2006 Annual Report

3050 Zanker RoadSan Jose, CA 95134www.ultratech.com

Years ago, Ultratech anticipated that the time woUld come when new technologies were needed to enable the devices of the fUtUre. bY first anticipating these technologY shifts and then pioneering the advanced solUtions reqUired to enable them, Ultratech is a leader in two critical markets — advanced packaging and laser thermal processing — with tools that are being leveraged to create the fUtUre-generation devices consUmers demand. technologY_accepted

foUnded in 1979, Ultratech is a leader in both of its major technologY markets — advanced packaging and laser thermal processing. the companY’s advanced packaging lithographY sYstems improve cost of ownership bY increasing both throUghpUt and Yields to provide cUstomers with greater reliabilitY and valUe. the companY’s leading-edge laser processing technologY is eqUallY compelling — enabling the transition to the 65-nm and smaller technologY nodes. leaders throUghoUt the chipmaking, displaY and nanotechnologY markets relY on these sYstems to enable the technologies of todaY and tomorrow.

Board of Directors

arthur w. Zafiropoulo chairman and chief executive officer, Ultratech, inc.

joel f. gemunder (1) president and ceo, omnicare, inc.

nick konidaris (2,3) president and ceo, electro scientific industries, inc.

dennis r. raney (2) independent consultant

henri richard executive vice president, chief sales and marketing officer, advanced micro devices

vincent f. sollitto, jr. (1) chairman and ceo, syntax-brillian corp.

rick timmins (2,3) vice president, finance — retired, cisco systems, inc.

corporate information

Executive Directors

arthur w. Zafiropoulo chairman and chief executive officer

bruce r. wright senior vice president, finance chief financial officer, secretary and treasurer

Senior Executives

andrew m. hawryluk, ph.d. senior vice president, engineering

s. david holmes senior vice president, human resources

david a. markle senior vice president and chief technical officer

laura rebouché vice president, investor relations, corporate and marketing communications

ronald j. volk senior vice president, operations

Yun wang, ph.d. vice president and chief technologist, laser processing

(1) member of the compensation committee (2) member of the audit committee (3) member of the nominating and corporate governance committee

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FFiscal 2006 was a year of both tough decisions and hard won successes. It was also a year characterized by challenges

and progress—one where we continued to build on our technology, infrastructure and market leadership, while also

enhancing our business model. In the thermal processing equipment market for the global semiconductor industry

we realized growing acceptance for our revolutionary laser processing (LP) systems. We also fortified our leadership

position in the advanced packaging (AP) lithography market. Turning to our business model, we are enhancing our

efficiency in both our manufacturing and support operations, which will continue for the next several quarters.

Investing in our LP technologies, maintaining our leadership in AP and optimizing our business model was no easy

task—a reality further exacerbated by prevailing market conditions. In response, we made tough decisions around

where to focus resources. This involved leveraging our strong balance sheet to make strategic investments and

remain steadfast in our vision of the future.

Putting Laser Processing on the Industry RoadmapInventing and commercializing new technologies has always had its challenges, especially in today’s business

with stakes as high as those in the semiconductor industry. With several billions of dollars at risk around a single

modern semiconductor production facility or fab, companies are very slow to adopt any new technology, especially

those focused on the critical transistor area of the chip.

The good news is that once a process technology gains acceptance in the semiconductor industry, it tends to stay in

use for as long as it remains viable, with numerous tool purchases based on that technology. This is very promising for

Ultratech since our laser thermal processing technology is now being utilized by several of the top logic producers,

as other rapid thermal processing technologies fail to meet future requirements.

Because our LP technologies are extendible from the 65-nm to the 45-nm and beyond nodes, this means that once

fully embraced we expect to see an ongoing stream of orders for such systems. We believe Ultratech is well positioned to

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Ultratech is working with of the top logic manufacturers

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benefit from such future purchases due to our existing technology lead, strong IP and patent position, as well as our close

working relationships with top manufacturers. In fiscal 2007, we hope to see additional repeat tool orders and therefore

expect that in the following year, our LP business will become a meaningful contributor to overall future profitability.

In evaluations at leading-edge fabs our LSA100 system has demonstrated superior performance and precision over

existing technologies—so much so that it has become, for several companies, a critical enabling technology for

logic devices. We believe that this technology will prove equally compelling in the manufacture of future-generation

DRAM and Flash memory devices. Along with improved performance and precision, our LSA100’s proven ability to

enhance yields is especially important. This is achieved by not just better controlling the manufacturing process, but

by also introducing less stress into the process.

To monitor and fine-tune our stress-minimizing advantages we acquired certain assets of Oraxion, a pioneer of

advanced wafer stress and misalignment mapping systems. These tools can measure over 600,000 points on a wafer

in two minutes to plot a complete wafer topography map. Using it in our lab allows customers to actually measure

how our advanced LSA100 system reduces the level of stress and lithography misalignments that can result in the

yield-killing defects generated by competing tools. In addition, by using it at customer sites we can fine-tune our

LSA100 to further enhance production yields.

Optimizing Our Model for LP and AP LeadershipDuring 2006, we invested in global sales and support organizations around our LSA100 tool—putting technical people

onsite to work hand-in-hand with top manufacturers. As a result, we validated not only the enabling capabilities of

the LSA100, but Ultratech’s ability to support and maintain thermal processing systems in a high-stakes production

environment. It was these proven support capabilities, as well as our technology advantages that secured repeat

LSA100 orders from customers.

Building on this momentum we expect to win even more repeat orders going into next year. Furthermore, with our

solution being demonstrated as both technically superior and production-ready for leading logic manufacturers, we

expect to see future penetration into both the memory and the foundry markets. For the foundry sector, our potential

to add value in both logic and memory production has special significance for the growing system-on-chip (SoC) market,

where logic and memory functionalities are increasingly combined. With the rising demand for higher-performing,

ever-smaller consumer devices based on SoC technology, this is an especially promising future growth avenue.

At the same time, we continued to fortify our AP lithography market leadership. Propelled by our strategic investments

and strong technology, we continue to hold greater than 80% share of this critical market, which we believe remains

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one of strong long-term growth. However, it, like other technology markets, is characterized by cost-conscious

producers who can cutback on production as quickly as they expand in response to changing demand environments.

This was definitely the case in 2006—hence the slowdown in growth we experienced as manufacturers realized they had

significant under-utilized capacity in place that would need to be worked off before they resume placing system orders.

Thanks to our strong balance sheet and existing efficiencies we were well positioned to weather this situation, which

we expect will be short lived. Indeed other industry observers anticipate that the long-term growth around the AP

market will remain strong due to continuing demands for increased speed, smaller form factors and greater consumer

display functionality among a growing proliferation of consumer devices, such as next-generation cell phones.

Delivering value to our stockholders required more than being smart in how we used our resources to mainstream

our LP technologies and maintain leadership in a tough AP market. It meant becoming even leaner as a business.

With manufacturing increasingly located in Asia, we enhanced our presence in this region, while we reduced

resource commitments elsewhere in line with industry trends. As a result, we were able to lower ongoing expenses

and bring down our breakeven point for future profitability.

Looking AheadIn closing we want to thank all of our stockholders for their continued support—employees who worked tirelessly to

deliver value to our customers and investors who continue to show faith in our vision. Notwithstanding our continued

market leadership around AP or the bottom-line improvements we achieved to help our financial performance, it is

the strides we made this year towards realizing new top-line growth potential in the thermal processing equipment

market that we believe are particularly exciting. As a company we remain focused on becoming an industry leader

in two, distinct high-growth markets, while also leveraging our technology and common platform to participate in

nanotechnology and mix-and-match lithography opportunities that arise.

We leave 2006 more convinced than ever that we have invested in the right technologies to deliver value to the global

semiconductor industry and strong future profitability to our stockholders. Moving into our 2007 fiscal year and

beyond, we look forward to realizing the potential of all our advanced technologies for our customers, employees

and you—our stockholders.

Sincerely,

Arthur W. Zafiropoulo

Chairman and Chief Executive Officer

80+%market share in advanced packaging

technology_accepted

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Ultratech pioneered the emerging laser processing market and holds or has pending over patents around its innovative technology

tThe global semiconductor industry is among the world’s most complicated, but its progress is captured in a simple

equation—Moore’s Law. As commonly interpreted today, this means that the number of transistors on an integrated

circuit (IC), which are drivers of device performance, doubles every eighteen months. This has meant that the

capabilities of electronic devices has and continues to follow a path of amazing progress. Yet, to double the number

of transistors on an IC has also meant shrinking the size of IC features to unimaginably small dimensions. Today,

design rules exist at smaller sizes than the wavelength of light and at dimensions where the properties of materials

traditionally used in the construction of semiconductors become nonviable.

In order to continue shrinking design rules to the 65-nm, 45-nm and below nodes requires working at ever-smaller

feature sizes and incorporating a host of new materials with new thermal properties. We believe, traditional thermal

annealing technologies are simply incapable of handling these new challenges, and without a new thermal processing

technology, Moore’s Law and the pattern of semiconductor industry progress could come to a halt. To meet this

challenge head-on, Ultratech developed its revolutionary laser processing (LP) technologies.

Leveraging core competencies in optics engineering, system integration and laser processing, Ultratech pioneered

both laser spike annealing (LSA) and laser thermal processing (LTP). Based on these breakthroughs, Ultratech

introduced the industry’s first commercial LP system, the LSA100, which in extensive evaluations at top IC

manufacturers is enhancing yields, improving performance and enabling the continued progression of Moore’s Law.

First evaluated by logic device manufacturers, Ultratech’s LP technology is now ready to demonstrate its enabling

benefits for memory and system-on-chip (SoC) devices. As a result, it is expected that this innovative new process

technology will one day be fully adopted across all types of advanced devices. Ultratech expects this mainstream

adoption to allow leading-edge manufacturers in all facets of the semiconductor industry to overcome the thermal

process challenges that threaten the continuation of Moore’s Law. Consumers will benefit as manufacturers extend

the fast pace of innovation and deliver new generations of more powerful electronic devices.

technology pioneer for laser thermal annealing

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technology_accepted

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UUltratech is the market and technology leader in lithography systems for the advanced packaging (AP) market.

As semiconductor packaging technology becomes ever more important to the overall performance and form factor

of an electronic device, the semiconductor industry is increasingly embracing advanced-packaging processes. The

growing proliferations of advanced consumer devices that place a premium on these attributes is driving the move

towards wafer-level, chip-scale packages, and gold and solder bumping.

In order to deliver the faster, smaller and more power-efficient devices of the future, adoption of advanced-packaging

technologies and the use of Ultratech’s leading AP systems are rising. Today, the company’s latest generation AP200

and AP300 systems are the preferred choice of manufacturers around the world, due to their performance, yield and

cost-of-ownership advantages. Based on the Unity Platform,™ the customer-configurable design of both systems

delivers extendibility across multiple device generations and supports today’s flexible manufacturing requirements.

This year, Ultratech launched two additional products on the Unity Platform to address the fluctuating market conditions

witnessed by its leading wafer foundry customers. These new tools extend the company’s original core philosophy to

provide high-performing, cost efficient equipment to meet its customers’ changing needs. Ultratech’s Unity GOLD

is designed to provide 150- and 200-mm wafer-packaging solutions for flat panel display (FPD) applications, while

the Unity PLATINUM lithography system enables 200- and 300-mm wafer processing capabilities for high-volume

chip manufacturing. Both of these systems have been well received by customers needing their unique advantages.

As the advanced-packaging lithography leader, Ultratech continues to leverage its industry experience to create

customized, low-risk solutions to meet its global customers’ changing technology and economic needs with a broad

and flexible portfolio of product offerings. The end result for consumers is affordable, compact electronic devices

that are increasingly powerful.

market leader for advanced packaging lithography

Over semiconductor wafers were processed using Ultratech’s advanced packaging lithography solutions in 2006

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* Operatingincomein2003includesthefavorableimpactof:sellinginventoryanddiscontinuedproductspreviouslywrittendownof$1.7million,or$0.07pershare—basicanddiluted;andreducingreserves

establishedinprioryearsfortherestructuringofoperationsof$0.7million,or$0.03pershare—basicanddiluted.

** Operatinglossin2006includesachargeof$1,907,000relatedtocertainexitactivities(ofwhich$96,000relatingtotheaccelerationofrestrictedstockunitsandoptionsareincludedinstock-basedcompensationexpenses)

and$1,957,000ofstock-basedcompensationexpenses.

Financial Highlights for Years Ended December 31, 2006** 2005 2004 2003*Dollarsinthousands,exceptpersharedata

Net Sales $ 119,633 $ 122,366 $ 109,892 $ 100,121

Gross profit as a percentage of net sales 38% 43% 48% 47%

Earnings per share—diluted $ -0.38 $ -0.10 $ 0.03 $ 0.31

Cash, cash equivalents and short-term investments $ 78,090 $ 141,067 $ 151,627 $ 165,902

2006 Financial HiGHliGHTS

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ort 2006 Form 10-K and 10-K/A

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K(Mark one)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2006

Or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to

Commission File Number: 0‑22248

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

Delaware(State or other jurisdiction of

incorporation or organization)

3050 Zanker Road San Jose, California

(Address of principal executive offices)

94‑3169580(I.R.S. Employer

Identification No.)

95134

(Zip Code)

(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

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Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

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 x  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. x

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

Large accelerated filer o Accelerated filer x Non-accelerated filer o

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

The aggregate market value of voting stock held by non-affiliates of the Registrant, as of July 1, 2006, was approximately $277,274,000 (based upon the closing price for shares of the Registrant’s Common Stock as reported by the NASDAQ Global 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 1, 2007, the Registrant had 23,243,322 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

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PART I

ITEM 1. BUSINESS

This Annual Report on Form 10-K contains, in addition to historical information, certain forward-looking statements that involve significant risks and uncertainties. Such statements can generally be identified by words such as “anticipates,” “expects,” “intends,” “will,” “could,” “believes,” “estimates,” “continue,” and similar expressions. Our 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, as well as those discussed under “Item 1A Risk Factors” and elsewhere in this Annual Report on Form 10-K.

The Company

Ultratech, Inc. (“Ultratech” or “we”) develops, manufactures and markets photolithography and laser processing equipment designed to reduce the cost of ownership for manufacturers of integrated circuits, including advanced packaging processes and various nanotechnology components, thin film head magnetic recording devices (“thin film heads” or “TFHs”), optical networking devices, laser diodes and LEDs (light emitting diodes).

Lithography

We supply step-and-repeat systems based on one-to-one (“1X”) technology to customers located throughout North America, Europe, Japan and the rest of Asia. We believe that our 1X steppers utilizing the Wynne Dyson optical design offer cost and performance advantages, as compared with competitors’ contact aligners or 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.

Advanced packaging for integrated circuits, specifically bump or wafer level chip scale packaging (“CSP”) techniques, require lithography steps in the device fabrication process. We continue to enhance our product offerings for bump, wafer level CSP processing and post passivation lithography (“PPL”). In addition, our 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. We also supply 1X photolithography systems to thin film head manufacturers and believe that our steppers offer advantages over certain competitive reduction lithography tools with respect to field size, throughput, specialized substrate handling and cost. Additionally, we supply 1X photolithography equipment to various other nanotechnology markets, where certain technical features, such as high resolution at gh-line wavelengths, depth of focus and special size substrates, may offer advantages over certain competing tools.

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Laser Anneal Technology

Device scaling has been the predominant means pursued by the semiconductor industry to achieve the gains in productivity and performance quantified by Moore’s Law. In the past several years, scaled device performance has been compromised because traditional transistor materials such as silicon, silicon dioxide, and polysilicon, have been pushed to their fundamental materials limits. Continued scaling thus requires the introduction of new materials. For example, the traditional gate dielectric has been silicon dioxide and as devices are scaled below 45 nm high K material such as halfnium oxide must be considered because silicon dioxide begins to lose its effectiveness at levels below 45 nm. These new materials impose added challenges to the methods used to dope and activate silicon to produce very shallow, highly activated junctions. The main challenges regarding short channel effects include achieving maximum activation and minimal diffusion with abrupt junctions.

By leveraging our core competencies in optics engineering and system integration and our extensive knowledge of laser processing, we introduced the LSA100 laser spike annealing system to enable thermal annealing solutions at the 65 nm technology node and below. This advanced annealing technology provides solutions to the difficult challenge of fabricating ultra-shallow junctions and highly activated source/drain contacts. Laser processing offers the flexibility to operate at near-instantaneous timeframes (microseconds to milliseconds) at temperatures below the melting point of silicon (1412° C). At these temperatures and anneal times, full activation is achieved with negligible diffusion. In addition, Ultratech’s proprietary hardware design minimizes the pattern density effect, reducing absorptivity variations.

Our products and markets are more fully described below.

General 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. Typically deposition is followed by the photolithography imaging process in which the deposited layer is coated with a photosensitive layer called photoresist or resist. Exposure of the resist to an image formed by ultraviolet light followed by development, results in some of the resist being removed. A subsequent etching step selectively removes the deposited material from areas not protected by the remaining resist pattern.

Photolithography is one of the most critical and expensive steps in IC device manufacturing. Photolithography exposure equipment is used to create device features by patterning a light-sensitive polymer coating on the wafer surface using a photomask containing the master image of a particular device layer. Typically, each exposure results in the patterning of a different deposited layer and therefore, requires a different pattern on the device. Each new device layer 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.

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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 ever more complex devices that incorporate progressively finer line widths. In the early 1970s, photolithography tools included contact printers and proximity aligners, which required the photomask to physically contact or nearly contact the wafer in order to transfer the entire pattern during a single exposure. By the mid 1970s, there were also projection scanners, which transferred the device image through reflective optics having a very narrow annular field that spanned the width of the wafer. Exposure was achieved by scanning the entire photomask and wafer in a single, continuous motion across the annular field. Scanners were followed by steppers, which expose a rectangular area or field on the wafer containing one or more chip patterns in a single exposure, then move or “step” the wafer 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 size control and better alignment between the multiple device layers resulting in higher yield and higher performance devices than was 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, employ photomask patterns that are four or five times larger than the device pattern that is to be exposed on the wafer surface. In addition, there is now a fourth generation of lithography tools, known as step-and-scan systems, that address device sizes of 0.35 micron and below. In contrast to steppers, which require lenses that cover the entire field, step-and-scan optical systems have an instantaneous field just large enough to span the width of a field and employ scanning to stretch coverage over the entire field. Each scan is followed by re-registration of the wafer with respect to the mask, i.e. “stepping”, to create multiple fields covering the entire wafer. The smaller instantaneous field sizes of step-and-scan system projection optical systems allows them to resolve finer geometries and scanning allows them to cover larger fields.

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, employ photomask patterns that are the same scale as the device pattern that is exposed on the wafer surface. The optical projection system, employed in Ultratech’s 1X steppers is based on a Wynne Dyson design, which uses both a reflective mirror and refractive lens elements. This design approach leads to a very simple and versatile optical system that is less expensive than those employed in reduction steppers. Because our 1X optical design covers a much broader spectral range than reduction steppers, it delivers a greater proportion of the exposure energy from the lamp to the wafer surface. Depending on the size of the lamp used and the exposure energy required for an application, this can result in appreciably higher throughput. Resolution considerations currently limit 1X steppers to manufacturing steps involving less-critical, larger feature sizes. Accordingly, we believe that sales of these systems are highly dependent upon capacity expansions by our current 1X customers, or by customers making the transition to chips containing “bump” connections, that facilitate the use of higher data rates and a higher number of connections.

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In the past, manufacturers of ICs and similar devices purchased capital equipment based principally on performance specifications. In view of the significant capital expenditures required to construct, equip and maintain advanced fabrication facilities, relatively short product cycles and manufacturers’ increasing concern for overall fabrication costs, we believe that focus is shifting to the total cost of ownership. Cost of ownership includes the costs associated with the acquisition of equipment, as well as components based on throughput, yield, up-time, service, labor overhead, maintenance, and various other costs associated with owning and using the equipment. As a result, in many cases the most technologically advanced system will not necessarily be the manufacturing system of choice.

In addition to enhancing our current lithography solutions, we have been developing new tools to serve new markets. The LSA100 tool is aimed at volume production of advanced state of the art devices. This product, based on the same platform and stage technology as our advanced lithography tools, employs a 3500 Watt CO2 laser to activate ultra-shallow, transistor junctions. Annealing times are reduced from several seconds, typical for the current generation of Rapid Thermal Processing (RTP) equipment, to a millisecond or less. This results in more abrupt junctions with a higher dopant activation levels and leads to transistors with higher drive currents and lower leakage. While this technology is expected to be useful for multiple IC generations, we anticipate that eventually this technology will be superseded by a laser processing technology that will reduce the processing time below one microsecond, thereby achieving even higher performance characteristics with almost “zero” thermal budget. We believe these new LP technologies—for which we have been awarded 55 patents and have 63 patent applications pending—remove several critical barriers to future device scaling and will help to extend Moore’s Law well into the future.

Products

We currently offer two different series of 1X lithography systems for use in the semiconductor fabrication process: the 1000 Family, which addresses the markets for scanner replacement, high volume/low cost semiconductor fabrication and R&D packaging activities and nanotechnology applications; and the Saturn Spectrum and the AP series, which were designed to meet the requirements in the advanced packaging market. These steppers currently offer minimum feature size capabilities ranging from 2.0 microns to 0.75 microns.

For the advanced packaging market, we offer our Saturn Spectrum Family as well as our new AP series built on the Unity PlatformTM. These advanced packaging systems were developed for high volume bump and wafer level CSP manufacturing and post passivation lithography applications. They provide broadband (g, h and i-line) exposure or selective exposure (gh or i-line), and are used in conjunction with downstream processes to produce a pattern of bumps, or metal connections, on the bond pads of the die for flip chip devices. Using flip chip interconnect offers reduced signal inductance, reduced power/ground inductance, die shrink advantages and reduced package footprint.

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The AP series, consisting of the AP300 & AP200, are built on our Unity Platform and feature a customer-configurable design that supports flexible manufacturing requirements as well as tool extendibility for multiple device generations. Designed to optimize productivity, the AP systems integrate the processing advantages associated with our advanced packaging lithography equipment with the productivity benefits of our new Unity Platform. We believe that these new lithography systems support a lower cost-of-ownership strategy due to significant throughput enhancements, higher reliability, and superior alignment and illumination systems.

The 1000 family is a small field system available with gh-line and i-line illumination options. In semiconductor applications, we offer the Star 100. This platform is typically used in the manufacture of power devices, ASICs, analog devices and compound semiconductors. In addition, this platform is well suited for a number of nanotechnology applications.

Nanotechnology manufacturing combines electronics with mechanics in small devices. We have defined a nanotechnology device as a device that has at least one dimension in the XYZ direction less than 0.1 microns. 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 addition, these systems are used in applications such as LED and laser diodes. In 2002, we introduced the NanoTech product family that consists of the NanoTech 100, NanoTech 160 and NanoTech 190. The NanoTech 160 system utilizes a platform based on the previous 1000 Series steppers, incorporating Dual Side Alignment (“DSA”) capability for applications requiring lithography on both sides of a wafer. The NanoTech 160 is an extension of the model 1600DSA stepper, and enhances the capabilities of the 1000 Series steppers by offering Dual Side Alignment capability, providing customers with a 1X stepper solution for this special processing requirement. Additionally, we believe that our NanoTech steppers offer resolution and depth of focus advantages over alternative technologies to the manufacturers of nanotechnology components.

The NanoTech 190 steppers have enhanced capabilities directed at TFH backend, or rowbar processing applications. These steppers are used to expose the Air Bearing Surface (ABS) patterns on rowbars.

We also sell upgrades to systems in our installed base and refurbished systems. These refurbished systems typically have a purchase price that is lower than the purchase price for our new systems.

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We also offer an advanced laser-based thermal annealing tool, the LSA100, built on a platform that is essentially the same as our Unity Platform. Thermal annealing is used by the semiconductor industry for a variety of process steps, including activation of implanted impurities, dielectric film formation, formation of silicides and stabilization of copper grain structure. Annealing tools currently in use by manufacturers of semiconductor devices are furnaces and rapid thermal annealing, or Rapid Thermal Processing (“RTP”), systems. We believe there is a need for tools that anneal at higher temperatures for shorter periods of time and that our future laser annealing tools may ultimately provide this capability to the industry. The near-term application of our laser-based thermal annealing tools is anticipated to be in the area of source/drain dopant activation. However, we are also researching the use of these tools for other applications. In 2006 we shipped and revenued production systems for multiple customers.

Our current systems are set forth below:

Product Line Wavelength

Minimum Feature Size

(microns)

1X Steppers:1000 Series:Star 100™ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . gh-line 0.8 - 1.0NanoTech 100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . gh-line 0.8 - 1.0NanoTech 160 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . gh-line 1.0 - 2.0NanoTech 190 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . gh-line 1.0 - 2.0Prisma-ghi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ghi-line 4.0Saturn Spectrum 300e2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ghi-line 2.0AP200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ghi-line 2.0AP300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ghi-line 2.0Laser Processing:LSA100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA NA

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Research, Development and Engineering

The semiconductor and nanotechnology industries are subject to rapid technological change and new product introductions and enhancements. We believe that continued and timely development and introduction of new and enhanced systems to serve these markets is essential for us to maintain our competitive position. We have made and continue to make substantial investments in the research and development of our core optical technology, which we believe is critical to our future financial results. We intend to continue to develop our technology and to develop innovative products and product features to meet customer demands. Current engineering projects include: continued research and development and process insertion for our laser processing technologies and continued development of our 1X stepper products. Other research and development efforts are currently focused on performance enhancement and development of new features for existing systems, both for inclusion as a standard component in our systems and to meet special customer order requirements; other efforts include reliability improvement; and manufacturing cost reductions. These research and development efforts are undertaken, principally, by our research, development and engineering organizations and costs are generally expensed as incurred. Other operating groups within Ultratech support our research, development and engineering efforts, and the associated costs are charged to those organizations and expensed as incurred.

We work with many customers to jointly develop technology required to manufacture advanced devices or to lower the customer’s cost of ownership. We also have a worldwide engineering support organization including reticle engineering, photo processing capability and applications support.

We have historically devoted a significant portion of our financial resources to research and development programs and expect to continue to allocate significant resources to these efforts in the future. As of December 31, 2006, we had approximately 84 full-time employees engaged in research, development, and engineering. For 2006, 2005 and 2004, total research, development, and engineering expenses were approximately $26.2 million, $27.0 million and $25.9 million, respectively, and represented 22%, 22% and 24% of our net sales, respectively.

Sales and Service

We market and sell our products in North America, Europe, Japan, Taiwan and the rest of Asia principally through our direct sales organization. We also have service personnel based throughout the United States, Europe, Japan and the rest of Asia.

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

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We support our customers with field service, applications, technical service engineers and training programs. We provide our customers with comprehensive support and service before, during and after delivery of our systems. To support the sales process and to enhance customer relationships, we work closely with prospective customers to develop hardware, software and applications test specifications and benchmarks, and often design customized applications to enable prospective customers to evaluate our equipment for their specific needs. Prior to shipment, our support personnel typically assist the customer in site preparation and inspection, and provide customers with training at our facilities or at the customer’s location. We currently offer our customers various courses of instruction on our systems, including instructions in system hardware, software and applications tools for optimizing our systems to fit a customer’s particular needs. Our customer training program also includes instructions in the maintenance of our systems. Our field support personnel work with the customer’s employees to install the system and demonstrate system readiness. Technical support is also available via telephone and through on-site Ultratech personnel.

In general, we warrant our new systems against defects in design, materials and workmanship for one year. We offer our customers additional support after the warranty period for a fee in the form of service 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

We perform all of our manufacturing activities (final assembly, system testing and certain subassembly) in clean room environments totaling approximately 25,000 square feet located in San Jose, California. Performing manufacturing operations in California exposes us to a higher risk of natural disasters, including earthquakes. In addition, in the past California has experienced power shortages, which have interrupted our operations. Such shortages could occur in the future and could again interrupt our operations resulting in product shipment delays, increased costs and other problems, any of which could have a material adverse effect on our business, customer relationships and results of operations. We are not insured against natural disasters and power shortages and the occurrence of such an event could have a material adverse impact on our business, financial condition and results of operations.

Our manufacturing activities consist of assembling and testing components and subassemblies, which are then integrated into finished systems. We rely on a limited number of outside suppliers and subcontractors to manufacture certain components and subassemblies. We order one of the most critical components of our technology, the glass for our 1X lenses, from external suppliers. We design the 1X lenses and provide the lens specifications and the glass to other suppliers, who then machine the lens elements. We then assemble and test the optical 1X lenses. We have recorded the critical parameters of each of our optical lenses sold since 1988, and believe that such information enables us to supply lenses to our customers that match the characteristics of our customers’ existing lenses.

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

We maintain a company-wide quality program. Our operations achieved ISO 9001:1994 certification in 1996 and ISO 14001:1996 certification in March 2001. Our ISO 9001 certification was upgraded to the ISO 9001:2000 standard in January 2002. Our ISO 14001 certification was upgraded to the ISO 14001:2004 standard in June 2006. All certifications have been maintained uninterrupted through the date of this report.

Competition

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

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Advanced Packaging

We experience competition in advanced packaging from various proximity aligner companies such as Suss Microtec AG (Suss Microtec) and projection companies such as Ushio, Inc. (Ushio) and Tamarack Scientific Co., Inc. (Tamarack). We expect our competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. This could cause a decline in sales or loss of market acceptance of our steppers in our served markets, and thereby materially adversely affect our business, financial condition and results of operations. Enhancements to, or future generations of, competing products may be developed that offer superior cost of ownership and technical performance features. We believe that to be competitive will require significant financial resources in order to continue to invest in new product development, to invest in new features and enhancements to existing products, to introduce new generation stepper systems in our served markets on a timely basis, and to maintain customer service and support centers worldwide. In marketing our products, we may also face competition from suppliers employing other technologies. In addition, increased competitive pressure has led to intensified price-based competition in certain of our markets, resulting in lower prices and margins. Should these competitive trends continue, our business, financial condition and operating results may be materially adversely affected.

We have obtained a leadership position in the advanced packaging market. Our primary competition in this market comes from contact aligners offered by companies such as Suss Microtec. Although contact and proximity aligners generally have lower purchase prices than 1X steppers, 1X steppers offer lower operating costs and total cost of ownership in most applications. We believe that most device manufacturers and wafer bump foundries choose 1X steppers due to the yield improvement offered by the use of non-contact lithography. Ushio, a Japanese semiconductor equipment company, has also introduced a 1X refractive stepper for the advanced packaging market. However, we believe 1X refractive steppers do not offer the same productivity and cost saving advantages as our 1X stepper based on the Wynne Dyson optical design. Tamarack has a 1X scanner for wafer bumping applications. We believe that Tamarack’s 1X scanners have higher operating costs as compared to our 1X steppers. In addition to competition from manufacturers of contact and proximity aligners, we also face competition from reduction stepper manufacturers. While reduction steppers are typically more expensive and offer less flexibility in processing thick resists, some device manufacturers may consider this technology option.

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Laser Processing

With respect to our laser annealing technologies, marketed under the LSA100 product name, our primary competition comes from companies such as Applied Materials, Inc. and Dainippon Screen Manufacturing Co., LTD. Many of these companies offer products utilizing rapid thermal processing (RTP), which is the current manufacturing technology. RTP does not prevent semiconductor device manufacturers from scaling the lateral dimensions of their transistors to obtain improved performance, but diffusion resulting from the time scales associated with RTP seriously limits the vertical dimension of the junctions. Faster annealing times result in shallower and more abrupt junctions and faster transistors. We believe that RTP manufacturers recognize the need to reduce thermal cycle times and are working toward this goal. Several companies have published papers on annealing tools that incorporate flash lamp anneal (FLA) technology in order to reduce annealing times and increase anneal temperatures. Developers of FLA technology claim to have overcome annealing difficulties at the 65nm node. This technique, which employs xenon flash lamps, has shown improvements over RTP in junction depth and sheet resistance, but we believe FLA suffers from pattern-related non-uniformities and could require additional, costly processes to equalize the reflectivity of different areas within the chip or wafer. Our proprietary laser processing solution has been specifically developed to provide junction annealing on near-instantaneous timescales, while achieving high activation levels. LSA, our first implementation of laser processing, activates dopants in the microsecond-to-millisecond time frame without melting. Our research indicates that, at temperatures just below the melting point of silicon, time durations in the microsecond to millisecond range, are required to achieve full activation, and minimal dopant diffusion.

In July 2000, we licensed certain rights to our then existing laser processing technology, with reservations, to a competing manufacturer of semiconductor equipment. We presently anticipate that this company and others intend to offer laser annealing tools to the semiconductor industry that will compete with our offerings. We believe that Applied Materials is working to introduce a laser based system that will suffer cost of ownership disadvantages.

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Intellectual Property Rights

Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we believe that our success will depend more upon the innovation, technological expertise and marketing abilities of our employees. Nevertheless, we have a policy of seeking patents when appropriate on inventions resulting from our ongoing research and development and manufacturing activities. We own 116 United States and foreign patents, which expire on dates ranging from April 2007 to December 2024 and have 87 United States and foreign patent applications pending. We also have various registered trademarks and copyright registrations covering mainly software programs used in the operation of our systems. We also rely upon trade secret protection for our confidential and proprietary information. We may not be able to protect our technology adequately and competitors may be able to develop similar technology independently. Our pending patent applications may not be issued or U.S. or foreign intellectual property laws may not protect our intellectual property rights. In addition, litigation may be necessary to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation has resulted in, and in the future could result in, substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations, regardless of the outcome of the litigation. Patents issued to us may be challenged, invalidated or circumvented and the rights granted thereunder may not provide competitive advantages to us. Furthermore, others may independently develop similar technology or products, or, if patents are issued to us, design around the patents issued to us. Invalidation of our patents related to those technologies could allow our competitors to more effectively compete against us, which could result in less revenue for us.

On February 29, 2000, we filed lawsuits asserting patent infringement and related claims against Nikon, Canon, and ASML in the U.S. District Court for the Eastern District of Virginia. In April 2000, we reached a settlement with Nikon, and in September 2001, we reached a settlement with Canon. In the patent litigation against ASML, a jury trial was conducted in the U.S. District Court for the Northern District of California during the three-month period ended July 2, 2005. The jury reached a verdict that the patent was infringed, but that the asserted claims of the patent were invalid. We filed a post-trial motion for a new trial and for judgment as a matter of law in our favor. ASML also filed a motion for judgment as a matter of law seeking to invalidate three of the asserted claims for lack of enablement and requested that the court awards costs. On February 13th, 2006, the Court denied our post-trial motions, including the motion for a new trial, and entered judgment in favor of ASML invalidating three claims of the patent for lack of enablement. The Court also awarded ASML approximately $330,000 in costs. We have filed an appeal with the Federal Circuit Court of Appeals, and filed our opening appellate brief on August 30, 2006. Although ASML originally filed a notice of cross-appeal, ASML subsequently withdrew its cross appeal and the Court entered an order to that effect on December 8, 2006. ASML’s opening appellate brief was filed on December 6, 2006, and Ultratech’s reply brief was filed January 12, 2007. We expect the case to be set for oral argument in late Spring 2007.

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On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement of certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for the Northern District of California. On May 17, 2005, the court found the subject patent to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of a federal patent litigation suit brought against it by us. We do not believe this new action has merit, particularly given the denial by the federal court and the subsequent federal appellate court’s affirmation of the order denying the award of any attorney’s fees payable to this company by us in the federal patent litigation. We filed a motion to have the state court complaint dismissed under California’s anti-SLAPP and demurrer statutes. Nonetheless the state court has preliminarily stated that it would deny our motion to dismiss as to the malicious prosecution claim, while granting it as to the abuse of process claim. In such event, we intend to appeal the denial of our motion to dismiss the malicious prosecution claim and otherwise vigorously defend against this action and to seek fees and/or sanctions against this company in relation thereto.

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

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

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Environmental Regulations

We are 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. We believe that we are currently in compliance in all material respects with such regulations and that we have obtained all necessary environmental permits to conduct our business. Nevertheless, the failure to comply with current or future regulations could result in substantial fines being imposed on us, suspension of production, alteration of the manufacturing process or cessation of operations. Such regulations could require us to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any failure by us to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances could subject us to significant liabilities.

Customers, Applications and Markets

We sell our systems to semiconductor, advanced packaging, thin film head, ink jet printer/accelerometer and various other nanotechnology manufacturers located throughout North America, Europe, Japan, Taiwan and the rest of Asia. Semiconductor manufacturers have purchased the 1000 Series steppers, the AP series of steppers, and the NanoTech steppers for the fabrication and/or packaging of microprocessors, microcontrollers, DRAMs, ASICs and a host of other devices. Such systems could be used in mix-and-match applications with other lithography tools, as replacements for scanners and contact proximity printers, in packaging for flip chip applications and for high volume, low cost, less critical feature size production.

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 us to additional risks, including the risk of default by one or more customers representing a significant portion of our total receivables. If we were required to record additional accounts receivable reserves, our business, results of operations and financial condition and results of operations would be materially adversely affected.

On a market application basis, sales to the semiconductor industry, primarily for advanced packaging applications, accounted for approximately 94% of system revenue for the year ended December 31, 2006, as compared to 79% and 75% for each of the years ended December 31, 2005 and 2004, respectively. During 2006, 2005 and 2004, approximately 6%, 21% and 25%, respectively, of our systems revenue was derived from sales to nanotechnology manufacturers, including micro systems, thin film head and optical networking device manufacturers. Our future results of operations and financial position would be materially adversely impacted by a downturn in any of these industries, or by loss of market share in any of these industries.

International sales accounted for approximately 64%, 69% and 65% of total net sales for the years 2006, 2005 and 2004, respectively, with Japan representing 26%, 13% and 32% of sales for those same years.

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

Backlog

We schedule production of our systems based upon order backlog, informal customer commitments and general economic forecasts for our targeted markets. We include in our backlog all accepted customer orders for our systems with assigned shipment dates within one year, as well as all orders for service, spare parts and upgrades, in each case, that management believes to be firm. However, 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, our backlog at any particular date may not necessarily be representative of actual sales for any succeeding period. As of December 31, 2006, our backlog was approximately $82.7 million, including $0.3 million of products shipped but not yet installed. In 2005, we had backlog of $108.8 million, and all products shipped had been installed and accepted as of December 31, 2005. Cancellation, deferrals or rescheduling of orders by these customers would have a material adverse impact on our future results of operations.

Employees

At December 31, 2006, we had approximately 332 full-time employees, including 84 engaged in research, development, and engineering, 27 in sales and marketing, 110 in customer service and support, 64 in manufacturing and 47 in general administration and finance. We believe our future success depends, in large part, on our ability to attract and retain highly skilled employees. None of our employees are covered by a collective bargaining agreement. We have, however, entered into employment agreements with a limited number of our employees, including our executive officers. We consider our relationships with our employees to be good.

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Information Available on Our Web‑site

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

Item 1A 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 us and our business:

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

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

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

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

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

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

Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we believe that our success will depend more upon the innovation, technological expertise and marketing abilities of our employees. Nevertheless, we have a policy of seeking patents when appropriate on inventions resulting from our ongoing research and development and manufacturing activities. We own 116 United States and foreign patents, which expire on dates ranging from April 2007 to December 2024 and have 87 United States and foreign patent applications pending. In addition, we have various registered trademarks and copyright registrations covering mainly software programs used in the operation of our systems. We also rely upon trade secret protection for our confidential and proprietary information. We may not be able to protect our technology adequately and competitors may be able to develop similar technology independently. Our pending patent applications may not be issued or U.S. or foreign intellectual property laws may not protect our intellectual property rights. In addition, litigation may be necessary to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights

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of others or to defend against claims of infringement. Such litigation has resulted in, and in the future could result in, substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations, regardless of the outcome of the litigation. Patents issued to us may be challenged, invalidated or circumvented and the rights granted thereunder may not provide competitive advantages to us. Furthermore, others may independently develop similar technology or products, or, if patents are issued to us, design around the patents issued to us. Invalidation of our patents related to those technologies could allow our competitors to more effectively compete against us, which could result in less revenue for us.

On February 29, 2000, we filed lawsuits asserting patent infringement and related claims against Nikon, Canon, and ASML in the U.S. District Court for the Eastern District of Virginia. In April 2000, we reached a settlement with Nikon, and in September 2001, we reached a settlement with Canon. In the patent litigation against ASML, a jury trial was conducted in the U.S. District Court for the Northern District of California during the three-month period ended July 2, 2005. The jury reached a verdict that the patent was infringed, but that the asserted claims of the patent were invalid. We filed a post-trial motion for a new trial and for judgment as a matter of law in our favor. ASML also filed a motion for judgment as a matter of law seeking to invalidate three of the asserted claims for lack of enablement and requested that the court awards costs. On February 13th, 2006, the Court denied our post-trial motions, including the motion for a new trial, and entered judgment in favor of ASML invalidating three claims of the patent for lack of enablement. The Court also awarded ASML approximately $330,000 in costs. We have filed an appeal with the Federal Circuit court of Appeals, and filed our opening appellate brief on August 30, 2006. Although ASML originally filed a notice of cross-appeal, ASML subsequently withdrew its cross appeal and the Court entered an order to that effect on December 8, 2006. ASML’s opening appellate brief was filed on December 6, 2006, and Ultratech’s reply brief was filed January 12, 2007. We expect the case to be set for oral argument in late Spring 2007.

On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement of certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for the Northern District of California. On May 17, 2005, the court found the subject patent to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of a federal patent litigation suit brought against it by us. We do not believe this new action has merit, particularly given the denial by the federal court and the subsequent federal appellate court’s affirmation of the order denying the award of any attorney’s fees payable to this company by us in the federal patent litigation. We filed a motion to have the state court complaint dismissed under California’s anti-SLAPP and demurrer statutes. Nonetheless the state court has

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preliminarily stated that it would deny our motion to dismiss as to the malicious prosecution claim, while granting it as to the abuse of process claim. In such event, we intend to appeal the denial of our motion to dismiss the malicious prosecution claim and otherwise vigorously defend against this action and to seek fees and/or sanctions against this company in relation thereto.

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

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

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

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

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

We experience competition in advanced packaging from various proximity aligner companies such as Suss Microtec AG (Suss Microtec) and projection companies such as Ushio, Inc. (Ushio). In nanotechnology, we experience competition from proximity aligner companies, such as Suss Microtec, as well as other stepper manufacturers who have developed or are developing tools specifically designed for nanotechnology applications. We expect our competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. This could cause a decline in sales or loss of market acceptance of our steppers in our served markets, and thereby materially adversely affect our business, financial condition and results of operations. Enhancements to, or future generations of, competing products may be developed that offer superior cost of ownership and technical performance features.

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With respect to our laser annealing technologies, marketed under the LSA100 product name, the primary competition comes from companies such as Applied Materials, Inc. and Dainippon Screen Manufacturing Co., LTD. Many of these companies offer products utilizing rapid thermal processing, or RTP, which is the current manufacturing technology. RTP does not prevent semiconductor device manufacturers from scaling the lateral dimensions of their transistors to obtain improved performance, but diffusion resulting from the time scales associated with RTP limits the vertical dimension of the junctions. Faster annealing times result in shallower and more abrupt junctions and faster transistors. We believe that RTP manufacturers recognize the need to reduce thermal cycle times and are working toward this goal. In July 2000, we licensed certain rights to our then existing laser processing technology, with reservations, to a competing manufacturer of semiconductor equipment. We presently anticipate that this company will offer laser-annealing tools to the semiconductor industry that will compete with our offerings.

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

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

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

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

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Historically, we have sold a substantial portion of our systems to a limited number of customers. In 2006, Matsushita and Intel accounted for 12% and 11%, respectively, of our net sales. In 2005, and 2004, Intel Corporation accounted for 13% and 10%, respectively, of our net sales. We expect that sales to a relatively few customers will continue to account for a high percentage of our net sales in the foreseeable future and believe that our financial results depend in significant part upon the success of these major customers and our ability to meet their future capital equipment needs. Although the composition of the group comprising our largest customers may vary from period to period, the loss of a significant customer or any reduction in orders by a significant customer, including reductions due to market, economic or competitive conditions in the semiconductor, semiconductor packaging or nanotechnology industries or in the industries that manufacture products utilizing integrated circuits, thin film heads or other nanotechnology components, would likely have a material adverse effect on our business, financial condition and results of operations. Our ability to maintain or increase our sales in the future depends, in part, on our ability to obtain orders from new customers as well as the financial condition and success of our existing customers, the semiconductor and nanotechnology industries and the economy in general.

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

On a market application basis, sales to the semiconductor industry, primarily for advanced packaging applications, accounted for approximately 94% and 79% of system revenue for the years ended 2006 and 2005, respectively. In 2006 and 2005, approximately 6% and 21%, respectively, of our systems revenue was derived from sales to nanotechnology manufacturers, including micro systems, thin film head and optical device manufacturers. Our future operating results and financial condition would be materially adversely impacted by a downturn in any of these industries, or by loss of market share in any of these industries. A growing portion of our backlog of system orders is comprised of laser spike annealing tools. To date, we have limited customer experience with this technology. Should significant demand not materialize, due to technical, production, market, or other factors, our business, financial position and results of operations would be materially adversely impacted.

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

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

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

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

Our business depends in significant part upon capital expenditures by manufacturers of semiconductors, advanced packaging semiconductors and nanotechnology components, 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 us. We believe that markets for new generations of semiconductors and semiconductor packaging will also be subject to similar fluctuations. Our business and operating results would be materially adversely affected by downturns or slowdowns in the semiconductor packaging market or by loss of market share. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We attempt to mitigate the risk of cyclicality by participating in multiple markets including semiconductor, semiconductor packaging, and nanotechnology sectors, as well as diversifying into new markets such as laser-based annealing for implant activation and other applications. Despite such efforts, when one or more of such markets experiences a downturn or a situation of excess capacity, our net sales and operating results are materially adversely affected.

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

The semiconductor and nanotechnology manufacturing industries are subject to rapid technological change and new product introductions and enhancements. Our ability to be competitive in these and other markets will depend, in part, upon our ability to develop new and enhanced systems and related 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. We will also be required to enhance the performance of our existing systems and related software tools. Our success 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 meet that demand. We may not be successful in selecting, developing, manufacturing or marketing new products and related software tools or enhancing our existing products and related software tools. Any such failure would materially adversely affect our business, financial condition and results of operations.

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

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

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

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International sales accounted for approximately 64%, 69% and 65% of total net sales for the years 2006, 2005 and 2004, respectively. We anticipate that international sales will continue to account for a significant portion of total net sales. As a result, a significant portion of our net sales will continue to be subject to certain risks, including unexpected changes in regulatory requirements; difficulty in satisfying existing regulatory requirements; exchange rate fluctuations; tariffs and other barriers; political and economic instability; difficulties in accounts receivable collections; natural disasters; difficulties in staffing and managing foreign subsidiary and branch operations; and potentially adverse tax consequences.

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

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

Our future operating results depend, in significant part, upon the continued contributions of key personnel, many of whom would be difficult to replace. We have entered into employment agreements with only a limited number of our employees, including our Chief Executive Officer and Chief Financial Officer, and our employees are employed “at will.” Some of these agreements contain vesting acceleration and severance payment provisions that could result in significant costs or charges to us should the employee be terminated without cause, die or have a disability. We do not maintain any life insurance on any of our key people. The loss of key personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, our future operating results depend in significant part upon our ability to attract and retain other qualified management, manufacturing, technical, sales and support personnel for our operations. There are only a limited number of persons with the requisite skills to serve in these positions and it may become increasingly difficult for us to hire such personnel over time. At times, competition for such personnel has been intense, particularly in the San Francisco Bay Area where we maintain our headquarters and principal operations, and there can be no assurance that we will be successful in attracting or retaining such personnel. The failure to attract or retain such persons would materially adversely affect our business, financial condition and results of operations.

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

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

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

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

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

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

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

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

We believe that factors such as announcements of developments related to our business, fluctuations in our operating results, a shortfall in revenue or earnings, changes in analysts’ expectations, general conditions in the semiconductor and nanotechnology industries or the worldwide or regional economies, sales of our securities into the marketplace, an outbreak or escalation of hostilities, announcements of technological innovations or new products or enhancements by us or our competitors, developments in patents or other intellectual property rights and developments in our relationships with our customers and suppliers could cause the price of our Common Stock to fluctuate, perhaps substantially. The market price of our Common Stock has fluctuated significantly in the past and we expect it to continue to experience significant fluctuations in the future, including fluctuations that may be unrelated to our performance.

As of March 1, 2007, we had options to purchase approximately 5,685,727 shares of our Common Stock outstanding. Among other determinants, the market price of our stock has a major bearing on the number of shares subject to outstanding stock options that are included in the weighted-average shares used in determining our net income (loss) per share. During periods of extreme volatility, the impact of higher stock prices can have a materially dilutive effect on our net income (loss) per share. Additionally, shares subject to outstanding options are excluded from the calculation of net income (loss) per share when we have a net loss or when the exercise price of the stock option is greater than the average market price of our Common Stock, as the impact of the stock options would be anti-dilutive.

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

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

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

On July 26, 2006 we purchased certain assets of Oraxion, Inc. Oraxion produced inspection equipment for surface metrology and stress analysis for the semiconductor industry. We may not realize the anticipated benefits of any acquisition or investment. We may in the future pursue additional acquisitions of complementary product lines, technologies or businesses. Future acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses and impairment charges related to goodwill and other intangible assets, which could materially adversely affect our financial condition and results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, personnel and products of the acquired companies; the diversion of management’s attention from other business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of key employees of the acquired company. In the event we acquire product lines, technologies or businesses which do not complement our business, or which otherwise do not enhance our sales or operating results, we may incur substantial write-offs and higher recurring operating costs, which could have a material adverse effect on our business, financial condition and results of operations. In the event that any such acquisition does occur, there can be no assurance as to the effect thereof on our business or operating results.

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

In the fourth quarter of 2006, we eliminated approximately 29 full-time positions, 69% in the United States and 31% internationally, and entered into a lease buyout agreement for the operating lease in the United Kingdom facility as part of our long-term expense reduction initiatives. As of December 31, 2006, we have reduced our workforce by 27 personnel in connection with this plan and recorded exit activity charges of approximately $1.9 million related to this plan. We may from time to time undertake additional expense reduction programs or actions, any of which could result in current period charges and expenses that could have a material adverse effect on that period’s operating results.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Ultratech 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. We also lease sales and support offices in the United States in East Fishkill, New York and Woburn, Massachusetts under leases expiring in 2007 and 2008, respectively. We maintain offices outside the United States in Taiwan, the Philippines, Japan, Korea, France, and China, with terms expiring between seven months and five years from December 31, 2006. We believe that our existing facilities will be adequate to meet our currently anticipated requirements and that suitable additional or substitute space will be available as needed. In the fourth quarter of 2006, in order to drive company-wide savings, we entered into a lease buyout agreement for the operating lease in the United Kingdom facility and we also exited a Texas facility when the lease expired.

ITEM 3. LEGAL PROCEEDINGS

On February 29, 2000, we filed lawsuits asserting patent infringement and related claims against Nikon, Canon, and ASML in the U.S. District Court for the Eastern District of Virginia. In April 2000, we reached a settlement with Nikon, and in September 2001, we reached a settlement with Canon. In the patent litigation against ASML, a jury trial was conducted in the U.S. District Court for the Northern District of California during the three-month period ended July 2, 2005. The jury reached a verdict that the patent was infringed, but that the asserted claims of the patent were invalid. We filed a post-trial motion for a new trial and for judgment as a matter of law in our favor. ASML also filed a motion for judgment as a matter of law seeking to invalidate three of the asserted claims for lack of enablement and requested that the court awards costs. On February 13th, 2006, the Court denied our post-trial motions, including the motion for a new trial, and entered judgment in favor of ASML invalidating three claims of the patent for lack of enablement. The Court also awarded ASML approximately $330,000 in costs. We have filed an appeal with the Federal Circuit Court of Appeals, and filed our opening appellate brief on August 30, 2006. Although ASML originally filed a notice of cross-appeal, ASML subsequently withdrew its cross appeal and the Court entered an order to that effect on December 8, 2006. ASML’s opening appellate brief was filed on December 6, 2006, and Ultratech’s reply brief was filed January 12, 2007. We expect the case to be set for oral argument in late Spring 2007.

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On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement of certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for the Northern District of California. On May 17, 2005, the court found the subject patent to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of a federal patent litigation suit brought against it by us. We do not believe this new action has merit, particularly given the denial by the federal court and the subsequent federal appellate court’s affirmation of the order denying the award of any attorney’s fees payable to this company by us in the federal patent litigation. We filed a motion to have the state court complaint dismissed under California’s anti-SLAPP and demurrer statutes. Nonetheless the state court has preliminarily stated that it would deny our motion to dismiss as to the malicious prosecution claim, while granting it as to the abuse of process claim. In such event, we intend to appeal the denial of our motion to dismiss the malicious prosecution claim and otherwise vigorously defend against this action and to seek fees and/or sanctions against this company in relation thereto.

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, 2006.

Executive Officers of the Registrant

As of December 31, 2006, the executive officers of Ultratech, who are appointed by and serve at the discretion of the Board of Directors, were as follows:Name Age Position with the Company

Arthur W. Zafiropoulo . . . . . . . . 67 Chairman of the Board of Directors, Chief Executive Officer and PresidentBruce R. Wright . . . . . . . . . . . . . . 58 Senior Vice President, Finance, Chief Financial Officer and Secretary

Mr. Zafiropoulo founded Ultratech 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 Ultratech from March 1993 to March 1996, from May 1997 until April 1999 and from April 2001 to January 2004. In October 2006, he resumed the responsibilities of President and

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Chief Operating Officer. 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 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 to June 2003, Mr. Zafiropoulo served as Chairman of SEMI, and Mr. Zafiropoulo has been on the Board of Directors of SEMI since July 1995.

Mr. Wright has served as Senior Vice President, Finance, Chief Financial Officer and Secretary since joining Ultratech 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. Wright serves on the Board of Directors of Credence Systems Corporation, a provider of products and equipment used for the testing of semiconductor integrated circuits.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is traded on the NASDAQ Global Market under the symbol UTEK. The following table sets forth, for the periods indicated, the range of high and low reported sale prices of our Common Stock.

Fiscal 2006—Fiscal Quarter Ended March 31 June 30 September 30 December 31

Market Price: High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25.01 $ 25.03 $ 15.96 $ 15.04Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15.76 $ 14.65 $ 12.75 $ 10.56

Fiscal 2005—Fiscal Quarter Ended March 31 June 30 September 30 December 31

Market Price: High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19.12 $ 21.64 $ 22.93 $ 17.87Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13.50 $ 14.29 $ 13.57 $ 13.21

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As of March 1, 2007, we had approximately 337 stockholders of record.

Ultratech’s fiscal quarters in 2006 ended on April 1, 2006, July 1, 2006, September 30, 2006 and December 31, 2006, and our fiscal quarters in 2005 ended on April 2, 2005, July 2, 2005, October 1, 2005 and December 31, 2005. For convenience of presentation, our fiscal quarters in each year have been shown as ending on March 31, June 30, September 30, and December 31.

We have not paid cash dividends on our Common Stock since inception, and our Board of Directors presently plans to reinvest our earnings in our business. Accordingly, it is anticipated that no cash dividends will be paid to holders of Common Stock in the foreseeable future.

On August 15, 2006, we issued 2,000 shares of our Common Stock in an unregistered, private placement under Section 4(2) of the Securities Act of 1933 to SEMI Foundation, a non-profit organization, to support their efforts to educate youth interested in science and math about career opportunities in the semiconductor industry.

On August 24, 2005, we issued 1,500 shares of our Common Stock in an unregistered, private placement under Section 4(2) of the Securities Act of 1933 to SEMI Foundation, a non-profit global trade organization, to support their efforts to educate youth interested in science and math about career opportunities in the semiconductor industry.

In August 2004, we issued 1,250 shares of our Common Stock in an unregistered, private placement under Section 4(2) of the Securities Act of 1933 to SEMI Foundation, a non-profit global trade organization, to support their efforts to educate youth interested in science and math about career opportunities in the semiconductor equipment industry.

We announced on September 19, 2005 that our Board of Directors authorized the repurchase of up to $30.0 million of our common stock in the open market at then prevailing market prices during the period commencing September 19, 2005 through September 30, 2007. During 2006, we repurchased 742,045 shares of our common stock at a total purchase price of $10.8 million. As of December 31, 2006, we had repurchased 1,386,580 shares of our common stock for a total of $20.0 million since the stock repurchase authorization date.

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ITEM 6. SELECTED FINANCIAL DATA

In thousands, except per share data and percentage information 2006(c) 2005 2004 2003(b) 2002(a)

Operations:Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 119,633 $ 122,366 $ 109,892 $ 100,121 $ 68,506Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,024 52,047 52,693 46,611 14,850Gross profit as a percentage of net sales . . . . . . . . 38% 43% 48% 47% 22%Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . $ (14,371) $ (4,875) $ (2,429) $ 2,972 $ (36,506)Income (loss) before income taxes and cumulative

effect of a change in accounting principle. . . . . $ (8,014 ) $ (522 ) $ 1,069 $ 6,996 $ (30,248 ) Pre-tax income (loss) as a percentage of net sales (6.7)% (0.4)% 1.0% 7.0% (44.2)%Provision (benefit) for income taxes . . . . . . . . . . . $ 954 $ 699 $ 445 $ (570) $ (4,866)Income (loss) before cumulative effect of a change

in accounting principle . . . . . . . . . . . . . . . . . . . . . $ (8,968 ) $ (1,221 ) $ 624 $ 7,566 $ (25,382 ) Cumulative effect of the adoption of FIN 47 . . . . $ — $ (1,122) $ — $ — $ —Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,968) $ (2,343) $ 624 $ 7,566 $ (25,382)Income (loss) before cumulative effect of a change

in accounting principle per share—basic . . . . . $ (0.38 ) $ (0.05 ) $ 0.03 $ 0.33 $ (1.12 ) Cumulative effect of the adoption of FIN 47 per

share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ (0.05) $ — $ — $ —Net income (loss) per share—basic . . . . . . . . . . . . $ (0.38) $ (0.10) $ 0.03 $ 0.33 $ (1.12)Number of shares used in per share computation—

basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,764 23,964 23,733 23,017 22,586Income (loss) before cumulative effect of a change

in accounting principle per share—diluted . . . . $ (0.38 ) $ (0.05 ) $ 0.03 $ 0.31 $ (1.12 )Cumulative effect of the adoption of FIN 47 per

share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.05) $ — $ — $ —Net income (loss) per share—diluted . . . . . . . . . . $ (0.38) $ (0.10) $ 0.03 $ 0.31 $ (1.12)Number of shares used in per share computation—

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,764 23,964 24,734 24,476 22,586Balance sheet:Cash, cash equivalents and short-term investments

(Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,090 $ 141,067 $ 151,627 $ 165,902 $ 157,529Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,951 165,181 169,621 170,501 152,160Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,050 222,309 230,546 220,748 222,366Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . 174,108 188,950 193,290 190,739 171,754

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Quarterly Data

Unaudited, in thousands, except per share data 1st 2nd 3rd 4th

2006Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,944 $ 26,043 $ 33,943 $ 24,703Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,657 11,811 12,450 8,106Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 (2,884) (3,568) (8,126)Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,582 (1,176) (2,568) (6,806)Net income (loss) per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.07 $ (0.05) $ (0.11) $ (0.29)Number of shares used in per share computation—basic . . . . . . . . . . . . . . . . . . 23,830 23,927 23,477 23,213Net income (loss) per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.06 $ (0.05) $ (0.11) $ (0.29)Number of shares used in per share computation—diluted . . . . . . . . . . . . . . . . 25,127 23,927 23,477 23,2132005Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,962 $ 28,826 $ 30,349 $ 35,229Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,278 11,689 13,014 15,066Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,855) (3,340) (214) 1,534Income before cumulative effect of change in accounting principle . . . . . . . . . — — — 2,474Cumulative effect of the adoption of FIN 47 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (1,122)Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,896) (1,994) 195 1,352Net income (loss) per share—basic:Income before cumulative effect of change in accounting principle . . . . . . . . . $ (0.08) $ (0.08) $ 0.01 $ 0.10Cumulative effect of the adoption of FIN 47 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — $ (0.04)Net Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.08) $ (0.08) $ 0.01 $ 0.06Number of shares used in per share computation—basic . . . . . . . . . . . . . . . . . . 23,877 23,944 24,129 23,905Net income (loss) per share—diluted:Income before cumulative effect of change in accounting principle . . . . . . . . . $ (0.08) $ (0.08) $ 0.01 $ 0.10Cumulative effect of the adoption of FIN 47 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — $ (0.04)Net Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.08) $ (0.08) $ 0.01 $ 0.06Number of shares used in per share computation—diluted . . . . . . . . . . . . . . . . 23,877 23,944 25,067 24,323

(a) Operating loss in 2002 includes a charge of: $5,305,000 related to cost of inventory write-downs; $1,425,000 related to cost of discontinued products; and $4,090,000 related to restructuring of operations.

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(b) Operating income in 2003, includes the favorable impact of selling inventory and discontinued products previously written down of $1,672,000. Operating income in 2003 also includes the favorable impact of reducing reserves established in prior years for the restructuring of operations of $728,000.

(c) Operating loss in 2006 includes a charge of $1,907,000 related to certain exit activities (of which $96,000 relating to the acceleration of restricted stock units and options are included in stock-based compensation expenses) and $1,957,000 of stock-based compensation expenses. Refer to Notes 5 and 11 of our consolidated financial statements herein for further disclosures related to these items.

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

Certain of the statements contained herein, which are not historical facts and which can generally be identified by words such as “anticipates”, “expects”, “intends”, “will”, “could”, “believes”, “estimates”, “continue”, and similar expressions, are forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, such as risks related to our dependence on new product introductions and market acceptance of new products and enhanced versions of our existing products; lengthy sales cycles, including the timing of system installations and acceptances; lengthy and costly development cycles for laser-processing and lithography technologies and applications; integration, development and associated expenses of the laser processing operation; delays, deferrals and cancellations of orders by customers; cyclicality in the semiconductor and nanotechnology industries; pricing pressures and product discounts; high degree of industry competition; intellectual property matters; expiration of licensing arrangements, and the resulting adverse impact on our licensing revenues; changes to financial accounting standards; changes in pricing by us, our competitors or suppliers; customer concentration; international sales; timing of new product announcements and releases by us or our competitors; ability to volume produce systems and meet customer requirements; sole or limited sources of supply; ability and resulting costs to attract or retain sufficient personnel to achieve our targets for a particular period; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon us achieving and maintaining profitability and the market price of our stock; mix of products sold; rapid technological change and the importance of timely product introductions; outcome of litigation; manufacturing variances and production levels; timing and degree of success of technologies licensed to outside parties; product concentration and lack of product revenue diversification; inventory obsolescence; asset impairment; effects of certain anti-takeover provisions; future acquisitions; volatility of stock price; foreign government regulations and restrictions; business interruptions due to natural disasters or utility failures; environmental regulations; and any adverse effects of terrorist attacks in the United States or elsewhere, or government responses thereto, or military actions in Iraq, Afghanistan, North Korea and elsewhere, on the economy in general, or on our business in particular. Due to these and additional factors, the statements, historical results and percentage relationships set forth below are not necessarily indicative of the results of operations for any future period. These forward-looking statements are based on management’s current beliefs and expectations, some or all of which may prove to be inaccurate, and which may change. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.

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OVERVIEW

Ultratech, Inc. develops, manufactures and markets photolithography and laser thermal processing equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Japan, Taiwan and the rest of Asia.

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

In July 2006, we completed the acquisition of certain assets of Oraxion, Inc., a manufacturer of advanced surface-metrology and stress-analysis equipment for the semiconductor and related industries. As a result of this acquisition, we plan to utilize Oraxion’s CGS-300 wafer inspection/metrology tool in conjunction with our own LSA100 laser spike anneal system used for 65nm and other next-generation devices.

In the fourth quarter of 2006, in order to reduce company-wide expenses, we eliminated approximately 29 full-time positions, 69% in the United States and 31% internationally, and entered into a lease buyout agreement for the operating lease in the United Kingdom facility. In addition, we plan to take similar actions during the first quarter of 2007. We expect these activities to be substantially completed by March 31, 2007.

Beginning in fiscal 2006, we accounted for stock-based compensation in accordance with SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107. As a result of adopting SFAS 123R on January 1, 2006, and excluding the expense related to restricted stock units which would have been included in our Consolidated Statements of Operations under the provisions of APB No. 25, our Consolidated Statements of Operations for the year ended December 31, 2006 changed by $0.9 million as compared to what we would have reported had we continued to account for share-based compensation under APB No. 25.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our 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 us 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, we evaluate our estimates, including those related to inventories, warranty obligations, purchase order commitments, bad debts, income taxes, intangible assets, restructuring liabilities, asset retirement obligations, and contingencies and litigation. Management bases its

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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.

We believe the following critical accounting policies are affected by our more significant judgments and estimates used in the preparation of our consolidated financial statements. We have reviewed these policies with our Audit Committee.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectibility is reasonably assured. We derive revenue from four sources—system sales, spare parts sales, service contracts and license fees.

Provided all other criteria are met, we recognize revenues on system sales when we have received customer acceptance of the system. In the event that terms of the sale provide for a lapsing customer acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. 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.

Our transactions frequently include the sale of systems and services under multiple element arrangements. In situations with multiple deliverables, revenue is recognized upon the delivery of the separate elements and when we receive customer acceptance or are otherwise released from our customer acceptance obligations. Consideration from multiple element arrangements is allocated among the separate accounting units based on the residual method under which the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements, provided the undelivered elements have value on a stand alone basis, there is objective and reliable evidence of fair value for the undelivered elements, the arrangement does not include a general right of return relative to the delivered item and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.

We generally recognize revenue from spare parts sales upon shipment, as our products are generally sold on terms that transfer title and risk of ownership when it leaves our site. We sell service contracts for which revenue is deferred and recognized ratably over the contract period and service contracts based on a purchased quantity of hours under which revenue is recognized as service hours are delivered. We recognize revenue from licensing and technology support agreements ratably over the contract period, or the estimated useful life of the licensed technologies, whichever is shorter.

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Costs related to deferred product revenues are capitalized (deferred) and recognized at the time of revenue recognition. Deferred product revenue and costs are netted on our balance sheet, under the caption “deferred product and services income.”

Costs incurred for shipping and handling are included in cost of sales.

Inventories and Purchase Order Commitments

The semiconductor industry is characterized by rapid technological change, changes in customer requirements and evolving industry standards. We perform a detailed assessment of inventory at each balance sheet date, which includes a review of, among other factors, demand requirements and market conditions. Based on this analysis, we record adjustments, when appropriate, to reflect inventory at lower of cost or market. Although we make every effort to ensure the accuracy of our forecasts of product demand, any significant unanticipated changes in demand, product mix or technological developments would significantly impact the value of our inventory and our reported operating results. In the future, if we find that our estimates are too optimistic and we determine that our inventory needs to be written down, we will be required to recognize such costs in our cost of sales at the time of such determination. For example, if the demand assumption used in our assessment at December 31, 2006 was reduced by 10%, assuming all other assumptions such as product mix are kept the same and that mitigation efforts were not possible, we would have had to write down our inventory and open purchase commitments by $0.2 million. Conversely, if we find our estimates are too pessimistic and we subsequently sell product that has previously been written down, our gross margin in that period will be favorably impacted. During 2002, we recorded a write down of inventory of $6.7 million and subsequently we realized favorable gross margin impacts of $0.1 million and $1.0 million in 2005 and 2004, respectively, due to sales of inventory that was previously written down. In 2006, we did not sell any previously written down inventory.

Warranty Obligations

We recognize the estimated cost of our product warranties at the time revenue is recognized. Our 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 our estimates, revisions to the estimated warranty liability would be required which could result in future charges or credits to our gross margins. As may occur with new product introductions, warranty costs in 2006 were higher than anticipated by approximately $1.5 million. We believe our warranty accrual, as of December 31, 2006, will be sufficient to satisfy outstanding obligations as of that date.

Allowance for Bad Debts

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. This reserve is established based upon historical trends, current economic conditions, delinquency status based on contractual terms and an analysis of specific exposures. If the financial condition of our 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 our systems is in excess of $2.5 million. Accordingly,

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a single customer default could have a material adverse effect on our results of operations. Our bad debt reserve as a percentage of gross accounts receivable increased from 1.2% at December 31, 2004 to 2.9% and 2.5% at December 31, 2005 and 2006 due principally to the impact of bad debt expense associated with a customer bankruptcy filing ($0.3 million) during 2005.

Deferred Income Taxes

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. As of December 31, 2006, we had recorded a valuation allowance of $77.7 million against our net deferred tax assets except those in Japan and Taiwan. As of December 31, 2006, we had recorded approximately $0.4 million of net foreign deferred tax assets related to our operations in Japan and Taiwan. Based on projected future pre-tax income in Japan and Taiwan, these assets were not subject to a valuation allowance as it is more likely than not that they will be realized in the future.

Stock‑Based Compensation

Beginning in fiscal 2006, we have accounted for stock-based compensation in accordance with SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility, employee stock option exercise behaviors and employee option forfeiture rates. If actual results differ significantly from these estimates, stock-based compensation expense recognized in our results of operations could be materially affected. As stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards that ultimately are expected to vest, the amount of the expense has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If factors change and we employ different assumptions in the application of SFAS 123R, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period.

RESULTS OF OPERATIONS

We derive a substantial portion of our total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $1.2 million to $5.6 million. As a result of these high sale prices, the timing and recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on our net sales and operating results for any particular period. Our backlog at the beginning of a period typically does not include all of the sales needed to achieve our sales objectives for that period. In addition, orders in backlog are subject to cancellation, shipment or customer acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. Consequently, our net sales and operating results for a period have been and

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will continue to be dependent upon our obtaining orders for systems to be shipped and accepted in the same period in which the order is received. Our business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and customer acceptance during that period. Furthermore, a substantial portion of our shipments has historically occurred near the end of each quarter. Delays in installation and customer acceptance due, for example, to our inability to successfully demonstrate the agreed-upon specifications or criteria at the customer’s facility, or to the failure of the customer to permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below our expectations, which may materially adversely affect our operating results for that period. This risk is especially applicable in connection with the introduction and initial sales of a new product line. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to rescheduling, delays, deferrals or cancellations by customers, additional customer configuration requirements, or to unexpected manufacturing difficulties or delays in deliveries by suppliers due to their long production lead times or otherwise, have caused and may continue to cause net sales in a particular period to fall significantly below our expectations, materially adversely affecting our operating results for that period. In particular, the long manufacturing and acceptance cycles of our advanced packaging family of wafer steppers and laser thermal processing systems and the long lead time for lenses and other materials, could cause shipments and acceptances of such products to be delayed from one quarter to the next, which could materially adversely affect our financial condition and results of operations for a particular quarter.

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

Net sales

2006 vs. 2005

(in millions) 2006 2005Amount of

ChangePercentage

Change

Sales of:Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87.9 $ 93.2 $ (5.3) -6%Spare parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.3 15.2 2.1 14%Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 12.5 1.7 13%Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 1.5 (1.3) -87%

Total Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 119.6 $ 122.4 $ (2.9) -2%

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Net sales consist of revenues from system sales, spare parts sales, services and licensing of technologies. For the year ended December 31, 2006, systems revenue accounted for approximately 73% of total net sales, and services, licenses and spare parts accounted for the remaining 27%. System sales decreased 6% to $87.9 million on a system unit volume decrease of 18%. This decrease was partially offset by a 15% increase in the average selling price of systems sold in 2006 compared to 2005. The revenue decrease was due primarily to delivery push-outs in the fourth quarter of 2006, reflecting softer business conditions. The average selling price of systems sold increased from the prior year primarily as a result of a shift in product mix in favor of our new laser processing products and away from our legacy platform products and refurbished units. In 2006, refurbished systems accounted for approximately 9% of units sold as compared to 18% of units sold in 2005. This percentage can fluctuate from year to year and, as refurbished units generally have lower average selling prices than new units, any such fluctuation will impact the weighted average selling price of the systems sold.

On a product market application basis, system sales to the semiconductor industry were $82.7 million for the year ended December 31, 2006, an increase of 13% as compared with system sales of $73.4 million in 2005. This increase was due to a 104% increase in laser thermal processing system sales. These systems typically have significantly higher average selling prices, as compared to our nanotechnology offerings.

System sales to the nanotechnology market were $5.2 million for the year ended December 31, 2006, a decrease of 74% as compared with sales of $19.8 million in 2005. System sales to the nanotechnology market are highly dependent on customer capacity demand in the thin film head industry.

Sales of spare parts in 2006 increased 14%, to $17.3 million, as compared to $15.2 million in 2005. This increase was mainly due to increased spare part usage as the result of system upgrades revenue increase in 2006 as compared to 2005. Revenues from services grew 13% to $14.2 million for the year ended December 31, 2006 as compared with $12.5 million in 2005. The increase in service revenue was primarily due to an increase in service provided as the result of system upgrades and additional service contracts entered into in 2006.

Licensing and licensing support arrangements declined to $0.2 million in 2006 as compared with $1.5 million in 2005. In 2006, we recognized license revenue of $0.2 million. In 2005, we recognized $1.0 million of amortization revenue from prior-period licensing agreements and $0.5 million of revenue from licensing agreements. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing and royalty arrangements, including those, if any, resulting from litigation. We may not be successful in generating licensing revenues and do not anticipate the recognition of significant levels of licensing income in the future.

At December 31, 2006, we had approximately $3.0 million of deferred product and services income resulting from products shipped but not yet installed and accepted, as compared with $2.0 million at December 31, 2005.

For the year ended December 31, 2006, international net sales were $76.6 million, or 64% of total net sales, as compared with $84.9 million, or 69% of total net sales in 2005. We expect sales to international customers to continue to represent a significant majority of our revenues during 2007. Our revenue derived from sales in foreign countries is not generally subject to significant exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, however, orders are

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often denominated in Japanese yen. For the year ended December 31, 2006, we recorded system sales in Japan of $27.5 million, of which 25% were denominated in Japanese yen. This subjects us to the risk of currency fluctuations. We attempt to mitigate this risk by entering into foreign currency forward exchange contracts for the period between when an order is received and when it is recorded as revenue. After recording revenue, we use various mechanisms, such as foreign currency forward exchange contracts and natural hedges, to offset substantial portions of the gains or losses associated with our Japanese yen denominated receivables due to exchange rate fluctuations. We had approximately $8.8 million of Japanese yen-denominated receivables at December 31, 2006. International sales expose us to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which impact the relative cost of ownership of our products and, thus, the customer’s willingness to purchase our product. (See “Risk Factors: International Sales”).

Net sales

2005 vs. 2004

(in millions) 2005 2004Amount of

ChangePercentage

change

Sales of:Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93.2 $ 82.0 $ 11.2 14%Spare parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 11.4 3.8 33%Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5 12.3 0.2 2%Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 4.2 (2.7) -64%

Total Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122.4 $ 109.9 $ 12.5 11%

System sales increased 14%, to $93.2 million. The average selling price of systems sold increased 29% from the prior year primarily as a result of increased sales to laser thermal processing and advanced packaging customers. The number of systems sold declined by 12% as a result of decreased sales of our 1000 and 100 series products. In 2005, refurbished systems accounted for approximately 18% of units sold as compared to 30% of units sold in 2004. This percentage can fluctuate from year to year and, as refurbished units generally have lower average selling prices than new units, any such fluctuation will impact the weighted average selling price of the systems sold.

On a product market application basis, system sales to the semiconductor industry were $73.4 million for the year ended December 31, 2005, an increase of 19% as compared with system sales of $61.5 million in 2004. This increase was due to an 18% increase in sales to the advanced packaging markets and a 217% increase in laser thermal processing system sales. These systems typically have significantly higher average selling prices, as compared to our nanotechnology offerings. System sales to the nanotechnology market were $19.8 million for the year ended December 31, 2005, a decrease of 3% as compared with sales of $20.5 million in 2004.

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Sales of spare parts for 2005 increased 33%, to $15.2 million, as compared to $11.4 million in 2004. This increase was mainly due to more revenue from system upgrades in 2005 as compared to 2004. Revenues from services grew 2% to $12.5 million for the year ended December 31, 2005 as compared with $12.3 million in 2004.

Revenues from licensing and licensing support arrangements declined to $1.5 million, as compared with $4.2 million in 2004, as a result of the completion of the amortization period of prior-period proceeds from licensing agreements. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing and royalty arrangements, including those, if any, resulting from litigation. We may not be successful in generating licensing revenues in the future.

At December 31, 2005, we had approximately $2.0 million of deferred product and services income resulting from products shipped but not yet installed and accepted and deferred service revenue, as compared with $1.2 million at December 31, 2004.

For the year ended December 31, 2005, international net sales were $84.9 million, or 69% of total net sales, as compared with $71.7 million, or 65% of total net sales for 2004. For the year ended December 31, 2005, we recorded system sales in Japan of $12.5 million, of which 26% were denominated in Japanese yen. We had approximately $1.6 million of Japanese yen-denominated receivables at December 31, 2005.

Gross profit

2006 vs. 2005

On a comparative basis, gross margins were 38.5% and 42.5% for 2006 and 2005, respectively. The 4.0 percentage point decline in gross margin in 2006 was mainly due to higher unabsorbed manufacturing expenses (2.9 points), higher unabsorbed service expenses (1.8 points) and higher inventory writedowns (0.9 points) partially offset by higher standard margin (1.3 points) due to changes in revenue mix resulting primarily from 5 laser thermal processing systems and 16 AP200/300 systems accepted during 2006 as compared with 3 laser thermal processing systems and 7 AP200/300 systems in 2005. The remaining 0.3 points are due to other miscellaneous charges, each of which individually is insignificant.

Exclusive of licensing revenues, gross margin was 38.4% for 2006 as compared with 41.8% for 2005. We believe disclosure of gross margins without reference to licensing revenues provides additional appropriate disclosure to allow comparison of our product and service gross margins over time because there is little, if any, cost of sales associated with our licensing revenues.

Our gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including the mix of products sold; the introduction of new products, which typically have higher manufacturing, installation and after-sale support costs until efficiencies are realized and which are typically discounted more than existing products until the products gain market acceptance; the rate of capacity utilization; writedowns of inventory and open purchase commitments; technology support and licensing revenues, which have no associated cost of sales; product discounts, pricing and competition in our targeted markets;

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non-linearity of shipments during the quarter which can result in manufacturing inefficiencies; the percentage of international sales, which typically have lower gross margins than domestic sales principally due to higher field service and support costs; and start-up costs and inefficiencies associated with the implementation of subcontracting arrangements.

2005 vs. 2004

On a comparative basis, gross margins were 42.5% and 47.9% for 2005 and 2004, respectively. The 5.4 percentage point decline in gross margin in 2005 was due to changes in revenue mix resulting primarily from the three laser thermal processing systems accepted during the fourth quarter of 2005 (2.5 points), certain manufacturing costs (1.3 points) and installation costs (0.9 points) resulting from the production and shipment ramp of our laser thermal processing systems and unity platform lithography systems and higher manufacturing costs resulting from facilities upgrades completed in late 2004 (0.7 points).

Exclusive of licensing revenues, gross margin was 41.8% for 2005 as compared with 45.9% for 2004. We believe disclosure of gross margins without reference to licensing revenues provides additional appropriate disclosure to allow comparison of our product and service gross margins over time because there is little, if any, cost of sales associated with our licensing revenues.

Research, development and engineering expenses

2006 vs. 2005

(in millions) 2006 2005Amount of

ChangePercentage

change

Research, development and engineering expenses . . . . . . . . . . . . . . . . . . . . $ 26.2 $ 27.0 $ (0.8) -3%

The decrease in research, development and engineering expenses in 2006, as compared to 2005, was primarily the result of lower spending associated with the development of our laser processing technologies. Given that there is an inherent delay between the time product development activities and expenditures occur and when resultant product revenue is ultimately realized, we expect current year research, development and engineering investments to contribute to revenue in future years. As a percentage of net sales, research, development and engineering expenses for each of the two years ended December 31, 2006 and 2005, respectively, were approximately 22%.

2005 vs. 2004

(in millions) 2005 2004Amount of

ChangePercentage

change

Research, development and engineering expenses . . . . . . . . . . . . . . . . . . . . . $ 27.0 $ 25.9 $ 1.1 4%

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The increase in research, development and engineering expenses in 2005, as compared to 2004, was primarily due to increased investments in the development of our laser processing technologies during the first half of 2005. We continued to invest significant resources in the development and enhancement of our laser processing systems and technologies and our 1X products and related technologies. In 2005, we revenued three laser thermal processing systems which was the result of our 2005 research, development and engineering effort.

Amortization of intangible assets

Amortization of intangible assets was $0.0 million, $0.1 million and $0.4 million for the years ended December 31, 2006, 2005 and 2004, respectively. Intangible assets consist of royalties received from prior-period proceeds from licensing agreements and were fully amortized during the year ended December 31, 2005.

Selling, general and administrative expenses

2006 vs. 2005

(in millions) 2006 2005Amount of

ChangePercentage

change

Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . $ 34.2 $ 29.9 $ 4.3 14%

Selling, general and administrative expenses increased by $4.3 million, or 14%, in 2006, as compared to 2005. The increase was primarily due to increased hiring, marketing and demonstration support marketing costs associated with our laser processing product line ($4.0 million); increased expense reduction actions in the fourth quarter of 2006 ($1.3 million), increased stock based compensation expense (associated with the implementation of SFAS 123R and compensation expenses related to restricted stock units as described in Note 5 ($1.6 million); partially offset by decreased legal costs compared to 2005 ($2.6 million).

2005 vs. 2004

(in millions) 2005 2004Amount of

ChangePercentage

change

Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29.9 $ 28.8 $ 1.1 4%

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Selling, general and administrative expenses increased by $1.1 million, or 4%, in 2005, as compared to 2004. This increase was due to an increase in legal costs, primarily related to our being a plaintiff in two patent infringement lawsuits ($2.1 million), partially offset by decreased selling expenses in North America ($0.5 million) and lower sales commission expenses ($0.5 million).

Interest and other income, net

(in thousands) 2006 2005 2004

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,273 $ 4,752 $ 3,624Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 (19) (12)Interest and other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,594 $ 4,733 $ 3,612

Interest income was $6.3 million for the year ended December 31, 2006, as compared with $4.8 million for 2005. The increase in 2006 from 2005 was primarily due to higher interest rates on our investments.

Interest income was $4.8 million for the year ended December 31, 2005, as compared with $3.6 million for 2004. The increase in 2005 from 2004 was primarily due to higher interest rates on our investments.

We presently maintain an investment portfolio with a weighted-average maturity of less than two years. Consequently, changes in short-term interest rates have a significant impact on our interest income. Future changes are expected to have a similar impact.

Provision for income taxes

For the year ended December 31, 2006, we recorded an income tax expense of $1.0 million, comprised primarily of foreign taxes. The actual expense recorded differs from the federal tax benefit at 35% primarily due to current tax expense in foreign jurisdictions and the fact that no tax benefit is recorded for U.S. losses that are not expected to be realized.

For the year ended December 31, 2005, we recorded an income tax expense of $0.7 million, comprised primarily of foreign taxes. The actual expense recorded differs from the federal tax benefit at 35% primarily due to current tax expense in foreign jurisdictions and the fact that the tax benefit of U.S. losses is not recognized.

For the year ended December 31, 2004, we recorded an income tax expense of $0.4 million which included a $0.1 million benefit related to the settlement of tax audit issues in the United Kingdom. The actual expense recorded, excluding the benefit related to the settlement of tax audit issues in the United Kingdom, represents 51% of pre-tax income. This rate is higher than the U.S. federal rate of 35% because the tax benefit of U.S. losses was not recognized as domestic deferred tax assets are fully reserved.

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In October 2004, the United States enacted The American Jobs Creation Act of 2004 (“the Act”). The Act provides for a three year phase-out of current extraterritorial income tax (“ETI”) benefits and replaces ETI with a phased-in nine percent domestic production activity deduction that will not be fully effective until 2010. We do not currently realize ETI tax benefits. This provision of the Act is not expected to have a material effect on our results of operations or financial position in the near future. The Act also includes a temporary deduction of 85% for certain foreign earnings that are repatriated, as defined in the Act. We did not repatriate any of our foreign earnings during the effective period of this deduction.

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 our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters, and we do not anticipate any material earnings impact from their ultimate resolutions.

Cumulative effect of the adoption of FIN 47

In December 2005 we adopted FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), an interpretation of FASB Statement No. 143, “Asset Retirement Obligations” (“SFAS 143”). FIN 47 clarifies that the term “conditional asset retirement obligation” as used in SFAS 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated, even if conditional on a future event. As permitted, we recognized the effect of applying FIN 47 as a cumulative effect of a change in accounting principle. Our adoption of FIN 47 in 2005 resulted in an increase in net equipment and leasehold improvements of approximately $1.0 million, recognition of an asset retirement obligation (the “ARO”) liability of $2.1 million, and a cumulative effect of adoption of $1.1 million or $0.05 per share, for the year ended December 31, 2005. The ARO liability is principally for estimable asset retirement obligations related to remediation costs, which we estimate will be incurred upon the expiration of certain operating leases. Refer to Note 17 of our consolidated financial statements herein for further disclosures related to this.

Outlook

The anticipated timing of orders, shipments and customer acceptances usually requires us to fill a number of production slots in any given quarter in order to meet our sales targets. If we are unsuccessful in our efforts to secure those production orders, or if existing production orders are delayed or cancelled, our results of operations will be materially adversely impacted. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We presently expect that net sales for 2007 will increase 5% to 10% from the level of net sales reported in 2006 of $119.6 million.

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Because our net sales are subject to a number of risks, including risks associated with the market acceptance of our new laser processing product line, delays in customer acceptance, intense competition in the capital equipment industry, uncertainty relating to the timing and market acceptance of our products, and the condition of the macro-economy and the semiconductor industry and the other risks described in this report, we may not exceed or maintain our current or prior level of net sales for any period in the future. Additionally, we believe that the market acceptance and volume production of our advanced packaging systems, laser processing systems, and our 1000 series family of wafer steppers are of critical importance to our future financial results. At December 31, 2006, these critical systems represented 86% of our backlog. To the extent that these products do not achieve or maintain significant sales due to difficulties involving manufacturing or engineering, the inability to reduce the current long manufacturing cycles for these products, competition, excess capacity in the semiconductor or nanotechnology device industries, or any other reason, our business, financial condition and results of operations would be materially adversely affected.

We believe we will achieve operating income breakeven for 2007 and that net income per share will be between $0.05 and $0.10. Cash flow for fiscal 2007 is anticipated to be positive.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $6.4 million for the year ended December 31, 2006, as compared with net cash used in operations of $4.1 million for the comparable period in 2005. Net loss of $9.0 million for the year ended December 31, 2006 included non-cash charges of $7.4 million for depreciation, amortization, and accretion expenses and $2.0 million for stock-based compensation, offset partially by $0.2 million of gains on disposal of equipment and settlement of asset retirement obligations. Cash used in operations was further impacted by a net change in operating assets and liabilities of $6.5 million. The $6.5 million use of cash from the net change in operating assets and liabilities was primarily a result of an increase in inventories of $12.0 million mainly due to the increase in the number of laser thermal processing evaluation units at our customer sites and inventory build-up in anticipation of increasing production of our laser processing products for the 65-nanometer high performance node that did not materialize in 2006, an increase of prepaid expenses, demonstration inventory, and other assets of $1.3 million, and a decrease in accrued rent of $0.4 million. These uses were partially offset by an increase in accounts payable of $2.0 million, an increase in advanced billings of $1.9 million, an increase in accrued expenses of $1.1 million due primarily to an increase in exit and termination liabilities, a decrease in accounts receivable of $1.1 million, an increase in deferred product and services income of $1.0 million, and a decrease in other liabilities of $0.1 million.

We believe that because of the relatively long manufacturing cycle of certain of our systems, particularly newer products, our inventories will continue to represent a significant portion of working capital. Currently, we are devoting significant resources to the development, introduction and commercialization of our laser processing system and to the development of our next generation 1X lithography technologies. We currently intend to continue to incur significant operating expenses in the areas of research, development and engineering, manufacturing, and selling, general and administrative costs in order to further develop, produce and support these new products. Additionally, gross profit margins, inventory and capital equipment levels may be adversely impacted in the future by costs

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associated with the initial production of the laser processing system and by future generations of our 1X wafer steppers. These costs include, but are not limited to, additional manufacturing overhead, costs of demonstration systems and facilities and the establishment of additional after-sales support organizations. Additionally, there can be no assurance that operating expenses will not increase, relative to sales, as a result of adding technical, marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our cash flow and operating results will be materially adversely affected until, among other factors, costs and expenses can be reduced. Our failure to achieve our sales targets for these new products could result in additional inventory write-offs and asset impairment charges, either of which could materially adversely impact our results of operations.

During the year ended December 31, 2006, net cash used in investing activities was $0.8 million, attributable to net proceeds of short and long-term investments of $2.5 million and proceeds from the sale of fixed assets of $0.1 million, offset by capital expenditures of $3.3 million. We are planning to incur capital expenditures in 2007 of approximately $3.1 million for equipment and facility improvements driven primarily by our new product introductions.

Net cash used in financing activities was $5.1 million during the year ended December 31, 2006, attributable to stock repurchases of $10.8 million, offset by net proceeds under our notes payable of $2.7 million, and $3.0 million of proceeds received from the issuance of common stock under our employee stock option plans.

At December 31, 2006, we had working capital of $105.0 million. Our principal source of liquidity at December 31, 2006 consisted of $71.1 million in cash, cash equivalents and short-term investments, net of related borrowings under our line of credit and $48.3 million of long-term investments.

In December 2004, we entered into a line of credit agreement with a brokerage firm replacing a similar arrangement that we had with a different firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds rate plus 100 basis points (6.25% as of December 31, 2006). Certain of our cash, cash equivalents and short-term investments secure but do not legally restrict borrowings outstanding under this facility. Funds are advanced to us under this facility based on pre-determined advance rates on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants. As of December 31, 2006, $7.0 million was outstanding under this facility, with a related collateral requirement of approximately $9.3 million of our cash, cash equivalents and investments. As of December 31, 2005, $4.3 million was outstanding under the facility, with a related collateral requirement of approximately $5.7 million of our cash, cash equivalents and short-term investments.

On September 19, 2005, our Board of Directors authorized the repurchase of up to $30.0 million of our common stock in the open market at then prevailing market prices during the period commencing September 19, 2005 through September 30, 2007. At December 31, 2006, we had repurchased 1,386,580 shares of its common stock at a total purchase price of $20 million. Future repurchases of our common stock could have a significant impact on our cash position.

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The following summarizes our contractual obligations at December 31, 2006, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

(in millions) TotalLess than

1 year 1‑3 years 3‑5 yearsAfter

5 years

Notes payable obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7.0 $ 7.0Non-cancelable operating lease obligations . . . . . . . . . . . . . . . . . 16.9 4.6 12.0 0.3Long-term payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 0.7Asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 1.0 1.0Open purchase order commitments . . . . . . . . . . . . . . . . . . . . . . . . 34.4 31.9 2.5Total contractual cash obligations . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61.0 $ 43.5 $ 15.5 $ 1.3 $ 0.7

The amounts shown in the table above for open purchase order commitments are primarily related to the purchase of inventories, equipment and leasehold improvements. We record charges to operations for purchase order commitments we deem 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, we believe we must continue to make significant expenditures for capital equipment; sales, service, training and support capabilities; systems, procedures and controls; and expansion of operations and research and development, among many other items. We expect that cash generated from operations and our cash, cash equivalents and short-term investments will be sufficient to meet our cash requirements for at least the next twelve months. However, in the near-term, we may continue to utilize existing and future lines of credit, and other sources of financing, in order to maintain our present levels of cash, cash equivalents and short-term investments. Beyond the next twelve months, we may require additional equity or debt financing to address our working capital or capital equipment needs. In addition, we may seek to raise equity or debt capital at any time that we deem market conditions to be favorable. Additional financing, if needed, may not be available on reasonable terms, or at all.

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

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Off‑Balance Sheet Transactions

Our off-balance sheet transactions consist of certain financial guarantees, both expressed and implied, related to indemnification for product liability, patent infringement and latent product defects. Other than liabilities recorded pursuant to known product defects, at December 31, 2006, we did not record a liability associated with these guarantees, as we have little or no history of costs associated with such indemnification requirements. (See Note 16)

Foreign currency

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk

Our exposure to market risk due to potential changes in interest rates, relates primarily to our investment portfolio, which consisted primarily of fixed interest rate instruments as of December 31, 2006 and 2005. We maintain an investment policy designed to ensure the safety and preservation of our invested funds by limiting market risk and the risk of default.

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

The following table presents the hypothetical changes in fair values in the financial instruments held by us at December 31, 2006 that are sensitive to changes in interest rates. These instruments are comprised of cash, cash equivalents and investments. 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 our portfolio reflects immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (BPS), 100 BPS, and 150 BPS:

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Cash equivalents and Available‑for‑sale Investments,in thousands:

Valuation of securities given an interest rate decrease of X basis points

No change in interest rate

Valuation of securities given an interest rate increase of X basis points

(150 BPS) (100 BPS) (50 BPS) 0 BPS 50 BPS 100 BPS 150 BPS

U.S. Treasury securities and obligations of U.S. government agencies . . . . . . . . . . . . . . . . . . . . . . .

U.S. corporate debt securities . . . . . .Total investments . . . . . . . . . . . . . . . . .

$ 83,883 $ 83,289 $ 82,703 $ 82,126 $ 81,558 $ 80,999 $ 80,447

40,788 40,669 40,552 40,438 40,325 40,214 40,105

$ 124,672 $ 123,958 $ 123,255 $ 122,564 $ 121,883 $ 121,213 $ 120,553

During 2006, we did not materially alter our investment objectives or criteria and believe that, although the composition of our portfolio has changed from the preceding year, the portfolio’s sensitivity to changes in interest rates is materially the same.

Credit risk

We mitigate credit default risk by attempting to invest in high credit quality securities and by positioning our 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 or resale markets to ensure portfolio liquidity and is diversified in accordance with our investment policy. To date, we have not experienced significant liquidity problems with our portfolio. Our largest holding at December 31, 2006, excluding the United States government and its agencies, was $3.9 million.

Foreign exchange risk

The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we do enter into these transactions in other currencies, primarily Japanese Yen. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates we have established cash flow and balance sheet hedging programs.

We use foreign currency forward contracts to hedge the risk that outstanding Japanese yen denominated receipts from customers for actual or forecasted sales of equipment may be adversely affected by changes in foreign currency exchange rates. Our hedging programs reduce, but do not always entirely eliminate, the impact of currency movements. (See “Derivative instruments and hedging” in Note 4 of Notes to Consolidated Financial Statements for additional disclosures.)

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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, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements included in Item 8:

Page Number

Consolidated Balance Sheets—December 31, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Consolidated Statements of Operations—Years ended December 31, 2006, 2005, and 2004 . . . . . . . . . . . . . . . . . . . . . . . . 59Consolidated Statements of Cash Flows—Years ended December 31, 2006, 2005, and 2004 . . . . . . . . . . . . . . . . . . . . . . . 61Consolidated Statements of Stockholders’ Equity—Years ended December 31, 2006, 2005, and 2004 . . . . . . . . . . . . . . . 63Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64-96Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

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CONSOLIDATED BALANCE SHEETS

In thousands, except share and per share amountsDecember 31,

2006December 31,

2005

AssetsCurrent assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,883 $ 36,344Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,207 104,723Accounts receivable, less allowance for doubtful accounts of $466 in 2006 and $577 in 2005 . . . 18,054 19,110 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,988 28,969Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,181 1,589

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,313 190,735Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,328 —

Equipment and leasehold improvements, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,326 25,117Demonstration inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,717 3,367Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,366 3,090

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 216,050 $ 222,309

Liabilities and Stockholders’ EquityCurrent liabilities:

Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,974 $ 4,289Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,440 8,403Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,409 9,270Deferred product and services income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,950 1,970Advance billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,713 854Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 876 768

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,362 25,554

See accompanying notes to consolidated financial statements.

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CONSOLIDATED BALANCE SHEETS (continued

In thousands, except share and per share amountsDecember 31,

2006December 31,

2005

Accrued rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,737 3,157Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,843 4,648

Commitments and contingencies

Stockholders’ equity:Preferred Stock, $.001 par value:

2,000,000 shares authorized; none issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Common Stock, $.001 par value:

40,000,000 shares authorized; issued and outstanding: 23,218,722 at December 31, 2006 and 23,749,789 at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 25

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226,146 221,225Treasury stock, 1,847,801 shares at December 31, 2006 and 1,107,756 shares

at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,670) (15,904)Accumulated other comprehensive loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (915) (886)Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,478) (15,510)

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,108 188,950Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 216,050 $ 222,309

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,

In thousands, except per share amounts 2006 2005 2004

Net salesProducts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,277 $ 108,377 $ 93,392Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,156 12,472 12,289Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 1,517 4,211

Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,633 122,366 109,892

Cost of salesCost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,256 60,647 48,466Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,353 9,672 8,733

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,024 52,047 52,693

Research, development, and engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,206 26,963 25,936Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 95 381Selling, general, and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,189 29,864 28,805

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,371) (4,875) (2,429)Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (237) (380) (114)Interest and other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,594 4,733 3,612

Income (loss) before income taxes and cumulative effect of change in accounting principle . . . . . . . (8,014) (522) 1,069Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 954 699 445Income (loss) before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . $ (8,968) $ (1,221) $ 624

Cumulative effect of the adoption of FIN 47 “Accounting for Conditional Asset Retirement Obligations” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (1,122) —

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,968) $ (2,343) $ 624

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS (comtinued)

Years Ended December 31,

In thousands, except per share amounts 2006 2005 2004

Net income (loss) per share—basicIncome (loss) before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . $ (0.38) $ (0.05) $ 0.03

Cumulative effect of the adoption of FIN 47 “Accounting for Conditional Asset Retirement Obligations”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ (0.05) $ —

Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.38) $ (0.10) $ 0.03Number of shares used in per share computations—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,764 23,964 23,733

Net income (loss) per share—dilutedIncome (loss) before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . $ (0.38) $ (0.05) $ 0.03

Cumulative effect of the adoption of FIN 47 “Accounting for Conditional Asset Retirement Obligations”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ (0.05) $ —

Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.38) $ (0.10) $ 0.03Number of shares used in per share computations—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,764 23,964 24,734

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,In thousands 2006 2005 2004Cash flows from operating activities:

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,968) $ (2,343) $ 624Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Cumulative effect of adoption of FIN 47 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,122 —Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,846 6,413 6,235Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,344 1,118 2,306Accretion of asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 — —(Gain)/loss on disposal of equipment and settlement of asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . (217) 1 122Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,957 77 235Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26) 46 269Changes in operating assets and liabilities:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,056 797 (10,509)Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,955) (1,127) (8,805)Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (593) 574 25Demonstration inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (486) 191 (2,099)Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (249) (439) (740)Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,037 (5,184) 5,858Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,139 1,570 (183)Deferred license revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (1,041) (3,711)Deferred product and services income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 980 726 156Advance billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,859 439 (1,108)Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 737 (745)Accrued rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (420) (137) 510Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 540 1,101

Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,381) 4,080 (10,459)

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Years Ended December 31,In thousands 2006 2005 2004

Cash flows from investing activities:

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,317) (8,596) (9,868)Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 — —Investments in securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42,155) (95,994) (102,513)Proceeds from sales and maturities of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,612 93,549 137,195Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (781) (11,041) 24,814

Cash flows from financing activities:

Proceeds from notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,954 108,929 37,900Repayment of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,269) (112,541) (32,564)Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,992 7,511 3,120Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,794) (9,188) —Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,117) (5,289) 8,456

Net effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (182) 609 25

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,461) (11,641) 22,836

Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,344 47,985 25,149

Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,883 $ 36,344 $ 47,985

Supplemental disclosures of cash flow information:Cash paid during the period for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 201 $ 312 $ 94Income taxes paid (tax refund received) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 936 (154) 668

Other non-cash changes:Systems transferred from (to) inventory to (from) equipment and demonstration inventory . . . . . . . . . . . . . . . . . . . $ 60 $ 5,782 $ 3,522Systems transferred from (to) equipment to (from) demonstration inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ 952 $ 1,097Increase/(decrease) in net equipment and leasehold improvements due to adoption of FIN 47 . . . . . . . . . . . . . . . . $ (229) $ 943 —Increase/(decrease) in asset retirement obligations resulting from adoption of FIN 47 . . . . . . . . . . . . . . . . . . . . . . . $ (82) $ 2,064 —

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Stockholders’ Equity

Additional Accumulated Other TotalCommon Stock Paid‑in Treasury Comprehensive Accumulated Stockholders’

In thousands Shares Amount Capital Stock Income (Loss) (Deficit) EquityBalance at December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . 23,582 $ 24 $ 210,323 $ (6,756) $ 937 $ (13,789) $ 190,739Net issuance of Common Stock under stock option plans and

employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . 272 — 3,102 18 — — 3,120Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . — — 235 — — — 235Components of comprehensive income:

Change in net unrealized gains (losses) on:Available-for-sale investments . . . . . . . . . . . . . . . . . . . — — — — (1,451) — (1,451)Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . — — — — 25 — 25

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — 624 624Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (802)Balance at December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . 23,854 24 213,660 (6,738) (489) (13,167) 193,290Net issuance of Common Stock under stock option plans . . 541 1 7,488 22 — — 7,511Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . (645) — — (9,188) — — (9,188)Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . — — 77 — — — 77Components of comprehensive loss:

Change in net unrealized gains (losses) on:Available-for-sale investments . . . . . . . . . . . . . . . . . . . — — — — (1,006) — (1,006)Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . — — — — 609 — 609

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — (2,343) (2,343)Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,740)Balance at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . 23,750 25 221,225 (15,904) (886) (15,510) 188,950Net issuance of Common Stock under stock option plans . . 211 — 2,964 28 — — 2,992Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . (742) — — (10,794) — — (10,794)Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,957 — — — 1,957Components of comprehensive loss:

Change in net unrealized gains (losses) on:Available-for-sale investments . . . . . . . . . . . . . . . . . . . — — — — 353 — 353Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . — — — — (182) — (182)Minimum postretirement medical obligation . . . . . . . . — — — — (200) — (200)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — (8,968) (8,968)Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — (8,997)Balance at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . 23,219 $ 25 $ 226,146 $ (26,670) $ (915) $ (24,478) $ 174,108

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. COMPANY AND INDUSTRY INFORMATION

Nature of operations

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

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

Major customers

In 2006, Matsushita and Intel accounted for 12% and 11% of our net sales. In 2005 and 2004, Intel Corporation accounted for 13% and 10% of our net sales. Intel Corporation accounted for 22% of our accounts receivable at December 31, 2006.

Business segments

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

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Enterprise-wide disclosures

Our products are manufactured in the United States and are sold worldwide. We market our products internationally through domestic and foreign-based sales and service. The following table presents enterprise-wide sales to external customers and long-lived assets by geographic region:

In thousands 2006 2005 2004

Net sales:United States of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,064 $ 37,506 $ 38,152Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,482 16,081 35,631Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,698 21,156 4,346Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,936 20,890 13,912Rest of world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,453 26,733 17,851

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 119,633 $ 122,366 $ 109,892Long-lived assets:

United States of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,598 $ 30,494 $ 27,211Rest of world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 811 1,080 1,796

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,409 $ 31,574 $ 29,007

The rest of the world is comprised of sales to customers and long-lived assets in countries that are individually insignificant.

With the exception of Japan, our operations in foreign countries are not currently subject to significant exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, we sell our products in both U.S. dollars and Japanese yen. However, we attempt to mitigate our currency exposure through the use of currency forward contracts. (See “Derivative Instruments and Hedging” in Footnote 4)

2. CONCENTRATIONS OF RISKS

Financial instruments that potentially subject Ultratech to concentrations of credit risk consist principally of cash equivalents, short- and long-term investments and trade receivables. These credit risks include the potential inability of an issuer or customer to honor their obligations under the terms of the instrument or the sales agreement. We place our cash equivalents and investments with high credit-quality financial institutions. We invest our excess cash in commercial paper, readily marketable debt instruments and collateralized funds of U.S. and state government entities. We have established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity.

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A majority of our trade receivables are derived from sales in various geographic areas, principally the U.S., Europe, Japan, Taiwan and the rest of Asia, to large companies within the integrated circuit and nanotechnology industries. We perform ongoing credit evaluations of our customers’ financial condition and require collateral, whenever deemed necessary. We maintain an allowance for uncollectible accounts receivable based upon expected collectibility and estimated returns and allowances. This reserve is established based upon historical trends, current economic conditions, delinquency status based on contractual terms and an analysis of specific exposures. As of December 31, 2006 and 2005, the recorded value of our accounts receivable approximated fair value due to the short-term nature of our accounts receivable.

Sole-source and single-source suppliers provide critical components and services for the manufacture of our products. The reliance on sole or limited groups of suppliers may subject us from time to time to quality, allocation and pricing constraints.

3. BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of Ultratech and our subsidiaries, all of which are wholly owned. Intercompany balances and transactions have been eliminated.

The U.S. dollar is the functional currency for all foreign operations. Foreign exchange gains and losses, which result from the process of remeasuring foreign currency financial statements into U.S. dollars or from foreign currency exchange transactions during the period, have been immaterial and are included in interest and other income, net.

Use of Estimates

The preparation of the financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management 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 ongoing basis, management evaluates its estimates, including those related to inventories, warranty obligations, purchase order commitments, asset retirement obligations, bad debts, estimated useful lives of fixed assets, asset impairment, income taxes, intangible assets, restructuring and contingencies and litigation. Management bases its estimates on historical experience and on various other analyses and 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.

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4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash equivalents

Cash equivalents consist of highly liquid investments with an original maturity date at acquisition of three months or less. The carrying value of cash equivalents approximates fair value.

Investments

Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the classification at each balance sheet date. At December 31, 2006 and 2005, all investments and cash equivalents in our portfolio were classified as “available for sale” and are stated at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss), as a separate component of stockholders’ equity. As of December 31, 2006, we classified certain investment securities with remaining maturities of one year or more as long-term investments.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as interest, dividends, realized gains and losses and declines in value judged to be other than temporary are included in interest and other income, net. The cost of securities sold is based on the specific identification method.

Allowances for Bad Debts

We maintain an allowance for uncollectible accounts receivable based upon expected collectibility. This reserve is established based upon historical trends, current economic conditions, delinquency status based on contractual terms and an analysis of specific exposures.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. The semiconductor industry is characterized by rapid technological change, changes in customer requirements and evolving industry standards. We perform a detailed assessment of inventory at each balance sheet date, which includes a review of, among other factors, demand requirements and market conditions. Based on this analysis, we record adjustments, when appropriate, to reflect inventory at lower of cost or market.

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Long-lived assets

Equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Equipment is depreciated on a straight-line basis over the estimated useful lives (three to ten years). Leasehold improvements are amortized on a straight-line basis over the life of the related assets or the lease term, whichever is shorter. Depreciation and amortization expense for the year ended 2006 was $7.2 million.

Demonstration inventory is stated at cost, less accumulated amortization. Demonstration inventory is amortized to its estimated net realizable value as a used system over its estimated useful life as a demonstration system, generally three years.

Intangible assets which are carried at cost, less accumulated amortization, are recognized on a straight-line basis over the economic lives of the respective assets, generally five to seven years. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the related asset may not be recoverable. As of December 31, 2006 and 2005, all the intangible assets had been fully amortized. Amortization of intangible assets was $0.1 million and $0.4 million for the years ended December 31, 2005 and 2004, respectively.

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess these assets for impairment based on estimated future cash flows from these assets. Other than as noted on Note 11, “Exit Activities”, and Note 17, “Asset Retirement Obligations,” no disposal charges have been recorded during the three years ended December 31, 2006.

Related-Party Transactions

In April 2006, we appointed a new member to our Board of Directors who is also an officer of one of our customers. During 2006, sales to that customer totaled $7.8 million. At December 31, 2006, we had $0.4 million of accounts receivables from that customer.

Derivative Instruments and Hedging

The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we do enter into these transactions in other currencies, primarily Japanese yen. Our policy is to minimize foreign currency denominated transaction and remeasurement exposures with derivative instruments, mainly forward contracts. The gains and losses on these derivatives are intended to at least partially offset the transaction and remeasurement gains and losses recognized in earnings. We do not enter into foreign exchange forward contracts for speculative purposes. Under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133) all derivatives are recorded on the balance sheet at fair value. The gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

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Cash Flow Hedging

We designate and document as cash flow hedges foreign exchange forward contracts that are used by us to hedge the risk that forecasted revenue may be adversely affected by changes in foreign currency exchange rates. The effective portion of the contracts’ gains or losses is included in accumulated other comprehensive income (loss) (OCI) until the period in which the forecasted sale or purchase being hedged is recognized , at which time the amount in OCI is reclassified to earnings as a component of revenue. To the extent that any of these contracts are not considered to be effective in offsetting the change in the value of the forecasted sales being hedged, the ineffective portion of these contracts is immediately recognized in income as a component of interest and other income, net. For the year ended December 31, 2006 there was no hedge ineffectiveness. We calculate hedge effectiveness at a minimum each fiscal quarter. We measure hedge effectiveness by comparing the cumulative change in the spot rate of the derivative with the cumulative change in the spot rate of the anticipated sales transactions. The maturity of these instruments is generally nine months or less. We record any excluded components of the hedge in interest and other income, net. As of December 31, 2006 the excluded components recorded in earnings were immaterial.

In the event the underlying forecasted transaction does not occur within the designated hedge period or it becomes probable that the forecasted transaction will not occur, the related gains and losses on the cash flow hedge are reclassified from OCI to interest and other income, net on the consolidated statement of operations. In the event it becomes probable that a hedged anticipated transaction will not occur, the gains or losses on the related cash flow hedges will immediately be reclassified from OCI to interest and other income, net.

Balance Sheet Hedging

We manage the foreign currency risk associated with yen denominated assets and liabilities using foreign exchange forward contracts with maturities of less than nine months. The change in fair value of these derivatives is recognized as a component of interest and other income, net and is intended to offset the remeasurement gains and losses associated with the non-functional currency denominated assets and liabilities.

At December 31, 2006 and 2005, we had currency forward contracts for the sale of Japanese yen of $15.0 million and $6.5 million, respectively. We had recorded $0.1 million and $0.3 million of accumulated gains as a component of other comprehensive income (loss) at December 31, 2006 and 2005, respectively. These amounts are expected to be reclassified into earnings within the next twelve months. The fair value of derivatives classified as cash-flow hedges at December 31, 2006 and 2005 was an asset of $0.3 million and an asset of $0.2 million, respectively. The fair value of other derivatives at December 31, 2006 and 2005 was an asset of $0.3 million and $0.0 million, respectively.

Our derivative financial instruments are subject to both credit and market risk. Credit risk is the risk of loss due to failure of a counterparty to perform its obligations in accordance with contractual terms. Market risk is the potential change in an investment’s value caused by fluctuations in interest and currency exchange rates, credit spreads or other variables. We monitor the credit-worthiness of the

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financial institutions that are counterparties to our derivative financial instruments and do not consider the risks of counterparty nonperformance to be material. Credit and market risks (as a result of an offset by the underlying cash flow being hedged) related to derivative instruments were not considered material at December 31, 2006 and 2005.

Revenue recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectibility is reasonably assured. We derive revenue from four sources—system sales, spare parts sales, service contracts and license fees.

Provided all other criteria are met, we recognize revenues on system sales when we have received customer acceptance of the system. In the event that terms of the sale provide for a lapsing customer acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. 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.

Our transactions frequently include the sale of systems and services under multiple element arrangements. In situations with multiple deliverables, revenue is recognized upon the delivery of the separate elements and when we receive customer acceptance or are otherwise released from our customer acceptance obligations. Consideration from multiple element arrangements is allocated among the separate accounting units based on the residual method under which the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements, provided the delivered elements have value on a stand alone basis, there is objective and reliable evidence of fair value for the undelivered elements, the arrangement does not include a general right of return relative to the delivered item and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.

We generally recognize revenue from spare parts sales upon shipment, as our products are generally sold on terms that transfer title and risk of ownership when it leaves our site. We sell service contracts for which revenue is deferred and recognized ratably over the contract period and service contracts based on a purchased quantity of hours under which revenue is recognized as service hours are delivered. We recognize revenue from licensing and technology support agreements ratably over the contract period, or the estimated useful life of the licensed technologies, whichever is shorter.

Costs related to deferred product revenues are capitalized (deferred) and recognized at the time of revenue recognition. Deferred product revenue and costs are netted on our balance sheet, under the caption “deferred product and services income.”

Costs incurred for shipping and handling are included in cost of sales.

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Warranty Accrual

We generally warrant our products for material and labor to repair the product for a period of 12 months for new products, or 3 months for refurbished products, from the date of customer acceptance. Accordingly, an accrual for the estimated cost of the warranty is recorded at the time the product is shipped and is recorded in the statement of operations at the time revenue is recognized.

Research, development, and engineering expenses

We are actively engaged in basic technology and applied research programs designed to develop new products and product applications. In addition, substantial ongoing product and process improvement engineering and support programs relating to existing products are conducted within engineering departments and elsewhere. Research, development and engineering costs are charged to operations as incurred.

Deferred Income Taxes

We record a valuation allowance to reduce our net deferred tax assets to the amount that is more likely than not to be realized. Based on the uncertainty of future taxable income, we have presently fully reserved our net deferred tax assets except those in Japan and Taiwan.

Reclassifications

Certain reclassifications have been made to prior year balances to conform to current year’s presentation.

Impact of recently issued accounting standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No 87, 88, 106, and 132(R) (“SFAS 158”). SFAS 158 requires plan sponsors of defined benefit pension and other postretirement benefit plans (collectively, “postretirement benefit plans”) to recognize the funded status of their postretirement benefit plans in the statement of financial position, measure the fair value of plan assets and benefit obligations as of the date of the fiscal year-end statement of financial position, and provide additional disclosures. On December 31, 2006, we adopted the recognition and disclosure provisions of SFAS 158. The immaterial effect of adopting SFAS 158 on our financial condition at December 31, 2006 has been included in the accompanying consolidated financial statements. SFAS 158 did not have an effect on our consolidated financial condition at December 31, 2005 or 2004. See Note 13 for further discussion of the effect of adopting SFAS 158 on our consolidated financial statements.

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

In July 2006, the FASB issued Financial Interpretation Number (FIN) 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) as an interpretation of SFAS No. 109, Accounting for Income Taxes. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of adopting FIN 48 on our financial condition, results of operations and cash flows.

5. STOCK‑BASED COMPENSATION

At December 31, 2006, Ultratech had several stock-based employee compensation plans, which are described more fully in Note 12.

Prior to January 1, 2006, we accounted for our stock plans under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and FIN No. 44, Accounting for Certain Transactions Involving Stock Compensation— an Interpretation of APB Opinion No. 25 as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. No stock-based employee compensation was recognized in the Consolidated Statement of Operations under SFAS No. 123 as all options granted under our stock plans had an exercise price equal to the market value of the underlying common stock on the date of grant. We adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), effective January 1, 2006 using the modified prospective transition method. Under this transition method, stock-based compensation expense recognized during the twelve months ended December 31, 2006 includes: (a) stock options granted prior to, but not yet vested, as of January 1, 2006 based on the grant-date fair value estimated in accordance with the original provisions of SFAS No.123, and (b) stock options and restricted stock units granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Under the modified prospective transition method, results for prior periods have not been restated. In November 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (“FSP 123R-3”). We elected to adopt the alternative transition method provided in the FSP 123R-3 for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123R.

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The following table shows total stock based compensation expense included in the accompanying Consolidated Statement of Operations for the year ended December 31, 2006. There was no tax effect:

In thousands

Year Ended December 31,

2006

Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140Research, development, and engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,553

$ 1,957

As a result of adopting SFAS No. 123R on January 1, 2006, and excluding the expense related to restricted stock units which would have been included in our Consolidated Statements of Operations under the provisions of APB No. 25, our Consolidated Statements of Operations for the year ended December 31, 2006 changed by the following amounts compared to what we would have reported had we continued to account for stock based compensation under APB No. 25:

Impact of adoption of

SFAS No. 123R

(In thousands, except per share amounts)

Year Ended December 31,

2006

Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (866)Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (866)Net loss per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.04)Net loss per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.04)

The estimated fair value of our stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period using a single grant approach on a ratable basis for awards granted after the adoption of SFAS No. 123R and using a multiple grant approach on an accelerated basis for awards granted prior to the adoption of SFAS No. 123R.

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Prior to the adoption of SFAS No. 123R, we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS No.123R requires cash flows resulting from tax benefits resulting from deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. During the year ended December 31, 2006, there was no excess tax benefit classified as financing cash flows that would have been classified as operating cash flows if we had not adopted SFAS No. 123R.

The modified prospective transition method of SFAS No. 123R requires the presentation of pro forma information for periods presented prior to the adoption of SFAS No. 123R regarding net income (loss) and net income (loss) per share as if we had accounted for our stock plans under the fair value method of SFAS No. 123. For proforma purposes, fair value of stock options was estimated using the Black-Scholes option valuation model and amortized using a multiple grant approach on an accelerated basis. The fair value of all of our stock-based awards was estimated assuming no expected dividends and using estimates of expected life, volatility and risk-free interest rate at the time of grant. The following table illustrates the effect on net income (loss) and net income (loss) per share if we had accounted for its stock plans under the fair value method of accounting under SFAS No. 123:

Years Ended December 31,

In thousands, except per share amounts 2005 2004

Net income (loss) as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,343) $ 624Deduct: SFAS No. 123 compensation expense, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (10,045) $ (25,294)Pro forma net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (12,388) $ (24,670)Net income (loss) per share—basic, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.10) $ 0.03Pro forma net loss per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.52) $ (1.06)Net income (loss) per share—diluted, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.10) $ 0.03Pro forma net loss per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.52) $ (1.06)

Included in the fair value stock-based employee compensation expense above for 2004, was $16.2 million resulting from the acceleration of vesting of options to purchase approximately 2.3 million shares of common stock for all optionees, except for non-employee members of the Board of Directors, whose exercise price, which ranges from $13.36 to $31.38 per share, exceeded the market price of our stock on the respective dates of acceleration, June 25, 2004 and July 19, 2004. We have never repriced stock options, thus, the exercise prices for the stock options accelerated were unchanged. These unvested “underwater” options, in our opinion, represented negligible value in retaining or motivating our employees. We believe, however, that fully vesting these options favorably motivates our employees to continue with our company and to work to increase stockholder value. Further, fully vesting these options also eliminated

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the need to recognize remaining unrecognized non-cash compensation expense in future periods in the Company’s statement of operations upon the adoption of SFAS 123R. As the exercise price of all the stock options affected was greater than their fair market price on the date of vesting acceleration, there was no impact, under the intrinsic value method of APB 25, on our consolidated statements of operations in 2004.

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The expected life of options is based on observed historical exercise patterns. Groups of employees that have similar historical exercise patterns have been considered separately for valuation purposes. For fiscal 2006, the expected volatility of stock options is based on a combination of historical and market-based implied volatility of our traded options. Expected volatilities for the year ended December 31, 2005 and 2004 were based solely on the historical volatility of our stock price. The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield reflects that we have not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.

We used the following weighted-average assumptions to estimate the fair value of stock options at the date of grant using the Black-Scholes option-pricing model.

2006 2005 2004

Expected life (in years): stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 4.1 2.2Expected life (in years): Employee Stock Purchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A N/A 0.50Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.93% 3.90% 2.54%Volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.55 0.51 0.60Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0% 0% 0%

The 2004 information in the table above reflects the termination of our Employee Stock Purchase Plan in July 2004 and the impact of the acceleration of vesting of underwater stock options discussed previously. The weighted average fair value of purchase rights granted under our Employee Stock Purchase Plan during 2004 was $8.21.

The weighted-average fair value per share of stock options granted during 2006, 2005 and 2004 was $7.85, $7.13 and $5.90, respectively.

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6. BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

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

Years Ended December 31,

In thousands, except per share amounts 2006 2005 2004

Numerator:Income (loss) before cumulative effect of change in accounting principle . . . . . . . . . . . . . . $ (8,968) $ (1,221) $ 624Cumulative effect of the adoption of FIN 47 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (1,122) —Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,968) $ (2,343) $ 624Denominator:

Denominator for net income (loss) per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,764 23,964 23,733Effect of dilutive Employee Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,001Denominator for net income (loss) per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,764 23,964 24,734

Net income (loss) per share—basicIncome (loss) before cumulative effect of change in accounting principle . . . . . . . . . . . . . . $ (0.38) $ (0.05) $ 0.03Cumulative effect of the adoption of FIN 47 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ (0.05) $ —Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.38) $ (0.10) $ 0.03Net income (loss) per share—dilutedIncome (loss) before cumulative effect of change in accounting principle . . . . . . . . . . . . . . $ (0.38) $ (0.05) $ 0.03Cumulative effect of the adoption of FIN 47 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ (0.05) $ —Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.38) $ (0.10) $ 0.03

For the year ended December 31, 2006, options to purchase 6,107,636 shares of Common Stock at an average exercise price of $17.68 were excluded from the computation of diluted net loss per share as the effect would have been anti-dilutive. This compares to the exclusion of 6,443,948 options at an average exercise price of $17.71 for the year ended December 31, 2005 and 2,245,000 options at an average exercise price of $25.25 for the year ended December 31, 2004. Options are anti-dilutive when we have a net loss or when the exercise price of the stock option is greater than the average market price of our Common Stock.

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7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss), as presented on the Consolidated Statements of Stockholder’s Equity, includes net income (loss) and other comprehensive income (loss). Accumulated other comprehensive income (loss) is comprised of the following items, net of tax:

December 31,

In thousands: 2006 2005

Unrealized gains (losses) on:Available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (847) $ (1,200)Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 314Change in minimum postretirement medical obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (200) —Accumulated other comprehensive loss at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (915) $ (886)

The amount of gain (loss) on foreign exchange contracts reclassified to earnings was ($34,000), ($247,000) and ($655,000) in 2006, 2005 and 2004, respectively. The amount of loss on available-for-sale investments reclassified to earnings was immaterial in each year of the three-year period ended December 31, 2006.

As discussed in Note 4, we adopted SFAS No. 158 as of December 31, 2006. SFAS No. 158 requires that we recognize on a prospective basis the funded status of our defined benefit pension and other postretirement benefit plans on the consolidated balance sheet and recognize as a component of accumulated other comprehensive income (loss), net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost. Additional minimum postretirement benefit liabilities of $200,000 was recorded at December 31, 2006 upon adoption of the new standard. This $200,000 is the net sum of unrecognized prior service cost of $210,000 and an unrecognized net gain of $10,000. Our postretirement benefits are further described in Note 13.

8. INVESTMENTS

We classified all of our investments as “available for sale” as of December 31, 2006 and 2005. Accordingly, we state our investments at estimated fair value. Fair values are determined based on quoted market prices or pricing models using current market rates. We deem all investments to be available to meet current working capital requirements. As of December 31, 2006, based upon recent operating results and expectations of future operating income, we classified certain investment securities with remaining maturities of one year or more as long-term investments.

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The following is a summary of our investments:

December 31, 2006 December 31, 2005

Cash equivalents and Available‑ Amortized

Accumulated Other

Comprehensive Estimated Amortized

Accumulated Other

Comprehensive Estimated

for‑sale Investments, in thousands: Cost Gains Losses Fair Value Cost Gains Losses Fair Value

U.S. Treasury securities and obligations of U.S. government agencies . . . . . . . . . . . . . . . . . . . $ 82,804 $ 2 $ 679 $ 82,126 $ 70,831 $ — $ 839 $ 69,992

U.S. corporate debt securities . . . . . . . . . . . . . . . . . . 40,607 3 172 40,438 68,175 6 367 67,814

$ 123,411 $ 4 $ 851 $ 122,564 $ 139,006 $ 6 $ 1,206 $ 137,806

The following is a reconciliation of our investments to the balance sheet classifications at December 31:

In thousands 2006 2005

Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,029 $ 33,083Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,207 104,723Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,328 —Investments, at estimated fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122,564 $ 137,806

Gross realized gains and losses on sales of investments were not material in each of the three-years ended December 31, 2006.

The gross amortized cost and estimated fair value of our investments at December 31, 2006, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

In thousands

Gross Amortized

CostFair

Value

Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,764 $ 44,745Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,647 77,819

$ 123,411 $ 122,564

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The following table provides the breakdown of the cash equivalents and investments with unrealized losses at December 31, 2006:

In Loss Position for Less Than 12 Months

In Loss Position for More Than 12 Months Total

Investments, in thousandsFair

Value

Gross Unrealized

LossesFair

Value

Gross Unrealized

LossesFair

Value

Gross Unrealized

Losses

U.S. Treasury securities and obligations of U.S. government agencies . . . . . . . . . . . . . . . . $ 20,884 $ 32 $ 51,089 $ 647 $ 71,973 $ 679U.S. corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 12,374 172 12,374 172

$ 20,884 $ 32 $ 63,464 $ 819 $ 84,347 $ 851

The following table provides the breakdown of the cash equivalents and investments with unrealized losses at December 31, 2005:

In Loss Position for Less Than 12 Months

In Loss Position for More Than 12 Months Total

Short‑term investments, in thousandsFair

Value

Gross Unrealized

LossesFair

Value

Gross Unrealized

LossesFair

Value

Gross Unrealized

Losses

U.S. Treasury securities and obligations of U.S. government agencies . . . . . . . . . . . . . . . $ 55,648 $ 678 $ 14,344 $ 161 $ 69,992 $ 839U.S. corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,443 179 15,914 188 31,357 367

$ 71,091 $ 857 $ 30,258 $ 349 $ 101,349 $ 1,206

We review our investment portfolio monthly to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include credit quality and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. If the credit quality of the investment does not meet the credit quality requirements of our investment policy, we will also consider additional factors such as the length of time and extent to which fair value has been less than the cost basis and the financial condition and near-term prospects of the investee. The gross unrealized losses associated with our cash equivalents and investments were primarily caused by an increase in interest rates during 2006. We have determined that the gross unrealized losses on our cash equivalents and short-term investments at December 31, 2006 are temporary in nature because each investment meets the credit quality requirements of our investment policy and because we have the ability and intent to hold these investments until they recover their unrealized losses, or until maturity.

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9. BALANCE SHEET DETAIL

December 31,

In thousands 2006 2005

Inventories:Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,067 $ 10,873Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,952 8,322Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,969 9,774

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,988 $ 28,969Equipment and leasehold improvements, net:

Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,011 $ 45,421Leasehold Improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,106 8,591Office equipment and furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,382 14,543

$ 63,499 $ 68,555Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43,173) (43,438)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,326 $ 25,117Accrued expenses:

Salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,632 $ 3,723Warranty accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,264 2,397Accrued taxes-other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,076 1,542Reserve for losses on purchase order commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623 406Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,814 1,202

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,409 $ 9,270Other Liabilities:

Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,165 $ 1,932Asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,982 2,064Postretirement medical obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 701 475Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) 177

$ 4,843 $ 4,648

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Warranty Accrual

We generally warrant our products for a period of 12 months for new products, or 3 months for refurbished products, from the date of customer acceptance for material and labor to repair the product; accordingly, an accrual for the estimated cost of the warranty is recorded at the time the product is shipped. Extended warranty terms, if granted, result in deferral of revenue equating to our standard pricing for similar service contracts. Recognition of the related warranty cost is deferred until product revenue is recognized. Factors that affect our warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

Changes in our product liability are as follows:

December 31,

In thousands 2006 2005

Balance, beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,397 $ 2,013Warranties issued during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,416 3,444Settlements during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,028) (3,519)Changes in liability for pre-existing warranties during the period, including expirations . . . . . . . . . . . . . . . 1,479 459Balance, end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,264 $ 2,397

As may occur with new product introductions, warranty costs in 2006 were higher than anticipated by approximately $1.5 million.

Deferred Service Income

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

December 31,

In thousands 2006 2005

Balance, beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,970 $ 1,332Service contracts sold during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,673 9,124Service contract revenue recognized during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,199) (8,486)Balance, end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,444 $ 1,970

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10. NOTES PAYABLE

In December 2004, we entered into a line of credit agreement with a brokerage firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds rate plus 100 basis points (6.25% as of December 31, 2006). Certain of our cash, cash equivalents and short-term investments secure borrowings outstanding under this facility. Funds are advanced to us under this facility based on pre-determined advance rates on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants, other than the aforementioned collateral requirement which does not legally restrict the cash and securities. As of December 31, 2006, $7.0 million was outstanding under this facility, with a related collateral requirement of approximately $9.3 million of our cash, cash equivalents and short-term investments. As of December 31, 2005, $4.3 million was outstanding under a similar facility, with a related collateral requirement of approximately $5.7 million of our cash, cash equivalents and short-term investments.

11. EXIT ACTIVITIES

In the fourth quarter of 2006, in order to reduce company-wide expenses, we eliminated approximately 29 full-time positions, 69% in the United States and 31% internationally, and entered into a lease buyout agreement for our operating lease in the United Kingdom. As of December 31, 2006, we had reduced our workforce by 27 personnel in connection with this plan. We recorded the exit activity charges pursuant to the provisions of FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (“SFAS 146”). In the fourth quarter of 2006, we recorded the charges of approximately $1.9 million related this plan, consisting of $1.6 million of severance and benefits charges and $0.3 million of facility lease termination costs. The $1.9 million of charges in the fourth quarter of 2006 was recorded to Cost of sales, Research, development, and engineering, and Selling, general and administrative expenses, in the Consolidated Statement of Operations in the amounts of $0.5 million, $0.1 million, and $1.3 million, respectively. We paid exit costs of $0.9 million during 2006. At December 31, 2006, there was a remaining accrual balance of $1.0 million related to severance and benefit payments to be paid until the first quarter of 2008. In addition, we plan to take similar actions during the first quarter of 2007. We expect these activities to be substantially completed by March 31, 2007.

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12. STOCKHOLDERS’ EQUITY

1993 Stock Option Plan/Stock Issuance Plan

Under Ultratech’s 1993 Stock Option Plan/Stock Issuance Plan, as amended and restated as of January 30, 2006, officers and other key employees, non-employee Board members and consultants may receive equity incentive awards in the form of stock options to purchase shares of Common Stock at no less than 100% of fair value at the grant date or restricted stock or restricted stock units. Options historically have vested in equal monthly installments over a fifty-month period, with a minimum vesting period of twelve months from the grant date, and generally expire ten years from the date of grant or upon the expiration of a limited period following any earlier termination of employment. In 2005 and 2004, certain options were granted with no vesting requirements, and others were granted with non-standard vesting periods that provided full vesting as of December 31, 2005 and or as of December 31, 2004 for grants made in that calendar year. Some of these option grants imposed sale and transfer restrictions on the shares purchasable under those grants. Those restrictions would terminate either on designated dates or the attainment of specified performance targets. The plan was amended on January 30, 2006 to allow the issuance of shares pursuant to restricted stock unit awards, and during fiscal year 2006, restricted stock unit awards were made which generally vest in equal annual installments over a three-year period measured from the award date but which defer the issuance of the vested shares until the end of the vesting period, subject to earlier issuance upon termination of employment under certain circumstances or a change in control. Awards under the plan may be subject to accelerated vesting under certain circumstances should a change in control occur. The plan terminates on the earlier of February 28, 2011 or the date on which all shares available for issuance under the plan have been issued. The plan contained an automatic share increase feature pursuant to which the share reserve automatically increased on the first trading day in January of each calendar year, through 2006, by an amount equal to four percent (4%) of the total number of shares of Common Stock outstanding on the last trading day in December of the immediately preceding calendar year, but in no event would such annual increase exceed 1.7 million shares, subject to adjustment in the event of certain changes to our capital structure. Under the plan, approximately 1,032,000, 131,000, and 56,000 options and awards were available for issuance at December 31, 2006, 2005 and 2004, respectively.

1998 Supplemental Stock Option/Stock Issuance Plan

Under our 1998 Supplemental Stock Option/Stock Issuance Plan, as amended, eligible employees (other than executive officers and employees holding the title of Vice President or General Manager) may receive options to purchase shares of Common Stock at not less than 100% of fair value on the grant date. These options generally vest in equal monthly installments over a fifty-month period, with a minimum vesting period of twelve months from grant date, and generally expire ten years from date of grant, subject to earlier termination following the optionee’s cessation of employee status. Direct stock issuances may also be made under the plan, subject to similar vesting provisions. Awards under the plan may be subject to accelerated vesting under certain circumstances should a change in control occur. The plan will terminate on the earlier of October 19, 2008, or the date on which all shares available for issuance under the plan have been issued. Under the plan, approximately 73,000, 43,000, and 16,000 options were available for issuance at December 31, 2006, 2005 and 2004, respectively.

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A summary of our stock option activity as of December 31, 2006, and related information follows:

OptionsWeighted‑Average

Exercise Price

Weighted Average Remaining

Contractual Term

Aggregate Intrinsic Value

as of December 31, 2006

Outstanding at January 1, 2006 . . . . . . . . . . . . . . . . . . 6,443,948 $ 17.71Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,000 $ 15.13Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (206,478) $ 14.37Forfeitures and cancellations. . . . . . . . . . . . . . . . . . . . (282,834) $ 19.40Outstanding at December 31, 2006 . . . . . . . . . . . . . . 6,107,636 $ 17.68 6.11 $ 714,420Vested and expected to vest at December 31, 2006 . 6,089,857 $ 17.69 6.10 $ 712,404Exercisable at December 31, 2006 . . . . . . . . . . . . . . . 5,865,843 $ 17.85 6.02 $ 608,068

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of fiscal 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2006. This amount changes based on the fair market value of our stock. Total intrinsic value of options exercised in fiscal 2006 was $1.3 million. Total fair value of shares vested in fiscal 2006 was $1.0 million.

A summary of our option activity for the prior years follows:

2005 2004Weighted‑Average Weighted‑Average

Options Exercise Price Options Exercise Price

Outstanding at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 6,128,142 $ 18.22 5,200,824 $ 17.11Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,388,500 $ 16.17 1,213,500 $ 22.32Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (539,286) $ 13.86 (120,390) $ 13.62Forfeitures and cancellations. . . . . . . . . . . . . . . . . . . . . . . (533,408) $ 23.41 (165,792) $ 16.98Outstanding at December 31 . . . . . . . . . . . . . . . . . . . . . . . 6,443,948 $ 17.71 6,128,142 $ 18.22

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At December 31, 2006, options outstanding were as follows:

Options Outstanding Options Exercisable

Range of Exercise Prices Options

Weighted‑Average Remaining

Contractual Life (Years)

Weighted‑Average Exercise Price Options

Weighted‑Average Exercise Price

$ 8.4100 - $13.6700 . . . . . . . . . . . . 1,154,301 5.28 $ 12.28 987,608 $ 12.28$13.7800 - $14.1200 . . . . . . . . . . . . 1,213,649 6.07 $ 14.01 1,200,549 $ 14.01$14.2500 - $16.0100 . . . . . . . . . . . . 1,103,318 6.99 $ 15.22 1,065,818 $ 15.23$16.1600 - $21.4500 . . . . . . . . . . . . 1,026,368 6.44 $ 18.33 1,001,868 $ 18.27$21.8300 - $27.8200 . . . . . . . . . . . . 1,049,900 5.61 $ 23.43 1,049,900 $ 23.43$28.7500 - $31.3750 . . . . . . . . . . . . 560,100 6.46 $ 29.67 560,100 $ 29.67$ 8.4100 - $31.3750 . . . . . . . . . . . . 6,107,636 6.11 $ 17.68 5,865,843 $ 17.85

As of December 31, 2006, $1.3 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 0.96 years.

Cash received from option exercises in fiscal 2006 was $3.0 million.

A summary of our restricted stock unit activity as of December 31, 2006, and related information follows:

Weighted‑AverageGrant Date

Shares Fair Value

Nonvested stock at January 1, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ 0.00Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167,500 $ 19.20Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53,694) $ 19.20Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,125) $ 19.20Nonvested stock at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,681 $ 19.20

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As of December 31, 2006, $2.1 million of total unrecognized compensation cost related to nonvested stock is expected to be recognized over a weighted-average period of 1.49 years.

Employee Stock Purchase Plan

Under the provisions of our Employee Stock Purchase Plan, virtually all employees could purchase Common Stock through payroll deductions at 85% of the lower of the fair market value of the Common Stock on the first or last day of the offering period. In February 2001, we commenced a plan that allows twenty-four month offering periods with semi-annual purchase dates. In July 2004, we terminated the Employee Stock Purchase Plan.

Treasury Stock

On September 19, 2005, our Board of Directors authorized the repurchase of up to $30.0 million of its common stock in the open market at the then prevailing market prices during the period commencing September 19, 2005 through September 30, 2007. We had repurchased 1,386,580 and 644,535 shares of our common stock for a total of $20.0 million and $9.2 million as of December 31, 2006 and 2005, respectively.

Shareholder Rights Plan

Our Shareholder Rights Plan provided that Preferred Share Purchase Rights were attached at the rate of one Right on each outstanding share of our Common Stock held by stockholders. These rights expired on February 9, 2007.

13. EMPLOYEE BENEFIT PLANS

Employee bonus plans

We currently sponsor a profit sharing plan and an executive incentive bonus plan that distribute employee awards based on the achievement of predetermined targets. We did not recognize expense under these various employee bonus plans in 2006, 2005 or 2004.

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Employee savings and retirement plans

Ultratech sponsors a 401(k) employee salary deferral plan that allows voluntary contributions by all full-time employees of from 1% to 20% of their pretax earnings. During the three years ended December 31, 2006, our contributions made to this plan were $0.5 million, $0.4 million, and $0.0 million, respectively. Our contributions generally become 20 percent vested at the end of an employee’s first year of service from the date of hire with us, and vest 20 percent per year of service thereafter until they become fully vested at the end of five years of service. We also sponsor an executive non-qualified deferred compensation plan (the “Plan”) that allows qualifying executives to defer current cash compensation. At December 31, 2006, Plan assets, representing the cash surrender value of life insurance policies held by us, and liabilities were approximately $2.1 million and $2.2 million, respectively, and are included in our consolidated balance sheets under the captions “other assets” and “other liabilities.” In conjunction with this Plan, we recognized $0.1 million of expense for each of the three years ended December 31, 2006, 2005 and 2004, respectively.

Postretirement benefits

We have committed to providing lifetime post-retirement medical and dental benefits to the Chief Executive Officer and Chief Financial Officer and their spouses, commencing after retirement. These medical and dental benefits are similar to the benefits provided to all full-time employees while employed by us, except that we are paying the entire cost of these benefits. The Chief Financial Officer and his spouse were included in the plan for the first time this year.

On December 31, 2006, we adopted the recognition and disclosure provisions of FASB Statement No. 158, which required us to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of our postretirement benefits plans in the December 31, 2006 statement of financial position, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses and unrecognized prior service costs, all of which were previously netted against the plans’ funded statuses in our statement of financial position pursuant to the provisions of FASB Statement No. 87. These amounts will be subsequently recognized as net periodic benefit cost pursuant to our historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic benefit cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of FASB Statement No. 158.

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The adoption of FASB Statement No. 158 did not affect our consolidated statement of operations for the year ended December 31, 2006. The incremental effects of adopting the provisions of FASB Statement No. 158 on our statement of financial position at December 31, 2006 are presented in the following table:

At December 31, 2006

Prior to Effect of As Reported

Adopting Adopting At December 31,

In thousands SFAS No. 158 SFAS No. 158 2006

Accrued benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 501 $ 200 $ 701Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . — 200 200

Included in accumulated other comprehensive income at December 31, 2006 are unrecognized prior service costs of $210,000 and unrecognized actuarial losses of ($10,000). The prior service cost and actuarial loss included in accumulated other comprehensive income and expected to be recognized in net periodic benefit cost during the fiscal year ended December 31, 2007 is $30,000 and $0, respectively.

The reconciliation of the beginning and ending balance of the accumulated postretirement benefit obligation and the fair value of plan assets for the year ended December 31, 2006 and 2005 is as follows:

In thousands December 31, 2006 December 31, 2005

Benefit obligation at beginning of year . . . . . . . . . . . . . . $ 475 $ 475Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 26Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 —Actuarial loss/(gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53) (26)Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . $ 701 $ 475Fair value of plan assets at end of year . . . . . . . . . . . . . . — —Funded status at end of year . . . . . . . . . . . . . . . . . . . . . . . $ (701) $ (475)

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Amounts recognized in the statement of financial position consist of:

In thousands December 31, 2006 December 31, 2005

Noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ —Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (701) (475)

$ (701) $ (475)

Weighted-average discount rates as of December 31, 2006 were 5.80% for the Chief Executive Officer’s plan and 5.90% for the Chief Financial Officer’s plan. The weighted-average discount rate as of December 31, 2005 and 2004 for the Chief Executive Officer’s plan was 5.50% and 4.50%, respectively.

For measurement purposes, a 14% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2007, and 13% for 2008. The rate was assumed to decrease gradually to 6% for 2015 and remain at that level thereafter.

Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income are as follows:

In thousands December 31, 2006 December 31, 2005

Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40 $ 26Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 —Amortization of net (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) (26)Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27 $ —

Other changes in plan assets and benefit obligations recognized in other comprehensive income are as follows:

In thousands December 31, 2006 December 31, 2005

Net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (10) $ —Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 —Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30) —Total recognized in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200 $ —Total recognized in net periodic benefit cost and other comprehensive income . . . . . $ 227 $ —

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The expected benefit payments in the next 10 years are as follows:

In thousands

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ —2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262012-2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231

$ 323

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

At December 31, 2006

1‑Percentage‑ 1‑Percentage‑

In thousands Point Increase Point Decrease

Effect on total of service and interest cost components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7 $ (6)Effect on postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 (87)

14. INCOME TAXES

The domestic and foreign components of income (loss) before income taxes and cumulative adjustments are as follows:

Years Ended December 31,

In thousands 2006 2005 2004

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (10,941) $ (480) $ (1,055)Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,927 (42) 2,124Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,014) $ (522) $ 1,069

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The components of the provision (benefit) for income taxes were as follows:

Years Ended December 31,

In thousands 2006 2005 2004

Federal:

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$

—$

—$

—Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —

— — —State:

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 51 13Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —

3 51 13Foreign:

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 979 691 162Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28) (43) 270

951 648 432Total income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 954 $ 699 $ 445

The difference between the provision (benefit) for income taxes and the amount computed by applying the U.S. federal statutory rate (35 percent) to income (loss) before income taxes is explained below:

Years Ended December 31,

In thousands 2006 2005 2004

Tax computed at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,805) $ (183) $ 374State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 33 8Foreign taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (73) 663 (311)U.S. losses not benefited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,830 186 374Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 954 $ 699 $ 445

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Significant components of deferred income tax assets and liabilities are as follows:

In thousands 2006 2005 2004

Deferred tax assets:Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,965 $ 39,941 $ 39,119Inventory valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,257 3,123 3,022Bad debt reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 223 92Basis difference in assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,326 4,334 5,186Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,777 25,428 24,328Warranty reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 876 926 781Deferred license income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 404Deferred product and services income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,133 753 361Other non-deductible accruals and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,966 5,916 4,316Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,021 80,644 77,609Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,726) (74,034) (72,944)Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,295 6,610 4,665Deferred tax liabilities:

Unremitted earnings of foreign subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,827) $ (6,170) $ (4,376)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (109) (109) —

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,936) (6,279) (4,376)Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 359 $ 331 $ 289

Based upon the weight of available evidence, which includes our historical operating performance and carry back potential, we have determined that a valuation allowance continues to be necessary for all tax jurisdictions except Japan and Taiwan.

The net valuation allowance increased by $3.7 million, $1.1 million and $5.5 million during the years ended December 31, 2006, 2005 and 2004, respectively. Approximately $13.3 million of the valuation allowance as of December 31, 2006 is attributable to pre-2006 windfall stock option deductions, the benefit of which will be credited to paid-in capital if and when realized through a reduction in income taxes payable. Beginning in 2006, we will track the windfall stock option deductions off balance sheet, as required by SFAS No. 123R. During 2006, we recorded $1.1 million of windfall stock option deductions that are being tracked off balance sheet. If and when realized, the tax benefit associated with those deductions of $0.4 million will be credited to additional paid-in capital.

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As of December 31, 2006, we had net operating loss carryforwards for federal and state tax purposes of $111 million and $43 million, respectively. We also had federal research and development tax credit carryforwards of approximately $10.1 million. The federal and state net operating loss carryforwards will expire at various dates beginning in 2007 through 2026, if not utilized. The federal tax credit carryforwards will expire at various dates beginning in 2011 through 2026, if not utilized.

Utilization of our net operating loss and tax credits carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses and credits before utilization.

15. COMMITMENTS AND CONTINGENCIES

We lease our facilities, and certain equipment under operating leases expiring through December 2011. Certain of our leasing arrangements subject us to letter of credit requirements. The leases for our headquarters and manufacturing operations contain a five-year renewal option subject to a fair market value pricing adjustment. As of December 31, 2006, the minimum annual rental commitments are as follows:

in thousands

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,6102008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,7022009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,5732010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,7362011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

$ 16,894

Rent expense was approximately $4.5 million, $4.2 million and $4.2 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Under terms of certain of our leases, we are obligated to provide a $2.4 million bank letter of credit as security to the landlord.

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On February 29, 2000, we filed lawsuits asserting patent infringement and related claims against Nikon, Canon, and ASML in the U.S. District Court for the Eastern District of Virginia. In April 2000, we reached a settlement with Nikon, and in September 2001, we reached a settlement with Canon. In the patent litigation against ASML, a jury trial was conducted in the U.S. District Court for the Northern District of California during the three-month period ended July 2, 2005. The jury reached a verdict that the patent was infringed, but that the asserted claims of the patent were invalid. We filed a post-trial motion for a new trial and for judgment as a matter of law in our favor. ASML also filed a motion for judgment as a matter of law seeking to invalidate three of the asserted claims for lack of enablement and requested that the court awards costs. On February 13th, 2006, the Court denied our post-trial motions, including the motion for a new trial, and entered judgment in favor of ASML invalidating three claims of the patent for lack of enablement. The Court also awarded ASML approximately $330,000 in costs. We have filed an appeal with the Federal Circuit Court of Appeals, and filed our opening appellate brief on August 30, 2006. Although ASML originally filed a notice of cross-appeal, ASML subsequently withdrew its cross appeal and the Court entered an order to that effect on December 8, 2006. ASML’s opening appellate brief was filed on December 6, 2006, and Ultratech’s reply brief was filed January 12, 2007. We expect the case to be set for oral argument in late Spring 2007.

On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement of certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for the Northern District of California. On May 17, 2005, the court found the subject patent to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of a federal patent litigation suit brought against it by us. We do not believe this new action has merit, particularly given the denial by the federal court and the subsequent federal appellate court’s affirmation of the order denying the award of any attorney’s fees payable to this company by us in the federal patent litigation. We filed a motion to have the state court complaint dismissed under California’s anti-SLAPP and demurrer statutes. Nonetheless the state court has preliminarily stated that it would deny our motion to dismiss as to the malicious prosecution claim, while granting it as to the abuse of process claim. In such event, we intend to appeal the denial of our motion to dismiss the malicious prosecution claim and otherwise vigorously defend against this action and to seek fees and/or sanctions against this company in relation thereto.

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16. FINANCIAL GUARANTEES

Our off-balance sheet transactions consist of certain financial guarantees, both express and implied, related to indemnification for product liability, patent infringement and latent product defects. Other than liabilities recorded pursuant to known product defects, at December 31, 2006, we did not record a liability associated with these guarantees, as we have little or no history of costs associated with such indemnification requirements. Contingent liabilities associated with product liability may be mitigated by insurance coverage we maintain.

17. ASSET RETIREMENT OBLIGATIONS

In the fourth quarter 2005 we adopted FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), an interpretation of FASB Statement No. 143, “Asset Retirement Obligations” (“SFAS 143”). FIN 47 clarifies that the term “conditional asset retirement obligation” as used in SFAS 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated, even if conditional on a future event. As permitted, we recognized the effect of applying FIN 47 as a cumulative effect of a change in accounting principle in 2005. Our adoption of FIN 47 resulted in an increase in net equipment and leasehold improvements of approximately $1.0 million, recognition of an asset retirement obligation (“ARO”) liability of $2.1 million, and a cumulative effect of adoption of $1.1 million, or $0.05 per share, for the year ended December 31, 2005. The ARO liability is principally for estimable asset retirement obligations related to remediation costs, which we estimate will be incurred upon the expiration of certain operating leases.

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The following table reflects unaudited pro forma presentations of the Company’s results of operations and asset retirement obligations as if FIN 47 had been retrospectively applied:

Years Ended December 31,

2005 2004In thousands, except per share amounts

Results of operations, as reported:Net income (loss)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,221) $ 624Net income (loss) per share—basic* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.05) $ 0.03Net income (loss) per share—diluted* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.05) $ 0.03Pro forma results of operation, assuming the retroactive application of FIN 47:Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,571) $ 432Net income (loss) per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.07) $ 0.02Net income (loss) per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.07) $ 0.02

*Prior to the cumulative effect of change in accounting principle

The following table sets forth an analysis of the ARO activity for the fiscal year ended December 31, 2006:

In thousands 2006

Balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,064Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179Liabilities incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Liabilities settled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (264)Balance as of December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,982

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Ultratech, Inc.

We have audited the accompanying consolidated balance sheets of Ultratech, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ultratech, Inc. at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 5 to the consolidated financial statements, in 2006, Ultratech, Inc. changed its method of accounting for share-based payments in accordance with the guidance provided in Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.” As discussed in Note 4 to the consolidated financial statements, in 2005, Ultratech, Inc. changed its method of accounting for asset retirement obligations in accordance with the guidance provided in FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.”

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Ultratech, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLPSan Jose, CaliforniaMarch 5, 2007

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Ultratech, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Ultratech, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Ultratech, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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In our opinion, management’s assessment that Ultratech, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Ultratech, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ultratech, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006 of Ultratech, Inc. and our report dated March 5, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLPSan Jose, California March 5, 2007

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is further required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

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Management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this assessment, our management has concluded that, as of December 31, 2006, our internal control over financial reporting is effective based on those criteria.

Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, has been audited by Ernst & Young, LLP, the independent registered public accounting firm who also audited our consolidated financial statements. Ernst & Young’s attestation report on management’s assessment of our internal control over financial reporting appears elsewhere herein.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

The information required by Part III is omitted from this Report and is incorporated herein by reference from our definitive proxy statement to be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A for our 2007 Annual Meeting of Stockholders to be held July 24, 2007.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information concerning our directors required by this Item is incorporated by reference from the Item captioned “Election of Directors” in our Proxy Statement for the 2007 Annual Meeting of Stockholders (the “Proxy Statement”). The information required by this Item relating to our executive officers is included under the caption “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K. Other information required by this Item is incorporated herein by reference from the Item captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

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ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference from the Item captioned “Executive Compensation” in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated by reference from the Items captioned “Election of Directors,” “Ownership of Securities” and “Equity Compensation Information for Plans or Individual Arrangements with Employees and Non-Employees” in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated by reference from the items captioned “Election of Directors” and “Certain Relationships and Related Transactions” in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated by reference from the item captioned “Fees billed to Ultratech by Ernst & Young LLP during fiscal year 2006” in the Proxy Statement.

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PART IV

ITEM 15. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND EXHIBITS

(a) The following documents are filed as part of this Report on Form 10-K

(1) Financial Statements

The financial statements (including the notes thereto) listed in the Index to Consolidated Financial Statement Schedule (set forth in Item 8 of Part II of this Form 10-K) are filed within this Annual Report on Form 10-K.

(2) Financial Statement Schedules

The following consolidated financial statement schedule is included herein:

Page Number

Schedule II Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

Schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes.

(3) Exhibits

The following exhibits are referenced or included in this report:

Exhibit Description

3.1(10) Amended and Restated Certificate of Incorporation of the Registrant, filed October 6, 1993. 3.1.1(10) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated May 17, 1995. 3.1.2(10) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, filed June 17, 1998. 3.1.3(10) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, filed June 20, 2003. 3.2(17) Bylaws of Registrant, as amended. 4.5(1) Specimen Common Stock Certificate of Registrant.10.1(20) 1993 Stock Option/Stock Issuance Plan (Amended and Restated as of January 30, 2006.10.2(1) Form of Indemnification Agreement entered into between the Registrant and each of its officers and directors.10.3(8) Form of Indemnification Agreement entered into between the Registrant and certain officers.

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Exhibit Description

10.4(1)Standard Industrial Lease—Single Tenant, Full Net between The Equitable Life Assurance Society of the United States, as Landlord, and Registrant, as Tenant, dated August 27, 1993.

10.4.1(8)First Amendment to Lease between The Equitable Life Assurance Society of the United States, as Landlord, and Registrant, as Tenant, dated November 1999.

10.5(2) Profit Sharing Plan.10.6(6) 1998 Supplemental Stock Option/ Stock Issuance Plan (Amended and Restated effective January 29, 2002).10.7(15) Brokerage Line of Credit Agreement with Morgan Stanley, dated December 16, 2004.10.8(5) Lease Agreement between Montague LLC, As Landlord, and Registrant, As Tenant dated November 22, 1999.10.10(14) Employment agreement between Registrant and Mr. Arthur Zafiropoulo, Chief Executive Officer.10.11(14) Employment agreement between Registrant and Mr. John Denzel, former President and Chief Operating Officer10.12(14) Employment agreement between Registrant and Mr. Bruce Wright, Senior Vice President and Chief Financial Officer.

10.13(19)Employment agreement between Registrant and Mr. Rick Friedman, former Senior Vice President, World-Wide Sales and Customer Service.

10.14(22)Amended and Restated Employment Agreement between Registrant and Mr. John Denzel, former President and Chief Operating Officer.

10.15(22)Separation and General Release Agreement between Registrant and Mr. John Denzel, former President and Chief Operating Officer.

10.16(21) Form of Restricted Stock Unit Issuance Agreement for Executive Officers with Employment Agreements.10.17(21) Form of Restricted Stock Unit Issuance Agreement for Other Employees.10.18(12) Description of 2005 Cash Bonus Plan.10.19(18) Description of 2006 Long-Term Incentive Plan, as amended.21 Subsidiaries of Registrant.23 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.24 Power of Attorney (contained in Signature page hereto).31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

(1) Previously filed with our Registration Statement on Form S-1 declared effective with the Securities and Exchange Commission on September 28, 1993. File No. 33-66522.

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(2) Previously filed with our 1993 Annual Report on Form 10-K (Commission File No. 0-22248).(3) Previously filed with our 1997 Annual Report on Form 10-K (Commission File No. 0-22248).(4) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (Commission File No. 0-22248).(5) Previously filed with our 2000 Annual Report on Form 10-K (Commission File No. 0-22248).(6) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (Commission File No. 0-22248).(7) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 (Commission File No. 0-22248).(8) Previously filed with our Annual Report on Form 10-K for the year ended December 31, 2002 (Commission File No. 0-22248).(9) Previously filed with our Registration Statement on Form S-8, dated February 14, 2003. File No. 333-103228. (10) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended June 28, 2003 (Commission File No. 0-22248). (11) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended March 29, 2003 (Commission File No. 0-22248). (12) Incorporated by reference to Item 1.01 of our Current Report on Form 8-K filed on January 27, 2005 (Commission File

No. 0-22248). (13) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended April 3, 2004 (Commission File No. 0-22248). (14) Previously filed with our Annual Report on Form 10-K for the year ended December 31, 2003 (Commission File No. 0-22248). (15) Previously filed with our Annual Report on Form 10-K for the year ended December 31, 2004 (Commission File No. 0-22248). (16) Previously filed with our Annual Report on Form 10-K for the year ended December 31, 2005 (Commission File No. 0-22248). (17) Previously filed with our Current Report on Form 8-K filed on February 2, 2007 (Commission File No. 0-22248). (18) Incorporated by reference to Item 1.01 of our Current Report on Form 8-K filed on February 3, 2006 (Commission File No. 0-22248)

and to Item 1.01 of our Current Report on Form 8-K filed on March 20, 2006 (Commission File No. 0-22248). (19) Previously filed with our Current Report on Form 8-K filed on February 3, 2006 (Commission File No. 0-22248). (20) Previously filed with our Registrant Statement on Form S-8 filed with the Securities and Exchange Commission on March 9, 2006.

File No. 333-132302. (21) Previously filed with our Quarterly Report on Form 10-Q filed on May 5, 2006 (Commission File No. 0-22248). (22) Previously filed with our Current Report on Form 8-K filed on November 8, 2006 (Commission File No. 0-22248).(b) Exhibits. See list of exhibits under (a)(3) above.(c) Financial Statement Schedules. See list of schedules under (a)(2) above.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunder duly authorized.

uLtratEch, Inc.Date: March 6, 2007 By: /s/ arthur ZafIroPouLo

Arthur ZafiropouloChairman of the Board of Directors andChief Executive Officer

The undersigned directors and officers of Ultratech, Inc. (the “Company”), a Delaware corporation, hereby constitute and appoint Arthur W. Zafiropoulo and Bruce R. Wright, and each of them with full power to act without the other, the undersigned’s true and lawful attorney-in-fact, with full power of substitution and resubstitution, for the undersigned and in the undersigned’s name, place and stead in the undersigned’s capacity as an officer and/or director of the Company, to execute in the name and on behalf of the undersigned this Report and to file such Report, with exhibits thereto and other documents in connection therewith and any and all amendments thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done and to take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required of, the undersigned, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact’s discretion.

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Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below (and the above Powers of Attorney granted) by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature Title Date

/s/ arthur ZafIroPouLo Chairman of the Board of Directors and Chief March 6, 2007Arthur Zafiropoulo Executive Officer (Principal Executive Officer)

/s/ BrucE WrIght Senior Vice President, Finance, Chief Financial March 6, 2007Bruce Wright Officer and Secretary (Principal Financial and Accounting Officer)

/s/ DEnnIs ranEY Director March 6, 2007Dennis Raney

/s/ rIck tImmIns Director March 6, 2007Rick Timmins

/s/ hEnrI rIcharD Director March 6, 2007Henri P Richard

/s/ JoEL gEmunDEr Director March 6, 2007Joel Gemunder

/s/ nIchoLas konIDarIs Director March 6, 2007Nicholas Konidaris

/s/ VIncEnt f. soLLItto Director March 6, 2007Vincent F. Sollitto

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SCHEULE II

ULTRATECH, INC.

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Description

Balance at Beginning of Period

Charged to Costs and Expenses

Charged to Other

Accounts Deductions(1)

Balance at End of Period

Allowance for doubtful accountsYear ended December 31, 2004

Trade accounts receivable . . . . . . . . . . . . . . . . . . $ 146 $ 93 $ — $ (2) $ 237$ 146 $ 93 $ — $ (2) $ 237

Year ended December 31, 2005Trade accounts receivable . . . . . . . . . . . . . . . . . . $ 237 $ 339 $ — $ 1 $ 577

$ 237 $ 339 $ — $ 1 $ 577Year ended December 31, 2006

Trade accounts receivable . . . . . . . . . . . . . . . . . . $ 577 $ (112) $ 1 $ — $ 466$ 577 $ (112) $ 1 $ — $ 466

(1) Deductions represent write-offs against reserve account balances.

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EXHIBIT INDEX

Exhibit Description

3.1(10) Amended and Restated Certificate of Incorporation of the Registrant, filed October 6, 1993.

3.1.1(10) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated May 17, 1995.

3.1.2(10) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, filed June 17, 1998.

3.1.3(10) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, filed June 20, 2003.

3.2(10) Bylaws of Registrant, as amended.

4.5(1) Specimen Common Stock Certificate of Registrant.

4.6(3) Shareholder Rights Agreement between Registrant and the First National Bank of Boston, filed on February 11, 1997, as amended on March 18, 1998.

4.6.1(4) Second Amendment to Shareholder Rights Agreement dated February 11, 1997 between Registrant and BankBoston, N.A. (formerly known as the First National Bank of Boston) as of October 12, 1998, and Certification of Compliance with Section 27 thereof.

10.1(13) 1993 Stock Option/Stock Issuance Plan (Amended and Restated as of March 2, 2004).

10.2(1) Form of Indemnification Agreement entered into between the Registrant and each of its officers and directors.

10.3(8) Form of Indemnification Agreement entered into between the Registrant and certain officers.

10.4(1) Standard Industrial Lease—Single Tenant, Full Net between The Equitable Life Assurance Society of the United States, as Landlord, and Registrant, as Tenant, dated August 27, 1993.

10.4.1(8) First Amendment to Lease between The Equitable Life Assurance Society of the United States, as Landlord, and Registrant, as Tenant, dated November 1999.

10.5(2) Profit Sharing Plan.

10.6(6) 1998 Supplemental Stock Option/ Stock Issuance Plan (Amended and Restated effective January 29, 2002).

10.7(15) Brokerage Line of Credit Agreement with Morgan Stanley, dated December 16, 2004.

10.8(5) Lease Agreement between Montague LLC, As Landlord, and Registrant, As Tenant dated November 22, 1999.

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10.10(14) Employment agreement between Registrant and Mr. Arthur Zafiropoulo, chief Executive Officer.

10.11(14) Employment agreement between Registrant and Mr. John Denzel, former President and Chief Operating Officer

10.12(14) Employment agreement between Registrant and Mr. Bruce Wright, Senior Vice President and Chief Financial Officer.

10.13(19) Employment agreement between Registrant and Mr. Rick Friedman, former Senior Vice President, World-Wide Sales and Customer Service.

10.14(22) Amended and Restated Employment Agreement between Registrant and Mr. John Denzel, former President and Chief Operating Officer.

10.15(22) Separation and General Release Agreement between Registrant and Mr. John Denzel, former President and Chief Operating Officer.

10.16(21) Form of Restricted Stock Unit Issuance Agreement for Executive Officers with Employment Agreements.

10.17(21) Form of Restricted Stock Unit Issuance Agreement for Other Employees.

10.18(12) Description of 2005 Cash Bonus Plan.

10.19(18) Description of 2006 Long-Term Incentive Plan, as amended.

21 Subsidiaries of Registrant.

23 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.

24 Power of Attorney (contained in Signature page hereto).

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Previously filed with our Registration Statement on Form S-1 declared effective with the Securities and Exchange Commission on September 28, 1993. File No. 33-66522.

(2) Previously filed with our 1993 Annual Report on Form 10-K (Commission File No. 0-22248). (3) Previously filed with our 1997 Annual Report on Form 10-K (Commission File No. 0-22248). (4) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (Commission File

No. 0-22248).

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(5) Previously filed with our 2000 Annual Report on Form 10-K (Commission File No. 0-22248). (6) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (Commission File No. 0-22248). (7) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 (Commission File

No. 0-22248). (8) Previously filed with our Annual Report on Form 10-K for the year ended December 31, 2002 (Commission File No. 0-22248). (9) Previously filed with our Registration Statement on Form S-8, dated February 14, 2003. (10) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended June 28, 2003 (Commission File No. 0-22248). (11) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended March 29, 2003 (Commission File No. 0-22248). (12) Incorporated by reference to Item 1.01 of our Current Report on Form 8-K filed on January 27, 2005 (Commission File

No. 0-22248). (13) Previously filed with our Quarterly Report on Form 10-Q for the quarter ended April 3, 2004 (Commission File No. 0-22248). (14) Previously filed with our Annual Report on Form 10-K for the year ended December 31, 2003 (Commission File No. 0-22248). (15) Previously filed with our Annual Report on Form 10-K for the year ended December 31, 2004 (Commission File No. 0-22248). (16) Previously filed with our Annual Report on Form 10-K for the year ended December 31, 2005 (Commission File No. 0-22248). (17) Previously filed with our Current Report on Form 8-K filed on February 2, 2007 (Commission File No. 0-22248). (18) Incorporated by reference to Item 1.01 of our Current Report on Form 8-K filed on February 3, 2006 (Commission File

No. 0-22248) and to Item 1.01 of our Current Report on Form 8-K filed on March 20, 2006 (Commission File No. 0-22248). (19) Previously filed with our Current Report on Form 8-K filed on February 3, 2006 (Commission File No. 0-22248). (20) Previously filed with our Registrant Statement on Form S-8 filed with the Securities and Exchange Commission on March 9, 2006.

File No. 333-132302. (21) Previously filed with our Quarterly Report on Form 10-Q filed on May 5, 2006 (Commission File No. 0-22248). (22) Previously filed with our Current Report on Form 8-K filed on November 8, 2006 (Commission File No. 0-22248).

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EXHIBIT 21

SUBSIDIARIES OF ULTRATECH, INC.

The following is a list of Ultratech, Inc.’s subsidiaries including their jurisdiction of incorporation as of December 31, 2006:

Subsidiaries Jurisdiction of incorporation

Ultratech CH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . KoreaUltratech International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State of Delaware, USAUltratech UK Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United KingdomUltratech Kabushiki Kaisha . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JapanUltratech Stepper East, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State of Delaware, USAUltratech Stepper (Thailand) Co. LTD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ThailandUltratech (Shanghai) Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peoples Republic of ChinaUltratech (Singapore) Pte, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SingaporeUltratech Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State of Nevada, USA

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EXHIBIT 23

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements:

(1) Registration Statements (Form S-8 Nos. 333-132302, 333-122551, 333-112448, 333-103228, 333-81396, 333-33338, 333-51117, and 333-06301) pertaining to the 1993 Stock Option/Stock Issuance Plan of Ultratech, Inc.,

(2) Registration Statements (Form S-8 Nos. 333-83954 and 333-43952) pertaining to the Supplemental Stock Option/ Stock Issuance Plan of Ultratech, Inc.,

(3) Registration Statement (Form S-8 No. 333-93653) pertaining to the 1998 Supplemental Stock Option/ Stock Issuance Plan of Ultratech, Inc.,

(4) Registration Statement (Form S-8 No. 333-85161) pertaining to the 1993 Stock Option/ Stock Issuance Plan, 1998 Supplemental Stock Option/ Stock Issuance Plan, and Employee Stock Purchase Plan of Ultratech, Inc., and

(5) Registration Statement (Form S-8 No. 333-33197) pertaining to the 1993 Stock Option/ Stock Issuance Plan and Employee Stock Purchase Plan of Ultratech, Inc.; of Ultratech, Inc. of our reports dated March 5, 2007, with respect to the consolidated financial statements and schedule of Ultratech, Inc., Ultratech, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Ultratech, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2006.

/s/ Ernst & Young LLPSan Jose, CaliforniaMarch 5, 2007

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EXHIBIT 31.1

I, Arthur Zafiropoulo, certify that:

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

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

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 6, 2007 /s/ arthur ZafIroPouLo

Arthur ZafiropouloChief Executive Officer

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EXHIBIT 31.2

I, Bruce Wright, certify that:

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

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

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 6, 2007 /s/ BrucE WrIght

Bruce WrightChief Financial Officer

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EXHIBIT 32.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002

I, Arthur Zafiropoulo, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

• the Annual Report of Ultratech, Inc. on Form 10-K for the year ended December 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

By: /s/ arthur ZafIroPouLo Date: March 6, 2007Name: Arthur ZafiropouloTitle: Chief Executive Officer

I, Bruce Wright, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

• the Annual Report of Ultratech, Inc. on Form 10-K for the year ended December 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

By: /s/ BrucE WrIght Date: March 6, 2007Name: Bruce WrightTitle: Chief Financial Officer

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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K/A(Amendment No. 1)

R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2006

OR

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from________ to ________

Commission file number: 1-8966

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

Delaware 94-3169580(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)

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

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

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Not Applicable(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, $0.001 par value per share Nasdaq Global Market

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes £ No R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes £ No R

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 R No £

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. R

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.Large accelerated filer £ Accelerated filer R Non-accelerated filer £

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

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The aggregate market value of voting stock held by non-affiliates of the Registrant, as of July 1, 2006, was approximately $277,274,000 (based upon the closing price for shares of the Registrant’s Common Stock as reported by the NASDAQ Global 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.

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

Class Outstanding at April 24, 2007

Common Stock, $0.001 par value per share 23,231,782

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TABLE OF CONTENTSPage Number

PART IItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 124

PART IIIItem 10. Directors, Executive Officers and Corporate Governance 125Item 11. Executive Compensation 129Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 155Item 13. Certain Relationships and Related Transactions, and Director Independence 160Item 14. Principal Accountant Fees and Services 161

PART IVITEM 15. Financial Statements, Financial Statement Schedules, and Exhibits 162

SIGNATURES 162EXHIBIT INDEX 164EXHIBIT 31.1 164EXHIBIT 31.2 166

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC on March 7, 2007 are incorporated by reference into Part III of this Annual Report on Form 10-K.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, originally filed on March 7, 2007 (the “Original Filing”). The Registrant is filing the performance graph required pursuant to Item 201(e) of Regulation S-K and is refiling Part III to include the information required by Items 10, 11, 12, 13 and 14 of Part III within the period required by General Instruction G(3) to Form 10-K. In addition, in connection with the filing of this Amendment and pursuant to the rules of the Securities and Exchange Commission, the Registrant is including with this Amendment certain currently dated certifications. Except as described above, no other changes have been made to the Original Filing.

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PART I

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

STOCK PERFORMANCE GRAPH

The graph depicted below reflects a comparison of the cumulative total return (change in stock price plus reinvestment of dividends) of the Company’s Common Stock assuming $100 invested as of December 31, 2001 with the cumulative total returns of the Nasdaq Composite Index and the Philadelphia Semiconductor Index.

Comparison of Cumulative Total Returns(1)(2)(3)(4)

0

20

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100

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2001 2002 2003 2004 2005 2006

UTEK Philadelphia Semiconductor Sector Index Nasdaq Composite Index

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(1) The graph covers the period from December 31, 2001 to December 31, 2006.

(2) No cash dividends have been declared on the Company’s Common Stock.

(3) Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

(4) The S&P Small Capital Semiconductor Equipment Index previously included in the Company’s stock performance graph is no longer available.

Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, which might incorporate future filings made by the Company under those statutes, the preceding Stock Performance Graph will not be incorporated by reference into any of those prior filings, nor will such report or graph be incorporated by reference into any future filings made by the Company under those statutes.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

As of December 31, 2006, the directors of Ultratech were as follows (ages and board committee assignments are as of April 15, 2007):

Name Age Position with the CompanyArthur W. Zafiropoulo 68 Chairman of the Board of Directors and Chief Executive OfficerJoel F. Gemunder (3) 67 DirectorNicholas Konidaris (1)(2) 62 DirectorDennis R. Raney (1) 64 DirectorHenri Richard 48 DirectorVincent F. Sollitto, Jr. (3) 59 DirectorRick Timmins (1)(2) 54 Director

(1) Member of the Audit Committee

(2) Member of the Nominating and Corporate Governance Committee

(3) Member of the Compensation Committee

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Arthur W. 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, from May 1997 until April 1999, and from April 2001 to January 2004. 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 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 to June 2003, Mr. Zafiropoulo served as Chairman of SEMI; and Mr. Zafiropoulo has been on the board of directors of SEMI since July 1995.

Joel F. Gemunder has been a director of the Company since October 1997. Mr. Gemunder has been President and a member of the board of directors of Omnicare, Inc., a pharmacy services provider, since 1981, and has been Chief Executive Officer of Omnicare since May 2001. Mr. Gemunder has also served as a member of the board of directors of Chemed Corp., a company operating in the sewer, drain and pipe cleaning, HVAC services and plumbing repair business and the HVAC and appliance repair and maintenance business, since 1977.

Nicholas Konidaris has served as a director of the Company since July 2000. Mr. Konidaris has served as President and Chief Executive Officer of Electro Scientific Industries, Inc., a global supplier of manufacturing equipment to increase productivity for customers in the semiconductor, passive components and electronic equipment markets, since January 2004. From July 1999 to January 2004, Mr. Konidaris served as President and Chief Executive Officer of Advantest America, Corp., a holding company of Advantest America, Inc., which is a manufacturer of testers and handlers. From February 1997 to July 2000, Mr. Konidaris served as the Chief Executive Officer of Advantest America, Corp. From July 1997 to January 2004, Mr. Konidaris also served as Chairman of the Board, President and Chief Executive Officer of Advantest America, Inc.

Dennis R. Raney has served as a director of the Company since April 2003. Mr. Raney has served as Principal of Liberty-Greenfield, LLP, a company that advises clients on real estate issues that have significant financial or operational consequences to their business, since May 2005. Mr. Raney served as Chief Financial Officer of eONE Global, LP, a company that identifies, develops and operates emerging electronic payment systems and related technologies that address e-commerce challenges, from July 2001 to June 2003. From March 1998 to July 2001, Mr. Raney served as Chief Financial Officer and Executive Vice President of Novell, Inc., a producer of network software. From January 1997 to December 1997, Mr. Raney served as Chief Financial Officer and Executive Vice President of QAD, Inc., a provider of enterprise resource planning software. Mr. Raney has also served as a director of EasyLink Services Corporation, a provider of information exchange services, since March 2003, and has served as chair of the audit committee of EasyLink’s board of directors since June 2004. In addition, since February 2004, Mr. Raney has served as a director of ViewPoint Corporation, a provider of visual application development, content assembly and delivery technology, and as chair of the audit committee of Viewpoint’s board of directors. Mr. Raney has served as a director, and as chair of the audit committee of the board of directors,

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of Infiniti Solutions, a provider of semiconductor testing, assembly and prototyping services, since July 2004. Mr. Raney served as a director of Equinix, a provider of data center and internet exchange services from April 2003 to June 2005, and served as chair of the audit committee of Equinix’s board of directors during that time. From July 2002 to June 2003, Mr. Raney served as a director of ProBusiness Services, Inc., which was acquired by Automatic Data Processing, Inc. in June 2003. Mr. Raney also served as a director and audit committee member of Redleaf, Inc., a technology operating company that provides services and capital for pre-seed state technology companies, from April 1999 to June 2003. Mr. Raney previously served as a director and audit committee member of W.R. Hambrecht & Company, an investment banking firm, from March 1999 to July 2001 and served as a director and audit committee member of ADAC Laboratories, a company that designs, develops, manufactures, sells and services electronic medical imaging and information systems, from March 1999 to March 2001. Mr. Raney holds a B.S. degree in chemical engineering from the South Dakota School of Mines & Technology and an MBA from the University of Chicago.

Henri Richard has served as a director of the Company since April 2006. Mr. Richard is Executive Vice President, Chief Sales and Marketing Officer at Advanced Micro Devices, Inc. (“AMD”). His current duties include oversight of the company’s global field sales and support organization, corporate marketing, and go-to-market activities for all AMD customer segments, including commercial, consumer and innovative solutions groups, and the company’s 50x15 digital inclusion initiative. Mr. Richard joined AMD in April 2002 as Group Vice President, Worldwide Sales. He was promoted to Senior Vice President in May 2003 and was appointed to his current position as an executive officer in February 2004. Prior to joining AMD, Mr. Richard was Executive Vice President of Worldwide Field Operations at WebGain, Inc., a privately held provider of Java software for Fortune 500 companies. Before WebGain, he was vice president of Worldwide Sales and Support for IBM’s Technology Group. Mr. Richard has also held senior executive positions with several notable companies in the U.S. and Europe, including tenures as President of the Computer Products Group at Bell Microproducts, Executive Vice President at Karma International, and Vice President at Seagate Technology/Conner Peripherals.

Vincent F. Sollitto, Jr. has served as a director of the Company since July 2000. Since November 2005, Mr. Sollitto has served as Chairman and Chief Executive Officer of Syntax-Brillian Corp., a high definition television developer and manufacturer. From September 2003 to November 2005 when it merged with Syntax Groups Corporation, Mr. Sollitto served as President and Chief Executive Officer, and as a director of Brillian Corp., a high definition television developer and manufacturer. Between February 2003 and August 2003, Mr. Sollitto served as President of Sollitto Associates, a management consulting firm. Mr. Sollitto served as a director and the Chief Executive Officer for Photon Dynamics, a manufacturer of test, repair and inspection equipment for the flat panel display industry, from June 1996 to February 2003. Mr. Sollitto served as acting Chief Financial Officer of Photon Dynamics from March 1998 to July 1998. From July 1993 to February 1996, Mr. Sollitto served as Vice-President and General Manager of Fujitsu Microelectronics, a semiconductor and electronics device company. Mr. Sollitto served as a director, and as a member of the audit and compensation committees of the board of directors, of Irvine Sensors Corporation, a developer of advanced signal processing and image stabilization technologies, from 1997 to 2004. Mr. Sollitto has served as a director and as a member of the audit committee and chairman of the compensation committee of the board of directors, of Applied Films Corporation, a solutions provider of thin film technology for the flat panel display industry, since July 1999.

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Rick Timmins has served as a director of the Company since August 2000. From January 1996 until April 2007, Mr. Timmins served as Vice-President of Finance for Cisco Systems, Inc. Mr. Timmins has served as a member of the board of directors of Transmeta Corporation, a developer of computing, microprocessing and semiconductor technologies, since May 2003, and is the chairman of the audit committee of Transmeta’s board of directors. Mr. Timmins holds a B.S. degree in accounting and finance from the University of Arizona and an M.B.A. degree from St. Edward’s University.

Information concerning our executive officers is incorporated by reference from Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC on March 7, 2007.

There are no family relationships between any directors or executive officers.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, executive officers and any persons who are the beneficial owners of more than ten percent (10%) of the Company’s common stock to file reports of ownership and changes in ownership with the SEC. Such directors, officers and greater than ten percent (10%) beneficial stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

Based solely on its review of the copies of such forms received by it and written representations from reporting persons for the 2006 fiscal year, the Company believes that all of the Company’s executive officers, directors and greater than ten percent (10%) beneficial stockholders complied with all applicable Section 16(a) filing requirements for the 2006 fiscal year.

CODE OF ETHICS

We have adopted a Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted this Code of Ethics on our website. Any future amendments to this Code will also be posted on our website.

AUDIT COMMITTEE

The Audit Committee currently consists of three (3) directors, Messrs. Konidaris, Raney and Timmins. The Audit Committee is responsible for overseeing the integrity of the Company’s financial statements and the appointment, compensation, qualifications, independence and performance of the Company’s independent auditors, as well as compliance with related legal and regulatory requirements and performance of the Company’s accounting practices and internal controls.

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The Board of Directors has determined that each current member of the Audit Committee is “independent” as that term is defined in Rule 10A-3 under the Securities Exchange Act of 1934 and an “independent director” as that term is defined in Rule 4200 of the NASDAQ Marketplace Rules. In addition, the Board of Directors has determined that each of Mr. Raney and Mr. Timmins is an “Audit Committee Financial Expert” as that term is defined by Item 407 of SEC Regulation S-K.

Item 11. Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Introduction. It is our intent in this Compensation Discussion and Analysis to inform our shareholders of the policies and objectives underlying the compensation programs for our executive officers. Accordingly, we will address and analyze each element of the compensation provided our chief executive officer, our chief financial officer and the other executive officers named in the Summary Compensation Table which follows this discussion. We are engaged in a very competitive industry, and our success depends upon our ability to attract and retain qualified executives through competitive compensation packages. The Compensation Committee of our Board of Directors administers the compensation programs for our executive officers with this competitive environment in mind. However, we believe that the compensation paid to our executive officers should also be substantially dependent on our financial performance and the value created for our shareholders. For this reason, the Compensation Committee also utilizes our compensation programs to provide meaningful incentives for the attainment of our short-term and long-term strategic objectives and thereby reward those executive officers who make a substantial contribution to the attainment of those objectives.

Compensation Policy for Executive Officers. We have designed the various elements comprising the compensation packages of our executive officers to achieve the following objectives:

• attract, retain, motivate and engage executives with superior leadership and management capabilities,

• provide an overall level of compensation to each executive officer which is externally competitive, internally equitable and performance-driven, and

• ensure that total compensation levels are reflective of our financial performance and provide the executive officer with the opportunity to earn above-market total compensation for exceptional business performance.

Each executive officer’s compensation package typically consists of three elements: (i) a base salary, (ii) a cash bonus tied to our attainment of pre-established financial objectives, and (iii) long-term, stock-based incentive awards, in the form of stock options and restricted stock unit awards, designed to align and strengthen the mutuality of interests between our executive officers and our shareholders. In determining the appropriate level for each element of such compensation, the Compensation Committee has consistently followed the practice of setting the compensation levels for our executive officers, other than Mr. Zafiropoulo, at or above the 50th percentile of the relevant market data, and for Mr. Zafiropoulo, at or above the 75th percentile of the relevant market data. In determining the appropriate level of each component of compensation for an executive officer, the

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Compensation Committee also subjectively reviews and evaluates the level of performance of the Company and the executive’s level of individual performance and potential to contribute to the Company’s future growth. Accordingly, an executive officer’s actual compensation may be higher or lower than the 50th percentile (75th percentile for Mr. Zafiropoulo) for his or her position depending on Company performance and operating results and his or her individual performance. Consistent with our philosophy of emphasizing pay for performance, the total cash compensation packages are designed to pay above the target when the Company exceeds its goals and below the target when the Company does not.

Comparative Framework. For purposes of measuring the competitive levels of the various elements of our executive officer compensation package, the Compensation Committee historically has engaged Compensation Strategies, a compensation consulting firm, to provide competitive compensation data and general advice on the Company’s compensation programs and policies for executive officers. The Compensation Committee uses such data to conduct periodic reviews of compensation levels among comparable companies in the high-tech and precision manufacturing industries. However, such comparative reviews are not conducted every year, and based on Compensation Strategies’ assessment that comparable companies were typically maintaining salary increases at 2005 levels, that bonus targets were steady and that long-term incentives were in a period of fluctuation due to the implementation of FAS 123R, no comparative review was undertaken in 2006. The companies which have historically comprised the comparative peer group are as follows:

Advanced Energy Industries IncApplied Materials KLA-Tencor Corp

Asyst Technologies Inc Kulicke & Soffa Industries IncATMI Inc Lam Research Corp

Axcelis Technologies Inc Mattson Technology IncBrooks Automation Inc MKS Instruments Inc

Coherent Inc Novellus Systems IncCymer Inc Roper Industries Inc

Gerber Scientific Inc V Varian Semiconductor Equipment Associates IncGSI Group Veeco Instruments

It is our objective to target the various elements of the compensation package provided each of our executive officers, other than Mr. Zafiropoulo, at the following percentiles when compared to the peer group data:

Base Salary 50th PercentileTotal Cash Compensation 50th PercentileTotal Direct Compensation 55th to 65th Percentile

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It is our objective to target the various elements of the compensation package provided to Mr. Zafiropoulo at a point between the following percentiles when compared to the peer group data:

Base Salary 75th to 90th PercentileTotal Cash Compensation 75th to 90th PercentileTotal Direct Compensation 75th to 90th Percentile

Elements of Compensation. Each of the three major elements comprising the compensation package for executive officers (salary, bonus and equity) is designed to achieve one or more of our overall objectives in fashioning a competitive level of compensation, tying compensation to the attainment of one or more of our strategic business objectives and subjecting a substantial portion of the executive officer’s compensation to our financial success as measured in terms of our stock price performance. The manner in which the Compensation Committee has so structured each element of compensation may be explained as follows.

Salary. The Compensation Committee reviews the base salary level of each executive officer in January each year, with any salary adjustments for the year generally to be made retroactive to January 1 of that year. The base salary for each executive officer named in the Summary Compensation Table is determined on the basis of his or her level of responsibility and experience. However, in light of the Company’s fiscal year 2005 financial results, the Compensation Committee decided for the 2006 fiscal year to maintain the base salary of each executive officer at the level established for the 2005 fiscal year, representing the second consecutive fiscal year in which the executive officers did not receive an increase in their level of base salary.

For the 2006 fiscal year, the annual rate of base salary for our executive officer group ranged from a high of $555,000 to a low of $266,863.

Incentive Compensation. In January 2006 the Compensation Committee approved the Long-Term Incentive Compensation Plan designed to advance our pay-for-performance policy by focusing the attention of our executive officers on the attainment of key objectives over one or more years. In 2006 the plan provided our executive officers with a direct financial incentive in the form of a bonus award to be paid in cash and tied to our achievement of aggressive pre-established operational goals for the 2006 year. Half of the actual bonus amount was to be paid to each participant following the close of the 2006 fiscal year, provided the participant continued in the company’s employ through such date or is otherwise eligible for such portion by reason of his or her retirement at or after age 65. The other half was to be deferred and subject to an annual installment vesting schedule tied to the participant’s continued service with the company over an additional three-year period. The deferred portion was to be paid as it vested and earn interest at a designated rate until paid. The plan provided for pro-ration of the non-deferred portion of the bonus in the event the participant’s employment should terminate under certain defined circumstances during the performance period. The deferred portion of the bonus was to immediately vest and become payable in the event the participant’s employment terminates under certain defined circumstances during the deferral period. Accelerated payouts under the plan may also occur in the event of certain changes in control or ownership of the company.

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The operational goals were tied to the following measures of our financial performance for the 2006 fiscal year, weighted as indicated: revenue (50% weighting) and earnings per share (50% weighting). For each executive officer, bonus opportunities for the revenue and earnings per share goals were established at threshold, target, above-target tier-I and above-target tier II levels of attainment, with the aggregate dollar amount of such bonuses not to exceed $4,908,300 for the 2006 fiscal year. No bonuses were to be paid under the plan unless those operational goals were each attained at not less than threshold level. At the time the goals were set in January, 2006, we believed that the goals, though aggressive in light of prior fiscal year goals, were attainable at the established target levels, but substantial uncertainty nevertheless existed as to the actual attainment of the goals at any of the established levels. Because the performance goals were aggressive, the bonus opportunity originally set for each executive officer at target level was between 90 percent and 150 percent of his base salary for the 2006 fiscal year, representing significantly higher percentages than have been set in past years. However, on March 14, 2006, the Compensation Committee reduced by 15% the dollar amount of the various bonus potentials previously approved for the executive officers for each level of attained company performance, and reduced the target earnings per share to reflect certain adjustments the Compensation Committee had intended to include at the time the target was set, but which were not actually included in the bonus plan document.

For the purposes of determining whether the revenue and earnings per share objectives were met for the 2006 fiscal year, the Compensation Committee used the numbers we reported for financial statement purposes in accordance with generally accepted accounting principles in the United States (“GAAP”).

In January 2007, the Compensation Committee determined that our financial performance for the 2006 year was below the threshold level for the revenue and earnings per share goals. As a result, no incentive bonuses were awarded under the plan.

Long-Term Incentives. We have structured our long-term incentive program for executive officers in the form of equity awards under our 1993 Stock Option/Stock Issuance Plan (the “1993 Plan”). For many years stock option grants were the sole form of our equity awards. Currently, we use stock option grants in combination with other forms of equity awards available under the 1993 Plan to provide long-term incentives to our executive officers.

Generally, the Compensation Committee approves equity awards each year in the first quarter of the fiscal year in connection with the annual review of the performance of our executive officers. In January 2007, the Compensation Committee approved a general policy to grant equity awards at a regularly scheduled meeting of the Compensation Committee, with such awards to be effective at the close of the second full trading day following the release of the Company’s earnings for the previous quarter and an exercise price equal to the closing price on the effective date.

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In December 2005, the Compensation Committee decided to accelerate the 2006 fiscal year option grants by making those grants in December 2005, before the Company became subject to the new stock-based compensation accounting rules under Statement of Financial Accounting Standards No. 123 (revised 2004) “FAS 123(R)”. By granting fully vested options at the end of the 2005 fiscal year with restrictions on the sale of the shares purchased under those options, the Company was able to avoid having to expense those options on its financial statements and thereby avoid impacting its reported earnings in the future. However, those options contain restrictions on the sale of the underlying shares which preclude the optionees from selling any shares acquired under those options and realizing any option gain until the sale restrictions lapse over periods ranging as long as two years.

Each stock option grant is designed to align the interests of the executive officer with those of the shareholders and to provide each individual with a significant incentive to manage the company from the perspective of an owner with an equity stake in the business. Each grant allows the officer to acquire shares of our common stock at a fixed price per share (the closing selling price on the grant date) over a specified period, usually ten years. Other than the fully-vested options granted in December 2005, options granted in past years generally vest and become exercisable in a series of installments over a fifty month service period, contingent upon the officer’s continued employment with the company. Accordingly, each option will provide a return to the executive officer only to the extent he remains employed with us during the vesting period, and then only if the fair market value of the underlying shares appreciates over the period between grant and exercise of the option.

In January 2006, the Compensation Committee began to award restricted stock units (“RSUs”) as part of our long-term incentive program. We believe that RSUs are a valuable addition to our long-term incentive program for several reasons, including ongoing concerns over the dilutive effect of option grants on our outstanding shares, our desire to have a more direct correlation between the FAS 123(R) compensation expense we must take for financial accounting purposes and the actual value delivered to our executive officers and other employees, and the fact that the incentive effects of RSUs are less subject to market volatility than stock options. Each RSU entitles the recipient to one share of our common stock at a designated issue date following the vesting of that unit, without the payment of an exercise price or other consideration. The units will vest in a series of three successive equal annual installments over the executive officer’s period of continued employment, subject to accelerated vesting in the event the officer’s employment terminates under certain circumstances or upon certain changes in control or ownership of the Company. The shares underlying the vested units will be issued following the completion of that three-year vesting period (or, if earlier, upon the occurrence of any of the accelerated vesting events), subject to the Company’s collection of the applicable withholding taxes.

As part of the introduction of the RSU program, the Compensation Committee established certain guidelines as to the number of shares of the Company’s common stock for which long-term equity compensation awards are to be made to the executive officers in the future, but has the flexibility to make adjustments to those guidelines at its discretion. The current guidelines provide for the grant of equity awards in the form of combined stock option and RSU grants that involve fewer shares of common stock than in earlier years due to the inclusion of the RSU component.

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The equity awards made during the 2006 fiscal year to our chief executive officer and the other executive officers named in the Summary Compensation Table are set forth in that table and the accompanying Grants of Plan-Based Awards table. In determining the total number of shares to award each executive officer in the combined form of stock options and RSUs, the Compensation Committee’s objective historically has been to bring the total direct compensation (salary, bonus and equity) of each executive officer other than Mr. Zafiropoulo to a point between the 55th and the 65th percentile of the peer group, and to bring the total direct compensation of Mr. Zafiropoulo to a point between the 75th and the 90th percentile of the peer group. For such purpose, RSUs were valued at their closing selling price at issuance and option awards were valued on the basis of the fair value expense disclosed in the annual report on Form 10-K for the most recently completed fiscal year of each company in the peer group.

The Compensation Committee believes that the new long-term incentive program involving a combination of RSUs and stock options will provide our executive officers and other employees with a competitive and more balanced equity compensation package, while at the same time reducing the total number of shares of our common stock issuable under those stock-based awards. This is particularly important for us, since the total direct compensation of our executive officers is weighted to the equity award component.

Market Timing of Equity Awards. The Compensation Committee does not engage in any market timing of the equity awards made to the executive officers or other award recipients. Except as mentioned above for the December 2005 option grants, the awards for existing executive officers and employees are made in connection with the annual review process which generally occurs in the first quarter each year. Equity awards for new hires are typically made at the next scheduled Compensation Committee meeting following the employee’s hire date. It is our intent that all stock option grants have an exercise price per share equal to the fair market value per share on the grant date.

Officer Employment Agreements. The Company has entered into Employment Agreements with Mr. Zafiropoulo and Mr. Wright. A summary of the material terms of those employment agreements, together with a quantification of the benefits available under the agreements, may be found in the section of this Annual Report on Form 10-K entitled “Executive Compensation and Other Information — Employment Contracts, Termination of Employment and Change in Control Arrangements.”

During the 2006 fiscal year, the Compensation Committee addressed on several occasions the provision of lifetime retiree health (medical and dental) coverage to Mr. Wright and his spouse and finally decided to provide such coverage in the event Mr. Wright’s employment with the Company occurs (i) by reason of his retirement after attainment of age 62 and completion of at least 10 years of service with the Company or in connection with a change of control of the Company. The Compensation Committee believes that the retiree health care package for Mr. Wright and his spouse is fair and reasonable when we consider the years of service of Mr. Wright and the level of dedication and commitment that he has rendered to us over that period, the contributions he has made to our growth and financial success, and the value we expect to receive from retaining his services prior to his retirement.

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On January 30, 2006, the Company entered into an employment agreement with Mr. Rick Friedman, then the Company’s Senior Vice President, World-wide Sales. In connection with the termination of Mr. Friedman’s employment with the Company on January 14, 2007, the Company entered into a Separation and General Release Agreement and an amendment to his January 30, 2006 employment agreement (collectively, the “Separation Agreement”). Pursuant to the Separation Agreement, upon his execution of a general release in favor of the Company, Mr. Friedman became entitled to receive the severance benefits that he was entitled to receive under the January 30, 2006 employment agreement. Accordingly, Mr. Friedman became entitled to receive the following benefits: (i) 12 months of continued base salary, (ii) accelerated vesting of twenty-five percent of each outstanding equity award granted to him, (iii) an extension of the time to exercise his vested stock options of up to one year and 90 days following the termination of his employment and (iv) reimbursement of COBRA costs for continued medical coverage for up to 18 months.

On November 24, 2003, the Company entered into an employment agreement with Mr. John Denzel, then the Company’s President and Chief Operating Officer. In connection with the termination of Mr. Denzel’s employment with the Company on November 3, 2006, the Company entered into a Separation and General Release Agreement and an Amended and Restated Employment Agreement with Mr. Denzel (collectively, the “Denzel Separation Agreement”). Pursuant to the Denzel Separation Agreement, upon his execution of a general release in favor of the Company, Mr. Denzel became entitled to receive the severance benefits that he was entitled to receive under the November 24, 2003 employment agreement, plus an additional benefit in the form of the accelerated vesting of twenty-five percent of each outstanding option granted to him before July 21, 2003. Accordingly, Mr. Denzel became entitled to receive the following benefits: (i) 12 months of continued base salary, (ii) acceleration of vesting of twenty-five percent of each outstanding equity award granted to him, (iii) an extension of the time to exercise certain of his vested stock options of up to one year and 90 days following the termination of his employment and (iv) reimbursement of COBRA costs for continued medical coverage for up to 18 months.

The Compensation Committee believes that the severance arrangements for Mr. Friedman and Mr. Denzel are fair and reasonable in consideration of the years of service of those officers and the level of dedication and commitment that they have rendered to us over those years.

Executive Officer Perquisites. It is not our practice to provide our executive officers with any meaningful perquisites. We do, however, provide Mr. Zafiropoulo with a company automobile which he uses from time to time for personal matters.

Other Programs. Our executive officers are eligible to participate in our 401(k) plan on the same basis as all other regular U.S. employees.

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Deferred Compensation Programs. In addition to the bonus component subject to mandatory deferral under the Company’s Long-Term Incentive Compensation Plan described under “Incentive Compensation” above, we maintain a non-qualified deferred compensation programs for our executive officers. Such program is described under the heading “Nonqualified Deferred Compensation” on page 144. However, we believe that the equity award component of each executive officer’s total direct compensation package should serve as a major source of wealth creation, including the accumulation of substantial resources to fund the executive officer’s retirement years.

Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly held companies for compensation paid to certain of their executive officers to the extent such compensation exceeds $1.0 million per covered officer in any year. The limitation applies only to compensation that is not considered to be performance-based under the terms of Section 162(m). The stock options granted to our executives have been structured to qualify as performance based compensation. Non-performance-based compensation paid to our executive officers for 2006 did not exceed the $1.0 million limit per officer. However, because we have begun to include service-vesting restricted stock units as a component of equity compensation, it is likely that the non-performance-based compensation payable to our executive officers will exceed the $1.0 million limit in one or more future years. We believe that in establishing the cash and equity incentive compensation programs for our executive officers, the potential deductibility of the compensation payable under those programs should be only one of a number of relevant factors taken into consideration, and not the sole governing factor. For that reason, we may deem it appropriate to provide one or more executive officers with the opportunity to earn incentive compensation, whether through cash bonus programs tied to our financial performance or through RSUs tied to the executive officer’s continued service, which may, together with base salary, exceed in the aggregate the amount deductible by reason of Section 162(m) or other provisions of the Internal Revenue Code. We believe it is important to maintain cash and equity incentive compensation at the levels needed to attract and retain the executive officers essential to our success, even if all or part of that compensation may not be deductible by reason of the Section 162(m) limitation.

Summary Compensation Information

The following table provides certain summary information concerning the compensation earned for services rendered in all capacities to the Company and its subsidiaries for the year ended December 31, 2006 by the Company’s Chief Executive Officer, Chief Financial Officer and each of the Company’s two other most highly compensated executive officers whose total compensation for the 2006 year was in excess of $100,000. The listed individuals shall be hereinafter referred to as the “named executive officers.”

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Nameand Principal

Position(a)

Year(b)

Salary($)(1)

(c)

StockAwards($)(2)

(d)

OptionAwards($)(3)

(e)

Change inPension Value

andNonqualified

DeferredCompensation

Earnings(f)

AllOther Compensation

($)(g)

Total($)(h)

Arthur W. Zafiropoulo, Chairman of the Board, Chief Executive Officer and President 2006 $ 555,000 $ 415,987 — — $ 16,978 (4) $ 987,965

Bruce R. Wright, Senior Vice President, Finance, Chief Financial Officer and Secretary 2006 $ 273,837 $ 48,000 $ 24,836 — $ 45,422 (5) $ 392,095

John E. Denzel, Former President and Chief Operating Officer (8) 2006 $ 259,077 $ 70,778 $ 127,889 $ 18,994(10) $ 313,090 (6) $ 770,834

Rick Friedman, Former Senior Vice President, World-wide Sales and Customer Services (9) 2006 $ 266,863 $ 47,176 — $ 4,846 (11) $ 800 (7) $ 314,839

(1) Includes amounts deferred under the Company’s 401(k) Plan, a qualified deferred compensation plan under section 401(k) of the Internal Revenue Code.

(2) The amounts in column (d) reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2006, in accordance with FAS 123(R), with respect to the portion of the stock awards which vested in that year, including awards which have been granted in earlier years. The reported dollar amount does not take into account any estimated forfeitures related to vesting conditions. Assumptions used in the calculation of this amount are included in footnote 5 to the Company’s audited financial statements for the fiscal year ended December 31, 2006 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2007. Except for Mr. Denzel, none of the named executive officers forfeited any stock awards during the 2006 fiscal year. Mr. Denzel forfeited restricted stock units covering 5,625 shares of the Company’s common stock in the 2006 fiscal year as a result of the termination of his employment.

(3) The amounts in column (e) reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2006, in accordance with FAS 123(R), with respect to the portion of the option awards which vested in that year, including awards which have been granted in earlier years. The reported dollar amount does not take into account any estimated forfeitures related to vesting conditions. Assumptions used in the calculation of this amount are included in footnote 5 to the Company’s audited financial statements for the fiscal year ended December 31, 2006 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2007. Except for Mr. Denzel, none of the named officers forfeited any stock options during the 2006 fiscal year. Mr. Denzel forfeited 56,250 option shares in the 2006 fiscal year as a result of the termination of his employment.

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(4) Represents (i) a matching contribution by the Company to the named executive officer’s account under our 401(k) Plan in the amount of $2,000 and (ii) $14,978 attributable to the non-business use of a Company car provided to Mr. Zafiropoulo.

(5) Represents (i) a matching contribution by the Company to the named executive officer’s account under our 401(k) Plan in the amount of $2,000 and (ii) $43,422 attributable to the amount accrued by the Company for the 2006 fiscal year with respect to a lifetime retiree health (medical and dental) coverage benefit approved for Mr. Wright in such year. For further information regarding such benefit, please see the section entitled “Officer Employment Agreements” in the Company’s Compensation Discussion and Analysis.

(6) Represents payments pursuant to a severance agreement with Mr. Denzel, including (i) $275,000 in severance pay to be paid in 12 equal monthly installments beginning on May 4, 2007, and (ii) $38,090 attributable to COBRA coverage provided at the Company’s cost for Mr. Denzel and his dependents for an eighteen-month period. For further information regarding Mr. Denzel’s severance agreement, please see the section entitled “Officer Employment Agreements” in the Company’s Compensation Discussion and Analysis.

(7) Represents a matching contribution by the Company to the named executive officer’s account under our 401(k) Plan.

(8) Mr. Denzel’s employment with the Company terminated on November 4, 2006.

(9) Mr. Friedman’s employment with the Company terminated on January 14, 2007.

(10) Represents 2006 investment earnings on Mr. Denzel’s nonqualified deferred compensation account. The earnings correspond to the actual market earnings on a select group of investment funds utilized to track the notional investment return on the account balance for the 2006 fiscal year. The Company has not made any determination as to which portion of such earnings may be considered above market for purposes of column (f) of this table and has elected to report the entire amount of such earnings.

(11) Represents 2006 investment earnings on Mr. Friedman’s nonqualified deferred compensation account. The earnings correspond to the actual market earnings on a select group of investment funds utilized to track the notional investment return on the account balance for the 2006 fiscal year. The Company has not made any determination as to which portion of such earnings may be considered above market for purposes of column (f) of this table and has elected to report the entire amount of such earnings.

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Grants of Plan-Based AwardsThe following table provides certain summary information concerning each grant of an award made to a named executive officer in the 2006

Fiscal Year under a compensation plan.

Potential PayoutsUnder Non-Equity Incentive

Plan Awards (1)

All OtherStock

Awards:Number

ofShares

of Stockor Units

(#)(2)(f)

Grant Date FairValue of Equity

Awards($)(g)

Name(a)

GrantDate(b)

Threshold($)(c)

Target($)(d)

Maximum($)(e)

Arthur W. Zafiropoulo 1/31/06 — — — 65,000 (2) 1,248,000 — 416,250 832,500 2,497,500 — —

Bruce R. Wright 1/31/06 — — — 7,500 (2) 144,000 — 137,500 275,000 825,000 — —

John E. Denzel 1/31/06 — — — 7,500 (3) 144,000 — 151,800 303,600 910,800 — —

Rick Friedman 1/31/06 — — — 5,000 (4) 96,000 — 112,500 225,000 675,000 — —

(1) Reflects the potential payouts under the Company’s 2006 Executive Officer Incentive Compensation Plan based on the Company’s performance during the 2006 year. No amounts were earned under such plan in 2006 because the Company’s performance for the 2006 fiscal year did not attain threshold levels. For more information regarding the 2006 Executive Officer Incentive Compensation Plan, please see the section entitled “Incentive Compensation” in the Company’s Compensation Discussion and Analysis.

(2) Reflects restricted stock units (“RSUs”) granted under the Company’s 1993 Stock Option/Stock Issuance Plan. Each RSU entitles the recipient to one share of the Company’s common stock at a designated date following the vesting of that unit. The units will vest in a series of three successive equal annual installments over the named executive officer’s period of continued employment; subject to accelerated vesting in the event his employment terminates under certain circumstances or upon certain changes in control or ownership of the Company. The shares underlying the vested units will be issued following the completion of that three-year vesting period or (if earlier) upon the occurrence of any of the accelerated vesting events.

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(3) Reflects RSUs granted to Mr. Denzel with the vesting and issuance schedule described in Footnote 2, above. However, in connection with the termination of his employment, 25% of the shares subject to Mr. Denzel’s RSUs vested on an accelerated basis, and the remaining units were canceled and ceased to be outstanding. Accordingly, 1,875 shares of the Company’s common stock will be issued to Mr. Denzel on May 4, 2007.

(4) Reflects RSUs granted to Mr. Friedman with the vesting and issuance schedule described in Footnote 2, above. One-third of the RSUs vested on January 1, 2007 pursuant to such schedule. In connection with the termination of his employment in January 2007, an additional 25% of the shares then subject to Mr. Friedman’s RSU award vested on an accelerated basis, and the remaining units were cancelled and ceased to be outstanding. Accordingly, a total of 2,916 shares of the Company’s common stock will be issued to Mr. Friedman on July 15, 2007.

Outstanding Equity Awards at Fiscal Year-EndThe following table provides certain summary information concerning outstanding equity awards held by the named executive officers as of

December 31, 2006. Option Awards Number of

SecuritiesUnderlyingUnexercisedOptions (#)Exercisable

(b)

Number of Securities Underlying Unexercised Options (#) Unexercisable (c)

Stock Awards

Name(a)

Option Exercise Price ($) (d)

Option Expiration Date (e)

Number of Shares or Units of Stock That Have Not Vested (#) (f)

Market Value of Shares or Units of Stock That Have Not Vested ($)(4) (g)

Arthur W. Zafiropoulo 43,334(2) $ 540,808 65,000 (1) $ 16.16 12/16/2015 7,082 $ 14.12 1/22/2015 72,918 $ 14.12 1/22/2015 80,000 $ 16.01 10/19/2014 200,000 $ 21.83 7/20/2013 125,000 $ 11.36 1/27/2013 7,339 $ 13.67 7/15/2012 92,661 $ 13.67 7/15/2012 80,000 $ 13.96 1/29/2012 8,382 $ 23.82 7/24/2011 91,618 $ 23.82 7/24/2011 38,308 $ 27.82 4/17/2011 22,000 $ 13.375 4/19/2009

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Bruce R. Wright 5,000(2) $ 62,400 30,000 (1) $ 16.16 12/16/2015 40,000 $ 14.12 1/22/2015 40,000 $ 16.01 10/19/2014 160,000 $ 21.83 7/20/2013 72,039 2,961(5) $ 11.36 1/27/2013 60,000 $ 13.67 7/15/2012 20,000 $ 13.96 1/29/2012 30,000 $ 23.82 7/24/2011 24,500 $ 27.82 4/17/2011 76,000 $ 11.875 4/18/2010 56,000 $ 13.125 5/31/2009

John E. Denzel 40,000 $ 14.12 03/14/2008 150,000 $ 21.83 03/14/2008 40,000 $ 16.01 03/14/2008 45,000 $ 13.67 03/14/2008 25,000 $ 23.82 03/14/2008 25,000 $ 15.625 03/14/2008 3,000 $ 27.82 03/14/2008 10,000 $ 17.625 03/14/2008 9,500 $ 19.00 03/14/2008 30,000 $ 16.16 03/14/2008 200 $ 17.50 03/14/2008

Rick Friedman 3,334(3) $ 41,608 200,000 $ 15.00 4/14/2008 15,000 $ 16.01 4/14/2008 40,000 $ 14.12 4/14/2008 20,000 $ 16.16 4/14/2008

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(1) The option was fully vested at the time of grant. However, any shares purchased under such option will be subject to certain transfer restrictions which prelude any sale of those shares until the restrictions lapse on December 31, 2007.

(2) Reflects RSUs granted under the Company’s 1993 Stock Option/Stock Issuance Plan. Each RSU entitles the recipient to one share of the Company’s common stock at a designated date following the vesting of that unit. The units will vest in a series of three successive equal annual installments over the named executive officer’s period of continued employment; subject to accelerated vesting in the event his employment terminates under certain circumstances or upon certain changes in control or ownership of the Company. The shares underlying the vested units will be issued following the completion of that three-year vesting period or (if earlier) upon the occurrence of any of the accelerated vesting events.

(3) Reflects RSUs granted to Mr. Friedman with the vesting and issuance schedule described in Footnote 2, above. In connection with the termination of his employment on January 14, 2007, 1,250 shares vested on an accelerated basis, and the remaining units were cancelled and ceased to be outstanding. Such shares will be issued to Mr. Friedman on July 15, 2007.

(4) Based on the $12.48 closing price of the Company’s common stock on December 29, 2006.

(5) The option vests in accordance with the following schedule: 50% of the option shares vested on the one year anniversary of the option grant date and the remaining option shares vest in a series of 38 equal monthly installments measured from one year anniversary of the option grant date, provided Mr. Wright continues to provide services to the Company through each such date. The option was granted on January 28, 2003 for a total number of 75,000 option shares.

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Option Exercises and Stock Vested

The following table sets forth for each of the named executive officers, the number of shares of the Company’s common stock acquired and the value realized on each exercise of stock options during the year ended December 31, 2006, and the number and value of shares of the Company’s common stock subject to each restricted stock or restricted stock unit award that vested during the year ended December 31, 2006. No stock appreciation rights were exercised by the named executive officers during the 2006 fiscal year, and none of those officers held any stock appreciation rights as of December 31, 2006.

Option Awards Stock Awards

Name(a)

Number of Shares Acquired on Exercise (#) (b)

Value Realized on Exercise ($)(1) (c)

Number of Shares Acquired on Vesting (#) (d)

Value Realized on Vesting ($)(2) (e)

Arthur W. Zafiropoulo — — 21,666 $ 270,392Bruce R. Wright — — 2,500 $ 31,200John E. Denzel 24,750 $ 56,502 1,875 $ 23,400Rick Friedman — — 1,666 $ 20,792

(1) Value realized is determined by multiplying (i) the amount by which the market price of the common stock on the date of exercise exceeded the exercise price by (ii) the number of shares for which the options were exercised.

(2) Value realized is determined by multiplying (i) the market price of the common stock on the applicable vesting date by (ii) the number of shares as to which each award vested on such date.

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Nonqualified Deferred Compensation

The following table shows the deferred compensation activity for the each named executive officer during the 2006 fiscal year under the Company’s Executive Deferred Compensation Plan.

Name(a)

ExecutiveContributions

in Last FY($)(b)

RegistrantContributions

in Last FY($)(c)

Aggregate

Earnings inLast FY ($)

(d)

AggregateWithdrawals/Distributions

($)(e)

AggregateBalance at

Last FYE ($)(f)

Arthur W. Zafiropoulo — — — — —Bruce R. Wright — — — — —John E. Denzel — — $ 18,994(1) — $ 427,193(1)(2)Rick Friedman — — $ 4,846(3) — $ 57,526(3)(4)

(1) Represents a rate of return for the 2006 fiscal year of approximately 4.6%. The amount in this column is included in “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the Summary Compensation Table on page 137 of this Form 10-K/A and is also included in column (f) of this table. The amount corresponds to a composite of the actual market earnings on a select group of investment funds utilized to track the notional investment return on the account balance for the 2006 fiscal year. The investment funds so utilized and the rate of return for each such fund for the 2006 year were as follows: SLD CB AIM Capital Appreciation (0% rate of return), SLD CB ING Marsico Growth Portfolio (-1.85% rate of return), SLD CB ING Limited Maturity Bond Portfolio (3.49 % rate of return), SLD CB ING Liquid Assets Portfolio (1.23% rate of return), SLD CB ING Oppenheimer Main Street Core (1.41% rate of return), SLD CB ING MFS Total Return Portfolio (4.59% rate of return), SLD CB ING T. Rowe Price Divsf MidCap Growth (-0.22% rate of return), SLD CB Fidelity Growth (4.29% rate of return), SLD ING JPMorgan Small Cap core Equity (-17.95% rate of return), SLD ING Stock Index (3.30% rate of return), SLD ING Lord Abbett U.S. Government Securities (12.61% rate of return), SLD CB ING T. Rowe Price Equity Income Portfolio (4.09% rate of return), SLD ING Evergreen Omega Portfolio (3.20% rate of return) and the SLD ING FMR Large Cap Growth (-3.01% rate of return).

(2) In connection with his termination of employment, Mr. Denzel received a lump sum distribution of $317,202 of his account balance under the Plan in January, 2007. The remainder of Mr. Denzel’s account balance under the Plan will be distributed in a lump sun on May 4, 2007.

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(3) Represents a rate of return for the 2006 fiscal year of approximately 8.5%. The amount in this column is included in “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the Summary Compensation Table on page 137 of this Form 10-K/A and also included in column (f) of this table. The amount corresponds to a composite of the actual market earnings on a select group of investment funds utilized to track the notional investment return of the account balance for the 2006 fiscal year. The investment funds so utilized and the rate of return for each such fund for the 2006 year were as follows: SLD CB ING Marsico Growth Portfolio (5.22% rate of return), SLD CB ING Limited Maturity Bond Portfolio (3.45% rate of return), SLD CB ING MFS Total Return Portfolio (10.80% rate of return), SLD CB ING T. Rowe Price Divsf MidCap Growth (8.75% rate of return), SLD CB AIM VI High Yield Fund CI I (0% rate of return), SLD CB Alger American MidCap Growth (0% rate of return), SLD CB ING T.Rowe Price Equity Income Portfolio (17.25% rate of return), SLD ING VP High Yield Bond (9.19% rate of return).

(4) In connection with his termination of employment, Mr. Friedman received a lump sum distribution of his account balance under the Plan in January, 2007.

Executive Deferred Compensation Plan. The Company has established the Executive Deferred Compensation Plan in order to provide its executive officers and other key employees with the opportunity to defer all or a portion of their cash compensation each year. Pursuant to the plan, each participant can elect do defer between 1% and 100% of his or her salary, commissions, bonuses and other awards. Each participant’s contributions to the plan are credited to an account maintained in his or her name on the Company’s books, in which the participant is fully vested at all times. The account is credited with notional earnings (or losses) based on the participant’s investment elections among a select group of investment funds utilized to track the notional investment return on the account balance. There are a total of 17 investment funds available for election, and the participant may change his or her investment choices daily. Upon the participant’s termination of employment for reasons other than retirement or disability, he or she will receive a lump sum distribution of his or her account balance within 60 days following the termination date. Upon the participant’s disability or retirement, his or her account balance will be distributed in a lump sum, or in 12 or more monthly installments (but not more than 180), pursuant to the participant’s prior election. In the event a participant dies prior to receiving a distribution under the plan, his or her beneficiary will receive a lump-sum distribution of the participant’s account balance under the plan. In the event a participant dies after his or her account balance has begun to be distributed, the balance of that account balance will be distributed to the participant’s beneficiary in accordance with the distribution schedule that had already begun.

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Compensation of Directors

The following table sets forth certain information regarding the compensation of each non-employee director for service on the Board of Directors during the 2006 fiscal year.

Name

(a)

Fees Earned or Paidin Cash ($)(1)

(b)Option Awards ($)(2)

(c)

Total ($)

(d)Joel F. Gemunder 33,000 58,951 91,951Nicholas Konidaris 36,000 58,951 94,951Rick Timmins 42,000 58,951 100,951Dennis R Raney 37,000 63,292 100,292Henri Richard 16,000 46,022 62,022Vincent F. Sollito 38,000 58,951 96,951Thomas D. George (3) 12,000 34,064 46,064

(1) Consists of the annual retainer and meeting fees for service as members of the Company’s Board of Directors. For further information concerning such fees, see the section below entitled “Director Annual Retainer and Meeting Fees.”

(2) The amounts in column (c) reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2006, in accordance with FAS 123(R), with respect to the portion of the option awards which vested in that year, including awards which have been granted in earlier years. The reported dollar amount does not take into account any estimated forfeitures related to vesting conditions. Assumptions used in the calculation of this amount are included in footnote 5 to the Company’s audited financial statements for the fiscal year ended December 31, 2006, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2007. None of the non-employee directors forfeited any stock options during the 2006 fiscal year. As of December 31, 2006 the following non-employee directors held options to purchase the following number of shares of the Company’s common stock: Mr. Gemunder, 68,000 shares; Mr. Konidaris, 56,000 shares; Mr. Timmins, 56,000 shares; Mr. Raney, 36,000 shares; Mr. Richard, 12,000 shares; Mr. Sollito, 56,000 shares; and Mr. George, 0 shares. Pursuant to the Automatic Option Grant Program of the Company’s 1993 Stock Option/Stock Issuance Plan, Messrs. Gemunder, Konidaris, Timmins, Raney and Sollito, each received an option to purchase 8,000 shares of the Company’s common stock with an exercise price per share of $13.51 at the 2006 Annual Meeting, and each such option had a grant date fair value under FAS 123(R) of $54,572. Pursuant to such program, Mr. Richard received an option to purchase 12,000 shares of common stock with an exercise price per share of $21.45 upon his appointment to the Board, and such option had a grant date fair value under FAS 123(R) of $130,725. For further information concerning the grant of options to non- employee directors under the Automatic Option Grant Program of the Company’s 1993 Stock Option/Stock Issuance Plan, see the section below entitled “1993 Stock Option/Stock Issuance Plan”.

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(3) Mr. George retired from the Company’s board of directors on July 18, 2006, the date of the 2006 Annual Meeting of Stockholders.

Director Annual Retainer and Meeting Fees. During the fiscal year ended December 31, 2006, the cash compensation paid to the non-employee Board members was as follows: (i) an annual retainer fee of $25,000 for the Chairman of the Audit Committee, $24,000 for the Chairman of the Compensation Committee and $20,000 for each of the other non-employee Board members; (ii) a per meeting fee for Audit Committee meetings that do not occur on the same day as regular Board meetings of $2,500; (iii) a per meeting fee for meetings of the other Board committees that do not occur on the same day as regular Board meetings of $1,000; and (iv) a per meeting fee for Board meetings of $1,000. The Company also reimburses each non-employee Board member for expenses incurred in connection with his attendance at such Board and committee meetings.

In January 2007 the Board increased the cash compensation of non-employee Board members for their service on the Board or any Board committee in the 2007 year. The cash compensation to be paid to the non-employee Board members for the 2007 year is as follows: (i) an annual cash retainer fee of $30,000, (ii) an additional cash fee of $10,000 for service as Chairman of the Audit Committee, (iii) an additional cash fee of $7,500 for service as Chairman of any standing Board committee other than the Audit Committee, (iv) a cash fee of $2,000 per Board meeting, (v) a cash fee of $2,000 per standing Board committee meeting (except no fee for a Board committee meeting held on the same day as a Board meeting), and (vi) a cash fee of $1,000 per standing Board committee meeting held on the day before or after a Board meeting at the Company’s headquarters.

1993 Stock Option/Stock Issuance Plan. Pursuant to the Automatic Option Grant Program in effect under the 1993 Plan, each individual who becomes a non-employee Board member automatically is granted, on the date of his or her initial election or appointment to the Board, a non-statutory stock option to purchase 12,000 shares of the Company’s common stock. The option will have an exercise price equal to the fair market value per share of common stock on the applicable grant date and a maximum term of ten (10) years measured from such grant date, subject to earlier termination following the optionee’s cessation of Board service. The option will be immediately exercisable for all of the option shares, but any unvested shares purchased upon exercise of the option will be subject to repurchase by the Company, at the exercise price paid per share, upon the optionee’s cessation of Board service prior to vesting in those shares. The shares will vest as follows: (i) fifty percent (50%) of the shares will vest upon completion of one (1) year of Board service measured from the grant date and (ii) the remaining shares will vest in three (3) successive equal annual installments upon completion of each of the next three (3) years of Board service thereafter. Mr. Richard received his initial 12,000-share option grant under the Automatic Option Grant Program on April 18, 2006 upon his appointment to the Board as a non-employee director. The grant has an exercise price of $21.45 per share, the fair market value per share of the Company’s common stock on the grant date.

Pursuant to the Automatic Option Grant Program in effect under the 1993 Plan, on the date of each Annual Meeting of Stockholders, each non-employee Board member who is to continue to serve on the Board, whether or not he or she is standing for re-election to the Board at that particular Annual Meeting, and who has served on the Board at least six months receives an automatic option grant for 8,000 shares of the Company’s common stock. Each such option will have an exercise price per share equal to the fair market value per share of the common stock on the grant date and a maximum term of ten (10) years measured from that date, subject to the earlier termination following the optionee’s cessation of Board

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service. The option is immediately exercisable for all the option shares. However, any unvested shares purchased upon exercise of the option will be subject to repurchase by the Company, at the option exercise price paid per share, upon the optionee’s cessation of Board service prior to vesting in those shares. The shares subject to each such 8,000-share grant will vest upon the earlier of (i) the optionee’s completion of one (1) year of Board service measured from the grant date and (ii) the optionee’s continuation in Board service through the day immediately preceding the date of the first Annual Meeting of Stockholders following the grant date. On July 18, 2006, the date of the 2006 Annual Meeting of Stockholders, Messrs. Konidaris, Timmins, Raney, Richard and Sollito, each received, as a continuing non-employee director, an option grant under the Automatic Option Grant Program for 8,000 shares of the Company’s common stock with an exercise price of $13.51 per share, the fair market value per share of the common stock on that date.

The shares subject to each outstanding option under the Automatic Option Grant Program will vest immediately upon an acquisition of the Company by merger or asset sale or upon certain other changes in control or ownership of the Company. Upon the successful completion of a hostile tender offer for more than 50% of the Company’s outstanding common stock, each automatic option grant made prior to January 1, 2006 may be surrendered to the Company in return for a cash distribution from the Company in an amount per surrendered option share equal to the excess of (i) the fair market value per share of the Company’s common stock on the date the option is surrendered to the Company or, if greater, the highest reported price per share of such common stock paid in the tender offer, over (ii) the option exercise price payable per share.

In light of his exceptional services as a non-employee Board member, Mr. Richard was granted a stock option to purchase 8,000 shares of the Company’s common stock, effective on February 5, 2007, with an exercise price per share equal to $11.96, the fair market value of the Company’s common stock on such date. This option grant represented the same number of option shares and vested on the same vesting schedule as the option that Mr. Richard would have received under the Automatic Option Grant Program at the 2006 Annual Meeting, if he had completed six months of Board service prior to the 2006 Annual Meeting date.

Employment Contracts, Termination of Employment Agreements and Change of Control

The Compensation Committee of the Board of Directors has the authority as the plan administrator of the Company’s 1993 Plan to provide for accelerated vesting of any shares of the Company’s common stock subject to outstanding equity awards held by the Chief Executive Officer and the Company’s other executive officers in the event their employment were to be terminated (whether involuntarily or through a resignation for good reason) following (i) an acquisition of the Company by merger or asset sale or (ii) a change in control of the Company effected through the acquisition of more than 50% of the Company’s outstanding common stock or through a change in the majority of the Board as a result of one or more contested elections for Board membership.

In November 2003, the Company entered into employment agreements with Messrs. Zafiropoulo, Denzel and Wright, effective as of January 1, 2004, and in January 2006, the Company entered into an employment agreement with Mr. Friedman, effective as of February 1, 2006.

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Employment Agreement with Mr. Zafiropoulo

The Company has entered into an employment agreement with Mr. Zafiropoulo that provides that he will serve as the Chief Executive Officer of the Company and that the Company will use its reasonable best efforts to see that he is elected as a member of the Board of Directors and as Chairman of the Board as long as he remains employed by the Company under the employment agreement. The employment agreement also provides for a base salary of $555,000, a target bonus of up to 60% of base salary (which can be increased by the Compensation Committee and which was initially set at 150% for the 2006 fiscal year) and stock option or other equity awards. In addition, Mr. Zafiropoulo’s employment agreement also provides for lifetime retiree health (medical and dental) coverage for Mr. Zafiropoulo and his spouse. If the retiree health benefit becomes taxable to Mr. Zafiropoulo or his spouse, the Company will pay him or her a “gross-up” payment to cover the taxes attributable to such coverage and any taxes that apply to the gross-up payment.

Mr. Zafiropoulo’s employment may be terminated by either party at any time, with or without cause. If the Company terminates his employment for any reason other than cause, or in the event of his death, disability or resignation for good reason, Mr. Zafiropoulo (or his beneficiary) will be entitled to receive the deferred portions of any annual bonuses previously earned, 12 months of continued base salary at the rate then in effect, accelerated vesting of 25% of the stock options and other equity awards granted to him on or after July 21, 2003, an extension of the time to exercise those vested stock options of up to one year and 90 days following the termination of his employment and continued use of a Company car for 12 months. In addition, the Board of Directors may, in its discretion, partially accelerate vesting and extend the exercise period for options granted prior to July 21, 2003.

If, however, Mr. Zafiropoulo’s employment terminates for any reason in connection with a change of control of the Company, then he will, instead, receive the deferred portions of any annual bonuses previously earned, 24 months of continued base salary at the rate then in effect (or, if greater, in effect immediately prior to the change of control) and continued use of a Company car for 24 months. In addition, regardless of whether Mr. Zafiropoulo’s employment is terminated following a change of control of the Company, the stock options and other equity awards granted to him on or after July 21, 2003 will fully vest upon a change of control, and the time for exercising those options will be extended up to one year and 90 days following the termination of his employment. In addition, upon a change of control, the Board of Directors may, in its discretion, fully accelerate vesting and extend the exercise period for options granted prior to July 21, 2003. If Mr. Zafiropoulo incurs an excise tax under Section 4999 of the Internal Revenue Code (relating to “excess parachute payments”) with respect to any payments he receives from the Company, the Company will make a “gross-up” payment to Mr. Zafiropoulo to cover this excise tax liability and any income and employment taxes that apply to the gross-up payment.

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For this purpose, a change of control generally includes:

• Acquisition of more than 50% of the Company’s voting stock by any person or group of related persons;

• Change in membership on the Board of Directors such that a majority of the directors who are currently on the Board of Directors, and those nominated by such directors, no longer constitute a majority of the Board of Directors;

• Consummation of a merger or consolidation in which the Company is not the surviving entity;

• Sale, transfer or other disposition of all or substantially all of the Company’s assets; or

• A reverse merger in which the Company is the surviving entity but in which the Company’s stockholders before the merger do not own more than 50% of the voting stock after the merger.

Employment Agreement with Mr. Wright

Mr. Wright’s employment agreement provides that he will serve as the Senior Vice President, Finance, Chief Financial Officer, and Secretary of the Company. The employment agreement provides for a base salary of $275,000, a target bonus of up to 40% of base salary (which can be increased by the Compensation Committee and which was initially set at 100% for fiscal year 2006) and stock option or other equity awards.

Mr. Wright’s employment may be terminated by either party at any time, with or without cause. If the Company terminates his employment for any reason other than cause, or in the event of his death, disability or resignation for good reason, Mr. Wright (or his beneficiary) will be entitled to receive the deferred portions of any annual bonuses previously earned, 12 months of continued base salary at the rate then in effect, accelerated vesting of 25% of the stock options and other equity awards granted to him on or after July 21, 2003, an extension of the time to exercise those vested stock options of up to one year and 90 days following the termination of his employment and, except in the case of death, reimbursement of COBRA costs for continued medical coverage for up to 18 months following termination of his employment. In addition, the Board of Directors may, in its discretion, partially accelerate vesting and extend the exercise period for options granted prior to July 21, 2003.

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If, however, Mr. Wright’s employment terminates for any reason in connection with a change of control of the Company, then he will, instead, receive the deferred portions of any annual bonuses previously earned and 24 months of continued base salary at the rate then in effect (or, if greater, in effect immediately prior to the change of control) and reimbursement of COBRA costs for continued medical coverage for up to 18 months following the termination of his employment. In addition, regardless of whether Mr. Wright’s employment is terminated following a change of control of the Company, the stock options and other equity awards granted to him on or after July 21, 2003 will fully vest upon a change of control, and the time for exercising those options will be extended up to one year and 90 days following the termination of his employment. In addition, the Board of Directors may, in its discretion, fully accelerate vesting and extend the exercise period for options granted prior to July 21, 2003. A change of control in Mr. Wright’s employment agreement has the same meaning as in Mr. Zafiropoulo’s employment agreement described above.

In January 2007 the Compensation Committee amended Mr. Wright’s employment agreement to provide Mr. Wright and his spouse with lifetime retiree health (medical and dental) coverage under either of the following two circumstances: (i) if at the time of his retirement from the Company Mr. Wright is over 62 years old and has accumulated at least 10 years of service with the Company, or (ii) in the event of a change of control of the Company.

Separation Agreement with Mr. Denzel

The terms of Mr. Denzel’s employment agreement, effective January 1, 2004, were substantially similar to the agreement described above for Mr. Wright. In connection with the termination of Mr. Denzel’s employment with the Company on November 3, 2006, the Company entered into a Separation and General Release Agreement and an Amended and Restated Employment Agreement (collectively, the “Denzel Separation Agreement”) with Mr. Denzel. Pursuant to the Denzel Separation Agreement upon Mr. Denzel’s execution of a general release in favor of the Company he became entitled to receive the severance benefits that he was entitled to receive under the original employment agreement, plus an additional benefit in the form of the accelerated vesting of twenty-five percent of each outstanding option granted to him before July 21, 2003. Pursuant to such agreement, Mr. Denzel became entitled to receive the following benefits: (i) 12 months of continued base salary, (ii) acceleration of vesting of twenty-five percent of each outstanding equity award granted to him, whether before or after July 21, 2003, (iii) an extension of the time to exercise certain of his vested stock options of up to one year and 90 days following the termination of his employment and (iv) reimbursement of COBRA costs for continued medical coverage for up to 18 months.

Separation Agreement with Mr. Friedman

The terms of Mr. Friedman’s employment agreement, dated January 30, 2006, were substantially similar to the agreement described above for Mr. Wright. In connection with the termination of Mr. Friedman’s employment with the Company on January 14, 2007, the Company entered into a Separation and General Release Agreement and an amendment to the January 30, 2006 employment agreement (collectively, the “Separation Agreement”). Pursuant to the Separation Agreement, upon Mr. Friedman’s execution of a general release in favor of the Company, Mr. Friedman became entitled to receive the severance benefits that he was entitled to receive under the January 30, 2006 employment agreement. Pursuant to such agreement, Mr. Friedman became entitled to receive the following benefits: (i) 12 months of continued base salary, (ii) acceleration of vesting

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of twenty-five percent of each outstanding equity award granted to him, (iii) an extension of the time to exercise his vested stock options of up to one year and 90 days following the termination of his employment and (iv) reimbursement of COBRA costs for continued medical coverage for up to 18 months.

Quantification of Benefits

The charts below quantify the potential payments Mr. Zafiropoulo and Mr. Wright would receive based upon the following assumptions:

(i) the executive’s employment terminated on December 31, 2006 under circumstances entitling him to severance benefits under his employment agreement,

(ii) as to any benefits tied to the executive’s rate of base salary, the rate of base salary is assumed to be the executive’s rate of base salary as of December 31, 2006, and

(iii) with respect to the first chart below, as to any benefits tied to a change in control, the change in control is assumed to have occurred on December 31, 2006 and the change in control consideration paid per share of outstanding common stock is assumed to be equal to the closing selling price of our common stock on December 29, 2006, which was $12.48 per share.

Benefits Received Upon Termination in Connection with a Change in Control

Executive

SalaryContinuation

LifetimeRetireeMedical

Coverage

AcceleratedVestingEquity

Awards /Extensionof StockOptionTerm

ContinuedUse of

CompanyAutomobile

Excise TaxGross-Up

Mr. Zafiropoulo $ 1,110,000 $ 458,003 (1) $ 1,711,876(2) $ 30,000 —Mr. Wright $ 542,820 $ 272,083 $ 894,907(2) — —(1) Includes a gross-up payment to cover the taxes attributable to such coverage and any taxes that apply to such gross-up payment.

(2) Represents (i) the intrinsic value of the accelerated vesting of the named executive officer’s unvested restricted stock units, based on the $12.48 closing selling price of the Company’s common stock on December 29, 2006 plus (ii) the value of the extension of the option term of all outstanding options held by the named executive officer on December 31, 2006 from 90 days to 455 days, estimated by using the Black-Scholes option pricing model, in accordance with the provisions of SFAS 123R.

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Benefits Received Upon Termination Not in Connection with a Change in Control

Executive

SalaryContinuation

LifetimeRetireeMedical

Coverage

COBRA

AcceleratedVestingEquity

Awards/Extensionof StockOptionTerm

Continued Useof CompanyAutomobile

Mr. Zafiropoulo $ 555,000 (1) $ 458,003(1) — $ 1,373,868(2) $ 15,000Mr. Wright $ 271,410 — $ 28,128 $ 855,907(2) —

(1) Includes a gross-up payment to cover the taxes attributable to such coverage and any taxes that apply to such gross-up payment.

(2) Represents (i) the intrinsic value of the accelerated vesting of the named executive officer’s unvested restricted stock units, based on the $12.48 closing selling price of the Company’s common stock on December 29, 2006 plus (ii) the value of the extension of the option term of all outstanding options held by the named executive officer on December 31, 2006 from 90 days to 455 days, estimated by using the Black-Scholes option pricing model, in accordance with the provisions of SFAS 123R.

The following chart quantifies the amounts payable to Messrs. Denzel and Friedman in connection with the termination of their employment on November 3, 2006 and January 14, 1007, respectively:

Executive

SalaryContinuation

COBRA

AcceleratedVestingEquity

Awards/Extensionof StockOptionTerm

(1)Mr. Denzel $ 275,000 $ 38,090 $ 509,482Mr. Friedman $ 250,000 $ 38,090 $ 476,403

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(1) Represents (i) the intrinsic value of the accelerated vesting of the named executive officer’s unvested restricted stock units, and/or stock options based on the $12.48 closing selling price of the Company’s common stock on December 29, 2006 plus (ii) the value of the extension of the option term of all outstanding options held by the named executive officer on December 31, 2006 from 90 days to 455 days, estimated by using the Black-Scholes option pricing model, in accordance with the provisions of SFAS 123R.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Gemunder, Richard and Sollitto served as members of the Company’s Compensation Committee during the fiscal year completed December 31, 2006. No member of the Compensation Committee is a former or current officer or employee of the Company or any of its subsidiaries. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity which has one or more of its executive officers serving as a member of the Company’s Board of Directors or Compensation Committee. The Board of Directors has determined that because of the relationship between the Company and Advanced Micro Devices, Inc. (“AMD”), a company with which Mr. Richard is affiliated, which relationship is described under the section entitled “Certain Relationships and Related Transactions” below, Mr. Richard no longer qualifies as an independent director under such Rule and no longer serves as a member of the Company’s Compensation Committee.

ANNUAL REPORT OF THE COMPENSATION COMMITTEE

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this annual report with management, and based on such review and such discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis, as contained herein, be included in this annual report.

Compensation CommitteeJoel F. GemunderVincent F. Sollitto, Jr.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Information for Plans or Individual Arrangements with Employees and Non-Employees

The following table provides information as of December 31, 2006 with respect to the shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans. There are no outstanding options assumed by the Company in connection with its acquisitions of other companies, and there are no assumed plans under which options can currently be granted.

A B C

Plan Category

Number of Securities tobe Issued upon Exerciseof Outstanding Options,Restricted Stock Unitsand Other Rights(3)

Weighted AverageExercise Price of

OutstandingOptions(4)

Number of SecuritiesRemaining Available forFuture Issuance UnderEquity Compensation

Plans (ExcludingSecurities Reflected in

Column A)(5)

Equity Compensation Plans Approved by Stockholders(1) 5,124,522 $ 18.13 1,032,471

Equity Compensation Plans Not Approved by Stockholders(2) 1,127,989 $ 15.69 73,418Total 6,252,511 $ 17.68 1,105,889

(1) Consists solely of the Company’s 1993 Stock Option/Stock Issuance Plan.

(2) Consists solely of the Company’s 1998 Supplemental Stock Option/Stock Issuance Plan.

(3) Includes 144,875 shares subject to restricted stock units that will entitle each holder to one share of common stock for each unit that vests over the holder’s period of continued service with the Company.

(4) Calculated without taking into account the 144,875 shares of common stock subject to outstanding restricted stock units that will become issuable following the vesting of those units, without any cash consideration or other payment required for those shares.

(5) As of December 31, 2006, 1,032,471 shares of common stock were available for issuance under the 1993 Stock Option/Stock Issuance Plan. The 1,032,471 available for issuance under the 1993 Stock Option/Stock Issuance Plan may be issued upon the exercise of stock options or stock appreciation rights granted under such plan, or those shares may be issued under the stock issuance program in effect under such plan through direct stock bonuses or pursuant to restricted stock awards or restricted stock units which vest upon the attainment of prescribed performance milestones or the completion of designated service periods.

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The Supplemental Stock Option/Stock Issuance Plan

The Supplemental Stock Option/Stock Issuance Plan (the “Supplemental Plan”) was implemented by the Board in October 1998 as a non-stockholder approved plan under which option grants or direct stock issuances may be made to employees who at the time of the grant are neither executive officers or Board members nor hold the title of Vice President or General Manager. The Board has authorized 1,950,000 shares of Common Stock for issuance under the Supplemental Plan. All option grants must have an exercise price per share not less than the fair market value per share of the Common Stock on the grant date, and all direct issuances of Common Stock under the Supplemental Plan must have an issue price not less than the fair market value of the shares at the time of issuance. Options will have a maximum term not in excess of ten years and will terminate earlier within a specified period following the optionee’s cessation of service with the Company (or any parent or subsidiary Company). Each granted option will vest in one or more installments over the optionee’s period of service with the Company. However, the options will vest on an accelerated basis in the event the Company is acquired and those options are not assumed, replaced or otherwise continued in effect by the acquiring entity. Direct stock issuances may be made with similar vesting conditions. All options granted under the Supplemental Plan will be non-statutory stock options under the Federal tax laws. As of December 31, 2006, options covering 1,127,989 shares of Common Stock were outstanding under the Supplemental Plan, 73,418 shares remained available for future option grants, and options covering 748,593 had been exercised.

Share issuances under the 1993 Stock Option/Stock Issuance Plan will not reduce or otherwise affect the number of shares of Common Stock available for issuance under the Supplemental Plan, and share issuances under the Supplemental Plan will not reduce or otherwise affect the number of shares of Common Stock available for issuance under the 1993 Stock Option/Stock Issuance Plan.

OWNERSHIP OF SECURITIES

The following table sets forth certain information known to the Company with respect to the beneficial ownership of the Company’s Common Stock as of March 31, 2007 (unless otherwise stated in the footnotes) by (i) all persons known to the Company who are or who may be deemed beneficial owners of five percent (5%) or more of the Company’s Common Stock based solely on a review of Form 4, Schedule 13G and Schedule 13D filings with the Securities and Exchange Commission since January 1, 2006, (ii) each director of the Company, (iii) the named executive officers and (iv) all current directors and named executive officers as a group. Unless otherwise indicated, the principal address of each of the stockholders below is c/o Ultratech, Inc., 3050 Zanker Road, San Jose, CA, 95134. Unless otherwise indicated, each of the security holders has sole voting and investment power with respect to the shares beneficially owned, subject to community property laws, where applicable. Except as otherwise indicated in the footnotes to the table or for shares of common stock held in brokerage accounts, which may from time to time, together with other securities held in those accounts, serve as collateral for margin loans made from such accounts, none of the shares reported as beneficially owned are currently pledged as securities for any outstanding loan or indebtedness. In some instances the beneficially owned shares include unvested shares subject to currently exercisable options. If unvested shares are in fact purchased under those options, the Company will have the right to repurchase those shares, at the exercise price paid per share, should the optionee’s service terminate prior to vesting in those shares.

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Name and Address of Beneficial Owner(1)Shares of Common Stock

Beneficially Owned Percentage of Shares Beneficially Owned(1)

Thales Fund Management, LLC (2) 3,526,751 15.17%Marek T. Fludzinski 140 Broadway, 45th Floor New York, NY 10005

Tocqueville Asset Management, L.P.(3) 2,270,880 9.77%40 West 57th Street, 19th Floor New York, New York 10019

Wells Fargo & Company(4) 1,581,174 6.80%Wells Capital Management IncorporatedWells Fargo Funds Management, LLC Lowry Hill Investment Advisors, Inc. 420 Montgomery Street San Francisco, CA 94104

Schroder Investment Management North America Inc.(5) 1,379,275 5.93%875 Third Avenue, 21nd Floor New York, NY 10022

Barclays Global Investors, NA(6) 1,280,565 5.51%Barclays Global Fund Advisors Barclays Global Investors, Ltd 45 Fremont Street San Francisco, CA 94105

David J. Greene and Company, LLC (7) 1,266,914 5.45%599 Lexington Avenue New York, NY 10022

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Arthur W. Zafiropoulo(8) 2,310,417 9.57%Bruce R. Wright(9) 671,211 2.81%John E. Denzel(10) 381,630 1.62%Rick Friedman(11) 275,000 1.17%Joel Gemunder(12) 69,000 *Rick Timmins(13) 68,500 *Vincent F. Sollitto(14) 56,000 *Nicholas Konidaris(15) 56,000 *Dennis Raney(16) 38,000 *Henri Richard(17) 20,000 *All current directors and executive officers as a group (10 persons)(18) 3,945,758 15.35%* Less than one percent of the outstanding Common Stock.

(1) Percentage of ownership is based on 23,251,782 shares of Common Stock issued and outstanding on March 31, 2007. This percentage also takes into account the Common Stock to which such individual or entity has the right to acquire beneficial ownership within sixty (60) days after March 31, 2007, including, but not limited to, through the exercise of options or pursuant to outstanding restricted stock units; however, such Common Stock will not be deemed outstanding for the purpose of computing the percentage owned by any other individual or entity. Such calculation is required by Rule 13d-3(d)(1)(i) under the Securities Exchange Act of 1934, as amended.

(2) Thales Fund Management, LLC and Marek T. Fludzinski information is based on their Schedule 13G, Schedule 13D and Form 4 filed with the Securities and Exchange Commission on January 11, 2007, March 13, 2007 and March 19, 2007, respectively.

(3) Tocqueville Asset Management, L.P. information based on its Schedule 13G filed with the Securities and Exchange Commission on February 14, 2007.

(4) Information regarding Wells Fargo & Company, Wells Capital Management Incorporated, Wells Fargo Funds Management, LLC and Lowry Hill Investment Advisors, Inc. is based on their Schedule 13G filed with the Securities and Exchange Commission on February 20, 2007.

(5) Information regarding Schroder Investment Management North America Inc. (“SIMNA”) is based on its Schedule 13G filed with the Securities and Exchange Commission on February 14, 2007. In that Schedule 13G, SIMNA disclaims beneficial ownership of an additional 10,525 shares held by its affiliate, Schroder Investment Management, Inc.

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(6) Information regarding Barclays Global Investors, NA, Barclays Global Fund Advisors and Barclays Global Investors, Ltd is based on their Schedule 13G filed with the Securities and Exchange Commission on January 23, 2007.

(7) Information regarding David J. Greene and Company, LLC is based on its Schedule 13G filed with the Securities and Exchange Commission on February 8, 2007.

(8) Includes 1,320,109 shares held in the name of Arthur W. Zafiropoulo, trustee of the Separate Property Trust, dated July 20, 1998, for the benefit of Arthur E. Zafiropoulo. Includes 890,308 shares of the Company’s Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 31, 2007. Also includes 100,000 shares held in the name of the Zafiropoulo Family Foundation.

(9) Includes 59,711 shares held in the name of the Bruce Wright & Kathryn Wright Living Trust UA dated 1/3/96. Includes 611,500 shares of the Company’s Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 31, 2007.

(10) Includes 377,500 shares of the Company’s Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 31, 2007.

(11) Includes 275,000 shares of the Company’s Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 31, 2007.

(12) Includes of 68,000 shares of the Company’s Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 31, 2007.

(13) Consists of 56,000 shares of the Company’s Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 31, 2007.

(14) Consists of 56,000 shares of the Company’s Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 31, 2007.

(15) Consists of 56,000 shares of the Company’s Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 31, 2007.

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(16) Includes 36,000 shares of the Company’s Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 31, 2007.

(17) Consists of 20,000 shares of the Company’s Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 31, 2007.

(18) Includes 2,448,308 shares of the Company’s Common Stock subject to options which are currently exercisable or which will become exercisable within 60 days after March 31, 2007.

Item 13. Certain Relationships and Related Transactions, and Director Independence

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In fiscal year 2006, AMD purchased Company products for a total of $8.9 million, representing 6.1% of the Company’s net sales for that year. Mr. Henri Richard is an executive officer of AMD. As a result, in accordance with Rule 4200 of the NASDAQ Marketplace Rules, the Board of Directors has determined that Mr. Richard no longer qualifies as an independent director under such Rule. The Audit Committee has approved the sale of the Company’s products and services to AMD in the ordinary course of business.

The Board of Directors has adopted a written policy that all material transactions with affiliates will be on terms no more or less favorable to the Company than those available from unaffiliated third parties and will be approved by the Audit Committee.

DIRECTOR INDEPENDENCE

The Board has determined that Messrs. Gemunder, Konidaris, Raney, Richard, Sollitto and Timmins each is an “independent director” as that term is defined in Rule 4200 of the NASDAQ Marketplace Rules. The Board of Directors has determined that because of the relationship between the Company and AMD, a company with which Mr. Richard is affiliated, which relationship is described under the section entitled “Certain Relationships and Related Transactions” above, Mr. Richard no longer qualifies as an independent director under such Rule. In addition, prior to his retirement from the Board in July 2006, the Board had determined that Mr. Tommy George was independent.

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Item 14. Principal Accountant Fees and Services

Audit Fees

Audit fees billed to the Company by Ernst & Young LLP for professional services rendered for the audit of the Company’s 2006 annual financial statements, review of quarterly financial statements, audit services in connection with statutory filings, consents, review of documents filed with the SEC, Section 404 review of internal control over financial reporting, and accounting and financial reporting consultation totaled $1,486,262. Audit fees billed to the Company by Ernst & Young LLP for professional services rendered for the audit of the Company’s 2005 annual financial statements, review of quarterly financial statements, audit services in connection with statutory filings, consents, review of documents filed with the SEC, and accounting and financial reporting consultation totaled $1,011,891.

Audit-Related Fees

There were no audit-related fees billed to the Company by Ernst & Young LLP during the Company’s 2006 and 2005 fiscal years.

Tax Fees

There were no tax fees billed to the Company by Ernst & Young LLP during the Company’s 2006 and 2005 fiscal years.

All Other Fees

Other than as set forth above, there were no other fees billed to the Company by Ernst & Young LLP during the Company’s 2006 and 2005 fiscal years.

Financial Information Systems Design and Implementation Fees

The Company did not engage Ernst & Young LLP to provide advice to the Company regarding financial information systems design and implementation during fiscal year 2006.

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All of the 2006 audit fees, audit-related fees and tax fees, and all other fees, were approved by the Audit Committee of the Company’s Board of Directors. The Audit Committee has delegated to Mr. Timmins the ability to approve, on behalf of the Audit Committee and in accordance with Section 10A under the Securities Exchange Act of 1934, services to be performed by the Company’s independent auditors.

The Audit Committee considered whether the provision of audit-related services, tax services, financial information systems design and implementation services and other non-audit services is compatible with the principal accountants’ independence.

PART IV

ITEM 15. Financial Statements, Financial Statement Schedules, and Exhibits

(a) The following documents are filed as part of this Report on Form 10-K/A

(3) Exhibits

The following exhibits are referenced or included in this report:

Exhibit Description

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunder duly authorized.

ULTRATECH, INC.

Date: April 30, 2007 By: /s/ ARTHUR ZAFIROPOULO Arthur Zafiropoulo Chairman of the Board of Directors and Chief Executive Officer

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Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature Title Date

/s/ ARTHUR ZAFIROPOULO Chairman of the Board of Directors and Chief Executive Officer April 30, 2007Arthur Zafiropoulo (Principal Executive Officer)

/s/ BRUCE WRIGHT Senior Vice President, Finance, Chief Financial Officer and Secretary April 30, 2007Bruce Wright (Principal Financial and Accounting Officer)

* Director April 30, 2007Dennis Raney

* Director April 30, 2007Rick Timmins

* Director April 30, 2007Henri P Richard

* Director April 30, 2007Joel Gemunder

* Director April 30, 2007Nicholas Konidaris

* Director April 30, 2007Vincent F. Sollitto

____________* Art Zafiropuolo, by signing his name hereto, does sign this document on behalf of the above noted individuals, pursuant to powers of attorney

duly executed by such individuals, which have been filed with the original Annual Report on Form 10-K filed with the SEC on March 7, 2007.

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By:

/s/ ARTHUR ZAFIROPOULO Chairman of the Board of Directors and Chief Executive Officer April 30, 2007Arthur Zafiropoulo (Principal Executive Officer)Attorney-in-Fact

EXHIBIT INDEX

Exhibit Description

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.1

I, Arthur Zafiropoulo, certify that:

1. I have reviewed this annual report on Form 10-K/A of Ultratech, Inc.;

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

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

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b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 30, 2007 /S/ ARTHUR ZAFIROPOULO Arthur Zafiropoulo Chief Executive Officer

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Exhibit 31.2

I, Bruce Wright, certify that:

1. I have reviewed this annual report on Form 10-K/A of Ultratech, Inc.;

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

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

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a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 30, 2007 /S/ BRUCE WRIGHT Bruce Wright Chief Financial Officer

Safe Harbor Language

This Annual Report includes statements that are forward-looking statements, which can be identified by words such as “anticipates,” “expects,” “intends,” “will,” “could,” “believes,” “estimates,” “continue” and similar expressions. These forward-looking statements are based on Ultratech’s current beliefs, expectations and assumptions. These forward-looking statements are subject to risks and uncertainties that could cause our actual results or future conditions to differ materially and adversely from those expressed in these statements. These risks and other important risk factors that could affect our business, results of operations and financial condition include those discussed in our Annual Report on form 10-K and 10K/A for the year ended December 31, 2006 filed with the Securities and Exchange Commission and attached to this Annual Report.

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Exchange: NASDAQ Global Market

Symbol: UTEK

Closing price (12/29/2006): $12.48

Dividend yield: Nil

Market capitalization at 12/31/2006: $289,769,651

Industry: Semiconductor Capital Equipment

Market segments: integrated circuits, including

advanced packaging processes, laser thermal

processing and nanotechnology components.

As of June 5, 2007, the Company had

approximately 8,800 beneficial stockholders,

including 320 stockholders of record.

Inquiries Concerning the Company: Ultratech

welcomes inquiries from its stockholders and

other interested investors. For additional copies

of this report, or other information, please contact:

Ultratech, Inc.

Investor Relations

3050 Zanker Road

San Jose, CA 95134

Phone: (408) 321-8835

Background on the Company and its products,

financial information, and our online annual

report, as well as other useful information which

may be of interest to investors, including the

Corporate Governance Policies adopted by

Ultratech’s Board of Directors and the charters

of the Audit, Nominating and Corporate

inVESTOR inFORMaTiOn

Governance, and Compensation Committees

of the Board of Directors, can be found on the

Company’s website at www.ultratech.com on

the “Investors” page under the “Corporate

Governance” link.

Transfer Agent and Registrar

Questions regarding misplaced stock certificates,

change of address or the consideration of

accounts should be addressed to the Company’s

transfer agent:

Computer Investor Services

P.O. Box 43078

Providence, RI 02940-3078

Phone: 781-575-2879

www.computershare.com

Annual Meeting

The Ultratech, Inc. annual meeting of stockholders

will be held at 2:00 p.m. on Tuesday,

July 24, 2007, at Ultratech Inc.’s Corporate

Headquarters, Building No. 2,

2880 Junction Avenue, San Jose, CA.

Independent Auditors

Ernst & Young LLP

San Jose, CA

General Counsel

O’Melveny & Myers LLP

Menlo Park, CA

foUnded in 1979, Ultratech is a leader in both of its major technologY markets — advanced packaging and laser thermal processing. the companY’s advanced packaging lithographY sYstems improve cost of ownership bY increasing both throUghpUt and Yields to provide cUstomers with greater reliabilitY and valUe. the companY’s leading-edge laser processing technologY is eqUallY compelling — enabling the transition to the 65-nm and smaller technologY nodes. leaders throUghoUt the chipmaking, displaY and nanotechnologY markets relY on these sYstems to enable the technologies of todaY and tomorrow.

Board of Directors

arthur w. Zafiropoulo chairman and chief executive officer, Ultratech, inc.

joel f. gemunder (1) president and ceo, omnicare, inc.

nick konidaris (2,3) president and ceo, electro scientific industries, inc.

dennis r. raney (2) independent consultant

henri richard executive vice president, chief sales and marketing officer, advanced micro devices

vincent f. sollitto, jr. (1) chairman and ceo, syntax-brillian corp.

rick timmins (2,3) vice president, finance — retired, cisco systems, inc.

corporate information

Executive Directors

arthur w. Zafiropoulo chairman and chief executive officer

bruce r. wright senior vice president, finance chief financial officer, secretary and treasurer

Senior Executives

andrew m. hawryluk, ph.d. senior vice president, engineering

s. david holmes senior vice president, human resources

david a. markle senior vice president and chief technical officer

laura rebouché vice president, investor relations, corporate and marketing communications

ronald j. volk senior vice president, operations

Yun wang, ph.d. vice president and chief technologist, laser processing

(1) member of the compensation committee (2) member of the audit committee (3) member of the nominating and corporate governance committee

2006 Annual Report

3050 Zanker RoadSan Jose, CA 95134www.ultratech.com

Years ago, Ultratech anticipated that the time woUld come when new technologies were needed to enable the devices of the fUtUre. bY first anticipating these technologY shifts and then pioneering the advanced solUtions reqUired to enable them, Ultratech is a leader in two critical markets — advanced packaging and laser thermal processing — with tools that are being leveraged to create the fUtUre-generation devices consUmers demand. technologY_accepted

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