UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 28, 2007

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

For the transition period from                 to

Ultra Clean Holdings, Inc.

Delaware		61-1430858
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)
150 Independence Drive, Menlo Park, California		94025-1136
(Address of principal executive offices)		(Zip Code)

(650) 323-4100
Registrant’s telephone number, including area code

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

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

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

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

Yes o       No þ

     Number of shares outstanding of the issuer’s common stock as of October 31, 2007: 21,512,379.

 

 

ULTRA CLEAN HOLDINGS, INC.
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION			3
ITEM 1. Financial Statements			3
ITEM 2. Managements Discussion And Analysis of Financial Condition And Results Of Operations			14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			21
ITEM 4. Controls and Procedures			21
PART II. OTHER INFORMATION			22
ITEM 1. Legal Proceedings			22
ITEM 1A. Risk Factors			22
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
ITEM 3. Defaults Upon Senior Securities			32
ITEM 4. Submission of Matters to a Vote of Security Holders			33
ITEM 5. Other Information			33
ITEM 6. Exhibits			33
Signatures			34
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ULTRA CLEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

		September 28				December 29,
		2007				2006
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	28,038			$	23,321
Accounts receivable, net of allowance of $372 and $287, respectively			42,861				44,543
Inventory, net			51,189				47,914
Deferred income taxes			4,855				4,186
Prepaid expenses and other			3,240				1,303
Total current assets			130,183				121,267
Equipment and leasehold improvements, net			11,468				9,433
Other long-term assets:
Goodwill			34,248				33,490
Purchased intangibles			21,100				22,112
Other non-current assets			847				745
Total assets		$	197,846			$	187,047
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Bank borrowings		$	3,559			$	4,206
Accounts payable			33,566				37,583
Accrued compensation and related benefits			4,120				4,021
Capital lease obligations, current portion			38				61
Income taxes payable			—				2,355
Other current liabilities			2,907				1,454
Total current liabilities			44,190				49,680
Long-term debt			24,484				27,358
Deferred and other tax liabilities			2,953				2,523
Capital lease obligations and other liabilities			283				318
Total liabilities			71,910				79,879
Commitments and contingencies (See note 10)
Stockholders’ equity:
Preferred stock — $0.001 par value, 10,000,000 authorized; none outstanding
Common stock — $0.001 par value, 90,000,000 authorized; 21,499,248 and 21,080,540 shares issued and outstanding, in 2007 and 2006, respectively			87,611				82,046
Retained earnings			38,325				25,122
Total stockholders’ equity			125,936				107,168
Total liabilities and stockholders’ equity		$	197,846			$	187,047

(See notes to condensed consolidated financial statements.)

ULTRA CLEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited; in thousands, except per share data)

		Three months ended								Nine months ended
		September 28, 2007				September 29, 2006				September 28, 2007				September 29, 2006
Sales		$	95,535			$	104,065			$	311,049			$	229,729
Cost of goods sold			82,165				88,694				265,106				195,457
Gross profit			13,370				15,371				45,943				34,272
Operating expenses:
Research and development			648				806				2,275				2,137
Sales and marketing			1,494				1,231				4,253				3,311
General and administrative			5,700				5,284				18,479				11,811
Total operating expenses			7,842				7,321				25,007				17,259
Income from operations			5,528				8,050				20,936				17,013
Interest and other income (expense), net			(460	)			(616	)			(1,450	)			(1,139	)
Income before provision for income taxes			5,068				7,434				19,486				15,874
Income tax provision			1,527				1,874				5,664				4,226
Net income		$	3,541			$	5,560			$	13,822			$	11,648
Net income per share:
Basic		$	0.17			$	0.27			$	0.65			$	0.63
Diluted		$	0.16			$	0.25			$	0.63			$	0.59
Shares used in computing net income per share:
Basic			21,366				20,737				21,240				18,600
Diluted			22,166				21,879				22,088				19,624

(See notes to condensed consolidated financial statements)

ULTRA CLEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)

		Nine months ended
		September 28, 2007				September 29, 2006
Cash flows from operating activities:
Net income		$	13,822			$	11,648
Adjustments to reconcile net income to net cash provided by     (used in) operating activities:
Depreciation and amortization			3,410				2,388
Deferred income tax			(1,066	)			(404	)
Excess tax benefit from stock-based compensation			(1,083	)			(655	)
Stock-based compensation			2,395				1,277
Changes in assets and liabilities:
Accounts receivable			1,682				(14,515	)
Inventory			(3,780	)			(15,993	)
Prepaid expenses and other			(712	)			337
Other non-current assets			(102	)			(10	)
Accounts payable			(4,036	)			13,015
Accrued compensation and related benefits			99				1,136
Income taxes payable (receivable)			(3,580	)			—
Other liabilities			2,527				92
Net cash provided by (used in) operating activities			9,576				(1,684	)
Cash flows from investing activities:
Purchases of equipment and leasehold improvements			(4,413	)			(2,243	)
Net cash used in acquisition			(46	)			(28,812	)
Cash used in investing activities			(4,459	)			(31,055	)
Cash flows from financing activities:
Principal payments on capital lease obligations			(48	)			(28	)
Proceeds from bank borrowings			—				30,078
Principal payments on long-term debt			(3,521	)			(696	)
Excess tax benefit from stock-based compensation			1,083				655
Proceeds from issuance of common stock			2,086				10,990
Net cash provided by (used in) financing activities			(400	)			40,999
Net increase in cash			4,717				8,260
Cash and cash equivalents at beginning of period			23,321				10,663
Cash and cash equivalents at end of period		$	28,038			$	18,923
Supplemental cash flow information:
Income taxes paid		$	7,795			$	3,610
Interest paid		$	1,748			$	722
Non-cash investing and financing activities:
Common stock issued in acquisition		$	—			$	20,072

(See notes to condensed consolidated financial statements)

ULTRA CLEAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization, Basis of Presentation and Significant Accounting Policies

     Organization - Ultra Clean Holdings, Inc. (the “Company”) is a developer and supplier of critical subsystems, primarily for the semiconductor capital equipment industry, including gas delivery systems, chemical mechanical planarization (“CMP”) subsystems, chemical delivery modules, frame and top plate assemblies and process modules. The Company’s products improve efficiency and reduce the costs of our customers’ design and manufacturing processes. The Company’s customers are primarily original equipment manufacturers (“OEMs”) of semiconductor capital equipment. On June 29, 2006, the Company completed the acquisition of Sieger Engineering, Inc. (“Sieger”) which was renamed UCT-Sieger Engineering LLC (“UCT-Sieger”).

     Basis of Presentation - The unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). This financial information reflects all adjustments which are, in the opinion of the Company, normal, recurring and necessary to present fairly the statements of financial position, results of operations and cash flows for the dates and periods presented. The Company’s December 29, 2006 balance sheet data were derived from audited financial statements as of that date. All significant intercompany transactions and balances have been eliminated from the information provided.

     The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the fiscal year ended December 29, 2006, included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2007. The Company’s results of operations for the three and nine months ended September 28, 2007 are not necessarily indicative of the results to be expected for any future periods.

     Use of Accounting Estimates - The presentation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. Actual amounts may differ from those estimates.

     Concentration of Credit Risk - Financial instruments which subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company sells its products to semiconductor capital equipment manufacturers in the United States. The Company performs credit evaluations of its customers’ financial condition and generally requires no collateral.

     The Company had significant sales to three customers, each accounting for 10% or more of total sales during the quarter: Applied Materials, Inc., Lam Research Corporation and Novellus Systems, Inc. As a group these three customers accounted for 85% and 83% of the Company’s sales for the three and nine month periods ended September 28, 2007, and 83% and 87% of the Company’s sales for the three and nine month periods ended September 29, 2006, respectively.

     Fiscal Year — The Company uses a 52-53 week fiscal year ending on the Friday nearest December 31. In 2007, the Company’s first, second, and third fiscal quarters ended on March 30, June 29, and September 28, respectively, and in 2006, the Company’s first, second, and third fiscal quarters ended on March 31, June 30, and September 29, respectively. All references to quarters refer to fiscal quarters and all references to years refer to fiscal years.

     Comprehensive Income — In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive Income”, the Company reports the change in its net assets from non-owner sources during the period by major components and as a single total. Comprehensive income for both the three and nine month periods ended September 28, 2007 and September 29, 2006, respectively, was the same as net income.

     Income Taxes — Income taxes were reported under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes , (“SFAS 109”) and, accordingly, deferred taxes are recognized using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base, and operating loss and tax credit carry-forwards. Valuation allowances are provided if it is more likely than not that some or all of the deferred tax assets will not be recognized. For any period presented, the Company has neither operating loss nor tax credit carry-forwards and no valuation allowance was deemed necessary.

     On December 30, 2006, the Company adopted the provision of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This interpretation requires that the Company recognize in the condensed consolidated financial statements the impact of a tax position that is more likely than not to be sustained upon examination based on the technical merits of the position. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for recognized tax benefits in the accompanying balance sheets along with any associated interest that would be payable to the taxing authorities upon examination (See note 7).

     Product Warranty — The Company provides a warranty on its products for a period of up to two years and provides for warranty costs at the time of sale based on historical activity. The determination of such provisions requires the Company to make estimates of product return rates and expected costs to repair or replace the products under warranty. If actual return rates and/or repair and replacement costs differ significantly from these estimates, adjustments to cost of sales may be required in future periods. Components of the reserve for warranty costs consisted of the following (in thousands):

		Nine months ended
		September 28,				September 29,
		2007				2006
Beginning balance		$	344			$	76
Additions related to sales			93				163
Warranty claims			(209	)			(139	)
Ending balance		$	228			$	100

     Revenue Recognition — Revenue from the sale of products is generally recorded upon shipment. In arrangements which specify title transfer upon delivery, revenue is not recognized until the product is delivered. The Company recognizes revenue when persuasive evidence of an arrangement exists, shipment has occurred, price is fixed or determinable and collectability is reasonably assured. If the Company has not substantially completed a product or fulfilled the terms of a sales agreement at the time of shipment, revenue recognition is deferred until completion. The Company’s standard arrangement for its customers includes a signed purchase order or contract, no right of return of delivered products and no customer acceptance provisions. The Company assesses collectability based on the credit worthiness of the customer and past transaction history. The Company performs on-going credit evaluations of customers and does not require collateral from customers.

     Stock-Based Compensation — The Company maintains a stock-based compensation plan which allows for the issuance of equity awards to executives and certain employees.

     On December 31, 2005, the Company implemented the provisions of SFAS No. 123(R), “Share-Based Payments” (“SFAS 123(R)”), using the modified prospective transition method. SFAS 123(R) requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant-date fair value of those awards. Using the modified prospective transition method of adopting SFAS 123(R), the Company began recognizing compensation expense for equity-based awards granted after December 31, 2005 plus unvested awards granted prior to December 31, 2005. Under this method of implementation, no

restatement of prior periods has been made. The following table shows the Company’s stock-based compensation expense included in the condensed consolidated income statements (in thousands):

		Three months ended								Nine months ended
		September 28, 2007				September 29, 2006				September 28, 2007				September 29, 2006
Cost of sales		$	271			$	112			$	678			$	275
Research and development			2				25				95				59
Sales and marketing			98				32				154				80
General and administrative			441				328				1,269				712
			812				497				2,196				1,126
Income tax benefit			(246	)			(154	)			(639	)			(349	)
Total stock-based compensation expense		$	566			$	343			$	1,557			$	777

     The exercise price of each stock option equals the market price of the Company’s stock on the date of grant. The estimated fair value of the Company’s equity-based awards, less expected forfeitures, is amortized over the awards’ vesting periods on a straight-line basis. Most options are scheduled to vest over four years and expire no later than ten years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average assumptions used in the model are outlined in the following table:

		Three months ended								Nine months ended
		September 28, 2007				September 29, 2006				September 28, 2007				September 29, 2006
Dividend yield			0.0	%			0.0	%			0.0	%			0.0	%
Expected volatility			50.0	%			50.0	%			50.0	%			50.0	%
Risk-free interest rate			4.3	%			4.9	%			4.6	%			4.9	%
Forfeiture rate			11.0	%			12.0	%			11.0	%			12.0	%
Expected life (in years)			5.0				4.9				5.0				4.9

     The weighted average estimated fair values of employee stock option grants for the three and nine months ended September 28, 2007 were $14.25 and $14.87, respectively. The computation of the expected volatility assumption used in the Black-Scholes calculations for new grants is based on a combination of the Company’s historical volatility and the volatility of similar companies in our industry. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the Company’s employee stock options. The Company does not currently pay dividends and has no plans to do so in the future. The forfeiture rate is based on the Company’s historical option forfeitures, as well as management’s expectation of future forfeitures based on current market conditions. When establishing the expected life assumption, the Company reviews annual historical employee exercise behavior of option grants with similar vesting periods.

     The following table summarizes information with respect to options outstanding at September 28, 2007 (in thousands):

		Number of
		Shares
Options outstanding at December 30, 2006			2,915
Granted			505
Exercised			(385	)
Canceled			(57	)
Options outstanding at September 28, 2007			2,978

     The following table summarizes the Company’s restricted stock award activity for the nine months ended September 28, 2007 (in thousands):

		Number of
		Shares
Unvested restricted stock awards at December 30, 2006			31
Granted			25
Vested			(15	)
Unvested restricted stock awards at September 28, 2007			41

     The Company also maintains an employee stock purchase plan (“ESPP”) that provides for the issuance of shares to all eligible employees of the Company at a discounted price. Under the ESPP, substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 95 percent of the fair market value of the Company’s stock at the end of each applicable purchase period. During the nine months ended September 28, 2007 and September 29, 2006, the Company issued 8,203 and 13,739 shares, respectively, under the ESPP.

     On May 29, 2007, the Company awarded 25,000 shares of restricted stock to its outside directors. The fair value of the shares was determined using the Company’s closing stock price on the date of grant. These shares fully vest on the one year anniversary from the date of grant. The total unamortized expense of the Company’s unvested restricted stock awards as of September 28, 2007, is $278,000.

     Recently Issued Accounting Standards — In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. The Company has not yet determined the impact this interpretation will have on its financial position, results of operation and cash flows.

     In September 2006, the FASB issued SFAS No.157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS 157 are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company will adopt SFAS No.157 as required in January 2008. The Company is currently evaluating the impact of SFAS 157 on its consolidated financial statements.

2. Acquisition

     In June 2006, the Company completed the acquisition of Sieger, a supplier of CMP modules and other critical subsystems to the semiconductor capital equipment, solar and flat panel industries. The total purchase price was approximately $53.5 million and was comprised of cash consideration of $32.4 million, including acquisition costs of $1.4 million, and stock consideration of $21.1 million for which the Company issued 2.6 million shares of its common stock. In accordance with EITF 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination”, the Company valued the common stock consideration based on the average closing sales price on the NASDAQ Global Market for two days before and two days after June 29, 2006, which was both the Company’s announcement date and transaction date for the acquisition.

     The Company has accounted for the acquisition of Sieger as a business combination and the operating results of Sieger have been included in the Company’s condensed consolidated financial statements from the date of acquisition. In addition to obtaining the assets identified in the purchase price allocation, the Company has increased its share of the critical subsystems market and has enhanced the potential leverage of its manufacturing operations. The allocation of purchase price is as follows (in thousands):

Tangible assets, net		$	10,894
Customer lists			13,800
Tradenames			800
Goodwill			27,957
Total		$	53,451

     Pro Forma Results — The following pro forma financial information presents the combined results of operations of the Company and UCT Sieger as if the acquisition had occurred as of the beginning of the periods presented. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of the Company

that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of the Company.

		Nine months ended
		September 29,
		2006
Sales		$	289,741
Net income		$	14,865
Basic net income per share		$	0.80
Diluted net income per share		$	0.76

3. Inventory, net

     Inventory, net, consisted of the following (in thousands):

		September 28,				December 29,
		2007				2006
Raw materials		$	33,718			$	30,234
Work in process			19,022				19,240
Finished goods			2,801				2,537
			55,541				52,011
Reserve for obsolescence			(4,352	)			(4,097	)
Total		$	51,189			$	47,914

4. Equipment and Leasehold Improvements, net

     Equipment and leasehold improvements, net, consisted of the following (in thousands):

		September 28,				December 29,
		2007				2006
Computer equipment and software		$	6,156			$	4,008
Furniture and fixtures			591				570
Machinery and equipment			7,020				6,201
Leasehold improvements			6,836				5,677
			20,603				16,456
Accumulated depreciation and amortization			(9,135	)			(7,023	)
Total		$	11,468			$	9,433

5. Purchased Intangibles and Goodwill

     Purchased intangibles consist of tradenames and customer relationships acquired as part of a business combination. As part of the Sieger acquisition in June 2006, the Company’s management determined the value of the assets acquired and the liabilities assumed. As a part of the determination of the value of the intangible assets acquired, the Company consulted with a third-party specialist. The Company allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The following tables provide a summary of the carrying amounts of purchased intangibles (in thousands):

		Gross
		Carrying				Accumulated				Net Carrying				Weighted Average
September 28, 2007		Amount				Amortization				Amount				Years
Customer list		$	13,800			$	(1,687	)		$	12,113				10.7
Tradenames			9,787				(800	)			8,987				*
Total		$	23,587			$	(2,487	)		$	21,100

		Gross
		Carrying				Accumulated				Net Carrying				Weighted Average
December 29, 2006		Amount				Amortization				Amount				Years
Customer list		$	13,800			$	(675	)		$	13,125			10.7 Years
Tradenames			9,787				(800	)			8,987				*
Total		$	23,587			$	(1,475	)		$	22,112

     Amortization expense related to purchased intangibles was $0.3 million and $1.0 million for the three and nine month periods ended September 28, 2007, respectively, and amortization expense was $0.7 million for the three and nine month periods ended September 29, 2006. The total expected future amortization related to purchased intangibles will be approximately $0.3 million, $1.4 million, $1.4 million, $1.3 million and $1.2 million for 2007 through 2011, respectively, and $6.4 million thereafter.

     The change in the carrying amount of goodwill during the nine months ended September 28, 2007 is as follows (in thousands):

		Net Carrying
		Amount
Goodwill, as of December 30, 2006		$	33,490
UCT-Sieger acquisition goodwill adjustments			550
Goodwill associated with the implementation of FIN 48 (see note 7)			208
Goodwill, as of September 28, 2007		$	34,248

     Adjustments to UCT-Sieger acquisition goodwill for the nine months ended September 28, 2007, related to adjustments to excess inventory of $504,000 and adjustments for professional services of $46,000.

6. Borrowing Arrangements

     In connection with the acquisition of Sieger in the second quarter of 2006, the Company entered into a borrowing arrangement and an equipment loan with two commercial banks. The loan agreement requires compliance with certain financial covenants, including a leverage and fixed charge coverage target. The loan agreement under the borrowing arrangement with one bank provides senior secured credit facilities in an aggregate principal amount of up to $32.5 million, consisting of a $25.0 million revolving line of credit ($10.0 million of which may be used for the issuance of letters of credit) and a $7.5 million term loan. The aggregate amount of the credit facilities is also subject to a borrowing base equal to 80% of eligible accounts receivable and is secured by substantially all of the Company’s assets. Each of the credit facilities will expire on June 29, 2009 and contains certain financial covenants, including minimum profitability and liquidity ratios. As of September 28, 2007, the Company was in compliance with all loan covenants. In addition, the term loan is subject to monthly amortization payments in 36 equal installments. Interest rates on outstanding loans under the credit facilities ranged from 7.0% to 7.5% per annum during the quarter ended September 28, 2007, and were 7.0% as of September 28, 2007.

The equipment loan is a 5 year, $5.0 million loan that is secured by certain equipment. The interest rate on the equipment loan was 7.6% per annum as of September 28, 2007. The combined balance outstanding on the borrowing arrangement and equipment loan at September 28, 2007 was $28.0 million.

7. Income Taxes

     The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on December 30, 2006. As a result of the implementation of FIN 48, the Company recorded a long-term tax liability of $827,000 for the recognition of excess tax benefits, which was accounted for as a decrease of $619,000 in retained earnings, including interest of $67,000, and an increase of $208,000 in goodwill as of December 30, 2006. The increase in goodwill is the result of certain tax benefits related to the acquisition of Ultra Clean Technology Systems and Service, Inc. in 2002.

     Derecognition in future periods of amounts recorded upon adoption of FIN 48, will result in an income tax benefit. The Company does not currently believe that the recognized tax benefit will change significantly within the next twelve months. There is no impact on the Company’s estimated effective tax rate for 2007 as a result of the adoption of FIN 48.

     The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2003 through 2006, and the Company and its subsidiaries’ state income tax returns are open to audit under the statute of limitations for the years ending December 31, 2002 through 2006.

8. Net Income Per Share

     Basic net income per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised or converted into common stock.

     The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income per share (in thousands, except per share data):

		Three months ended								Nine months ended
		September 28,				September 29,				September 28,				September 29,
		2007				2006				2007				2006
Numerator:
Net income		$	3,541			$	5,560			$	13,822			$	11,648
Denominator:
Shares used in computation — basic:
Weighted average common shares outstanding			21,393				20,822				21,267				18,689
Weighted average common shares outstanding subject to repurchase			(27	)			(85	)			(27	)			(89	)
Shares used in computing basic Net income per share			21,366				20,737				21,240				18,600
Shares used in computation — diluted:
Shares used in computing basic Net income per share			21,366				20,737				21,240				18,600
Dilutive effect of common shares outstanding subject to repurchase			27				85				27				89
Dilutive effect of options outstanding			773				1,057				821				935
Shares used in computing diluted Net income per share			22,166				21,879				22,088				19,624
Net income per share — basic		$	0.17			$	0.27			$	0.65			$	0.63
Net income per share — diluted		$	0.16			$	0.25			$	0.63			$	0.59

9. Related Party Transactions

     The Company leases a facility from an entity controlled by one of the Company’s executive officers. The Company incurred rent expense resulting from the lease of this facility of $63,000 and $188,000 for the three and nine months ended September 28, 2007, respectively, and $59,600 for the three and nine months ended September 29, 2006.

     The spouse of one of the Company’s executive’s is the sole owner of the Company’s primary travel agency. The Company incurred fees for travel-related services, including the cost of airplane tickets, of $70,000 and $285,000 for the respective three and nine month periods ended September 28, 2007, and $63,000 and $203,000 for the three and nine month periods ended September 29, 2006, respectively.

     The sister, son and sister-in-law of one of the Company’s executives work for the Company. For the three and nine month periods ended September 28, 2007 aggregate salaries paid by the Company to the aforementioned individuals totaled $42,000 and $129,000, respectively, and $44,000 for the three and nine month periods ended September 29, 2006, respectively.

10. Commitments and Contingencies

     The current lease for the Company’s corporate headquarters in Menlo Park expires on December 31, 2007. In September 2007, the Company entered into a facility lease agreement for approximately 104,000 square feet of office space in Hayward, California and plans to move into the new facility in the second quarter of 2008. In lieu of a cash security deposit, the Company established an irrevocable standby letter of credit in the amount of $156,000 naming the landlord of the new facility as the beneficiary. Pursuant to the lease agreement, the Company will receive approximately $4.1 million in tenant improvement allowances and incentives as well as $1.2 million in rent abatements over the first two years of the lease. The operating lease term for the new facility will commence on February 15, 2008, and will continue through February 14, 2015, with minimum monthly lease payments beginning at $119,000 and escalating annually after the first two years. The Company’s total future minimum lease payments over the term of the lease will be approximately $10.2 million.

     At September 28, 2007, the Company had purchase commitments totaling $48.8 million that related primarily to the purchase of inventory.

     On September 2, 2005, the Company filed suit in the federal court for the Northern District of California against Celerity, Inc., or Celerity, seeking a declaratory judgment that the Company’s new substrate technology does not infringe certain of Celerity’s patents and/or that Celerity’s patents are invalid. On September 13, 2005, Celerity filed suit in the federal court of Delaware alleging that the Company infringed eight patents by developing and marketing products that use Celerity’s fluid distribution technology. The complaint by Celerity seeks injunction against future infringement of its patents and compensatory and treble damages. The Delaware litigation was transferred to the Northern District of California on October 19, 2005 and on December 12, 2005 was consolidated with the Company’s previously filed declaratory judgment action. The Court issued its claim construction order on September 29, 2006. The Company then filed motions for summary judgments of non-infringement and invalidity with the Court. The Court issued summary judgment in April 2007, dismissing four of Celerity’s patent infringement claims. In addition, Celerity had previously withdrawn two of its patent infringement claims. The case ultimately went to trial in June 2007, and, on June 25, 2007, a jury found that the Company did not infringe on one of the two remaining patents at issue but did infringe on the other. The jury awarded damages of $13,900 to Celerity. The Company has requested and the United States Patent and Trademark Office (USPTO) has granted the Company’s request and agreed to re-examine the one Celerity patent that the Company was found to infringe. The review process is currently under way by the USPTO, and the Company is proceeding with a redesign of the product that was found to infringe the Celerity patent. Management is currently reviewing legal alternatives including appealing the judgment. The Company does not expect the ruling to have a material impact on operating results or cash flows.

ITEM 2. Managements Discussion And Analysis of Financial Condition And Results Of Operations

     The information set forth in this quarterly report on Form 10-Q contains forward-looking statements regarding future events and our future results. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following: projections of our financial performance, our anticipated growth and trends in our businesses, levels of capital expenditures, the adequacy of our capital resources to fund operations and growth, our ability to compete effectively with our competitors, our strategies and ability to protect our intellectual property, future acquisitions, customer demand, our manufacturing and procurement process, employee matters, supplier relations, foreign operations (including our operations in China), the legal and regulatory backdrop (including environmental regulation), our exposure to market risks and other characterizations of future events or circumstances described in this Quarterly Report. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

     Overview

     We are a leading developer and supplier of critical subsystems, primarily for the semiconductor capital equipment and flat panel display industry. We develop, design, prototype, engineer, manufacture and test subsystems which are highly specialized and tailored to specific steps in the semiconductor manufacturing process. Our revenue is derived primarily from the sale of critical subsystems related to semiconductor manufacturing equipment, and include gas delivery subsystems, chemical delivery modules, top-plate assemblies, frame assemblies, chemical mechanical planarization (“CMP”) subsystems, and process modules.

     Our primary customers are semiconductor equipment manufacturers. We provide our customers complete subsystem solutions that combine our expertise in design, test, component characterization and highly flexible manufacturing operations with quality control and financial stability. This combination helps us to drive down total manufacturing costs, reduce design-to-delivery cycle times and maintain high quality standards for our customers. We believe these characteristics, as well as our standing as a leading supplier of critical subsystems, place us in a strong position to benefit from the growing demand for subsystem outsourcing.

     Ultra Clean Holdings, Inc. was founded in November 2002 for the purpose of acquiring Ultra Clean Technology Systems and Service, Inc. Ultra Clean Technology Systems and Service, Inc. was founded in 1991 by Mitsubishi Corporation and was operated as a subsidiary of Mitsubishi until November 2002, when it was acquired by Ultra Clean Holdings, Inc. Ultra Clean Holdings, Inc. became a publicly traded company in March 2004. In June 2006, we completed the acquisition of Sieger Engineering, Inc., a California corporation (“Sieger”). The total purchase price was approximately $53.5 million and was comprised of cash consideration of $32.4 million, including acquisition costs of $1.4 million, and stock consideration of $21.1 million. UCT-Sieger is a supplier of chemical mechanical planarization modules and other subsystems to the semiconductor and flat panel capital equipment industries. We believe that the acquisition has enhanced our strategic position as a semiconductor equipment subsystem supplier. We conduct our operating activities primarily through our four wholly-owned subsidiaries, Ultra Clean Technology Systems and Service, Inc., Ultra Clean Technology (Shanghai) Co., LTD, Ultra Clean Micro-Electronics Equipment (Shanghai) Co., LTD and UCT-Sieger.

     We have in the past considered and will continue to consider acquisitions that will enable us to expand our geographic presence, secure new customers and diversify into complementary products and markets as well as broaden our technological capabilities in semiconductor capital equipment manufacturing.

Financial Highlights

     Our operating results for the three and nine months ended September 28, 2007 compared to the same periods in the prior year reflect a decrease in demand of our products as a result of an overall slowdown in the semiconductor capital equipment market. Our results for the three and nine month periods ended September 29, 2006, include the results of the acquisition of UCT-Sieger, which was completed in June 2006. As such, our operating results for the three and nine months ended September 29, 2006, include three months, and one day and three months, respectively, of the operating results of UCT-Sieger. Sales for the three months ended September 29, 2007 were $95.5

million, a decrease of $8.5 million, or 8.2%, from the same quarter of 2006. Gross profit in the third quarter of 2007 also decreased to $13.4 million, or 14.0% of sales, from $15.4 million, or 14.8% of sales, in the third quarter of 2006. Total operating expenses in the third quarter of 2007 increased to $7.8 million, or 8.2% of sales, from $7.3 million, or 7.1% of sales, in the third quarter of 2006. Net income during the third quarter of 2007 decreased to $3.5 million from $5.6 million for the comparable period in 2006 as a result of higher operating expenses, and decreased sales and gross profits experienced during the current quarter.

     Results of Operations

     For the periods indicated, the following table sets forth certain costs and expenses and other income items as a percentage of sales. The table and subsequent discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in our quarterly report.

		Three months ended								Nine months ended
		September 28,				September 29,				September 28,				September 29,
		2007				2006				2007				2006
Sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			86.0	%			85.2	%			85.2	%			85.1	%
Gross profit			14.0	%			14.8	%			14.8	%			14.9	%
Operating expenses:
Research and development			0.7	%			0.8	%			0.7	%			0.9	%
Sales and marketing			1.6	%			1.2	%			1.4	%			1.4	%
General and administrative			5.9	%			5.1	%			5.9	%			5.2	%
Total operating expenses			8.2	%			7.1	%			8.0	%			7.5	%
Income from operations			5.8	%			7.7	%			6.8	%			7.4	%
Interest and other income (expense), net			(0.5	)%			(0.6	)%			(0.5	)%			(0.5	)%
Income before provision for income taxes			5.3	%			7.1	%			6.3	%			6.9	%
Income tax provision			1.6	%			1.8	%			1.9	%			1.8	%
Net income			3.7	%			5.3	%			4.4	%			5.1	%

Net Sales

     Sales in the third quarter of 2007 decreased 8.2% to $95.5 million from $104.1 million in the third quarter of 2006. The decrease in sales reflects the decrease in demand resulting from the overall slowdown in the semiconductor capital equipment market. Of the $8.5 million quarterly sales decrease from the comparable period in 2006, sales of critical subsystems contributed $3.4 million, or 40.0% and sales from UCT-Sieger contributed $5.1 million, or 60.0%, in part due to a decrease in demand for precision machining products. Sales for the nine months ended September 28, 2007 increased $81.3 million, or 35.4%, to $311.0 million from $229.7 million for the nine months ended September 29, 2006. The increase from 2006 revenue is comprised of $43.8 million of critical subsystem sales, which represent 53.9% of the incremental revenue for the period. Also contributing to our increased sales for the nine months ended September, 28, 2007, was $66.3 million of revenue derived from UCT-Sieger, which increased 130.0% from $28.8 million for the three months and one day results of operations included in the comparable period of 2006.

     Historically, a relatively small number of OEM customers have accounted for a significant portion of our sales. In the three and nine months ended September 28, 2007 and September 29, 2006, three customers each accounted for 10% or more of our total sales: Applied Materials, Inc., Lam Research Corporation and Novellus Systems, Inc. As a group these three customers accounted for 85% and 83% of our sales for the respective three and nine month periods ended September 28, 2007, and 83% and 87% of our sales for the three and nine months ended September 29, 2006, respectively.

Gross Profit

     Cost of goods sold consists primarily of purchased materials, labor and overhead, including depreciation related to certain capital assets associated with the design and manufacture of products sold. Gross profit for the three months ended September 28, 2007 decreased to $13.4 million, or 14.0% of sales, from $15.4 million, or 14.8% of sales, for the same period in 2006. Our gross margin for the three month period ended September 28, 2007 decreased from the comparable three month period in 2006 due to competitive pressure to lower the pricing of our products. Gross profit for the nine months ended September 28, 2007, increased $45.9 million from $34.3 million for the same period in 2006. As a percentage of sales, gross profit remained relatively flat at 14.8% and 14.9% for the nine month periods ended 2007 and 2006, respectively. In order to meet demand while also improving gross margin, we intend to reduce materials and overhead costs by transferring additional production to our Shanghai facilities which maintain a lower cost base.

Research and Development Expense

     Research and development expense consists primarily of activities related to new component testing and evaluation, test equipment and fixture development, product design, and other product development activities. Research and development expense for the third quarter of 2007 was $0.6 million, or 0.7% of sales, compared with $0.8 million, or 0.8% of sales, for the same quarter of 2006. Research and development expense for the nine months of 2007 was $2.3 million, or 0.7% of sales, compared with $2.1 million, or 0.9% of sales, for the same period of 2006. The increase in dollars for the nine months of 2007 is due primarily to an increase in headcount and related expenses, whereas the decrease as a percent of sales is due to an increase in sales in the nine months ended September 28, 2007 compared to the same period in the prior year.

Sales and Marketing Expense

     Sales and marketing expense consists primarily of salaries and commissions paid to our sales and service employees, salaries paid to our engineers who work with the sales and service employees to help determine the components and configuration requirements for new products and other costs related to the sales of our products. Sales and marketing expense for the third quarter of 2007 was $1.5 million, or 1.6% of sales, compared with $1.2 million, or 1.2% of sales, in the same quarter of 2006. Sales and marketing expense for the nine months of 2007 was $4.3 million, or 1.4% of sales, compared with $3.3 million, or 1.4% of sales, in the same period of 2006. The increase in dollars during the three and nine month periods is due primarily to an increase in headcount and related costs.

General and Administrative Expense

     General and administrative expense consists primarily of salaries and overhead associated with our administrative staff and professional fees. General and administrative expense increased $0.4 million, or 7.9% in the third quarter of 2007 to $5.7 million, or 5.9% of sales, compared with $5.3 million, or 5.1% of sales, in the same quarter of 2006. General and administrative expense increased $6.7 million, or 56.5%, in the first nine months of 2007 to $18.5 million, or 5.9% of sales, compared with $11.8 million, or 5.2% of sales, in the same period of 2006. The increase in the third quarter of 2007 is due mainly to costs related to the implementation of our new ERP system. The increase for the nine months ended September 28, 2007, compared to the prior year, is due to higher levels of accounting and consulting costs in connection with annual audit fees and Sarbanes-Oxley 404 compliance requirements, compensation and related expenses resulting from an increase in headcount due in part to the addition of UCT-Sieger, as well as an increase in legal fees related to a patent infringement lawsuit that went to trial in June 2007.

Interest and Other Income (Expense), net

     Interest and other income (expense), net for the third quarter and nine months of 2007 was $(0.5) million and $(1.5) million, respectively, compared to $(0.6) million and $(1.1) million in the third quarter and nine months of 2006, respectively. The increase in net expense for the nine months of 2007 is primarily attributable to interest costs associated with borrowings to support the Sieger acquisition in June 2006.

Income Tax Provision

     Our effective tax rate for the nine months of 2007 was 29.1% compared to 30.8% for the year ended December 29, 2006. The decrease in 2007 reflects, primarily, a change in the geographic mix of worldwide earnings and financial results for fiscal year 2007

compared with fiscal year 2006, as a higher portion of our income is being generated from our Shanghai facility. There is no impact on our estimated effective tax rate for 2007 from the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48).

     Liquidity and Capital Resources

     As of September 28, 2007, we had cash and cash equivalents of $28.0 million compared to $23.3 million as of December 29, 2006.

     Net cash provided by operating activities for the nine months ended September 28, 2007 increased to $9.6 million from net cash used in operating activities of $1.7 million in the comparable period of fiscal 2006. The $11.3 million increase can be attributed to higher net income of $2.2 million, which would be $3.2 million when adjusted to exclude the effects of non-cash charges for depreciation and amortization expense, deferred taxes, and stock-based compensation expense. The change in operating cash for the current period is also driven by favorable changes in accounts receivable and inventory balances of $16.2 million and $12.2 million, respectively, which are partially offset by an unfavorable change in accounts payable of $17.0 million.

     Cash used in investing activities for the nine months ended September 28, 2007 decreased to $4.5 million from $31.1 million in the comparable period of fiscal 2006. Purchases of equipment and leasehold improvements increased $2.2 million due primarily to spending related to the implementation of our new ERP system, and leasehold improvements in our new Shanghai facility. This increase was offset by a decrease of $28.8 million related to cash used in the Sieger acquisition in June 2006.

     Net cash used in financing activities for the nine months ended September 28, 2007 decreased to $0.4 million from cash provided by financing activities of $41.0 million in the comparable period of fiscal 2006. Cash used in financing activities for the current period of 2007 is attributable primarily to principal payments on bank debt of $3.5 million, partially offset by proceeds from issuance of common stock of $2.1 million and the tax benefit from stock based compensation of $1.1 million. However, in the comparable period of 2006, cash provided by financing activities included bank borrowings of $30.1 million related to our acquisition of UCT-Sieger, and cash proceeds of $10.5 million related to proceeds received from common stock issued in a secondary offering to the public in the first quarter of 2006.

     In connection with our acquisition of Sieger in the second quarter of 2006, we entered into a borrowing arrangement and an equipment loan. The loan and security agreement (“Loan Agreement”) provides senior secured credit facilities in an aggregate principal amount of up to $32.5 million, consisting of a $25 million revolving line of credit ($10 million of which may be used for the issuance of letters of credit) and a $7.5 million term loan. The aggregate amount of the credit facilities is also subject to a borrowing base equal to 80% of eligible accounts receivable and is secured by substantially all of our assets. Each of the credit facilities will expire on June 29, 2009 and contains certain financial covenants, including minimum profitability and liquidity ratios. In addition, the term loan is subject to monthly amortization payments in 36 equal installments. Interest rates on outstanding loans under the credit facilities ranged from 7.0% to 7.5% per annum during the quarter ended September 28, 2007 and were 7.0% per annum as of September 28, 2007. The equipment loan is a 5-year, $5 million loan that is secured by certain equipment. The interest rate on the equipment loan was 7.6% as of September 28, 2007. The combined balance outstanding on the borrowing arrangement and equipment loan at September 28, 2007 was $28.0 million.

     We anticipate that we will continue to finance our operations with cash flows from operations, existing cash balances and a combination of long-term debt and/or lease financing and additional sales of equity securities. The combination and sources of capital will be determined by management based on our then-current needs and prevailing market conditions.

     Although cash requirements fluctuate based on the timing and extent of many factors, management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy our liquidity requirements for at least the next 12 months.

     Contractual Obligations and Contingent Liabilities and Commitments

     Other than operating leases for certain equipment and real estate, we have no significant off-balance sheet transactions, unconditional purchase obligations or similar instruments and, other than with respect to the revolving credit facility described above, are not a guarantor of any other entities’ debt or other financial obligations.

     The following table summarizes our future minimum lease payments and principal payments under debt obligations as of September 28, 2007 (in thousands):

		Remainder
		of 2007				2008				2009				2010				2011				2012				Total
Capital Lease(1)		$	14			$	33			$	12			$	—			$	—			$	—			$	59
Operating Lease(2)			579				1,896				2,397				1,867				1,817				6,274				14,830
Borrowing arrangements			1,040				3,367				22,185				1,008				443				—				28,043
Total(3)		$	1,633			$	5,296			$	24,594			$	2,875			$	2,260			$	6,274			$	42,932

     Critical Accounting Policies, Significant Judgments and Estimates

     Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure at the date of our financial statements. Estimates and judgments are reviewed on an on-going basis, including those related to sales, inventories, intangible assets, stock compensation and income taxes. The estimates and judgments are based on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis of the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We consider certain accounting policies related to the purchase accounting for the Sieger acquisition, revenue recognition, inventory valuation, accounting for income taxes, valuation of intangible assets and goodwill and equity incentives to employees to be critical policies due to the estimates and judgments involved in each.

Revenue Recognition

     Revenue Recognition — Our revenue is concentrated in a few OEM customers in the semiconductor capital equipment and flat panel display industry. Our standard arrangement for our customers includes a signed purchase order or contract, no right of return of delivered products and no customer acceptance provisions. Revenue from sales of products is recognized when:

•		we enter into a legally binding arrangement with a customer;
•		we ship the products;
•		price is deemed fixed or determinable;
•		product delivery is deemed free of contingencies or significant uncertainties; and
•		collection is probable.

     Revenue is generally recognized upon shipment of the product. In arrangements which specify title transfer upon delivery, revenue is not recognized until the product is delivered. In addition, if we have not substantially completed a product or fulfilled the terms of the agreement at the time of shipment, revenue recognition is deferred until completion. Determination of criteria in the fourth and fifth bullet points above is based on our judgment regarding products we may deliver with contingencies or significant uncertainties and the collectability of those amounts. We defer revenue for product that we may deliver to a customer that is missing a critical component or requires customer testing.

     We assess collectability based on the credit worthiness of the customer and past transaction history. We perform on-going credit evaluations of customers and do not require collateral from our customers. We have not experienced significant collection losses in the past. A significant change in the liquidity or financial position of any one customer could make it more difficult for us to assess collectability.

Inventory Valuation

     We value the majority of our inventories at the lesser of standard cost, determined on a first-in, first-out basis, or market. We value inventory from our recently acquired subsidiary, UCT-Sieger, at the lesser of actual cost or market. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis. Obsolete inventory or inventory in excess of our estimated usage is written-down to its estimated market value less costs to sell, if less than its cost. The inventory write-downs are recorded as an inventory valuation allowance established on the basis of obsolete inventory or specific identified inventory in excess of estimated usage. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technological obsolescence of our products. If actual market conditions are less favorable than our projections, additional inventory write-downs may be required. If the inventory value is written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold either as a component of a subsystem or as separate inventory.

Accounting for Income Taxes

     The determination of our tax provision is subject to judgments and estimates. The carrying value of our net deferred tax assets, which is made up primarily of tax deductions, assumes we will be able to generate sufficient future income to fully realize these deductions. In determining whether the realization of these deferred tax assets may be impaired, we make judgments with respect to whether we are likely to generate sufficient future taxable income to realize these assets. We have not recorded any valuation allowance to impair our tax assets because, based on the available evidence, we believe it is more likely than not that we will be able to utilize all of our deferred tax assets in the future. If we do not generate sufficient future income, the realization of these deferred tax assets may be impaired, resulting in an additional income tax expense.

     On December 30, 2006, we adopted the provision of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that we recognize in the condensed consolidated financial statements the impact of a tax position that is more likely than not to be sustained upon examination based on the technical merits of the position. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for recognized tax benefits in the accompanying balance sheets along with any associated interest that would be payable to the taxing authorities upon examination.

Business Combinations

     In accordance with business combination accounting, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The Company’s management estimates the fair

value and may consult with a third-party specialist to assist management in determining the fair values of acquired intangible assets such as trade name and customer relationships. Such valuations require management to make significant estimates and assumptions. Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.

Valuation of Intangible Assets and Goodwill

     We periodically evaluate our intangible assets and goodwill in accordance with Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), Goodwill and Other Intangible Assets, for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets include goodwill, customer lists and tradename. Factors we consider important that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, or significant negative industry or economic trends. The provisions of SFAS No. 142 also require a goodwill impairment test annually or more frequently if impairment indicators arise. In testing for a potential impairment of goodwill, the provisions of SFAS No. 142 require the application of a fair value based test at the reporting unit level. We operate in one segment and have one reporting unit. Therefore, all goodwill is considered enterprise goodwill and the first step of the impairment test prescribed by SFAS No. 142 requires a comparison of our fair value to our book value. If the estimated fair value is less than the book value, SFAS No. 142 requires an estimate of the fair value of all identifiable assets and liabilities of the business, in a manner similar to a purchase price allocation for an acquired business. This estimate requires valuations of certain internally generated and unrecognized intangible assets such as in-process research and development and developed technology. Potential goodwill impairment is measured based upon this two-step process. We performed the annual goodwill impairment test as of December 29, 2006 and determined that goodwill was not impaired.

Equity Incentives to Employees

     On December 31, 2005, we began to account for our employee stock purchase plan (“ESPP”) and employee stock-based compensation plan in accordance with the provisions of Statement of Financial Account Standards 123(R) “Accounting for Stock-Based Compensation,” (“SFAS 123(R)”), which requires recognition of the fair value of stock-based compensation. The fair value of stock options was estimated using a Black-Scholes option valuation model. This methodology requires the use of subjective assumptions in implementing SFAS 123(R), including expected stock price volatility and the estimated life of each award. The fair value of stock-based compensation awards less the estimated forfeitures is amortized over the service period of the award, and we have elected to use the straight-line method. We make quarterly assessments of the adequacy of the tax credit pool to determine if there are any deficiencies that require recognition in the consolidated income statements.

Recently Issued Accounting Standards

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities . SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. We have not yet determined the impact this interpretation will have on our financial position, results of operation and cash flows.

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS 157 are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We will adopt SFAS 157 as required in January 2008 and are currently evaluating the impact of SFAS 157 on our consolidated financial statements.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates, foreign exchange rates or equity prices.

Foreign Exchange Rates

     We do not make material sales in currencies other than the United States Dollar or have material purchase obligations outside of the United States, except in China where we have purchase commitments totaling $4.9 million in United States Dollar equivalents. We have performed a sensitivity analysis assuming a hypothetical 10-percent movement in foreign currency exchange rates applied to the underlying exposure described above. As of September 28, 2007, the analysis indicated that such market movements would not have a material effect on our business, financial condition or results of operations. Although we do not anticipate any significant fluctuations, there can be no assurance that foreign currency exchange risk will not have a material impact on our financial position, results of operations or cash flow in the future.

Interest Rates

     Our interest rate risk relates primarily to our third party debt which totals $28.0 million as of September 28, 2007, and carries interest rates pegged to the LIBOR and PRIME rates. An immediate increase in interest rates of 100 basis points would increase our interest expense by approximately $0.1 million per quarter. This would be partially offset by increased interest income on our invested cash. Conversely, an immediate decline of 100 basis points in interest rates would decrease our interest expense by approximately $0.1 million per quarter. This would be partially offset by decreased interest income on our invested cash.

ITEM 4. Controls and Procedures

     As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to provide reasonable assurance that information required to be disclosed by us in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

     As required by Rule 13a-15(d), management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the fiscal quarter.

     It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

     On September 2, 2005, we filed suit in the federal court for the Northern District of California against Celerity, Inc., or Celerity, seeking a declaratory judgment that our new substrate technology does not infringe certain of Celerity’s patents and/or that Celerity’s patents are invalid. On September 13, 2005, Celerity filed suit in the federal court of Delaware alleging that we have infringed eight patents by developing and marketing products that use Celerity’s fluid distribution technology. The complaint by Celerity seeks injunction against future infringement of its patents and compensatory and treble damages. The Delaware litigation was transferred to the Northern District of California on October 19, 2005 and on December 12, 2005 was consolidated with our previously filed declaratory judgment action. The Court issued its claim construction order on September 29, 2006. We then filed motions for summary judgments of non-infringement and invalidity with the Court. The Court issued summary judgment in April 2007, dismissing four of Celerity’s patent infringement claims. In addition, Celerity had previously withdrawn two of its patent infringement claims. The case ultimately went to trial in June 2007, and, on June 25, 2007, a jury found that UCT did not infringe on one of the two remaining patents at issue but did infringe on the other. The jury awarded damages of $13,900 to Celerity. We have requested and the United States Patent and Trademark Office (USPTO) has granted our request and agreed to re-examine the one Celerity patent that we were found to infringe. The review process is currently under way by the USPTO, and we are proceeding with a redesign of the product that was found to infringe the Celerity patent. Management is currently reviewing legal alternatives including appealing the judgment. We do not expect the ruling to have a material impact on operating results or cash flows.

     From time to time, we are also subject to various legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business.

ITEM 1A. Risk Factors

The highly cyclical nature of the semiconductor capital equipment industry and general economic slowdowns could harm our operating results.

     Our business and operating results depend in significant part upon capital expenditures by manufacturers of semiconductors, which in turn depend upon the current and anticipated market demand for semiconductors. Historically, the semiconductor industry has been highly cyclical, with recurring periods of over-supply of semiconductor products that have had a severe negative effect on the demand for capital equipment used to manufacture semiconductors. We have experienced and anticipate that we will continue to experience significant fluctuations in customer orders for our products. Our sales were $311.0 million for the nine months of 2007 (of which $65.8 million related to Sieger), $337.2 million for the year ended 2006 (of which $55.6 million related to Sieger) and $147.5 million for the year ended 2005. Historically, semiconductor industry slowdowns have had, and future slowdowns may have, a material adverse effect on our operating results.

     In addition, uncertainty regarding the growth rate of economies throughout the world has from time to time caused companies to reduce capital investment and may in the future cause reduction of such investments. These reductions have often been particularly severe in the semiconductor capital equipment industry.

We rely on a small number of customers for a significant portion of our sales, and any impairment of our relationships with these customers would adversely affect our business.

     A relatively small number of OEM customers has historically accounted for a significant portion of our sales, and we expect this trend to continue. Applied Materials, Inc., Lam Research Corporation and Novellus Systems, Inc. as a group accounted for 83% of our sales in the first nine months of 2007, 86% of our sales for the year ended 2006, and 89% of our sales for the year ended 2005. Because of the small number of OEMs in our industry, most of which are already our customers, it would be difficult to replace lost revenue resulting from the loss of, or the reduction, cancellation or delay in purchase orders by, any one of these customers. Consolidation among our customers or a decision by any one or more of our customers to outsource all or most manufacturing and assembly work to a single equipment manufacturer may further concentrate our business in a limited number of customers and expose us to increased risks relating to dependence on an even smaller number of customers.

     In addition, by virtue of our customers’ size and the significant portion of revenue that we derive from them, they are able to exert significant influence and pricing pressure in the negotiation of our commercial agreements and the conduct of our business with them. We may also be asked to accommodate customer requests that extend beyond the express terms of our agreements in order to maintain our relationships with our customers. If we are unable to retain and expand our business with these customers on favorable terms, our business and operating results will be adversely affected.

     We have had to qualify, and are required to maintain our status, as a supplier for each of our customers. This is a lengthy process that involves the inspection and approval by a customer of our engineering, documentation, manufacturing and quality control procedures before that customer will place volume orders. Our ability to lessen the adverse effect of any loss of, or reduction in sales to, an existing customer through the rapid addition of one or more new customers is minimal because of these qualification requirements. Consequently, our business, operating results and financial condition would be adversely affected by the loss of, or any reduction in orders by, any of our significant customers.

We have significant existing debts; the restrictive covenants under some of our debt agreements may limit our ability to expand or pursue our business strategy; if we are forced to prepay some or all of this indebtedness our financial position would be severely and adversely affected.

     We have a significant amount of outstanding indebtedness. At September 28, 2007, our long-term debt was $24.5 million and our short-term debt was $3.5 million, for an aggregate total of $28.0 million. Our loan agreement requires compliance with certain financial covenants, including a leverage and fixed charge coverage target. The covenants contained in our line of credit with the bank also restrict our ability to take certain actions, including our ability to:

	•		incur additional indebtedness;
	•		pay dividends and make distributions in respect of our capital stock;
	•		redeem capital stock;
	•		make investments or other restricted payments outside the ordinary course of business;
	•		engage in transactions with shareholders and affiliates;
	•		create liens;
	•		sell or otherwise dispose of assets;
	•		make payments on our debt, other than in the ordinary course; and
	•		engage in mergers and acquisitions.

     While we are currently in compliance with the financial covenants in our loan agreement, we cannot assure you that we will meet these financial covenants in subsequent periods. If we are unable to meet any covenants, we cannot assure you that the bank will grant waivers and amend the covenants, or that the bank will not terminate the agreement, preclude further borrowings or require us to repay any outstanding borrowings. As long as our indebtedness remains outstanding, the restrictive covenants could impair our ability to expand or pursue our business strategies or obtain additional funding. Forced prepayment of some or all of our indebtedness would reduce our available cash balances and have an adverse impact on our operating and financial performance.

We may not be able to integrate efficiently the operations of past and future acquired businesses.

     We have made, and may in the future, consider making additional acquisitions of, or significant investments in, businesses that offer complementary products, services, technologies or market access. For example, we acquired Sieger Engineering, Inc. in June 2006. If we are to realize the anticipated benefits of past and future acquisitions or investments, the operations of these companies must be integrated and combined efficiently with our own. The process of integrating supply and distribution channels, computer and accounting

systems, and other aspects of operations, while managing a larger entity, will continue to present a significant challenge to our management. In addition, it is not certain that we will be able to incorporate different financial and reporting controls, processes, systems and technologies into our existing business environment. The difficulties of integration may increase because of the necessity of combining personnel with varied business backgrounds and combining different corporate cultures and objectives. We may assume substantial debt and incur substantial costs associated with these activities and we may suffer other material adverse effects from these integration efforts which could materially reduce our earnings, even over the long-term. We may not succeed with the integration process and we may not fully realize the anticipated benefits of the business combinations. The dedication of management resources to such integration or divestitures may detract attention from the day-to-day business, and we may need to hire additional management personnel to manage our acquisitions successfully.

     In addition, we frequently evaluate acquisitions of, or significant investments in, complementary companies, assets, businesses and technologies. Even if an acquisition or other investment is not completed, we may incur significant cost in evaluating such acquisition or investment, which has in the past had, and could in the future have, an adverse effect on our results of operations.

We have identified deficiencies in the internal controls of Sieger that existed prior to our acquisition of Sieger, and the identification of any deficiencies in the future could affect our ability to ensure timely and reliable financial reports.

     We have identified deficiencies in the internal controls associated with Sieger which existed at the time of our acquisition of Sieger. We are in the process of implementing changes to strengthen the internal controls of UCT-Sieger. However, additional measures may be necessary. The measures we expect to take to improve the internal controls of UCT-Sieger may not be sufficient to address the issues identified by us or ensure that the internal controls of UCT-Sieger are effective. Due to the timing of the acquisition, we excluded the operations of UCT-Sieger from our Section 404 of Sarbanes-Oxley Act of 2002 (“SOX 404”) attestation process at December 29, 2006. However, we will include UCT-Sieger in our SOX 404 attestation process at December 28, 2007 and there can be no assurance that these deficiencies will be sufficiently remediated by that time.

We may experience difficulties with our new ERP system which could impact our financial reporting.

     We may experience difficulties with the implementation of our new enterprise resource planning (“ERP”) system which we expect to complete during the first quarter of 2008. Such difficulties could disrupt our ability to timely and accurately process and report key components of the results of our consolidated operations, our financial position and cash flows. Any disruptions or difficulties that may occur in connection with this new ERP system could also adversely affect our ability to complete the evaluation of our internal controls and attestation activities pursuant to SOX 404. System failure or malfunctioning may result in disruption of operations and the inability to process transactions and could adversely affect our financial results.

We have established, and intend to expand, our operations in China, which exposes us to risks associated with operating in a foreign country.

     We are expanding our operations in China. Total assets in China at September 28, 2007 and December 29, 2006 were $22.8 million and $17.4 million, respectively.

     We are exposed to political, economic, legal and other risks associated with operating in China, including:

	•		foreign currency exchange fluctuations;
	•		political, civil and economic instability;
	•		tariffs and other barriers;
	•		timing and availability of export licenses;
	•		disruptions to our and our customers’ operations due to the outbreak of communicable diseases, such as SARS and avian flu;
	•		disruptions in operations due to the weakness of China’s domestic infrastructure, including transportation and energy;

	•		difficulties in developing relationships with local suppliers;
	•		difficulties in attracting new international customers;
	•		difficulties in accounts receivable collections;
	•		difficulties in staffing and managing a distant international subsidiary and branch operations;
	•		the burden of complying with foreign and international laws and treaties;
	•		difficulty in transferring funds to other geographic locations; and
	•		potentially adverse tax consequences.

     Over the past several years the Chinese government has pursued economic reform policies, including the encouragement of private economic activity and greater economic decentralization, the Chinese government may not continue these policies or may significantly alter them to our detriment from time to time without notice. Changes in laws and regulations or their interpretation, the imposition of confiscatory taxation policies, new restrictions on currency conversion or limitations on sources of supply could materially and adversely affect our Chinese operations, which could result in the partial or total loss of our investment in that country and materially and adversely affect our future operating results.

Our quarterly revenue and operating results fluctuate significantly from period to period, and this may cause volatility in our common stock price.

     Our quarterly revenue and operating results have fluctuated significantly in the past, and we expect them to continue to fluctuate in the future for a variety of reasons which may include:

	•		demand for and market acceptance of our products as a result of the cyclical nature of the semiconductor industry or otherwise, often resulting in reduced sales during industry downturns and increased sales during periods of industry recovery;
	•		changes in the timing and size of orders by our customers;
	•		cancellations and postponements of previously placed orders;
	•		pricing pressure from either our competitors or our customers, resulting in the reduction of our product prices;
	•		disruptions or delays in the manufacturing of our products or in the supply of components or raw materials that are incorporated into or used to manufacture our products, thereby causing us to delay the shipment of products;
	•		decreased margins for several or more quarters following the introduction of new products, especially as we introduce new subsystems;
	•		delays in ramp-up in production, low yields or other problems experienced at our new manufacturing facility in China;
	•		changes in design-to-delivery cycle times;
	•		inability to reduce our costs quickly in step with reductions in our prices or in response to decreased demand for our products;
	•		changes in our mix of products sold;
	•		write-offs of excess or obsolete inventory;

	•		one-time expenses or charges associated with failed acquisition negotiations or completed acquisitions;
	•		announcements by our competitors of new products, services or technological innovations, which may, among other things, render our products less competitive; and
	•		geographic mix of worldwide earnings.

     As a result of the foregoing, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful and that these comparisons may not be an accurate indicator of our future performance. Changes in the timing or terms of a small number of transactions could disproportionately affect our operating results in any particular quarter. Moreover, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors. If this occurs, we would expect to experience an immediate and significant decline in the trading price of our common stock.

Third parties have claimed and may in the future claim we are infringing their intellectual property, which could subject us to litigation or licensing expenses, and we may be prevented from selling our products if any such claims prove successful.

     We have litigated a claim of infringement from Celerity, Inc. in the past, and we may receive notices of other such claims in the future. In addition, we may be unaware of intellectual property rights of others that may be applicable to our products. Any litigation regarding patents or other intellectual property could be costly and time-consuming and divert our management and key personnel from our business operations, any of which could have a material adverse effect on our business and results of operations. The complexity of the technology involved in our products and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement may also require us to enter into costly license agreements. However, we may not be able to obtain licenses on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against the development, manufacture and sale of certain of our products if any such claims prove successful.

We are subject to order and shipment uncertainties and any significant reductions, cancellations or delays in customer orders could cause our revenue to decline and our operating results to suffer.

     Our revenue is difficult to forecast because we generally do not have a material backlog of unfilled orders and because of the short time frame within which we are often required to design, produce and deliver products to our customers. Most of our revenue in any quarter depends on customer orders for our products that we receive and fulfill in the same quarter. We do not have long-term purchase orders or contracts that contain minimum purchase commitments from our customers. Instead, we receive non-binding forecasts of the future volume of orders from our customers. Occasionally, we order and build component inventory in advance of the receipt of actual customer orders. Customers may cancel order forecasts, change production quantities from forecasted volumes or delay production for reasons beyond our control. Furthermore, reductions, cancellations or delays in customer order forecasts occur without penalty to, or compensation from, the customer. Reductions, cancellations or delays in forecasted orders could cause us to hold inventory longer than anticipated, which could reduce our gross profit, restrict our ability to fund our operations and cause us to incur unanticipated reductions or delays in revenue. If we do not obtain orders as we anticipate, we could have excess component inventory for a specific product that we would not be able to sell to another customer, likely resulting in inventory write-offs, which could have a material adverse affect on our business, financial condition and operating results. In addition, because many of our costs are fixed in the short term, we could experience deterioration in our gross profit when our production volumes decline.

The manufacturing of our products is highly complex, and if we are not able to manage our manufacturing and procurement process effectively, our business and operating results will suffer.

     The manufacturing of our products is a highly complex process that involves the integration of multiple components and requires effective management of our supply chain while meeting our customers’ design-to-delivery cycle time requirements. Through the course of the manufacturing process, our customers may modify design and system configurations in response to changes in their own customers’ requirements. In order to rapidly respond to these modifications and deliver our products to our customers in a timely manner, we must effectively manage our manufacturing and procurement process. If we fail to manage this process effectively, we risk losing customers and damaging our reputation. In addition, if we acquire inventory in excess of demand or that does not meet customer specifications, we would incur excess or obsolete inventory charges. These risks are even greater as we expand our business beyond Gas Delivery Systems into new subsystems. As a result, this could limit our growth and have a material adverse effect on our business, financial condition and operating results.

OEMs may not continue to outsource other critical subsystems, which would adversely impact our operating results.

     The success of our business depends on OEMs continuing to outsource the manufacturing of critical subsystems for their semiconductor capital equipment. Most of the largest OEMs have already outsourced production of a significant portion of their critical subsystems. If OEMs do not continue to outsource critical subsystems for their capital equipment, our revenue would be significantly reduced, which would have a material adverse affect on our business, financial condition and operating results. In addition, if we are unable to obtain additional business from OEMs, even if they continue to outsource their production of critical subsystems, our business, financial condition and operating results could be adversely affected.

If our new products are not accepted by OEMs or if we are unable to maintain historical margins on our new products, our operating results would be adversely impacted.

     We design, develop and market critical subsystems to OEMs. Sales of these new products are expected to make up an increasing part of our total revenue. The introduction of new products is inherently risky because it is difficult to foresee the adoption of new standards, to coordinate our technical personnel and strategic relationships and to win acceptance of new products by OEMs. We may not be able to recoup design and development expenditures if our new products are not accepted by OEMs. Newly introduced products typically carry lower gross margins for several or more quarters following their introduction. If any of our new subsystems is not successful in the market, or if we are unable to obtain gross margins on new products that are similar to the gross margins we have historically achieved, our business, operating results and financial condition could be adversely affected.

We may not be able to manage our future growth successfully.

     Our ability to execute our business plan successfully in a rapidly evolving market requires an effective planning and management process. We have increased, and plan to continue to increase, the scope of our operations. Our year-to-date revenues in 2007 increased 35.4% over year-to-date revenues in 2006, and our 2006 revenues increased 128.6% over our 2005 revenues, in significant part due to the acquisition of Sieger. Due to the cyclical nature of the semiconductor industry, however, future growth is difficult to predict. Our expansion efforts could be expensive and may strain our managerial and other resources. To manage future growth effectively, we must maintain and enhance our financial and operating systems and controls and manage expanded operations. Although we occasionally experience reductions in force, over time the number of people we employ has generally grown and we expect this number to continue to grow when our operations expand. The addition and training of new employees may lead to short-term quality control problems and place increased demands on our management and experienced personnel. If we do not manage growth properly, our business, operating results and financial condition could be adversely affected.

Our business is largely dependent on the know-how of our employees, and we generally do not have a protected intellectual property position.

     Our business is largely dependent upon our design, engineering, manufacturing and testing know-how. We rely on a combination of trade secrets and contractual confidentiality provisions and, to a much lesser extent, patents, copyrights and trademarks, to protect our proprietary rights. Accordingly, our intellectual property position is more vulnerable than it would be if it were protected by patents. If we fail to protect our proprietary rights successfully, our competitive position could suffer, which could harm our operating results. We may be required to spend significant resources to monitor and protect our proprietary rights, and, in the event we do not detect infringement of our proprietary rights, we may lose our competitive position in the market if any such infringement occurs. In addition, competitors may design around our technology or develop competing technologies and know-how.

If we do not keep pace with developments in the semiconductor industry and with technological innovation generally, our products may not be competitive.

     Rapid technological innovation in semiconductor manufacturing requires the semiconductor capital equipment industry to anticipate and respond quickly to evolving customer requirements and could render our current product offerings and technology obsolete. Technological innovations are inherently complex. We must devote resources to technology development in order to keep pace with the

rapidly evolving technologies used in semiconductor manufacturing. We believe that our future success will depend upon our ability to design, engineer and manufacture products that meet the changing needs of our customers. This requires that we successfully anticipate and respond to technological changes in design, engineering and manufacturing processes in a cost-effective and timely manner. If we are unable to integrate new technical specifications into competitive product designs, develop the technical capabilities necessary to manufacture new products or make necessary modifications or enhancements to existing products, our business prospects could be harmed.

     The timely development of new or enhanced products is a complex and uncertain process which requires that we:

	•		design innovative and performance-enhancing features that differentiate our products from those of our competitors;
	•		identify emerging technological trends in the semiconductor industry, including new standards for our products;
	•		accurately identify and design new products to meet market needs;
	•		collaborate with OEMs to design and develop products on a timely and cost-effective basis;
	•		ramp-up production of new products, especially new subsystems, in a timely manner and with acceptable yields;
	•		successfully manage development production cycles; and
	•		respond effectively to technological changes or product announcements by others.

The industry in which we participate is highly competitive and rapidly evolving, and if we are unable to compete effectively, our operating results would be harmed.

     Our competitors are primarily companies that design and manufacture critical subsystems for semiconductor capital equipment. Although we have not faced competition in the past from the largest subsystem and component manufacturers in the semiconductor capital equipment industry, these suppliers could compete with us in the future. Increased competition has in the past resulted, and could in the future result, in price reductions, reduced gross margins or loss of market share, any of which would harm our operating results. We are subject to pricing pressure as we attempt to increase market share with our existing customers. Competitors may introduce new products for the markets currently served by our products. These products may have better performance, lower prices and achieve broader market acceptance than our products. Further, OEMs typically own the design rights to their products and may provide these designs to other subsystem manufacturers. If our competitors obtain proprietary rights to these designs such that we are unable to obtain the designs necessary to manufacture products for our OEM customers, our business, financial condition and operating results could be adversely affected.

     Our competitors may have greater financial, technical, manufacturing and marketing resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the development, promotion, sale and support of their products, and reduce prices to increase market share. Moreover, there may be merger and acquisition activity among our competitors and potential competitors that may provide our competitors and potential competitors an advantage over us by enabling them to expand their product offerings and service capabilities to meet a broader range of customer needs. Further, if one of our customers develops or acquires the internal capability to develop and produce critical subsystems that we produce, the loss of that customer could have a material adverse effect on our business, financial condition and operating results. The introduction of new technologies and new market entrants may also increase competitive pressures.

We must achieve design wins to retain our existing customers and to obtain new customers.

     New semiconductor capital equipment typically has a lifespan of several years, and OEMs frequently specify which systems, subsystems, components and instruments are to be used in their equipment. Once a specific system, subsystem, component or instrument is incorporated into a piece of semiconductor capital equipment, it will likely continue to be incorporated into that piece of equipment for at least several months before the OEM switches to the product of another supplier. Accordingly, it is important that our products are designed into the new semiconductor capital equipment of OEMs, which we refer to as a design win, in order to retain our competitive position with existing customers and to obtain new customers.

     We incur technology development and sales expenses with no assurance that our products will ultimately be designed into an OEM’s semiconductor capital equipment. Further, developing new customer relationships, as well as increasing our market share at existing customers, requires a substantial investment of our sales, engineering and management resources without any assurance from prospective customers that they will place significant orders. We believe that OEMs often select their suppliers and place orders based on long-term relationships. Accordingly, we may have difficulty achieving design wins from OEMs that are not currently our customers. Our operating results and potential growth could be adversely affected if we fail to achieve design wins with leading OEMs.

We may not be able to respond quickly enough to increases in demand for our products.

     Demand shifts in the semiconductor industry are rapid and difficult to predict, and we may not be able to respond quickly enough to an increase in demand. Our ability to increase sales of our products depends, in part, upon our ability to:

	•		mobilize our supply chain in order to maintain component and raw material supply;
	•		optimize the use of our design, engineering and manufacturing capacity in a timely manner;
	•		deliver our products to our customers in a timely fashion;
	•		expand, if necessary, our manufacturing capacity; and
	•		maintain our product quality as we increase production.

     If we are unable to respond to rapid increases in demand for our products on a timely basis or to manage any corresponding expansion of our manufacturing capacity effectively, our customers could increase their purchases from our competitors, which would adversely affect our business.

Our dependence on our suppliers may prevent us from delivering an acceptable product on a timely basis.

     We rely on both single-source and sole-source suppliers some of whom are relatively small, for many of the components we use in our products. In addition, our customers often specify components of particular suppliers that we must incorporate into our products. Our suppliers are under no obligation to provide us with components. As a result, the loss of or failure to perform by any of these providers could adversely affect our business and operating results. In addition, the manufacturing of certain components and subsystems is an extremely complex process. Therefore, if a supplier were unable to provide the volume of components we require on a timely basis and at acceptable prices, we would have to identify and qualify replacements from alternative sources of supply. The process of qualifying new suppliers for these complex components is lengthy and could delay our production, which would adversely affect our business, operating results and financial condition. We may also experience difficulty in obtaining sufficient supplies of components and raw materials in times of significant growth in our business. For example, we have in the past experienced shortages in supplies of various components, such as mass flow controllers, valves and regulators, and certain prefabricated parts, such as sheet metal enclosures, used in the manufacture of our products. In addition, one of our competitors manufactures mass flow controllers that may be specified by one or more of our customers. If we are unable to obtain these particular mass flow controllers from our competitor or convince a customer to select alternative mass flow controllers, we may be unable to meet that customer’s requirements, which could result in a loss of market share.

Defects in our products could damage our reputation, decrease market acceptance of our products, cause the unintended release of hazardous materials and result in potentially costly litigation.

     A number of factors, including design flaws, material and component failures, contamination in the manufacturing environment, impurities in the materials used and unknown sensitivities to process conditions, such as temperature and humidity, as well as equipment failures, may cause our products to contain undetected errors or defects. Problems with our products may:

•

cause delays in product introductions and shipments;

	•		result in increased costs and diversion of development resources;
	•		cause us to incur increased charges due to unusable inventory;
	•		require design modifications;
	•		decrease market acceptance of, or customer satisfaction with, our products, which could result in decreased sales and product returns; or
	•		result in lower yields for semiconductor manufacturers.

     If any of our products contain defects or have reliability, quality or compatibility problems, our reputation might be damaged and customers might be reluctant to buy our products. We may also face a higher rate of product defects as we increase our production levels. Product defects could result in the loss of existing customers, or impair our ability to attract new customers. In addition, we may not find defects or failures in our products until after they are installed in a semiconductor manufacturer’s fabrication facility. We may have to invest significant capital and other resources to correct these problems. Our current or potential customers also might seek to recover from us any losses resulting from defects or failures in our products. Hazardous materials flow through and are controlled by our products and an unintended release of these materials could result in serious injury or death. Liability claims could require us to spend significant time and money in litigation or pay significant damages.

The technology labor market is very competitive, and our business will suffer if we are unable to hire and retain key personnel.

     Our future success depends in part on the continued service of our key executive officers, as well as our research, engineering, sales, manufacturing and administrative personnel, most of whom are not subject to employment or non-competition agreements. In addition, competition for qualified personnel in the technology industry is intense, and we operate in geographic locations in which labor markets are particularly competitive. Our business is particularly dependent on expertise which only a very limited number of engineers possess. The loss of any of our key employees and officers, including our Chief Executive Officer, Vice President of Engineering, Vice President of Sales and Vice President of Technology, or the failure to attract and retain new qualified employees, would adversely affect our business, operating results and financial condition.

We may not be able to fund our future capital requirements from our operations, and financing from other sources may not be available on favorable terms or at all.

We have made capital expenditures of $4.4 million in 2007 to date, of which $2.2 million related to the implementation of our new ERP system, and $1.6 million related to the development of our manufacturing facilities in China. This compares to capital expenditures of $4.0 million in 2006, most of which was for facility cleanroom expansion and improvement and the implementation of our new ERP system. We have recently leased a second manufacturing facility in Shanghai, China in close proximity to our existing facility for which we have invested $1.1 million to date, and we have leased a new manufacturing facility in California. We expect to invest $6.6 million in these facilities over the next four years. The amount of our future capital requirements will depend on many factors, including:

	•		the cost required to ensure access to adequate manufacturing capacity;
	•		the timing and extent of spending to support product development efforts;
	•		the timing of introductions of new products and enhancements to existing products;
	•		changing manufacturing capabilities to meet new customer requirements; and
	•		market acceptance of our products.

     Although we currently have a credit facility, we may need to raise additional funds through public or private equity or debt financing if our current cash and cash flow from operations are insufficient to fund our future activities. Our loan agreement with our credit facility terminates on June 29, 2009 and we may not be able renew it on favorable terms. Future equity financings could be dilutive to holders of

our common stock, and debt financings could involve covenants that restrict our business operations. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated requirements, any of which could adversely affect our business, operating results and financial condition.

Fluctuations in currency exchange rates may adversely affect our financial condition and results of operations.

     Our international sales are denominated primarily, though not entirely, in U.S. dollars. Many of the costs and expenses associated with our Shanghai subsidiary are paid in Chinese Renminbi, and we expect our exposure to Chinese Renminbi to increase as we ramp up production in that facility. In addition, purchases of some of our components are denominated in Japanese Yen. Changes in exchange rates among other currencies in which our revenue or costs are denominated and the U.S. dollar may affect our revenue, cost of sales and operating margins. While fluctuations in the value of our revenue, cost of sales and operating margins as measured in U.S. dollars have not materially affected our results of operations historically, we do not currently hedge our exchange exposure, and exchange rate fluctuations could have an adverse effect on our financial condition and results of operations in the future.

If environmental contamination were to occur in one of our manufacturing facilities, we could be subject to substantial liabilities.

     We use substances regulated under various foreign, domestic, federal, state and local environmental laws in our manufacturing facilities. Our failure or inability to comply with existing or future environmental laws could result in significant remediation liabilities, the imposition of fines or the suspension or termination of the production of our products. In addition, we may not be aware of all environmental laws or regulations that could subject us to liability.

We might experience business disruptions and unanticipated expenses associated with the relocation of our headquarters to a new facility.

     The current lease for our headquarters and manufacturing facility in Menlo Park expires on December 31, 2007. We have entered into a new lease in Hayward, California, to consolidate the Menlo Park operations and certain South San Francisco manufacturing operations and we plan to move into the new facility in the second quarter of 2008. After December 31, 2007, we will lease our current facility in Menlo Park on a month-to-month basis as needed until we have moved into our new facility. We will incur moving expenses and could experience disruptions in our operations relating to the move, either of which could be material. We may not have anticipated all the logistical impediments and obstacles and may incur unanticipated expenses relating to the move, which could adversely affect our financial condition and results of operation.

If our facilities were to experience catastrophic loss due to natural disasters, our operations would be seriously harmed.

     Our facilities could be subject to a catastrophic loss caused by natural disasters, including fires and earthquakes. We have facilities in areas with above average seismic activity, such as our manufacturing facility in South San Francisco, California and our manufacturing and headquarters facilities in Menlo Park, California. If any of our facilities were to experience a catastrophic loss, it could disrupt our operations, delay production and shipments, reduce revenue and result in large expenses to repair or replace the facility. In addition, we have in the past experienced, and may in the future experience, extended power outages at our South San Francisco and Menlo Park, California facilities. We do not carry insurance policies that cover potential losses caused by earthquakes or other natural disasters or power loss.

We must maintain effective controls, and our auditors will report on them.

     The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. As a result, our management’s attention might be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and operating results. Any failure by us to maintain adequate controls or to adequately implement new controls could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could adversely affect the trading price of our common stock. In addition, we might need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge, and we might not be able to do so in a timely fashion.

The market for our stock is subject to significant fluctuation.

     The size of our public market capitalization is relatively small, and the volume of our shares that are traded is low. The market price of our common stock could be subject to significant fluctuations. Among the factors that could affect our stock price are:

	•		quarterly variations in our operating results;
	•		our ability to successfully introduce new products and manage new product transitions;
	•		changes in revenue or earnings estimates or publication of research reports by analysts;
	•		speculation in the press or investment community;
	•		strategic actions by us or our competitors, such as acquisitions or restructurings;
	•		announcements relating to any of our key customers, significant suppliers or the semiconductor manufacturing and capital equipment industry generally;
	•		general market conditions;
	•		the effects of war and terrorist attacks; and
	•		domestic and international economic factors unrelated to our performance.

     The stock markets in general, and the markets for technology stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

Provisions of our charter documents could discourage potential acquisition proposals and could delay, deter or prevent a change in control.

     The provisions of our amended and restated certificate of incorporation and bylaws could deter, delay or prevent a third party from acquiring us, even if doing so would benefit our stockholders. These provisions include:

	•		a requirement that special meetings of stockholders may be called only by our board of directors, the chairman of our board of directors, our president or our secretary;
	•		advance notice requirements for stockholder proposals and director nominations; and
	•		the authority of our board of directors to issue, without stockholder approval, preferred stock with such terms as our Board of Directors may determine.

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

     None.

ITEM 3. Defaults Upon Senior Securities

     None.

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

     None.

ITEM 5. Other Information

     None.

ITEM 6. Exhibits

(a) Exhibits

     The following exhibits are filed with this current Report on Form 10-Q for the quarter ended September 28, 2007:

Exhibit
Number		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.
32.1		Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		ULTRA CLEAN HOLDINGS, INC. (Registrant)
Date: November 7, 2007
		By: Name:		/s/ Clarence L. Granger   Clarence L. Granger
		Title:		Chairman and Chief Executive Officer
				(Principal Executive Officer)
Date: November 7, 2007
		By: Name:		/s/ Jack Sexton   Jack Sexton
		Title:		Chief Financial Officer
				(Principal Financial Officer)

Exhibit Index

Exhibit
Number		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.
32.1		Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.