in 2006. Net cash provided by operating activities during the first six months of 2007 was primarily attributable to a decrease in deferred product and services income of $3.3 million, a decrease in inventories of $2.2 million and adjustments of non-cash charges of $4.4 million to net loss, principally for depreciation, amortization and stock-based compensation, which was partially offset by a net loss of $2.2 million for the first half of 2007 and increases in accounts receivable of $1.8 million, accounts payable of $3.4 million and other liabilities of $1.3 million.

We believe that because of the relatively long manufacturing cycle of certain of our systems, particularly newer products, our inventories will continue to represent a significant and growing portion of working capital. Currently, we are devoting significant resources to the development, introduction and commercialization of our laser processing system and to the development of our next generation 1X lithography technologies. Additionally, gross profit margins, inventory and capital equipment levels may be adversely impacted in the future by costs associated with the production of the laser processing system and by future generations of our 1X wafer steppers. These costs include, but are not limited to, additional manufacturing overhead, costs of demonstration systems and facilities and the establishment of additional after-sales support organizations. Additionally, there can be no assurance that operating expenses will not increase, relative to sales, as a result of adding technical, marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our cash flow and operating results will be materially adversely affected until, among other factors, costs and expenses can be reduced. Our failure to achieve our sales targets for these new products could result in additional inventory write-offs and asset impairment charges, either or both of which could materially adversely impact our results of operations.

During the first six months of 2007, net cash provided by investing activities was $7.4 million, attributable to net proceeds from the sale and maturity of short and long-term investments of $7.8 million, offset by capital expenditures of $0.4 million.

Net cash provided by financing activities was $3.7 million during the first six months of 2007, attributable to net proceeds under our notes payable of $2.7 million and $1.0 million of proceeds received from the issuance of common stock under our employee stock option plans.

At June 30, 2007, we had working capital of $120.7 million and long-term investments of $34.0 million. Our principal sources of liquidity at June 30, 2007 consisted of $86.7 million in cash, cash equivalents and short-term investments, net of outstanding borrowings under our line of credit, and $34.0 million of long-term investments. We have a line of credit agreement with a brokerage firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds open rate plus 100 basis points (approximately 6.25% as of June 30, 2007). Certain of our cash, cash equivalents and marketable securities secure borrowings outstanding under this facility, but we are not restricted in the use of those assets. Funds are advanced to us under this facility in accordance with pre-determined advance rates based on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants other than a collateral requirement. As of June 30, 2007, $9.7 million was outstanding under this facility, with a related collateral requirement of approximately $12.9 million of our cash, cash equivalents and investments.

In September 2005, our Board of Directors authorized the repurchase of up to $30.0 million of our common stock in the open market at then prevailing market prices during the period from September 2005 through September 2007. We did not repurchase any shares of our common stock during the six months ended June 30, 2007. Through June 30, 2007, we had repurchased 1.4 million shares of our common stock at a total purchase price of $20.0 million. Any future repurchase of stock could have a significant impact on our cash position.

The development and manufacture of new lithography and laser-based systems and enhancements are highly capital-intensive. In order to be competitive, we believe we must continue 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 other items. We expect that cash generated from operations and our cash, cash equivalents and short-term investments will be sufficient to meet our cash requirements for at least the next twelve months. However, in the near-term, we may continue to utilize existing and future lines of credit, and other sources of financing, in order to maintain our present levels of cash, cash equivalents and investments. Beyond the next twelve months, we may require additional equity or debt financing to address our working capital or capital equipment needs. In addition, we may seek to raise equity or debt capital at any time that we deem market conditions to be favorable. Additional financing, if needed, may not be available on reasonable terms, or at all.

We may in the future pursue acquisitions of complementary product lines, technologies or businesses. Future acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses and impairment charges related to goodwill and other intangible assets, which could materially adversely affect our financial condition and results 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’s attention from other business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of key employees of the acquired company. In the event we acquire product lines, technologies or businesses which do not complement our business, or which otherwise do not enhance our sales or operating results, we may incur substantial write-offs and higher recurring operating costs, which could have a material adverse effect on our business, financial condition and results of operations. In the event that any such acquisition does occur, there can be no assurance as to the effect thereof on our business or operating results.

Foreign Currency

As part of our overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, we attempt to hedge most of our Japanese yen denominated foreign currency exposures. We use foreign currency forward contracts to hedge the risk that outstanding Japanese yen denominated receipts from customers, for actual or forecasted sales of equipment after receipt of customer orders, may be adversely affected by changes in foreign currency exchange rates. We use foreign currency forward exchange contracts and natural hedges to offset substantial portions of the potential gains or losses associated with our Japanese yen denominated assets and liabilities due to exchange rate fluctuations. We enter into foreign currency forward contracts that generally have maturities of nine months or less.

Information Available on Company Website

Our website is located at www.ultratech.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (and amendments to those reports), as soon as reasonably practicable after such reports are filed electronically with the SEC. We have adopted a Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted this Code of Ethics on our website. Any future amendments to this Code will also be posted on our website.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Reference is made to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2006 and to the subheading “Derivative Instruments and Hedging” in Item 8, “Financial Statements and Supplementary Data”, under the heading “Notes to Consolidated Financial Statements” of our Annual Report on Form 10-K for the year ended December 31, 2006.

Interest Rate Risk

Our exposure to market risk due to potential changes in interest rates relates primarily to our investment portfolio, which consisted primarily of fixed interest rate instruments as of June 30, 2007. We maintain an investment policy designed to ensure the safety and preservation of our invested funds by limiting market risk and the risk of default.

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

Foreign Currency Risk Management

The majority of our revenue, 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 the volatility of future cash flows caused by changes in currency exchange rates, we have established cash flow and balance sheet hedging programs.

We use foreign currency forward contracts to hedge the risk that outstanding Japanese yen denominated receipts from customers for actual or forecasted sales of equipment may be adversely affected by changes in foreign currency exchange rates. Our hedging programs reduce, but do not always entirely eliminate, the impact of currency movements.

Item 4. Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective and ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is further required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees. Neither side appealed the rulings by the Federal Circuit, and they are final.

Item 1A. Risk Factors

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

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

Currently, we are devoting significant resources to the development, introduction and commercialization of our laser products as well as our lithography wafer steppers. We intend to continue to develop these products and technologies during 2007, and will continue to incur significant operating expenses in the areas of research, development and engineering, manufacturing and general and administrative costs in order to develop, produce and support these new products. Additionally, gross profit margins and inventory levels may be further adversely impacted in the future by costs associated with the initial production of our laser processing systems and by future generations of our 1X lithography systems. Introduction of new products generally involves higher installation costs and product performance uncertainties that could delay customer acceptance of our systems, resulting in a delay in recognizing revenue associated with those systems and a reduction in gross margins. These costs include, but are not limited to, additional manufacturing overhead, additional inventory write-downs, costs of demonstration systems and facilities, costs associated with the establishment of additional after-sales support organizations. Additionally, operating expenses may increase, relative to sales, as a result of adding additional marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our operating results will be materially adversely affected.

Our ability to commercialize our laser processing technologies depends on our ability to demonstrate a manufacturing-worthy tool. We do not presently have in-house capability to fabricate devices. As a result, we must rely on partnering with semiconductor companies to develop the anneal process. The development of new process technologies is largely dependent upon our ability to interest potential customers in working on joint process development. Our ability to deliver timely solutions is also limited by wafer turnaround at the potential customer’s fabrication facility.

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

Sales of our systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity or to restructure current manufacturing facilities, either of which typically involves a significant commitment of capital. Many of our customers in the past have cancelled the development of new manufacturing facilities and have substantially reduced their capital equipment budgets. In view of the significant investment involved in a system purchase, we have experienced and may continue to experience delays following initial qualification of our systems as a result of delays in a customer’s approval process. Additionally, we are presently receiving orders for systems that have lengthy delivery schedules, which may be due to longer production lead times or a result of customers’ capacity scheduling requirements. For these and other reasons, our systems typically have a lengthy sales cycle during which we may expend substantial funds and management effort in securing a sale. Lengthy sales cycles subject us to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which we have little or no control. In order to maintain or exceed our present level of net sales, we are dependent upon obtaining orders for systems that will ship and be accepted in the current period. We may not be able to obtain those orders.

The semiconductor industry historically has been highly cyclical and has experienced periods of oversupply, which has in turn affected the market for semiconductor equipment such as ours and which can adversely affect our results of operations during such periods.

Our business depends in significant part upon capital expenditures by manufacturers of semiconductors, advanced packaging semiconductors and nanotechnology components which in turn depend upon the current and anticipated market demand for such devices and products utilizing such devices. The semiconductor industry historically has been highly cyclical and has experienced recurring periods of oversupply. This has, from time to time, resulted in significantly reduced demand for capital equipment including the systems manufactured and marketed by us. We believe that markets for new generations of semiconductors and semiconductor packaging will also be subject to similar fluctuations. Our business and operating results would be materially adversely affected by downturns or slowdowns in the semiconductor packaging market or by loss of market share. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We attempt to mitigate the risk of cyclicality by participating in multiple markets including semiconductor, semiconductor packaging, and nanotechnology sectors, as well as diversifying into new markets such as laser-based annealing for implant activation and other applications. Despite such efforts, when one or more of such markets experiences a downturn or a situation of excess capacity, our net sales and operating results are materially adversely affected.

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

Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we believe that our success will depend more upon the innovation, technological expertise and marketing abilities of our employees. Nevertheless, we have a policy of seeking patents when appropriate on inventions resulting from our ongoing research and development and manufacturing activities. We own 124 United States and foreign patents, which expire on dates ranging from April 2008 to April 2025 and have 83 United States and foreign patent applications pending. In addition, we have various registered trademarks and copyright registrations covering mainly software programs used in the operation of our systems. We also rely upon trade secret protection for our confidential and proprietary information. We may not be able to protect our technology adequately and competitors may be able to develop similar technology independently. Our pending patent applications may not be issued or U.S. or foreign intellectual property laws may not protect our intellectual property rights. In addition, litigation may be necessary to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation has resulted in, and in the future could result in, substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations, regardless of the outcome of the litigation. Patents issued to us may be challenged, invalidated or circumvented and 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. Invalidation of our patents related to those technologies could allow our competitors to more effectively compete against us, which could result in less revenue for us.

enablement. The Court also awarded ASML approximately $330,000 in costs. We filed an appeal with the Federal Circuit Court of Appeals, and filed our opening appellate brief on August 31, 2006. Although ASML originally filed a notice of cross-appeal, ASML subsequently withdrew its cross appeal and the Court entered an order to that effect on December 8, 2006. ASML’s opening appellate brief was filed on December 6, 2006, and our reply brief was filed on January 12, 2007. The case was argued on May 11, 2007. On May 14, 2007, the Federal Circuit Court of Appeals affirmed the jury’s verdict and the District Court’s February 13, 2006 Order in favor of ASML.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of a federal patent litigation suit described above. We do not believe this new action has merit, particularly given the denial by the federal court of that company’s request to be awarded attorneys’ fees payable by us in the patent litigation and the subsequent federal appellate court’s affirmation of the order denying any such award. We filed a motion to have the state court complaint dismissed under California’s anti-anti-SLAPP and demurrer statutes. The anti-SLAPP statute is aimed at striking lawsuits that are brought in order to quash an individual’s constitutional rights to free speech or seeking redress of grievances (i.e. filing suit). The state court granted the anti-SLAPP motion as to the abuse of process claim, but denied it as to the malicious prosecution claim. We have appealed the decision denying the anti-SLAPP motion as to the malicious prosecution claim, and briefing thereon shall commence in October 2007.

We believe that the outcome of these matters will not be material to our business, financial condition or results of operations.

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

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

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

The capital equipment industry in which we operate is intensely competitive. A substantial investment is required to install and integrate capital equipment into a semiconductor, semiconductor packaging or nanotechnology device production line. We believe that once a device manufacturer or packaging subcontractor has selected a particular supplier’s capital equipment, the manufacturer generally relies upon that equipment for the specific production line application and, to the extent possible, subsequent generations of similar products. Accordingly, it is difficult to achieve significant sales to a particular customer once another supplier’s capital equipment has been selected.

We experience competition in advanced packaging from various proximity aligner companies such as Suss Microtec AG (Suss Microtec) and projection companies such as Ushio, Inc. (Ushio). In addition, some device manufacturers may consider using reduction steppers for advanced packaging processes. In nanotechnology, we experience competition from proximity aligner companies, such as Suss Microtec, as well as other stepper manufacturers who have developed or are developing tools specifically designed for nanotechnology applications. We expect our competitors in the lithography arena to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. This could cause a decline in

sales or loss of market acceptance of our steppers in our served markets, and thereby materially adversely affect our business, financial condition and results of operations. Enhancements to, or future generations of, competing products may be developed that offer superior cost of ownership and technical performance features.

With respect to our laser annealing technologies, marketed under the LSA100 product name, our primary competition comes from companies such as Dainippon Screen Manufacturing Co., Ltd., Applied Materials, Inc. and Mattson Technology, Inc. Many of these companies offer products utilizing rapid thermal processing (RTP) which is the current prevailing manufacturing technology. RTP does not prevent semiconductor device manufacturers from scaling the lateral dimensions of their transistors to obtain improved performance, but diffusion resulting from the time scales associated with RTP limits the vertical dimension of the junctions. Faster annealing times result in shallower and more abrupt junctions and faster transistors. We believe that RTP manufacturers recognize the need to reduce 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. We presently anticipate that this company will offer laser-annealing tools to the semiconductor industry that will compete with our offerings.

Another potential advanced annealing solution utilizes flash lamp annealing technology, or FLA. Several companies have published papers on annealing tools that incorporate flash lamp technology in order to reduce annealing times and increase anneal temperatures. Developers of FLA technology claim to have overcome annealing difficulties at the 65nm node. This technique, which employs xenon flash lamps, has shown improvements over RTP in junction depth and sheet resistance, but we believe FLA suffers from pattern-related non-uniformities and could require additional, costly processes to equalize the reflectivity of different areas within the chip or wafer. Our proprietary laser processing solution has been specifically developed to provide junction annealing on near-instantaneous time-scales, while achieving high activation levels. Laser spike annealing, our first implementation of laser processing, activates dopants in the microsecond-to-millisecond time frame without melting. Our research indicates that, at temperatures just below the melting point of silicon, time durations in the microsecond to millisecond range are required to achieve full activation and minimal dopant diffusion.

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

We believe that in order to be competitive, we will need to continue to invest significant financial resources in new product development, new features and enhancements to existing products, the introduction of new stepper systems in our served markets on a timely basis, and maintaining customer service and support centers worldwide. In marketing our products, we may also face competition from vendors employing other technologies. In addition, increased competitive pressure has led to intensified price-based competition in certain of our markets, resulting in lower prices and margins. Should these competitive trends continue, our business, financial condition and operating results may be materially adversely affected.

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

Historically, we have sold a substantial portion of our systems to a limited number of customers. In the three- and six-month periods ended June 30, 2007, our top five customers accounted for 88.9% and 58.1% of our system sales, respectively, compared to 76.7% and 57.6%, in the comparable periods of 2006. We expect that sales to a relatively few customers will continue to account for a high percentage of our net sales in the foreseeable future and believe that our financial results depend in significant part upon the success of these major customers and our ability to meet their future capital equipment needs. Although the composition of the group comprising our largest customers may vary from period to period, the loss of a significant customer or any reduction in orders by a significant customer, including reductions due to market, economic or competitive conditions in the semiconductor, semiconductor packaging or nanotechnology industries or in the industries that manufacture products utilizing integrated circuits, thin film heads or other nanotechnology components, would likely have a material adverse effect on our business, financial condition and results of operations. Our ability to maintain or increase our sales in the future depends, in part, on our ability to obtain orders from new customers as well as the financial condition and success of our existing customers, the semiconductor and nanotechnology industries and the economy in general.

In addition to the business risks associated with dependence on a few major customers, these significant customer concentrations have in the past resulted in significant concentrations of accounts receivable. These significant and concentrated receivables expose us to additional risks, including the risk of default by one or more customers representing a significant portion of our total receivables. If we

were required to take additional accounts receivable reserves, our business, financial condition and results of operations would be materially adversely affected.

On a market application basis, sales to the semiconductor industry, primarily for advanced packaging applications and laser thermal processing, accounted for 74.3% and 79.3% of system revenue for the second quarter of 2007 and 2006, respectively, while sales to nanotechnology manufacturers, including micro systems, thin film head and optical device manufacturers, accounted for the remaining 25.7% and 20.7% of our systems revenue, respectively. For the first half of 2007, sales to the semiconductor industry and nanotechnology manufacturers accounted for 84.1% and 88.6%, respectively, compared to 15.9% and 11.4% of the corresponding period in 2006. Our future operating results and financial condition would be materially adversely impacted by a downturn in any of these industries, or by loss of market share in any of these industries. A growing portion of our backlog of system orders is comprised of laser spike annealing tools. To date, we have limited customer experience with this technology. Should significant demand not materialize, due to technical, production, market, or other factors, our business, financial position and results of operations would be materially adversely impacted.

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

Our manufacturing activities consist of assembling and testing components and subassemblies, which are then integrated into finished systems. We rely on a limited number of outside suppliers and subcontractors to manufacture certain components and subassemblies. We order one of the most critical components of our technology, the glass for our 1X lenses, from external suppliers. We design the 1X lenses and provide the lens specifications and the glass to other suppliers, who then grind and polish the lens elements. We then assemble and test the optical 1X lenses.

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

Our industry is subject to rapid technological change and product innovation, which could result in our technologies and products being replaced by those of our competitors, which would adversely affect our business and results of operations.

The semiconductor and nanotechnology manufacturing industries are subject to rapid technological change and new product introductions and enhancements. Our ability to be competitive in these and other markets will depend, in part, upon our ability to develop new and enhanced systems and related applications, and to introduce these systems and related applications at competitive prices and on a timely and cost-effective basis to enable customers to integrate them into their operations either prior to or as they begin volume product manufacturing. We will also be required to enhance the performance of our existing systems and related applications. Our success in developing new and enhanced systems and related applications depends upon a variety of factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, product performance in the field and effective sales and marketing. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both future demand and the technology that will be available to meet that demand. We may not be successful in selecting, developing, manufacturing or marketing new

products and related applications or enhancing our existing products and related applications. Any such failure would materially adversely affect our business, financial condition and results of operations.

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

We may encounter additional technical, manufacturing or other difficulties that could further delay future introductions or volume production of systems or enhancements. Our inability to complete the development or meet the technical specifications of any of our systems or enhancements and related applications, or our inability to manufacture and ship these systems or enhancements and related tools in volume and in time to meet the requirements for manufacturing the future generation of semiconductor or nanotechnology devices would materially adversely affect our business, financial condition and results of operations. In addition, we may incur substantial unanticipated costs to ensure the functionality and reliability of our products early in the products’ life cycles. If new products have reliability or quality problems, reduced orders or higher manufacturing costs, delays in customer acceptance, revenue recognition and collecting accounts receivable and additional service and warranty expenses may result. Any of such events may materially adversely affect our business, financial condition and results of operations.

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

International sales accounted for approximately 60.2% and 68.0% of total net sales for the three- and six-month periods ended June 30, 2007, respectively, compared to 69.2% and 63.9% in the comparable periods of 2006. We anticipate that international sales will continue to account for a significant portion of total net sales. As a result, a significant portion of our net sales will continue to be subject to certain risks, including unexpected changes in regulatory requirements; difficulty in satisfying existing regulatory requirements; exchange rate fluctuations; tariffs and other barriers; political and economic instability; difficulties in accounts receivable collections; natural disasters; difficulties in staffing and managing foreign subsidiary and branch operations; and potentially adverse tax consequences.

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

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

Our future operating results depend, in significant part, upon the continued contributions of key personnel, many of whom would be difficult to replace. We have entered into employment agreements with only a limited number of our key employees, including our Chief Executive Officer and Chief Financial Officer, and our other employees are employed “at will.” Some of these agreements contain vesting acceleration and severance payment provisions that could result in significant costs or charges to us should the employee be terminated without cause, die or have a disability. We do not maintain any life insurance on any of our key employees. The loss of key personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, our future operating results depend in significant part upon our ability to attract and retain other qualified management, manufacturing, technical, sales and support personnel for our operations. There are only a limited number of persons with the requisite skills to serve in these positions and it may become increasingly difficult for us to hire such personnel over time. At times, competition for such personnel has been intense, particularly in the San Francisco Bay Area, where we maintain our headquarters and principal operations, and we may not be successful in attracting or retaining such personnel. The failure to attract or retain such persons would materially adversely affect our business, financial condition and results of operations.

Changes in financial accounting standards or policies in the past have affected, and in the future may, affect, our reported results of operations.

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

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

Changes in securities laws and listing standards, in particular those that have resulted from the passage of the Sarbanes-Oxley Act of 2002 and related rules and regulations, have increased our legal and financial costs, and we expect to continue to spend significant resources to comply with these requirements.

The Sarbanes-Oxley Act of 2002 required changes in our corporate governance, public disclosure and compliance practices. The rules and regulations applicable to us have increased and will continue to increase our legal and financial compliance costs, and have made some activities more difficult, such as by requiring stockholder approval of new option plans. In addition, we have incurred and expect to continue to incur significant costs in connection with compliance with Section 404 of the Sarbanes-Oxley Act regarding internal controls over financial reporting. We incurred significant costs to achieve initial compliance with Section 404, and we expect ongoing annual costs to maintain compliance to also be substantial. We also expect these developments to make it more difficult and more expensive to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These developments could make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers. In addition, in connection with our Section 404 certification process, we may identify from time to time deficiencies in our internal controls. Any material weakness or deficiency in our internal controls over financial reporting could materially and negatively impact our reported financial results and the market price of our stock could significantly decline. Additionally, adverse publicity related to the disclosure of a material weakness or deficiency in internal controls over financial reporting could have a negative impact on our reputation, business and stock price.

Our equity incentive plans, certain provisions of our Certificate of Incorporation and Bylaws, and Delaware law may discourage third parties from pursuing a change of control transaction with us.

Certain provisions of our Certificate of Incorporation, equity incentive plans, licensing agreements, Bylaws and Delaware law may discourage certain transactions involving a change in control of our company. In addition to the foregoing, our classified board of directors, the shareholdings of our officers, directors and persons or entities that may be deemed affiliates and the ability of the Board of Directors to issue “blank check” preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing us from experiencing a change in control and may adversely affect the voting and other rights of holders of our Common Stock.

Our stock price has experienced significant volatility in the past and we expect this to continue in the future as a result of many factors, some of which could be unrelated to our operating performance, and such volatility can have a major impact on the number of shares subject to outstanding stock options that are included in calculating our earnings per share.

We believe that factors such as announcements of developments related to our business, fluctuations in our operating results, a shortfall in revenue or earnings, changes in analysts’ expectations, general conditions in the semiconductor and nanotechnology industries or the worldwide or regional economies, sales of our securities into the marketplace, an outbreak or escalation of hostilities,

announcements of technological innovations or new products or enhancements by us or our competitors, developments in patents or other intellectual property rights and developments in our relationships with our customers and suppliers could cause the price of our Common Stock to fluctuate, perhaps substantially. The market price of our Common Stock has fluctuated significantly in the past and we expect it to continue to experience significant fluctuations in the future, including fluctuations that may be unrelated to our performance.

As of June 30, 2007, we had options and restricted stock units to purchase approximately 5.5 million shares of our Common Stock outstanding. Among other determinants, the market price of our stock has a major bearing on the number of shares subject to outstanding stock options that are included in the weighted-average shares used in determining our net income (loss) per share. During periods of extreme volatility, the impact of higher stock prices can have a materially dilutive effect on our net income (loss) per share. Additionally, shares subject to outstanding options are excluded from the calculation of net income (loss) per share when we have a net loss or when the exercise price of the stock option is greater than the average market price of our Common Stock, as the impact of the stock options would be anti-dilutive.

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

Terrorist attacks in the United States and elsewhere, government responses thereto, and military actions in Iraq, Afghanistan and elsewhere, may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. In addition, any of these events could increase volatility in the United States and world financial markets which may depress the price of our Common Stock and may limit the capital resources available to us or our customers or suppliers, which could result in decreased orders from customers, less favorable financing terms from suppliers, and scarcity or increased costs of materials and components of our products. Additionally, terrorist attacks directly upon us may significantly disrupt our ability to conduct our business. Any of these occurrences could have a significant impact on our operating results, revenues and costs and may result in increased volatility of the market price of our Common Stock.

If we acquire companies, products, or technologies, we may face risks associated with those acquisitions.

In July 2006 we purchased certain assets of Oraxion, Inc. Oraxion produced inspection equipment for surface metrology and stress analysis for the semiconductor industry. We may not realize the anticipated benefits of any acquisition or investment. We may in the future pursue additional acquisitions of complementary product lines, technologies or businesses. Future acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses and impairment charges related to goodwill and other intangible assets, which could materially adversely affect our financial condition and results 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’s attention from other business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of key employees of the acquired company. In the event we acquire product lines, technologies or businesses which do not complement our business, or which otherwise do not enhance our sales or operating results, we may incur substantial write-offs and higher recurring operating costs, which could have a material adverse effect on our business, financial condition and results of operations. In the event that any such acquisition does occur, there can be no assurance as to the effect thereof on our business or operating results.

Our long-term expenses reduction programs may result in an increase in short-term expenses.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In September 2005, our Board of Directors authorized the repurchase of up to $30.0 million of our common stock in the open market during the period commencing September 2005 through September 2007. We did not repurchase any shares of our common stock

during the first six months of 2007. We purchased a total of 1.4 million shares of our common stock since September 2005 for a total of $20.0 million.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

3.1^(a)		Amended and Restated Certificate of Incorporation of the Registrant, filed October 6, 1993.

3.1.1^(a)		Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated May 17, 1995.

3.1.2^(a)		Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated June 17, 1998.

3.1.3^(a)		Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated June 20, 2003.

3.2^(b)		Bylaws of the Registrant, as amended.

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.


^(a)		Previously filed with our Quarterly Report on Form 10-Q for the quarter ended June 28, 2003 (Commission File No. 0-22248) and incorporated herein by reference.

^(b)		Previously filed with our Current Report on Form 8-K filed on February 2, 2007 (Commission File No. 0-22248) and incorporated herein by reference.


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and July 1, 2006
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and July 1, 2006
Notes to Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


	June 30,		December 31,
(In thousands )	2007		2006*
	(Unaudited)
*ASSETS*
Current assets:
Cash and cash equivalents	$	36,767	$	23,883
Short-term investments		59,674		54,207
Accounts receivable, net		19,887		18,054
Inventories		37,265		40,988
Prepaid expenses and other current assets		3,137		2,181

Total current assets		156,730		139,313

Long-term investments		33,997		48,328
Equipment and leasehold improvements, net		19,105		20,326
Demonstration inventories		4,321		4,717
Other assets		2,109		3,366


Total assets	$	216,262	$	216,050

*LIABILITIES AND STOCKHOLDERS’ EQUITY*
Current liabilities:
Notes payable	$	9,705	$	6,974
Accounts payable		7,036		10,440
Deferred product and services income		6,244		2,950
Other current liabilities		13,030		13,998

Total current liabilities		36,015		34,362

Other liabilities		6,660		7,580

Stockholders’ equity		173,587		174,108


Total liabilities and stockholders’ equity	$	216,262	$	216,050


	ULTRATECH, INC. (Registrant)
Date: July 31, 2007	By:	/s/ BRUCE WRIGHT
		Bruce Wright
		Senior Vice President, Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)



Date: July 31, 2007	/s/ ARTHUR ZAFIROPOULO
	Arthur Zafiropoulo
	Chief Executive Officer



Date: July 31, 2007	/s/ BRUCE WRIGHT
	Bruce Wright
	Chief Financial Officer

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*		The Balance Sheet as of December 31, 2006 has been derived from the audited financial statements at that date.

	•		the Quarterly Report of Ultratech, Inc. on Form 10-Q for the period ended June 30, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	•		the information contained in such Quarterly Report fairly presents in all material respects the financial condition and results of operations of Ultratech, Inc.


By:	/s/ ARTHUR ZAFIROPOULO	Date: July 31, 2007

Name:	Arthur Zafiropoulo
Title:	Chief Executive Officer


*		A signed original of this written statement required by Section 906 has been provided to Ultratech, Inc. and will be retained by Ultratech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.