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

FORM 10-K

        (Mark one)

For the Fiscal Year Ended December 31, 2002

Or

For the transition period from                              to                             

Commission File Number: 0-22248

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

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

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value Per Share;
Preferred Stock Purchase Rights

        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 ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No o

        The aggregate market value of voting stock held by non-affiliates of the Registrant, as of June 28, 2002, was approximately $248,470,000 (based upon the closing price for shares of the Registrant's Common Stock as reported by the Nasdaq National Market on that date, the last trading date of the Registrant's most recently completed second quarter). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 17, 2003, the Registrant had 22,744,794 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 5, 2003 are incorporated by reference into Part III of this Annual Report on Form 10-K.

PART I

ITEM 1.    BUSINESS

        This Annual Report on Form 10-K may contain, in addition to historical information, certain forward-looking statements that involve significant risks and uncertainties. The Company's actual results could differ materially from the information set forth in any such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below under "Additional Risk Factors", as well as those discussed elsewhere in this Annual Report on Form 10-K.

The Company

        Ultratech Stepper, Inc. ("Ultratech" or the "Company") develops, manufactures and markets photolithography equipment designed to reduce the cost of ownership for manufacturers of integrated circuits, including advanced packaging processes and various nanotechnology components, including thin film head magnetic recording devices ("thin film heads" or "TFHs"). The Company supplies step-and-repeat systems based on one-to-one ("1X") technology to customers located throughout North America, Europe, Japan and the rest of Asia. Ultratech believes that its 1X steppers offer cost and certain performance advantages, as compared with competitors' reduction steppers, to semiconductor device manufacturers for applications involving line geometries of 0.75 microns or greater ("non-critical feature sizes") and to nanotechnology manufacturers. The Company's 1X steppers do not currently address applications involving line geometries of less than 0.75 microns ("critical feature sizes"). Advanced packaging for integrated circuits, specifically bump or wafer level CSP techniques, require lithography steps in the fabrication process. Ultratech continues to enhance its product offerings for bump and wafer level chip scale packaging ("CSP") processing with the introduction of an improved version of the Company's flagship bump lithography tool, the Saturn Spectrum 3^e. Additionally, the Company has developed the Saturn Spectrum 300e² in order to broaden its advanced packaging market base into 300mm packaging activities. The Company's 1X steppers are also used as replacements for scanners in existing fabrication facilities to enable semiconductor manufacturers to extend the useful life and increase the capabilities of their facilities. In addition, the Company's steppers are used to manufacture high volume, low cost semiconductors used in a variety of applications such as telecommunications, automotive control systems, power systems and consumer electronics. Ultratech also supplies 1X photolithography systems to thin film head manufacturers and believes that its steppers offer advantages over certain competitive reduction lithography tools with respect to field size, throughput, specialized substrate handling and cost. Additionally, the Company supplies 1X photolithography equipment to various other nanotechnology markets, where certain technical features, such as high resolution at g-line wavelengths and depth of focus, may offer advantages over competing tools. Ultratech has developed and commenced shipment of the model 1600DSA stepper, with specific design modifications to address the unique requirements of the nanotechnology market, including dual-side wafer processing capability.

        The Company's products and markets are more fully described below.

Background

        The fabrication of devices such as integrated circuits ("semiconductors" or "ICs") requires a large number of complex processing steps, including deposition, photolithography and etching. Deposition is a process in which a layer of either electrically insulating or electrically conductive material is deposited on the surface of a wafer. The photolithography imaging process imprints device features on a light sensitive polymer photoresist. After development of the photoresist, etching selectively removes material from areas not covered by the imprinted pattern.

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        Photolithography is one of the most critical and expensive steps in IC device manufacturing. According to the Semiconductor Industry Association, a significant portion of the cost of processing silicon wafers in the fabrication of ICs is related to photolithography. Photolithography exposure equipment is used to image device features on the surface of thin deposition films by selectively exposing a light sensitive polymer photoresist coated on the wafer surface, through a photomask containing the master image of a particular device layer. Exposure of each process layer imprints a different set of features on the device. These device layers must be properly aligned to previously defined layers before imaging takes place, so that structures formed on the wafers are correctly placed, one on top of the other, in order to ensure a functioning device.

        Since the introduction of the earliest commercial photolithography tools for IC manufacturing in the early 1960s, a number of tools have been introduced to enable manufacturers to produce increasingly complex devices that incorporate progressively finer line widths. In the late 1970s, photolithography tools known as step-and-repeat projection aligners, or steppers, were introduced. Unlike prior tools, such as contact printers and proximity aligners, which required the photomask to physically contact the wafer in order to transfer the entire pattern during a single exposure, and scanners, which transferred the device image by scanning a narrow slit of light across the entire photomask and wafer in a single, continuous motion, steppers expose only a small square or rectangular portion of the wafer in a single exposure, then move or "step" to an adjacent site to repeat the exposure. This stepping process is repeated as often as necessary until the entire wafer has been exposed. By imaging a small area, steppers are able to achieve finer resolution, improved image precision and better alignment between the multiple device layers with higher yield and productivity in certain devices than possible with earlier tools.

        The two principal types of steppers currently in use by the semiconductor industry are reduction steppers, which are the most widely used steppers, and 1X steppers. Reduction steppers, which typically have reduction ratios of four or five-to-one, are tools in which the photomask pattern containing the design is typically four or five times larger than the device pattern that is to be exposed on the wafer surface. Additionally, step-and-scan systems address device sizes of .35 micron and below. In contrast to steppers, which expose the entire field in a single exposure, step-and-scan systems scan a narrow slit of imagery across a field and repeat this operation over multiple fields to expose the entire wafer.

        The principal advantage of reduction steppers and step-and-scan systems is that they may be used in manufacturing steps requiring critical feature sizes and are therefore necessary for manufacturing advanced ICs. 1X steppers, on the other hand, are tools in which the photomask containing the design is the same size as the device pattern that is exposed on the wafer surface. Current 1X steppers, unlike most current reduction steppers, are based on different technology which incorporates both reflective and refractive elements in its optical lens imaging system that, although highly sophisticated in design, is much simpler than a current reduction stepper's lens imaging system which incorporates only refractive elements. As a result, current 1X steppers are generally less expensive than the current reduction steppers required for critical feature sizes. Because of their optical design, 1X steppers typically are also able to deliver greater exposure energy to the wafer surface, which may result in higher throughput than is achievable with certain reduction steppers. However, 1X steppers are currently limited to use in manufacturing steps involving non-critical feature sizes. Accordingly, the Company believes that sales of these systems are highly dependent upon capacity expansions by its current 1X customers, or by customers making the transition to bumped chips, which employ a different means of electrically connecting the chip to the outside world.

        In the past, manufacturers of ICs and similar devices purchased capital equipment based principally on technological capabilities. In view of the significant capital expenditures required to construct, equip and maintain fabrication facilities, relatively short product cycles and manufacturers' increasing concern for overall fabrication costs, the Company believes that manufacturers of ICs and bumped wafers increasingly are focusing on reducing their total cost to manufacture a device. A major

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component of this cost is the cost of ownership of the equipment used for a particular application in a fabrication facility. Cost of ownership is measured in terms of the costs associated with the acquisition of equipment, as well as factors such as throughput, yield, up-time, service, labor overhead, maintenance, and various other costs of owning and using the equipment. With increasing importance being placed upon a system's overall cost of ownership, in many cases the system with the most technologically advanced capabilities will not necessarily be the manufacturing system of choice. As part of the focus on cost reduction, the Company believes that device manufacturers are attempting to extend the useful life and enhance the production capabilities of fabrication facilities by selecting equipment that can replace existing tools while offering better performance in a cost-effective manner.

Products

        The Company currently offers three different series of 1X systems for use in the semiconductor fabrication process: the model 1500 Series, which addresses the markets for scanner replacement, high volume/low cost semiconductor fabrication and R&D packaging activities; the Saturn Wafer Stepper® Family, which addresses the market for mix-and-match in advanced semiconductor fabrication and bump processing for flip chips; and the Titan Wafer Stepper®, which addresses the markets for scanner replacement and high volume/low cost semiconductor fabrication. These steppers currently offer feature size capabilities ranging from 2.0 microns to 0.75 microns and typically range in price from $900,000 to $3.6 million per system. The model 1500 Series and the Titan Wafer Stepper offer g- and h-line illumination specifications. The Saturn Wafer Stepper Family features an i-line illumination specification that is designed to make them compatible with advanced i-line reduction steppers. In bump processing, the Company offers its Saturn Spectrum 3, Saturn Spectrum 3^e, and the Saturn Spectrum 300e². The Saturn Spectrum 3^e was developed for high volume bump and wafer level CSP manufacturing. The Saturn Spectrum 300e² is the Company's flagship product offering to support 300mm bump manufacturing. All of these bump steppers provide broadband (g, h and i-line) exposure, and are used in conjunction with electroplating to produce a pattern of bumps, or metal connections, on the bond pads of the die for flip chip devices. This pattern can be placed in a tight array across the entire die, as opposed to the conventional method of wire bonding which is limited to the periphery of the die. This allows manufacturers to shrink the die size. The flip chip device can then be placed in a small outline package or directly on a printed circuit board. The Saturn and Titan wide-field systems have a unique D-shaped field that allows for a one-to-one field match with step-and-scan systems, or a two-to-one match with reduction steppers. The D-shaped field is designed to allow the semiconductor manufacturer to optimize overlay and throughput for its non-critical mix-and-match layers.

        The Company also offers photolithography equipment for use in various nanotechnology markets. Nanotechnology manufacturing combines electronics with mechanics in small devices for detection and control of a wide variety of parameters. Examples include accelerometers used to activate air bags in automobiles, and membrane pressure sensors used in industrial control systems. These micro-machined devices are manufactured on silicon substrates using photolithography techniques similar to those used for manufacturing semiconductors and thin film head devices. In 2000, the Company introduced and began shipping its 1600DSA stepper into the nanotechnology market, using a platform based on the 1500 Series steppers, incorporating Dual Side Alignment ("DSA") capability for applications requiring lithography on both sides of a wafer. The Company believes the 1600DSA stepper enhances the capabilities of the 1500 Series steppers by offering the first stepper with Dual Side Alignment capability, providing customers with a 1X stepper solution to this special processing requirement. Additionally, the Company believes that its 1500 Series steppers and the Saturn Wafer Stepper Family offer resolution and depth of focus advantages over alternative technologies to the manufacturers of nanotechnology components.

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        The Company has introduced the model 1900 Series steppers, with enhanced capabilities directed at TFH backend, or rowbar processing applications. These steppers are used to expose the Air Bearing Surface (ABS) pattern on these rowbars.

        The Company also sells upgrades and refurbishments to systems in its installed base. These refurbished systems typically have a purchase price that is significantly lower than the purchase price for the Company's new systems.

        Basic features of the Company's current stepper systems are set forth below:

        The Company also offers laser-based thermal annealing tools under the "Verdant" product name. The anneal process is used by the Semiconductor industry for a variety of process steps, including activation of implanted impurities, growth of oxides, formation of silicides and stabilization of copper grain structure. Common annealing tools, currently in use by manufacturers of semiconductor devices, are furnaces and rapid thermal annealing, or RTA, systems. The Company believes there is a need for tools that deliver annealing at higher temperatures for shorter periods of time and that its laser annealing tools may ultimately provide this capability to the industry. The near-term application of the Company's laser-based thermal annealing tools is anticipated to be in the area of implant activation. However, the Company is also researching the use of these tools for other annealing applications.

        Currently, the Company offers two laser annealing tools. The first tool is designed for use in research and development applications, with the objective of process optimization. The Company shipped and recorded revenue on two of these systems in 2002. The second tool is targeted for pilot production. As of March 17, 2003, the Company has received orders for two of these pilot tools.

Research, Development and Engineering

        The semiconductor and nanotechnology (which includes thin film heads) industries are subject to rapid technological change and new product introductions and enhancements. The Company believes that continued and timely development and introduction of new and enhanced systems is essential for the Company to maintain its competitive position. The Company has made a substantial investment in the research and development of its core optical technology, which the Company believes is critical to its financial results. The Company intends to continue to develop its technology and to develop innovative products and product features to meet customer demands. Current engineering projects include: the continued research and development and process insertion for the Company's laser thermal processing technologies; continued development of the Company's 1X optical products, including the Company's 300mm tool for bump processing; and development of more flexible optical systems. Other research and development efforts are currently focused on reliability improvement; manufacturing cost reduction; and performance enhancement and development of new features for existing systems, both for inclusion in the Company's systems and to meet specific customer order requirements. These research and development efforts are undertaken, principally, by the Company's research, development and engineering organizations and costs are generally expensed as incurred. Other operating groups

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within the Company support the Company's research, development and engineering efforts, and the associated costs are charged to these organizations as incurred. The Company also has programs devoted to the development of new photolithography systems, including new generations of photolithography systems for existing and new markets, enhancements and extensions of existing photolithography systems for existing and new markets, and custom engineering for specific customers.

        The Company works with many customers to develop technology required to manufacture advanced devices or to lower the customer's cost of ownership. The Company maintains an engineering department that supports customer design of 1X stepper photomasks for both test and production purposes and an applications engineering group that assist customers in optimizing the use of the Company's systems.

        The Company has historically devoted a significant portion of its financial resources to research and development programs and expects to continue to allocate significant resources to these efforts in the future. As of December 31, 2002, the Company had approximately 55 full-time employees engaged in research, development, and engineering. For 2002, 2001 and 2000, total research, development, and engineering expenses were approximately $23.5 million, $25.8 million and $26.8 million, respectively, and represented 34.3%, 19.7% and 18.3% of the Company's net sales, respectively.

Sales and Service

        The Company markets and sells its products in North America, Europe, Japan and Taiwan principally through its direct sales organization. The Company sells its products in the Asia/Pacific region, excluding Japan and Taiwan, primarily through independent sales organizations.

        Ultratech's service personnel are based throughout the United States, Europe, Japan and the rest of Asia. The Company currently has two sales and service offices in the United States outside of California; and seven sales and/or service offices in the United Kingdom, Germany, France, Japan, Korea, Taiwan and Singapore. Additionally, the Company maintains personnel in Thailand and the Philippines, and uses third-party providers in Hong Kong and Malaysia, to service equipment and support customers in such locations. As part of its customer service, the Company maintains an on-line computerized network of its parts inventory in the United States, Europe, Japan and Taiwan.

        The Company believes that as semiconductor and nanotechnology device manufacturers produce increasingly complex devices, they will require an increased level of support. Reliability, performance, yield, cost, uptime and mean time between failures are increasingly important factors by which customers evaluate potential suppliers of photolithography equipment. The Company believes that the strength of its worldwide service and support organization is an important factor in its ability to sell its systems, maintain customer loyalty and reduce the maintenance costs of its systems. In addition, the Company believes that working with its suppliers and customers is necessary to ensure that the Company's systems are cost effective, technically advanced and designed to satisfy customer requirements.

        The Company supports its customers with field service, applications, technical service engineers and training programs. The Company provides its customers with comprehensive support and service before, during and after delivery of its systems. To support the sales process and to enhance customer relationships, the Company works closely with prospective customers to develop hardware, software and applications test specifications and benchmarks, and often designs customized applications to enable prospective customers to evaluate the Company's equipment for their specific needs. Prior to shipment, Ultratech's support personnel typically assist the customer in site preparation and inspection, and typically provide customers with training at the Company's facilities or at the customer's location. The Company currently offers to its customers various courses of instruction on the Company's systems, including instructions in system hardware, software and applications tools for optimizing the Company's systems. The Company's customer training program also includes instructions in the maintenance of the

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Company's systems. The Company's field support personnel work with the customers' employees to install the system and demonstrate system readiness. Technical support is also available through on-site Company personnel.

        In general, the Company warrants its new systems against defects in design, materials and workmanship for one year. The Company offers its customers additional support after the warranty period in the form of applications and maintenance contracts for specified time periods. Service contracts include various options such as priority response, planned preventive maintenance, scheduled one-on-one training, daily on-site support, and monthly system and performance analysis.

Manufacturing

        The Company performs all of its manufacturing activities (final assembly, system testing and certain subassembly) in clean room environments totaling approximately 26,000 square feet. These facilities are located in San Jose, California. Performing manufacturing operations in California exposes the Company to a higher risk of natural disasters, including earthquake. The Company is not insured against natural disasters and power shortages and the occurrence of such an event could materially adversely impact the Company's results of operations.

        The Company's manufacturing activities consist of assembling and testing components and subassemblies, which are then integrated into finished systems. The Company relies on a limited number of outside suppliers and subcontractors to manufacture certain components and subassemblies. This strategy enables the Company to maximize its manufacturing capacity. The Company orders one of the most critical components of its technology, the glass for its 1X lenses, from suppliers on purchase orders. The Company designs the 1X lenses and provides the lens specifications to other suppliers that grind the lens elements. The Company then assembles and tests the optical 1X lenses in its metrology laboratory. The Company has recorded the critical parameters of each of its optical lenses sold since 1982, and believes that such information enables it to supply lenses to its customers that match the characteristics of its customers' existing lenses.

        In addition to glass, the Company procures many of its 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, the Company has been able to obtain adequate services and supplies of components and subassemblies for its systems in a timely manner. However, disruption or termination of certain of these sources could result in a significant adverse impact on the Company's ability to manufacture its systems. This, in turn, would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's reliance on sole or a limited group of suppliers and the Company's increasing reliance on subcontractors involve several risks, including a potential inability to obtain an adequate supply of required components due to the suppliers' failure or inability to provide such components in a timely manner, or at all, and reduced control over pricing and timely delivery of components. Although the timeliness, yield and quality of deliveries to date from the Company's subcontractors have been acceptable, manufacture of certain of these components and subassemblies is an extremely complex process, and long lead-times are required. Any inability to obtain adequate deliveries or any other circumstance that would require the Company to seek alternative sources of supply or to manufacture such components internally could delay the Company's ability to ship its products, which could damage relationships with current and prospective customers and have a material adverse effect on the Company's business, financial condition and results of operations.

        Prior to shipment of the Company's systems, the customer's engineers may perform acceptance tests at Ultratech's facility. After passing the acceptance test, the system is packaged in the clean room environment and prepared for shipment.

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        The Company maintains a company-wide quality program. The intent of the program is to provide continuous improvement in the Company's steppers and services to meet customer requirements. The Company trains all of its employees in basic quality skills and regularly participates in quality sharing meetings with other equipment manufacturers and customer quality audits of procedures and personnel. The Company's 1X operation achieved ISO 9001:1994 certification in 1996 and ISO 14001:1996 certification in March 2001. The Company's ISO 9001 certification was upgraded to the ISO 9001:2000 standard in January 2002. All certifications have been maintained uninterrupted through the date of this report.

Competition

        The capital equipment industry in which the Company operates is intensely competitive. A substantial investment is required to install and integrate capital equipment into a semiconductor, semiconductor packaging or nanotechnology device production line. The Company believes that once a device manufacturer or packaging subcontractor has selected a particular vendor's capital equipment, the manufacturer generally relies upon that equipment for the specific production line application and, to the extent possible, subsequent generations of similar products. Accordingly, it is difficult to achieve significant sales to a particular customer once another vendor's capital equipment has been selected. The Company experiences intense competition worldwide from a number of leading stepper manufacturers, such as Nikon Inc. ("Nikon"), Canon, Inc. ("Canon") and ASM Lithography ("ASML"), all of which have substantially greater financial, marketing and other resources than the Company. Nikon supplies a 1X stepper for use in the manufacture of liquid crystal displays and Canon, Nikon and ASML offer reduction steppers for thin film head fabrication. With respect to the semiconductor packaging and nanotechnology markets, the Company experiences intense competition from various proximity aligner companies such as Suss Microtec AG.

        ASML, Canon and Nikon have each introduced an i-line step-and-scan system as a lower cost alternative to the deep ultra-violet (DUV) step-and-scan system for use on the less critical layers. These systems compete with wide-field steppers, such as the Company's Saturn and Titan steppers, for advanced mix-and-match applications. In addition, the Company believes that the high cost of developing new lithography tools has increasingly caused its competitors to collaborate with customers and other parties in various areas such as research and development, manufacturing and marketing, or to acquire other competitors, thereby resulting in a combined competitive threat with significantly enhanced financial, technical and other resources. The Company expects its competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics that will also compete directly with the Company's products. This could cause a decline in sales or loss of market acceptance of the Company's steppers, and thereby materially adversely affect the Company's business, financial condition and results of operations. There can be no assurance that enhancements to, or future generations of, competing products will not be developed that offer superior cost of ownership and technical performance features. The Company believes that to be competitive, it will require significant financial resources in order to continue to invest in new product development, features and enhancements, to introduce next generation stepper systems on a timely basis, and to maintain customer service and support centers worldwide. In marketing its products, the Company may also face competition from vendors employing other technologies. In addition, increased competitive pressure has led to intensified price-based competition in certain of the Company's markets, resulting in lower prices and margins. Should these competitive trends continue, the Company's business, financial condition and operating results would continue to be materially adversely affected. There can be no assurance that the Company will be able to compete successfully in the future.

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        With respect to the Company's laser annealing technologies, marketed under the Verdant product name, the primary competition comes from RTA, which is the current manufacturing technology. RTA does not limit semiconductor device manufacturers from scaling their transistors to obtain improved performance. However, improved annealing technology results in faster transistors for a given size. RTA manufacturers recognize the need to reduce thermal cycle times and are working toward this goal. Several companies have published papers on their prototype annealing tools that incorporate flash lamp technology in order to reduce annealing times and increase anneal temperatures. The Company believes these tools are presently in the development phase. Additionally, competition to the Verdant products may come from other 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. In July 2000, the Company licensed its then existing laser annealing technology, with reservations, to a manufacturer of semiconductor equipment. The Company presently anticipates this company will offer laser annealing tools to the semiconductor industry that will compete with the Company's offerings.

        Foreign integrated circuit manufacturers have a significant share of the worldwide market for certain types of integrated circuits for which the Company's systems are used. The Japanese stepper manufacturers are well established in the Japanese stepper market, and it is extremely difficult for non-Japanese lithography equipment companies to penetrate this market. Although the Company has experienced recent success in the introduction of its Saturn Spectrum family of wafer steppers into the Japanese marketplace, to date the Company has not established itself as a major competitor in the Japanese equipment market and there can be no assurance that the Company will be able to achieve significant sales to Japanese manufacturers in the future.

Intellectual Property Rights

        Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, it believes that any success will depend more upon the innovation, technological expertise and marketing abilities of its employees. Nevertheless, the Company has a policy of seeking patents when appropriate on inventions resulting from its ongoing research and development and manufacturing activities. The Company owns various United States and foreign patents, which expire on dates ranging from March 2004 to October 2020 and has various United States and foreign patent applications pending. The Company also has various registered trademarks and copyright registrations covering mainly software programs used in the operation of its stepper systems. The Company also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that the Company will be able to protect its technology adequately or that competitors will not be able to develop similar technology independently. There can be no assurance that any of the Company's pending patent applications will be issued or that U.S. or foreign intellectual property laws will protect the Company's intellectual property rights. In addition, litigation may be necessary to enforce the Company's patents, copyrights or other intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations, regardless of the outcome of the litigation. Patents issued to the Company may be challenged, invalidated or circumvented and the rights granted thereunder may not provide competitive advantages to the Company. Furthermore, others may independently develop similar products, duplicate the Company's products or, if patents are issued to the Company, design around the patents issued to the Company. Additionally, the Company presently has several agreements in force to license certain of its technologies. Challenges to, or invalidation of, patents related to those technologies would expose the Company to the risk of forfeiture of revenues and further risk of damage claims.

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        On February 29, 2000, in the U.S. District Court of Virginia, the Company filed patent infringement lawsuits against Nikon, Canon and ASML. In April 2000, the Company reached a settlement with Nikon and in September 2001, the Company reached a settlement with Canon. The patent litigation case against ASML is ongoing. The court has made a preliminary determination that ASML does not infringe the patent. The Company intends to appeal this preliminary determination of the court. On October 12, 2001, the Company was sued in the District Court in Massachusetts for alleged infringement of certain patents owned by Silicon Valley Group, Inc. ("SVG"), a company acquired by ASML. The Company is in the process of defending against this claim and believes the claim is without merit.

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

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

Environmental Regulations

        The Company is subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's systems. The Company believes that it is currently in compliance in all material respects with such regulations and that it has obtained all necessary environmental permits to conduct its business. Nevertheless, the failure to comply with current or future regulations could result in substantial fines being imposed on the Company, suspension of production, alteration of the manufacturing process or cessation of operations. Such regulations could require the Company to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any failure by the Company to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances could subject the Company to significant liabilities.

Customers, Applications and Markets

        The Company sells its systems to semiconductor, advanced packaging, thin film head and various other nanotechnology manufacturers located throughout North America, Europe, Japan, Taiwan and the rest of Asia. Semiconductor manufacturers have purchased the model 1500 Series steppers, the Saturn Wafer Stepper, the Saturn Spectrum 3e wafer stepper, the Saturn Spectrum 300e² wafer stepper and the Titan Wafer Stepper for the fabrication and/or packaging of microprocessors, microcontrollers,

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DRAMs, ASICs and other devices. Such systems are used in mix-and-match environments with other lithography tools, as replacements for scanners and contact printers, in start-up fabrication facilities, in packaging for ultrathin and flip chip applications and for high volume, low cost non-critical feature size semiconductor production. The Company believes that thin film head manufacturers have purchased the model 1900 Series steppers due to their throughput and overall cost of ownership. The Company believes that manufacturers of nanotechnology devices have purchased the model 1500 Series steppers, the 1600DSA and Saturn and Titan wafer stepper families because of their high throughput and flexible field size advantages along with their cost-effective, submicron imaging capabilities.

        Historically, the Company has sold a substantial portion of its systems to a limited number of customers. In 2002, Intel Corporation accounted for 19% and Sumitomo Chemical Company, Ltd. accounted for 10% of the Company's net sales. In 2001, no single customer accounted for 10% or more of the Company's net sales. In 2000, Royal Philips Electronics N.V. accounted for 10% of the Company's net sales.

        On a market application basis, sales to semiconductor packaging customers accounted for approximately 53% of system revenue for the year ended December 31, 2002, as compared to 32% and 26% for the years ended December 31, 2001 and 2000, respectively. The Company's future results of operations and financial position would be materially adversely impacted by further downturns in this market segment, or by loss of market share.

        At December 31, 2002, one customer accounted for 41% of the Company's system backlog. Cancellation, deferrals or rescheduling of orders by this customer would have a material adverse impact on the Company's future results of operations.

        The Company presently expects that net sales for the quarter ending March 31, 2003 will be flat to slightly higher than net sales in the comparable period in 2002. The Company anticipates that it will experience operating and net losses for the three-month period ending March 31, 2003. The Company believes that gross margin for the quarter ending March 31, 2003 will be flat, as compared to the comparable period in 2002. Should further erosion to the Company's business occur, the Company might incur a higher risk of inventory obsolescence and excess purchase commitments, which would materially adversely impact results of operations. Additionally, increased price-based competition may continue to contribute to further erosion of gross margin.

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

        The Company expects that sales to a relatively few customers will continue to account for a high percentage of its net sales in the foreseeable future and believes that the Company's financial results depend in significant part upon the success of these major customers and the Company's ability to meet their future capital equipment needs. Although the composition of the group comprising the Company's largest customers may vary from period to period, the loss of a significant customer or any reduction in orders by any significant customer, including reductions due to market, economic or competitive conditions in the semiconductor, semiconductor packaging or nanotechnology industries or in the industries that manufacture products utilizing integrated circuits, thin film heads or other nanotechnology components, may have a material adverse effect on the Company's business, financial condition and results of operations. The Company's ability to maintain or increase its sales in the future depends, in part, on its ability to obtain orders from new customers as well as the financial condition and success of its existing customers, the semiconductor and nanotechnology industries and the economy in general.

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        In addition to the business risks associated with dependence on major customers, these significant customer concentrations have in the past resulted in significant concentrations of accounts receivable. These significant and concentrated receivables expose the Company to additional risks, including the risk of default by one or more customers representing a significant portion of the Company's total receivables. If the Company were required to take additional accounts receivable reserves, its business, financial condition and results of operations would be materially adversely affected.

        Sales of the Company's systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity or to restructure current manufacturing facilities, either of which typically involves a significant commitment of capital. Many of the Company's customers 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, the Company has experienced and may continue to experience delays following initial qualification of the Company's systems as a result of delays in a customer's approval process. Additionally, the Company is 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. In order to maintain or exceed the Company's present level of net sales, the Company is dependent upon obtaining orders for systems that will ship and be accepted in the current period. There can be no assurance that the Company will be able to obtain those orders. For these and other reasons, the Company's systems typically have a lengthy sales cycle during which the Company may expend substantial funds and management effort in securing a sale. Lengthy sales cycles subject the Company to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which the Company has little or no control.

Backlog

        The Company schedules production of its systems based upon order backlog, informal customer commitments and general economic forecasts for its targeted markets. The Company includes in its backlog all customer orders for its systems for which it has accepted purchase orders and assigned shipment dates within one year, as well as all orders for service, spare parts and upgrades. All orders are subject to cancellation or rescheduling by the customer with limited or no penalties. Because of changes in system delivery schedules, cancellations of orders and potential delays in system shipments, the Company's backlog at any particular date may not necessarily be representative of actual sales for any succeeding period. As of December 31, 2002 and 2001, the Company's backlog was approximately $50.4 million and $58.4 million, respectively, including $10.5 million and $6.0 million, respectively, of products shipped but not yet installed and accepted.

        The Company believes that demand for semiconductors and semiconductor equipment is currently experiencing a severe downturn. As a result, the Company may continue to experience lower order booking rates in the near term and may experience an increased incidence of order deferrals, rescheduling and cancellations. Fewer net bookings would result in lower net sales and gross margin, which would materially adversely impact the Company's business and results of operations.

Employees

        At December 31, 2002, the Company had approximately 299 full-time employees, including 55 engaged in research, development, and engineering, 34 in sales and marketing, 93 in customer service and support, 69 in manufacturing and 48 in general administration and finance. The Company believes any future success, should it occur, would depend, in large part, on its ability to attract and retain highly skilled employees. None of the employees of the Company is covered by a collective bargaining agreement. The Company considers its relationships with its employees to be good.

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Additional Risk Factors

        In addition to risks described in the foregoing discussions under "Business," including but not limited to those under "Products," "Research, Development and Engineering," "Sales and Service," "Manufacturing," "Competition," "Intellectual Property Rights," "Environmental Regulations," "Customers, Applications and Markets," "Backlog," and "Employees," the following risks apply to the Company and its business:

        Cyclicality of Semiconductor, Semiconductor Packaging and Thin Film Head Industries     The Company's business depends in significant part upon capital expenditures by manufacturers of semiconductors, bumped semiconductors and nanotechnology components, including thin film head magnetic recording devices, which in turn depend upon the current and anticipated market demand for such devices and products utilizing such devices. The semiconductor industry 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 the Company. The semiconductor industry, which includes the semiconductor-packaging sector, is presently experiencing a severe downturn. The Company also believes that markets for new generations of semiconductors and semiconductor packaging will also be subject to similar fluctuations. The Company's business and operating results would be materially adversely affected by continued downturns or slowdowns in the semiconductor packaging market or by loss of market share. Accordingly, the Company can give no assurance that it will be able to achieve or maintain its current or prior level of sales.

        The Company attempts to mitigate the risk of cyclicality by participating in multiple markets including semiconductor, semiconductor packaging, thin film head and other nanotechnology sectors, as well as diversifying into new markets such as photolithography for optical networking (a nanotechnology application). Despite such efforts, when one or more of such markets experiences a downturn or a situation of excess capacity, such as is presently occurring in the semiconductor, semiconductor packaging, optical networking and thin film head markets, the Company's net sales and operating results are materially adversely affected.

        During 2002, 2001 and 2000, approximately 20%, 33% and 18%, respectively, of the Company's net sales were derived from sales to nanotechnology manufacturers, including micro systems, TFH and optical networking device manufacturers.

        Development of New Product Lines; Expansion of Operations    Currently, the Company is devoting significant resources to the development, introduction and commercialization of its Verdant laser thermal processing systems and to enhancements of its Saturn Spectrum 3^e and Saturn Spectrum 300e² wafer steppers and related platforms. The Company intends to continue to develop these products and technologies during 2003, 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 further 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 its Verdant laser thermal processing systems and by future generations of its 1X lithography systems. These costs include, but are not limited to, additional manufacturing overhead, additional inventory write-offs, costs of demonstration systems and facilities, costs associated with managing multiple sites and the establishment of additional after-sales support organizations. Additionally, there can be no assurance that operating expenses will not increase, relative to sales, as a result of adding additional marketing and administrative personnel, among other costs, to support the Company's new products. If the Company is unable to achieve significantly increased net sales or if its sales fall below expectations, the Company's operating results will be materially adversely affected.

        The Company's ability to commercialize its laser annealing, or laser thermal processing technologies, depends on its ability to demonstrate a manufacturing-worthy tool. The Company does

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not presently have in-house capability to fabricate devices. As a result, the Company must rely on partnering with companies to develop the anneal process. The development of new process technologies is largely dependant upon the Company's ability to interest potential customers in working on joint process development. The Company's ability to deliver timely solutions is also limited by wafer turnaround at the potential customer's fabrication facility.

        Rapid Technological Change; Importance of Timely Product Introduction    The semiconductor and nanotechnology manufacturing industries are subject to rapid technological change and new product introductions and enhancements. The Company's ability to be competitive in these and other markets will depend, in part, upon its ability to develop new and enhanced systems and related software tools, and to introduce these systems and related software tools at competitive prices and on a timely and cost-effective basis to enable customers to integrate them into their operations either prior to or as they begin volume product manufacturing. The Company will also be required to enhance the performance of its existing systems and related software tools. Any success of the Company in developing new and enhanced systems and related software tools depends upon a variety of factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, product performance in the field and effective sales and marketing. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both future demand and the technology that will be available to supply that demand. There can be no assurance that the Company will be successful in selecting, developing, manufacturing or marketing new products and related software tools or enhancing its existing products and related software tools. Any such failure would materially adversely affect the Company's business, financial condition and results of operations.

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

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

        Sole or Limited Sources of Supply    The Company relies heavily on outside suppliers and subcontractors to manufacture certain components and subassemblies in an attempt to maximize the Company's available manufacturing capacity. The Company orders one of the most critical components of its technology, the glass for its 1X lenses, from suppliers on purchase orders. The Company designs the 1X lenses and provides the lens specifications to other suppliers that grind the lens elements. The Company then assembles and tests the optical 1X lenses in its metrology laboratory. The Company has recorded the critical parameters of each of its optical lenses sold since 1982, and believes that such information enables it to supply lenses to its customers that match the characteristics of its customers' existing lenses.

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        In addition to glass, the Company procures many of its 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, the Company has been able to obtain adequate services and supplies of components and subassemblies for its systems in a timely manner. However, disruption or termination of certain of these sources could result in a significant adverse impact on the Company's ability to manufacture its systems. This, in turn, would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's reliance on sole or a limited group of suppliers and the Company's increasing reliance on subcontractors involve several risks, including a potential inability to obtain an adequate supply of required components due to the suppliers' failure or inability to provide such components in a timely manner, or at all, and reduced control over pricing. Although the timeliness, yield and quality of deliveries to date from the Company's subcontractors have been acceptable, manufacture of certain of these components and subassemblies is an extremely complex process, and long lead-times are required. Any inability to obtain adequate deliveries or any other circumstance that would require the Company to seek alternative sources of supply or to manufacture such components internally could delay the Company's ability to ship its products, which could damage relationships with current and prospective customers and have a material adverse effect on the Company's business, financial condition and results of operations.

        International Sales    International net sales accounted for approximately 48%, 51% and 54% of total net sales for the years 2002, 2001 and 2000, respectively. The Company anticipates that international sales, which typically have lower gross margins than domestic sales, principally due to increased competition and higher field service and support costs, will continue to account for a significant portion of total net sales. As a result, a significant portion of the Company's net sales will continue to be subject to certain risks, including dependence on outside sales representative organizations; unexpected changes in regulatory requirements; difficulty in satisfying existing regulatory requirements; exchange rate fluctuations; tariffs and other barriers; political and economic instability; difficulties in accounts receivable collections; natural disasters; difficulties in staffing and managing foreign subsidiary and branch operations; and potentially adverse tax consequences. Although the Company generally transacts its international sales in U.S. dollars, international sales expose the Company to a number of additional risk factors, including fluctuations in the value of local currencies relative to the U.S. dollar, which, in turn, impact the relative cost of ownership of the Company's products and may further impact the purchasing ability of its international customers. However, in Japan, the Company has direct sales operations and orders are often denominated in Japanese yen. This may subject the Company to a higher degree of risk from currency fluctuations. The Company attempts to mitigate this exposure through the use of foreign exchange contracts. The Company is also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of semiconductors and nanotechnology products. The Company cannot predict whether the United States, Japan or any other country will implement changes to quotas, duties, taxes or other charges or restrictions upon the importation or exportation of the Company's products. These factors, or the adoption of restrictive policies, may have a material adverse effect on the Company's business, financial condition and results of operations.

        Dependence on Key Personnel    The Company's future operating results depend, in significant part, upon the continued contributions of key personnel, many of whom would be difficult to replace. None of such persons has an employment or non-competition agreement with the Company. The Company does not maintain any life insurance on any of its key persons. The loss of key personnel could have a material adverse effect on the business, financial condition and results of operations of the Company. In addition, the Company's future operating results depend in significant part upon its ability to attract and retain other qualified management, manufacturing, technical, sales and support personnel for its operations. There are only a limited number of persons with the requisite skills to

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serve in these positions and it may become increasingly difficult for the Company to hire such personnel over time. At times, competition for such personnel has been intense, particularly in the San Francisco Bay Area where the Company maintains its headquarters and principal operations, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The failure to attract or retain such persons would materially adversely affect the Company's business, financial condition and results of operations.

        Changes to Financial Accounting Standards May Affect the Company's Reported Results of Operations    The Company prepares its financial statements to conform with generally accepted accounting principles, or GAAP. These principles are subject to interpretation by the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on the Company's reported results and may affect its reporting of transactions completed before a change is announced.

        Accounting policies affecting many other aspects of our business, including rules relating to employee stock options, restructurings, asset disposals, intangible assets, derivatives, financial instruments, revenue recognition, in-process research and development charges, have recently been revised or are under review. Changes to those rules or the questioning of current practices may have a material adverse effect on the Company's reported financial results or on the way it conducts business. In addition, the Company's preparation of financial statements in accordance with GAAP requires that it 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 the Company's estimates and could impact its future operating results.

        In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), entitled "Revenue Recognition in Financial Statements". Effective January 1, 2000, the Company changed its method of accounting for product sales to recognize such revenues when the contractual obligation for installation has been satisfied, or when installation is substantially complete, and customer acceptance provisions have lapsed, provided collection of the related receivable is probable. The cumulative effect of the change in accounting principle includes system revenue, cost of sales and certain expenses, including warranty and commission expenses, which were recognized when both installation and customer acceptance provisions were satisfied, subsequent to January 1, 2000. The cumulative effect of this change in accounting principle, $18.9 million (or $0.89 per share, basic and diluted), was reported as a charge to operations in the quarter ended March 31, 2000.

        Effects of Certain Anti-Takeover Provisions    Certain provisions of the Company's Certificate of Incorporation, equity incentive plans, Shareholder Rights Plan, licensing agreements, Bylaws and Delaware law may discourage certain transactions involving a change in control of the Company. In addition to the foregoing, the Company's classified board of directors, the shareholdings of the Company's officers, directors and persons or entities that may be deemed affiliates and the ability of the Board of Directors to issue "blank check" preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing a change in control of the Company and may adversely affect the voting and other rights of holders of Common Stock.

        Volatility of Stock Price and Dilutive Impact of Employee Stock Options    The Company believes that factors such as announcements of developments related to the Company's business, fluctuations in the Company's 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 securities of the Company into the marketplace, an outbreak or escalation of hostilities, announcements of technological innovations or new products or enhancements by the

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Company or its competitors, developments in patents or other intellectual property rights and developments in the Company's relationships with its customers and suppliers could cause the price of the Company's Common Stock to fluctuate, perhaps substantially. The market price of the Company's Common Stock may continue to experience significant fluctuations in the future, including fluctuations that may be unrelated to the Company's performance.

        As of March 3, 2003, the Company had approximately 5.2 million stock options outstanding. Among other determinants, the market price of the Company's stock has a major bearing on the number of stock options outstanding that are included in the weighted-average shares used in determining the Company's net income (loss) per share. During periods of extreme volatility, the impact of higher stock prices can have a materially dilutive effect on the Company's net income (loss) per share (diluted). Additionally, options are excluded from the calculation of net income (loss) per share when the Company has a net loss or when the exercise price of the stock option is greater than the average market price of the Company's Common Stock, as the impact of the stock options would be anti-dilutive.

        Terrorist Attacks and Threats, and Government Responses Thereto, May Negatively Impact All Aspects of Our Operations, Revenues, Costs and Stock Price    Terrorist attacks in the United States and elsewhere, and government responses thereto, 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 the Company's Common Stock and may limit the capital resources available to the Company or its 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. 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.

Information Available on Company Web-site

        The Company's web-site is located at www.ultratech.com. The Company makes available, free of charge, through its web-site, its annual report on Form 10-K, quarterly reports on 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 with the SEC.

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ITEM 2.    PROPERTIES

        The Company maintains its headquarters and manufacturing operations in San Jose, California in two leased facilities, totaling approximately 177,000 square feet, which contain general administration and finance, marketing and sales, customer service and support, manufacturing and research, development, and engineering. The leases for these facilities expire at various dates from March 2010 to January 2011. The Company also leases two sales and support offices in the United States in Woburn, Massachusetts and Austin, Texas under leases with terms expiring between 11 months and three years from December 31, 2002. The Company maintains offices outside the United States in Taiwan, the Philippines, Japan, Korea, France, Germany and the United Kingdom, with terms expiring between one month and thirteen years from December 31, 2002. The Company believes that its existing facilities will be adequate to meet its currently anticipated requirements and that suitable additional or substitute space will be available as needed.

ITEM 3.    LEGAL PROCEEDINGS

        On February 29, 2000, in the U.S. District Court of Virginia, the Company filed patent infringement lawsuits against Nikon, Canon and ASML. In April 2000, the Company reached a settlement with Nikon and in September 2001, the Company reached a settlement with Canon. The patent litigation case against ASML is ongoing. The court has made a preliminary determination that ASML does not infringe the patent. The Company intends to appeal this preliminary determination of the court. On October 12, 2001, the Company was sued in the District Court in Massachusetts for alleged infringement of certain patents owned by Silicon Valley Group, Inc. ("SVG"), a company acquired by ASML. The Company is in the process of defending against this claim and believes the claim is without merit.

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

        No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2002.

Executive Officers of the Registrant

        As of December 31, 2002, the executive officers of the Company, who are appointed by and serve at the discretion of the Board of Directors, were as follows:

        Mr. Zafiropoulo founded the Company in September 1992 to acquire certain assets and liabilities of the Ultratech Stepper Division (the "Predecessor") of General Signal Technology Corporation ("General Signal") and, since March 1993, has served as Chief Executive Officer and Chairman of the Board. Additionally, Mr. Zafiropoulo served as President of the Company from March 1993 to March 1996 and from May 1997 until April 1999. Mr. Zafiropoulo resumed the position of President in April 2001. Between September 1990 and March 1993, he was President of the Predecessor. From February 1989 to September 1990, Mr. Zafiropoulo was President of General Signal's Semiconductor Equipment Group International, a semiconductor equipment company. From August 1980 to February 1989, Mr. Zafiropoulo was President and Chief Executive Officer of Drytek, Inc., a plasma

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dry-etch company that he founded in August 1980, and which was later sold to General Signal in 1986. From July 1987 to September 1989, Mr. Zafiropoulo was also President of Kayex, a semiconductor equipment manufacturer, which was a unit of General Signal. From July 2001 to July 2002, Mr. Zafiropoulo served as Vice Chairman of SEMI (Semiconductor Equipment and Materials International), an international trade association representing the semiconductor, flat panel display equipment and materials industry. From July 2002, Mr. Zafiropoulo has served as Chairman of SEMI; and Mr. Zafiropoulo has been on the Board of Directors of SEMI since July 1995. In addition, Mr. Zafiropoulo also serves on the Board of Directors of Advanced Energy Industries, Inc., a leading manufacturer of power conversion and control systems.

        Mr. Wright has served as Senior Vice President, Finance, Chief Financial Officer and Secretary since joining the Company on June 1, 1999. From May 1997 to May 1999, Mr. Wright served as Executive Vice President, Finance and Chief Financial Officer of Spectrian Corporation, a radio frequency (RF) amplifier company. From November 1994 through May 1997, Mr. Wright was Senior Vice President of Finance and Administration, and Chief Financial Officer of Tencor Instruments until its acquisition by KLA Instruments Corporation in 1997, which formed KLA-Tencor Corporation, and from December 1991 through October 1994, Mr. Wright was Vice President and Chief Financial Officer of Tencor Instruments.

        Mr. Denzel has served as Senior Vice President, Operations since January 2002. From December 1999 to December 2001, Mr. Denzel served as Vice President of Operations responsible for all Engineering and Manufacturing activities. From July 1996 to November 1999, Mr. Denzel served as the Vice President of Manufacturing. Prior to joining the Company, Mr. Denzel was Vice President at Trend Plastics Inc. from 1995 to 1996, responsible for Finance, Sales, Marketing, Human Resources and Information Systems. From 1993 to 1995, Mr. Denzel was the Director of Technology at the J_c-I-T Institute of Technology. Prior to that, Mr. Denzel worked in various positions at Watkins-Johnson Company, a semiconductor equipment, electronics and environmental services company.

        Mr. Smith has served as Senior Vice President, Worldwide Sales since September 2001. From January 2000 to September 2001, Mr. Smith served as Vice President of Worldwide Sales. From March 1999 to December 1999, Mr. Smith served as Director of Marketing, and from August 1997 to February 1999, he served as Director of International Marketing. From June 1997 to July 1997, Mr. Smith was the Director of International Business Development. From July 1992 to May 1997, Mr. Smith served as Director of Operations for the Company's Japan and Korea offices.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The following table sets forth, for the periods indicated, the range of high and low sale prices of the Company's Common Stock, as reported by the National Association of Securities Dealers, Inc.'s Automated Quotation System:

        The Company's Common Stock is traded on the Nasdaq National Market® system under the symbol UTEK. The market prices per share represent the highest and lowest sale prices for the Company's Common Stock on the Nasdaq National Market during each fiscal quarter. As of March 17, 2003, the Company had approximately 346 stockholders of record.

        The Company's fiscal quarters in 2002 ended on March 30, 2002, June 29, 2002, September 28, 2002 and December 31, 2002, and the Company's fiscal quarters in 2001 ended on March 31, 2001, June 30, 2001, September 29, 2001 and December 31, 2001, respectively. For convenience of presentation, the Company's 2002 fiscal quarters have been shown as ending on March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, and the Company's 2001 fiscal quarters have been shown as ending on March 31, 2001, June 30, 2001, September 30, 2001 and December 31, 2001.

        The Company has not paid cash dividends on its Common Stock since inception, and its Board of Directors presently plans to reinvest the Company's earnings in its business. Accordingly, it is anticipated that no cash dividends will be paid to holders of Common Stock in the foreseeable future.

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ITEM 6.    SELECTED FINANCIAL DATA

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Quarterly Data

(a)

Gross profit (loss) in 1998 includes special charges of $15,231,000 and $11,177,000 in the third and fourth quarters, respectively, relating primarily to the write-down of inventories and provisions for estimated losses on purchase commitments. Results of operations in 1998 include a charge of $12,566,000 in the second quarter, or $0.60 per share—basic and diluted, to reflect acquired in-process research and development incurred in conjunction with the acquisition of ISI, and a related adjustment to operations of $7,458,000 in the fourth quarter, or $0.35 per share, to reduce the in-process research and development charge as a result of the final purchase price allocation. Additionally, results of operations in 1998 include special charges of $5,775,000 and $5,400,000 in the third and fourth quarters, respectively, reflecting provisions for doubtful accounts and leases receivable, provisions for sales returns and allowances and costs associated with a reduction in the Company's workforce.

(b)

Operating income (loss) in 2000 includes special charges of $7,984,000 and $1,686,000 in the second and third quarters, respectively, relating to the shutdown of the Company's UltraBeam unit. Net income (loss) in 2000 includes a non-operating gain of $15,983,000 in the third quarter, relating to the sale of land and income taxes of $2,433,000 relating to the sale of land and other special items. Additionally, net income in 2000 includes a charge of $18,883,000 in the first quarter related to the cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements."

(c)

Operating income (loss) in 2001 includes third and fourth quarter charges of $10,993,000 and $77,000, respectively, or $0.50 per share—basic and diluted, related to cost of discontinued products, and $11,988,000 and $290,000, respectively, or $0.55 per share—basic and diluted, related to restructure of operations.

(d)

Operating income (loss) in 2002 includes third and fourth quarter charges of: $5,733,000 and ($428,000), respectively, or $0.23 per share—basic and diluted, related to cost of inventory writedown; $2,169,00 and ($744,000), respectively, or $0.06 per share—basic and diluted, related to cost of discontinued products; and $4,297,000 and ($207,000), or $0.18 per share—basic and diluted, related to restructure of operations.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

        Certain of the statements contained in this report may be considered 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 cyclicality in the nanotechnology and semiconductor industries, delays, deferrals and cancellations of orders by customers, customer concentration, dependence on new product introductions and commercial success of any new products, integration and development of the Verdant operations, pricing pressures, competition, lengthy sales cycles for the Company's systems, ability to volume produce systems and meet customer requirements, the mix of products sold, sole or limited sources of supply, international sales, manufacturing inefficiencies and absorption levels, risks associated with introducing new technologies, inventory obsolescence, economic and political conditions worldwide, delays in collecting accounts receivable, extended payment terms, changes in technologies, and any adverse effects of worldwide terrorist attacks on the economy in general or our business in particular.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and 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 on-going basis, the Company evaluates its estimates, including those related to inventories, warranty obligations, purchase order commitments, bad debts, income taxes, intangible assets, restructuring and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed 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.

        The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The Company has reviewed these policies with its Audit Committee.

Revenue Recognition

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

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        Revenue from spare parts sales is generally recognized upon shipment. Deferred income related to service revenue is recognized ratably over the life of the related service contract. Deferred income relative to the Company's licensing activities is recognized over the estimated useful life of the licensed technologies, or the contract period of any technology transfer support arrangements.

Inventories and Purchase Order Commitments

        The Company estimates and reserves for the effects on inventory and purchase order commitments of obsolescence and unrealizable carrying values based upon estimates of future demand for its products and market conditions. With the exception of certain long lead-time items, principally optical components, the Company presently records reserves for inventories and purchase order commitments in excess of 18 months of production demand. Due to the cyclical nature of the Company's business, during periods of peak demand, the Company has shortened this production outlook to 12 months of production demand. Had the Company used a 12-month production demand horizon as of December 31, 2002, additional inventory and purchase order commitment reserves of $0.8 million would be required. Should actual production demand differ from management's estimates, revisions to inventory write-downs and purchase order commitment reserves would be required.

Warranty Obligations

        The Company provides for the estimated cost of its product warranties at the time revenue is recognized. The Company's warranty obligation is affected by product failure rates, material usage rates and the efficiency by which the product failure is corrected. Should actual product failure rates, material usage rates and labor efficiencies differ from the Company's estimates, revisions to the estimated warranty liability would be required.

Bad Debt

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

Deferred Taxes

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

RESULTS OF OPERATIONS

        Factors that have caused results to fluctuate significantly in the past and most likely will continue to significantly impact results in the future, and could cause actual results to differ materially, include the following: cyclicality in the Company's served markets, including the current severe downturn in the semiconductor and nanotechnology industries; delays, deferrals and cancellations of orders by customers; customer concentration; high degree of industry competition; market acceptance of new products and enhanced versions of the Company's existing products; lengthy and costly development cycles for advanced lithography and laser thermal processing technologies and applications; integration and development of Verdant operations; mix of products sold; timing of new product announcements

24

and releases by the Company or its competitors; expiration of technology support and licensing arrangements, and the resulting adverse impact on the Company's licensing revenues; product discounts; changes in pricing by the Company, its competitors or suppliers; timing and degree of success of technologies licensed to outside parties; product concentration and lack of product revenue diversification; outcome of litigation; lengthy sales and manufacturing cycles and the pattern of capital spending by customers, including the timing of system acceptances; inventory obsolescence; manufacturing inefficiencies and the ability to volume produce systems; the ability and resulting costs to attract or retain sufficient personnel to achieve the Company's targets for a particular period; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon the Company attaining profitability and the market price of the Company's stock; sole or limited sources of supply; international sales; rapid technological change and the importance of timely product introductions; future acquisitions; changes to financial accounting standards; intellectual property matters; environmental regulations; any adverse effects of worldwide terrorist attacks on the economy in general or on our business in particular; political and economic instability throughout the world; business interruptions due to natural disasters or utility failures; and regulatory changes; and the other risk factors listed in this filing and other Company filings with the SEC. The Company undertakes no obligation to update any of its disclosures to reflect such future events.

        The Company derives a substantial portion of its total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $900,000 to $3.6 million for the Company's 1X steppers. 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 the Company's net sales and operating results for any particular period.

        The Company's backlog at the beginning of a period typically does not include all of the sales needed to achieve the Company's 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, the Company's net sales and operating results for a period have been and will continue to be dependent upon the Company obtaining orders for systems to be shipped and accepted in the same period in which the order is received. The Company's business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and customer acceptance during that period. Furthermore, a substantial portion of the Company's shipments has historically been realized near the end of each quarter. Delays in installation and customer acceptance due, for example, to the inability of the Company 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 time, may cause net sales in a particular period to fall significantly below the Company's expectations, which may materially adversely affect the Company's operating results for that period. 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 the Company's expectations, materially adversely affecting the Company's operating results for that period. In particular, the long manufacturing cycles of the Company's Saturn Spectrum family of wafer steppers, laser thermal processing systems and the long lead time for lenses and other materials, could cause shipments of such products to be delayed from one quarter to the next, which could materially adversely affect the Company's financial condition and results of operations for a particular quarter.

        Additionally, the need for continued expenditures for research and development, capital equipment, ongoing training and worldwide customer service and support, among other factors, will

25

make it difficult for the Company to reduce its operating expenses in a particular period if the Company fails to achieve its net sales goals for the period.

        The Company experienced weakness in its business during the three-month period ended September 30, 2002, as system revenue levels were significantly below that of the preceding and successive periods. The Company believes this weakness may have been seasonal. The Company's present sales goal for the three-month period ending September 30, 2003 requires that a substantial number of new system orders, with near-term delivery dates, be obtained. The Company's business has, in prior years, been subject to seasonality, although the Company believes such seasonality had been masked in more recent years by strong cyclical trends within the semiconductor and nanotechnology industries.

Net sales

2002 vs. 2001

        Net sales consist of revenues from system sales, spare parts sales, service and licensing of technologies. For the year ended December 31, 2002, net sales were $68.5 million, a decline of 48% as compared with $130.7 million for the year ended December 31, 2001. System sales decreased 51%, to $44.2 million, on a unit volume decline of 58%. Excluding reduction lithography systems, which have been discontinued by the Company, system sales decreased 52% to $37.4 million, on a unit volume decline of 55%. The weighted-average selling prices of systems sold, exclusive of reduction systems, declined 13%, due primarily to a higher proportion of refurbished systems sold in 2002 and generally weaker market conditions. In 2002, refurbished systems accounted for approximately 45% of units sold. Geographically, the decline in unit volumes was attributable to 40% or greater declines in all regions the Company serves, with the steepest decline (78%) occurring in Europe. On a market segment basis, the decline in unit volumes was primarily attributable to a lack of demand from nanotechnology and semiconductor customers.

        Spare part sales decreased 37%, to $8.2 million, primarily as a result of decreased utilization of plant capacity within the semiconductor industry and certain system upgrades that occurred in 2001.

        Revenues from services declined 24%, to $10.9 million, primarily as a result of decreased utilization of plant capacity within the semiconductor industry.

        Revenues from licensing and licensing support arrangements declined to $5.2 million, as compared with $12.7 in 2001, as a result of a large technology support agreement that expired in February 2002. The Company presently anticipates that revenues from licensing and licensing support arrangements will remain at approximately $0.9 million per quarter for 2003.

        At December 31, 2002, the Company had approximately $10.5 million of deferred revenue resulting from products shipped but not yet installed and accepted, as compared with $6.0 million at December 31, 2001. This resulted in a net increase in deferred product and services income of approximately $2.7 million. During 2002, deferred license income decreased by $5.2 million, to $8.5 million, as a result of amortization of proceeds received in prior periods. Amortization of license income results in current period license revenue. Deferred income related to the Company's products is recognized upon satisfying the contractual obligations for installation and/or customer acceptance. Deferred income related to service revenue is recognized over the life of the related service contract. Deferred income relative to the Company's licensing activities is recognized over the estimated useful life of the licensed technologies, or the period of any technology transfer support arrangements.

        On a product market application basis, system sales to the semiconductor industry were $36.8 million for the year ended December 31, 2002, a decrease of 36% as compared with system sales of $57.2 million in 2001. System sales to the semiconductor industry included $6.8 million and $12.7 million of reduction stepper systems for the years ended December 31, 2002 and 2001,

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respectively; including a single system sale of $6.7 million for the quarter ended December 31, 2002. This decline was primarily attributable to the severely depressed economic environment in the semiconductor industry in particular, and the economy as a whole. The Company discontinued its XLS reduction stepper platform in September 2001 and has since suspended development of its advanced reduction lithography systems. System sales to the nanotechnology market were $7.4 million for the year ended December 31, 2002, a decrease of 78% as compared with sales of $33.4 million in 2001, primarily as a result of lower demand from microsystems and optical networking customers.

        For the year ended December 31, 2002, international net sales were $33.2 million, or 48% of total net sales, as compared with $67.0 million, or 51% of total net sales for 2001. The Company's operations in foreign countries are not generally subject to significant exchange rate fluctuations, principally because sales contracts for the Company's systems are generally denominated in U.S. dollars. In Japan, however, orders are often denominated in Japanese yen. This subjects the Company to the risk of currency fluctuations. The Company attempts to mitigate this exposure through the use of foreign exchange contracts; however, this effort can be costly and there can be no assurance of the success of any such efforts. International sales expose the Company to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which, in turn, impact the relative cost of ownership of the Company's products. (See "Additional Risk Factors: International Sales").

        Our served markets have been and are presently experiencing severe downturns due, in part, to the macro-economic conditions facing the U.S. and world economies. Although the Company's level of new orders exceeded the Company's revenue during the year ended December 31, 2002, the Company also experienced significant levels of order cancellations during the year. Additionally, the Company removed from backlog certain system orders that it believes may not be shipped during the next twelve months, as required by Company policy. This decision was predicated on recent customer announcements of declining financial performance and cutbacks in planned capital expenditures. As a result of these cancellations and restructurings, the Company's backlog at December 31, 2002 declined relative to levels at December 31, 2001.

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

        The Company presently expects that net sales for the quarter ending March 31, 2003 will be flat to slightly higher than net sales in the comparable period in 2002. The Company anticipates that it will experience operating and net losses for the three-month period ending March 31, 2003.

        Should further declines in the Company's outlook for 2003 and 2004 occur, the Company may be required to take additional steps to reduce its future operating expenses and may also require the Company to increase its inventory and purchase order commitment reserve positions. These actions, if required, would materially adversely impact the Company's financial condition and results of operations.

        Because the Company's net sales are subject to a number of risks, including intense competition in the capital equipment industry, uncertainty relating to the timing and market acceptance of the Company's products and the condition of the macro-economy and the semiconductor industry, the Company may not exceed or maintain its current or prior level of net sales for any period in the future. Additionally, the Company believes that the market acceptance and volume production of its Saturn Spectrum 3^e, its 300mm offerings, its laser thermal processing systems and its 1000 series family of wafer steppers, are of critical importance to its future financial results. To the extent that these

27

products do not achieve 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, customer acceptances, or any other reason, the Company's business, financial condition and results of operations would be materially adversely affected.

2001 vs. 2000

        For the year ended December 31, 2001, net sales were $130.7 million, a decrease of 11% as compared with net sales of $146.7 million for the year ended December 31, 2000. System sales decreased 18%, to $90.6 million, on a unit volume decline of 35%. System sales were favorably impacted by a 10% increase in weighted-average selling prices and a change in product mix in favor of the Company's more expensive models. The decline in unit volume was primarily attributable to weaker demand from semiconductor customers throughout the world and thin film head customers in Asia, excluding Japan, partially offset by higher demand from micro-machining and optical networking customers during the first half of 2001.

        Spare part sales decreased 1%, to $13.1 million.

        Revenues from services declined 17%, to $14.3 million, primarily as a result of decreased utilization of plant capacity within the semiconductor industry.

        Revenues from licensing and licensing support arrangements increased to $12.7 million, from $6.0 million in 2000, as a result of agreements entered into in late 2000 and 2001.

        At December 31, 2001, the Company had approximately $6.0 million of deferred revenue resulting from products shipped but not yet installed and accepted, as compared with $15.7 million at December 31, 2000, resulting in a net decrease in deferred product and service income of approximately $3.2 million. During the year ended December 31, 2001, deferred license income decreased by $8.7 million, to $13.7 million, as a result of amortization of proceeds received in 2000, partially offset by certain proceeds received in 2001.

        On a product market application basis, system sales to the semiconductor and semiconductor packaging industries were $57.2 million for the year ended December 31, 2001, a decrease of 41% as compared with system sales of $96.8 million in 2000. System sales to the nanotechnology market were $33.4 million, an increase of 149% as compared with sales of $13.4 million in 2000. This increase was primarily attributable to the sale of the Company's systems to micro-machining and optical networking device customers, partially offset by fewer sales of the Company's systems to thin film head customers.

        For the year ended December 31, 2001, international net sales were $67.0 million, or 51% of total net sales, as compared with $79.3 million, or 54% of total net sales for 2000. The decline in international net sales, both in terms of absolute dollars and as a percentage of total net sales, was primarily attributable to decreased sales of the Company's Saturn Spectrum 3 Wafer Stepper to semiconductor packaging companies in Japan. The Company anticipates that a substantial portion of its overall sales will continue to come from sales of its Saturn Spectrum 3^e wafer stepper to semiconductor packaging manufacturers in the Japan and Asia, excluding Japan territories.

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Gross profit

2002 vs. 2001

        The Company's gross profit as a percentage of net sales, or gross margin, was 21.7% for the year ended December 31, 2002, as compared with 34.3% for the year ended December 31, 2001, inclusive of charges for the cost of inventory writedown of $5.3 million for the year ended December 31, 2002, and the cost of discontinued products of $1.4 million and $11.1 million for the years ended December 31, 2002 and 2001, respectively. On a comparative basis, gross margins, exclusive of the aforementioned charges, were adversely affected by the lack of capacity utilization. Lack of capacity utilization results in higher levels of unabsorbed overhead. This adverse impact on gross margins from these lower production levels was partially offset by cost savings associated with the closing of the Company's Wilmington, Massachusetts facility and by other cost reduction measures taken in the second half of 2001. Gross margins for the quarter ended December 31, 2002 were adversely impacted by recording $0.9 million of non-cash expenses related to prior periods, pursuant to rent-averaging requirements under certain of the Company's facility leases. The Company does not believe these amounts are material to the periods in which they should have been recorded, nor does it believe the prospective correction of such amounts during the year ended December 31, 2002 is material to its consolidated operating results for such year.

        Exclusive of licensing and licensing support revenues, gross margin was 15.2% for the year ended December 31, 2002, as compared with 27.2% for the year ended December 31, 2001, inclusive of the aforementioned charges.

        In September 2002, as a direct result of worsening conditions in the semiconductor industry in particular, and the general economy as a whole, the Company discontinued or suspended development of certain advanced reduction lithography programs, including 157nm, and discontinued certain 1X products and platforms. Additionally, the Company significantly reduced its revenue outlook for 2003. As a result, the Company recognized inventory write-downs of $5.6 million and additional purchase order commitment reserves of $1.1 million for the year ended December 31, 2002.

        In the three-month period ended September 30, 2001, as a direct result of dramatically worsening conditions in the semiconductor industry, the Company decided to discontinue its XLS reduction stepper production and focus its efforts on developing next-generation platforms for its reduction technologies, principally 157nm. As a result of this decision, the Company recognized inventory write-downs of $8.5 million and additional purchase order commitment reserves of $2.5 million.

        The Company's 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 mix of products sold; inventory and open purchase commitment reserve provisions; the rate of capacity utilization; product discounts and competition in the Company's targeted markets; technology support and licensing revenues, which have little, if any, associated cost of sales; non-linearity of shipments during the quarter; 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

29

acceptance; the percentage of international sales, which typically have lower gross margins than domestic sales principally due to higher field service and support costs; and the implementation of subcontracting arrangements.

        The Company believes that gross margin for the quarter ending March 31, 2003 will be flat, as compared to the comparable period in 2002. Should further erosion to the Company's business occur, the Company might incur a higher risk of inventory obsolescence and excess purchase commitments, which would materially adversely impact results of operations. Additionally, increased price-based competition may continue to contribute to further erosion of gross margin.

        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 the Company's 300mm offerings, its Saturn Spectrum 3^e or the Verdant laser thermal processing system, the Company's business, financial condition and results of operations would be materially adversely affected.

2001 vs. 2000

        The Company's gross profit as a percentage of net sales, or gross margin, was 34.3% for the year ended December 31, 2001, as compared with 39.3% for 2000, inclusive of a charge of $11.1 million for the cost of discontinued products for the year ended December 31, 2002. On a comparative basis, exclusive of the aforementioned charge, gross margin was favorably affected in 2001 by higher weighted-average selling prices, increased licensing and licensing support revenues (which have no corresponding cost of sales) and cost reduction measures.

        Exclusive of licensing and licensing support revenues, gross margin was 27.2% for the year ended December 31, 2001, as compared with 36.7% for 2000, inclusive of the aforementioned charge. Gross margin for 2001 was adversely affected by a charge of $11.1 million relating to the discontinuance of the Company's XLS product platform, a shift in product mix, and production and after-sales inefficiencies caused by lower production and shipment levels.

        In the three-month period ended September 30, 2001, as a direct result of dramatically worsening conditions in the semiconductor industry, the Company decided to discontinue its XLS reduction stepper production and focus its efforts on developing next-generation platforms for its reduction technologies, principally 157nm. As a result of this decision, the Company recognized inventory write-downs of $8.5 million and additional purchase order commitment reserves of $2.5 million.

Research, development and engineering expenses

2002 vs. 2001

        The Company's research, development, and engineering expenses were $23.5 million for the year ended December 31, 2002, as compared to $25.8 million for the year ended December 31, 2001. The year-over-year decline in spending was primarily attributable to the discontinuance of the Company's XLS reduction stepper platform and to other cost reduction measures implemented in the second half of 2001 and during 2002. Research, development, and engineering expenses for the quarter ended December 31, 2002 were adversely impacted by recording $0.5 million of non-cash expenses related to prior periods, pursuant to rent-averaging requirements under certain of the Company's facility leases. The Company does not believe these amounts are material to the periods in which they should have been recorded, nor does it believe the prospective correction of such amounts during the year ended December 31, 2002 is material to its consolidated operating results for such year.

        The Company continues to invest significant resources in the development and enhancement of its laser thermal processing systems and technologies and its 1X optical products and related technologies. The Company presently expects that, as a result of the cost reduction measures taken in

30

September 2002, the absolute dollar amount of research, development and engineering expenses for the quarter ending March 31, 2003 will be lower than expenses incurred for the comparable period in 2002.

2001 vs. 2000

        The Company's research, development and engineering expenses were $25.8 million for the year ended December 31, 2001, as compared with $26.8 million for 2000. The decline in spending was primarily attributable to the shutdown of the Company's UltraBeam operations, which occurred early in the second quarter of 2000, and cost containment measures implemented in 2001, partially offset by increased spending on the Company's laser thermal processing and 1X and advanced reduction stepper technologies.

Amortization of intangible assets

2002 vs. 2001

        Amortization of intangible assets was $0.4 million for the year ended December 31, 2002, as compared with $1.5 million for the year ended December 31, 2001. The year-over-year reduction in amortization was a direct result of impairment charges recognized in the quarter ended September 30, 2001 relating to certain intangible assets (see "Restructure of operations").

2001 vs. 2000

        Amortization of intangible assets was $1.5 million for the year ended December 31, 2001, as compared with $2.1 million for 2000. The reduction in amortization was a direct result of impairment charges recognized in the quarter ended September 30, 2001 relating to certain intangible assets (see "Restructure of operations").

Selling, general and administrative expenses

2002 vs. 2001

        Selling, general, and administrative expenses were $23.4 million for the year ended December 31, 2002, as compared with $29.7 million for the year ended December 31, 2001. As a percentage of net sales, selling, general, and administrative expenses increased to 34.1%, as compared with 22.7% in 2001. The year-over-year decline, in absolute dollars, was primarily attributable to cost containment measures implemented in the second half of 2001 and during 2002, and lower sales and support expenses, including sales commissions, typically associated with a decline in sales. These cost containment measures included approximately $0.6 million of executive pay reductions, which ceased as of December 31, 2002. Selling, general, and administrative expenses for the quarter ended December 31, 2002 were adversely impacted by recording $0.3 million of non-cash expenses related to prior periods, pursuant to rent-averaging requirements under certain of the Company's facility leases. The Company does not believe these amounts are material to the periods in which they should have been recorded, nor does it believe the prospective correction of such amounts during the year ended December 31, 2002 is material to its consolidated operating results for such year.

        The Company presently anticipates that selling, general and administrative expenses for the three-month period ending March 31, 2003 will be lower than the comparable period in 2002, due primarily to the cost reduction measures taken in September 2002.

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2001 vs. 2000

        Selling, general and administrative expenses were $29.7 million for the year ended December 31, 2001, as compared with $30.3 million for 2000. As a percentage of net sales, selling, general and administrative expenses increased to 22.7% in 2001, as compared with 20.6% in 2000. The decline, in absolute dollars, was primarily attributable to cost containment measures implemented in 2001 and lower sales and support expenses, including sales commissions, typically associated with a decline in sales, partially offset by higher legal and consulting expenses incurred in conjunction with the Company's restructuring and efforts toward expansion into China.

Restructure of operations

        In September 2002, in response to worsening conditions in the semiconductor industry in particular, and the general economy as a whole, the Company decided to reduce its workforce by approximately 15% and to cease or suspend activities related to certain engineering and administrative initiatives. As a result of this decision, the Company recognized a restructuring charge of $4.3 million, or $0.19 per share for the three-month period ended September 30, 2002. The Company reduced this charge by $0.2 million during the three-month period ended December 31, 2002, primarily as a result of canceling its plans to exit a certain building and an adjustment of its international severance costs. Of the total net charge for the year ended December 31, 2002 of $4.1 million, the cash component included employee severance costs of $0.9 million, contract termination fees of $0.2 million and facility closure costs of $0.1 million. The non-cash component of this charge included $2.5 million of impairment to the carrying value of equipment and leasehold improvements and $0.3 million of impairment to prepaid expenses and other current assets. As of December 31, 2002, the accrued but unpaid amount of these restructuring costs was $0.3 million.

        In September 2001, the Company reached a decision to consolidate its manufacturing operations and eliminate approximately 20% of its workforce. As a result of this decision, the Company recognized a restructuring charge of $12.0 million, or $0.54 per share (diluted) in the quarter ended September 30, 2001. Additionally, the Company recognized restructuring charges of $0.3 million, or $0.01 per share (diluted) in the quarter ended December 31, 2001, primarily related to employee severance costs of $0.6 million (from additional personnel actions) and higher fixed asset disposal costs of $0.4 million, partially offset by revised facility closure and other cost estimates of $0.7 million. Of the full-year charge of $12.3 million, non-cash components included a $4.1 million impairment charge for intangible assets related to the Company's XLS reduction product platform acquired in 1998 and a $1.5 million impairment charge for fixed assets disposed of in conjunction with the consolidation of manufacturing facilities. The cash components of this charge included $4.0 million for estimated expenditures related to the closure of facilities, $2.5 million for employee severance costs and $0.1 million of other restructuring costs. As of December 31, 2002, the amount of restructuring costs accrued but unpaid was $2.2 million.

Shutdown of operations

        During the quarter ended June 30, 2000, the Company shut down the operations of its UltraBeam unit. As a direct result of this decision, the Company recognized a charge in the quarter ended June 30, 2000 of $8.0 million, or $0.38 per share (diluted). During the quarter ended September 30, 2000, the Company recognized an additional charge of $1.7 million, or $0.08 per share (diluted) primarily attributed to revised estimates of amounts to be realized upon the disposition of operating assets. Of the full-year charge of $9.7 million, approximately $6.8 million related to the disposition of operating and capital assets, $0.4 million related to termination benefits associated with the termination of 14 employees, $2.3 million related to facilities and other non-employee amounts paid for shutdown and $0.2 million related to other liabilities. There were no significant revisions to the original

32

termination provisions established by the Company. At December 31, 2002, there were no outstanding payables or accruals associated with this charge.

Gain on sale of land

        In September 2000, the Company exercised an option it held to purchase 6.34 acres of undeveloped land it leased in San Jose, California and sold this property to a third party. This transaction resulted in a net gain of $16.0 million, or $0.75 per share (diluted), before related income taxes. In conjunction with this transaction, the Company had collateralized a loan payable by the former owner to a third party with securities valued at $5.5 million. Upon completion of this transaction, the restriction on these securities was removed.

Interest and other income, net

        Interest and other income, net, which consists primarily of interest income, was $6.4 million for the year ended December 31, 2002, as compared with $7.9 million for 2001 and $7.6 million for 2000. Interest and other income, net, for the three month period ended December 31, 2002, included approximately $0.2 million of interest income related to an income tax refund received during the period.

        The decrease, relative to 2001, was primarily attributable to lower interest rates on the Company's investments and lower average invested balances. The increase in interest and other income, net, in 2001, relative to levels achieved in 2000, was primarily related to interest income from higher invested balances, partially offset by lower interest rates.

        The Company presently maintains an investment portfolio with a weighted-average maturity of less than one year. Consequently, changes in short-term interest rates have a major impact on the Company's interest income. Future changes are expected to have a similar impact. The Company presently expects that interest and other income, net, for the three-month period ending March 31, 2003, will be significantly lower than levels achieved in the comparable period in 2002, primarily as a result of lower interest rates and lower invested balances.

Income tax expense

        For the year ended December 31, 2002, the Company recorded a benefit income tax provision of $4.9 million. The benefit provision relates to resolution of the Company's IRS audit for the years 1993 through 1996 and a carry back of losses to recover prior years' federal alternative minimum taxes of $1.2 million. The ability to recover the prior years' alternative minimum taxes is due to a recent US federal law change, allowing for the recovery of these amounts. In conjunction with the carry back of losses to recover prior years' federal alternative minimum taxes, the Company has recorded income taxes receivable of $1.2 million as of December 31, 2002.

        The Company recognized income taxes of $1.0 million during the year ended December 31, 2001, related primarily to foreign tax requirements. There was no income tax benefit recognized on the Company's pre-tax losses in 2001 and 2000, due to uncertainty related to the utilization of its net operating loss carry-forward. The Company recognized income taxes of $2.4 million during 2000. This provision for 2000 consists primarily of foreign withholding taxes, as well as state and federal minimum taxes.

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

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        Income taxes can be affected by estimates of whether, and within which jurisdictions, future earnings will occur and how and when cash is repatriated to the United States, combined with other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with the Company's 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. The Company believes it has adequately provided for any reasonably foreseeable outcome related to these matters, and it does not anticipate any material earnings impact from their ultimate resolutions.

LIQUIDITY AND CAPITAL RESOURCES

        Net cash used in operating activities was $17.8 million for the year ended December 31, 2002, as compared with $7.0 million during the year ended December 31, 2001. Cash used in operating activities in 2002 was primarily attributable to the Company's net loss of $25.4 million and a net change in operating assets and liabilities of $11.2 million, partially offset by non-cash charges to income of $18.8 million. Included in both the net loss and non-cash charges to income for the year ended December 31, 2002 is $5.6 million relating to the write-off of inventories, resulting from worsening conditions in the semiconductor industry and the discontinuance of certain of the Company's product platforms, and $2.5 million of impairment charges for fixed assets pursuant to the Company's restructure of operations in September 2002. The $11.2 million net change in operating assets and liabilities was primarily a result of a decline in deferred license income of $5.2 million, an increase in inventories of $4.7 million, a decline of $3.9 million in income taxes payable and a decline in accounts payable of $2.4 million, partially offset by an increase in deferred rent of $3.1 million and an increase in deferred product and services income of $2.7 million.

        The Company believes that because of the relatively long manufacturing cycle of certain of its systems, particularly newer products, the Company's inventories will continue to represent a significant portion of working capital. Currently, the Company is devoting significant resources to the development, introduction and commercialization of its Verdant laser thermal processing system and to the volume production of its Saturn Spectrum 3^e and 300mm wafer steppers. The Company currently intends to continue to develop these products and technologies during the remainder of 2003, 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 further develop, produce and support these new products. Additionally, gross profit margins, inventory and capital equipment levels may be further adversely impacted in the future by costs associated with the initial production of these new product lines. These costs include, but are not limited to, additional manufacturing overhead, costs of demonstration systems and facilities, costs associated with managing multiple sites and the establishment of additional after-sales support organizations. Additionally, there can be no assurance that operating expenses will not increase, relative to sales, as a result of adding additional marketing and administrative personnel, among other costs, to support the Company's new products. If the Company is unable to achieve significantly increased net sales or if its sales fall below expectations, the Company's cash flow and operating results will be materially adversely affected until, among other factors, costs and expenses can be reduced. The failure of the Company to achieve its sales targets for these new products could result in additional inventory write-offs and asset impairment charges, either of which could materially adversely impact the Company's results of operations.

        The semiconductor and nanotechnology industries have been and are presently experiencing a severe downturn due, in part, to macro-economic conditions facing the U.S. and world economies. As a result, the Company has experienced significantly lower order rates for its systems and this trend may continue in the near-term. Prolonged weakness in the Company's business would continue to place the Company's inventories at a greater risk of obsolescence. Lower demand for the Company's systems may continue to lead to additional inventory write-offs and purchase commitment reserves, which would

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materially adversely impact the Company's results of operations. Additionally, worsening business conditions increase the likelihood of further restructuring of operations and impairments to the Company's assets, either of which would have a material adverse impact on results of operations.

        During the year ended December 31, 2002, net cash used in investing activities was $38.9 million, attributable to a net increase in available-for-sale securities of $34.1 million and capital expenditures of $4.8 million.

        Cash generated by financing activities was $12.2 million during the year ended December 31, 2002, attributable to net borrowings of $9.8 million and $2.4 million in proceeds received from the issuance of Common Stock under the Company's stock option plans and its employee stock purchase plans.

        At December 31, 2002, the Company had working capital of $152.2 million. The Company's principal source of liquidity at December 31, 2002 consisted of $157.5 million in cash, cash equivalents and short-term investments.

        The Company has approximately $7.6 million of retained earnings in its foreign subsidiaries. Possible adverse tax consequences associated with repatriating these funds may effectively restrict their use to cash requirements in those specific jurisdictions.

        During 2002, the Company received proceeds of $3.2 million in conjunction with a sale/leaseback transaction. To provide additional security to the lessor, the Company granted a security interest in certain of its other equipment having a net book value of approximately $1.2 million at December 31, 2002. The Company recorded a deferred rent credit equal to the excess of the sale proceeds over the adjusted basis in the equipment sold. During the three-year term of this agreement, the deferred rent credit will be amortized as an offset to rental expense. At December 31, 2002, credits of $0.7 million and $1.1 million representing the short-term and long-term portions of deferred rent, respectively, were carried as liabilities on the Company's balance sheet.

        In September 2002, the Company entered into a line of credit agreement with a brokerage firm. Under the terms of this agreement, the Company may borrow funds at a cost equal to the current Federal funds rate plus 100 basis points (2.25% as of December 31, 2002). Certain of the Company's cash, cash equivalents and short-term investments secure borrowings outstanding under this facility. Funds are advanced to the Company under this facility based on pre-determined advance rates on the cash and securities held by the Company in this brokerage account. This agreement has no set expiration date and there are no loan covenants, other than the aforementioned collateral requirement. As of December 31, 2002, $9.0 million was outstanding under this facility, with a related collateral requirement of approximately $12.9 of the Company's cash, cash equivalents and short-term investments. Additionally, the Company had short-term borrowings of $0.8 million outstanding under other credit facilities.

        In January 2003, the Company's Board of Directors authorized the purchase of up to 5.0 million shares of the Company's Common Stock at prevailing market prices. As of March 17, 2003, the Company had not elected to repurchase shares under this arrangement. Should the Company decide to acquire its own shares in the open market, potentially large amounts of the Company's cash, cash equivalents and short-term investments would be required.

        The Company's off-balance sheet transactions consist of certain financial guarantees, both express and implied, related to product liability, infringement of intellectual property and latent product defects. Other than liabilities recorded pursuant to known product defects, at December 31, 2002, the Company did not record a liability associated with these guarantees, as the Company has little or no history of costs associated with such indemnification requirements.

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        The following summarizes the Company's contractual obligations at December 31, 2002, and the effect such obligations are expected to have on its liquidity and cash flows in future periods:

        At December 31, 2002, the Company had open purchase order commitments of approximately $25 million, primarily related to the purchase of inventories, equipment and leasehold improvements. The Company records reserves for purchase order commitments it deems in excess of normal operating requirements (see "Critical Accounting Policies and Estimates").

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

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

Foreign currency

        The Company uses foreign exchange contracts to hedge the risk that unremitted Japanese yen denominated receipts from customers for actual or forecasted sales of equipment after receipt of customer purchase orders may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, the Company attempts to hedge most of these Japanese yen denominated foreign currency

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exposures anticipated over the ensuing twelve-month period. At December 31, 2002, the Company had taken action to hedge approximately 100% of these Japanese yen denominated exposures. To hedge this exposure, the Company used foreign exchange forward contracts that generally have maturities of nine months or less, which generally will be rolled over to provide continuing coverage throughout the year. The Company often closes foreign exchange sale contracts by purchasing an offsetting purchase contract. At December 31, 2002, the Company had contracts for the sale of $2.4 million of foreign currencies at fixed rates.

Adoption of the Euro

        The introduction of a European single currency, the Euro, was initially implemented as of January 1, 1999, and the transition period continued through January 1, 2002. As of December 31, 2002, the adoption of the Euro had not had a material effect on the Company's foreign exchange and hedging activities or the Company's use of derivative instruments. While the Company will continue to evaluate the impact of the Euro introduction over time, based on currently available information, management does not believe that the introduction of the Euro currency will have a material adverse impact on the Company's financial condition or overall trends in results of operations.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk

        The Company's exposure to market risk due to potential changes in interest rates, relates primarily to the Company's investment portfolio, which consisted primarily of fixed interest rate instruments as of December 31, 2002. The Company maintains an investment policy designed to ensure the safety and preservation of its invested funds by limiting market risk and the risk of default.

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

        The following table presents the hypothetical changes in fair values in the financial instruments held by the Company at December 31, 2002, that are sensitive to changes in interest rates. These instruments are comprised of cash, cash equivalents, short-term investments and corporate equity securities. These instruments are held for purposes other than trading. The modeling techniques used measure the change in fair values arising from selected hypothetical changes in interest rates. Assumed market value changes to the Company's portfolio reflects immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (BPS), 100 BPS, and 150 BPS over a twelve-month time horizon. Beginning fair values represent the market principal plus accrued interest for financial reporting purposes at December 31, 2002. Ending fair values comprises the estimated market principal plus accrued interest at a twelve-month time horizon, and assumes no change in the investment principal or portfolio mix. This table estimates the fair value of the portfolio at a twelve-month time horizon:

        The table was developed based on the fact that a 50-BPS move in the Federal Funds Rate has occurred twenty-one times in the last ten years; a 100-BPS move in the Federal Funds Rate has occurred nine times in the last ten years; and a 150-BPS move in the Federal Funds Rate has occurred five times in the last ten years.

        The Company has not materially altered its investment objectives or criteria and believes that, although the composition of the Company's portfolio has changed from the preceding year, the portfolio's sensitivity to changes in interest rates is materially the same.

Credit risk

        The Company mitigates default risk by attempting to invest in high credit quality securities and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary

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or resale markets to ensure portfolio liquidity and is diversified in accordance with the Company's investment policy. To date, the Company has not experienced liquidity problems with its portfolio.

Foreign exchange risk

        Foreign exchange contracts are used primarily by the Company to hedge the risk that unremitted Japanese yen denominated receipts from customers for actual or forecasted sales of equipment after receipt of customer purchase orders may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, the Company attempts to hedge most of these Japanese yen denominated foreign currency exposures anticipated over the ensuing twelve-month period. At December 31, 2002, the Company had taken action to hedge approximately 100% of these Japanese yen denominated exposures. To hedge this exposure, the Company used foreign exchange contracts that generally have maturities of nine months or less, which generally will be rolled over to provide continuing coverage throughout the year. The Company often closes foreign exchange sale contracts by purchasing an offsetting purchase contract.

        The Company records these foreign exchange contracts at fair value in its consolidated balance sheet and the related gains or losses on these contracts are deferred in stockholders' equity (as a component of comprehensive income). These deferred gains and losses are recognized in income, as a component of revenue or cost of sales, in the period in which the sales or purchases being hedged are received and recognized in income. However, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the sales or purchases being hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized in income. These amounts were not material to the periods presented.

        Gains and losses on foreign exchange contracts that are not designated as hedges are included as a component of interest and other income, net, in the Company's consolidated statement of operations.

        At December 31, 2002, the Company had contracts for the sale of $2.4 million of Japanese Yen at fixed rates. The Company had no deferred gains or losses on foreign exchange contracts at December 31, 2002.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The Selected Financial Data information contained in Item 6 of Part II hereof is hereby incorporated by reference into this Item 8 of Part II of this Form 10-K.

ULTRATECH STEPPER, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

Consolidated Financial Statements included in Item 8:

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CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY