================================================================================

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

                                   ----------

                                    FORM 10-Q

                                   ----------

(Mark One)

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

      For the quarterly period ended September 26, 2004

      OR

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

      For the transition period from ________________ to ________________

                        Commission file number: 000-24838

                                   ----------

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

                Delaware                                    77-0208119
      (State or other jurisdiction                       (I.R.S. Employer
   of incorporation or organization)                  Identification Number)

                47131 Bayside Parkway, Fremont, California 94538
              (Address of principal executive offices) (Zip Code)

                                 (510) 657-5900
              (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 |X| No [ ]

      Indicate by check mark whether the registrant is an accelerated  filer (as
defined in Rule 12b-2 of the Act).

Yes |X| No [ ]

      Number of shares of common  stock  outstanding  as of  November  1,  2004:
51,435,339.

================================================================================


<PAGE>

                   MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES

                                   ----------

                               TABLE OF CONTENTS

                                                                           Page
                                                                           ----
                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited):

         Condensed Consolidated Balance Sheets --
           at September 26, 2004 and December 31, 2003..................      3

         Condensed Consolidated Statements of Operations -- for
           the Three and Nine Months Ended September 26, 2004
           and September 28, 2003.......................................      4

         Condensed Consolidated Statements of Cash Flows -- for
           the Nine Months Ended September 26, 2004 and
           September 28, 2003...........................................      5

         Notes to Condensed Consolidated Financial Statements...........      6

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations..........................     19

Item 3.  Quantitative and Qualitative Disclosures
           About Market Risk............................................     36

Item 4.  Controls and Procedures........................................     37

                           PART II. OTHER INFORMATION

Item 1.   Legal Proceedings.............................................     39

Item 6.   Exhibits......................................................     39

Signatures..............................................................     40


                                       2
<PAGE>

                        PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                 September 26,          December 31,
                                                                                                     2004                   2003
                                                                                                 -------------         ------------
                                     ASSETS

<S>                                                                                                <C>                    <C>
Current assets:
      Cash and cash equivalents ......................................................             $  80,489              $  77,115
      Restricted cash ................................................................                   510                    509
      Accounts receivable, net .......................................................                62,676                 34,260
      Advance billings ...............................................................                14,293                 20,684
      Inventories ....................................................................                51,688                 27,430
      Inventories - delivered systems ................................................                 4,966                  6,549
      Prepaid expenses and other assets ..............................................                15,480                 12,995
                                                                                                   ---------              ---------
        Total current assets .........................................................               230,102                179,542

Property and equipment, net ..........................................................                23,323                 16,211
Goodwill .............................................................................                 8,239                  8,239
Intangibles ..........................................................................                 1,641                  2,626
Other non-current assets .............................................................                 1,142                    769
                                                                                                   ---------              ---------
        Total assets .................................................................             $ 264,447              $ 207,387
                                                                                                   =========              =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Accounts payable ...............................................................             $  24,395              $  21,340
      Accrued liabilities ............................................................                55,507                 62,608
      Deferred revenue ...............................................................                32,132                 38,680
                                                                                                   ---------              ---------
        Total current liabilities ....................................................               112,034                122,628
                                                                                                   ---------              ---------
Long-term liabilities:
      Deferred income taxes ..........................................................                   623                  1,055
                                                                                                   ---------              ---------
        Total long-term liabilities ..................................................                   623                  1,055
                                                                                                   ---------              ---------
        Total liabilities ............................................................               112,657                123,683
                                                                                                   ---------              ---------
Commitments and contingencies (Note 14)

Stockholders' equity:
      Common stock ...................................................................                    50                     45
      Additional paid-in capital .....................................................               593,584                546,099
      Accumulated other comprehensive income .........................................                 9,192                  9,468
      Treasury stock .................................................................                (2,987)                (2,987)
      Accumulated deficit ............................................................              (448,049)              (468,921)
                                                                                                   ---------              ---------
        Total stockholders' equity ...................................................               151,790                 83,704
                                                                                                   ---------              ---------
        Total liabilities and stockholders' equity ...................................             $ 264,447              $ 207,387
                                                                                                   =========              =========
</TABLE>


           See accompanying notes to condensed consolidated financial
                            statements (unaudited).


                                       3
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                          Three Months Ended                 Nine Months Ended
                                                                    ------------------------------    ------------------------------
                                                                    September 26,    September 28,    September 26,    September 28,
                                                                        2004            2003              2004             2003
                                                                     ---------        ---------        ---------        ---------
<S>                                                                  <C>              <C>              <C>              <C>
Net sales ......................................................     $  68,038        $  32,633        $ 181,314        $ 130,926
Cost of sales ..................................................        37,247           19,886          102,112           87,495
                                                                     ---------        ---------        ---------        ---------
      Gross profit .............................................        30,791           12,747           79,202           43,431
                                                                     ---------        ---------        ---------        ---------
Operating expenses:
      Research, development and engineering ....................         5,616            4,483           15,970           18,716
      Selling, general and administrative ......................        14,956           12,638           41,299           42,309
      Amortization of intangibles ..............................           328              328              985            1,823
      Restructuring and other charges ..........................            --              489               --              489
                                                                     ---------        ---------        ---------        ---------
        Total operating expenses ...............................        20,900           17,938           58,254           63,337
                                                                     ---------        ---------        ---------        ---------

Income (loss) from operations ..................................         9,891           (5,191)          20,948          (19,906)
Loss on disposition of Wet Business ............................            --               --               --          (10,257)
Interest and other income:
      Interest income ..........................................           365              307              889              931
      Interest expense .........................................           (22)              --              (57)            (107)
      Other income (expense), net ..............................           (36)             960             (600)              41
                                                                     ---------        ---------        ---------        ---------
        Interest and other income, net .........................           307            1,267              232              865
                                                                     ---------        ---------        ---------        ---------
Income (loss) before provision for (benefit from)
      income taxes .............................................        10,198           (3,924)          21,180          (29,298)
Provision for (benefit from) income taxes ......................             1              (21)             308              142
                                                                     ---------        ---------        ---------        ---------
Net income (loss) ..............................................     $  10,197        $  (3,903)       $  20,872        $ (29,440)
                                                                     =========        =========        =========        =========
Net income (loss) per share:
      Basic ....................................................     $    0.20        $   (0.09)       $    0.43        $   (0.66)
                                                                     =========        =========        =========        =========
      Diluted ..................................................     $    0.20        $   (0.09)       $    0.41        $   (0.66)
                                                                     =========        =========        =========        =========

Shares used in computing net income (loss) per share:
      Basic ....................................................        49,922           44,975           49,085           44,911
                                                                     =========        =========        =========        =========
      Diluted ..................................................        51,051           44,975           50,588           44,911
                                                                     =========        =========        =========        =========
</TABLE>


           See accompanying notes to condensed consolidated financial
                            statements (unaudited).


                                       4
<PAGE>


                   MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                              Nine Months Ended
                                                                                                        ----------------------------
                                                                                                        September 26,  September 28,
                                                                                                             2004            2003
                                                                                                        -------------  -------------
<S>                                                                                                        <C>             <C>
Cash flows from operating activities:
      Net income (loss) ............................................................................       $ 20,872        $(29,440)
      Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
        activities:
        Depreciation ...............................................................................          3,877           4,820
        Deferred taxes .............................................................................           (403)            477
        Provision for excess and obsolete inventories ..............................................            348              --
        Amortization of intangibles ................................................................            985           1,823
        Restructuring and other charges ............................................................             --             489
        Loss on disposal of Wet Business ...........................................................             --          10,257
        Loss on disposal of property and equipment .................................................            136           1,206
        Changes in assets and liabilities, net of effect of disposition of the Wet
             Business:
             Accounts receivable, net ..............................................................        (28,495)         15,396
             Advance billings ......................................................................          6,315           8,281
             Inventories ...........................................................................        (24,662)          7,421
             Inventories, delivered systems ........................................................          1,563          14,473
             Prepaid expenses and other current assets .............................................         (2,610)         (1,501)
             Other assets ..........................................................................           (512)          1,108
             Accounts payable ......................................................................          3,087          (6,044)
             Accrued liabilities ...................................................................         (7,050)         (6,020)
             Deferred revenue ......................................................................         (6,473)        (32,076)
                                                                                                           --------        --------
                 Net cash used in operating activities .............................................        (33,022)         (9,330)
                                                                                                           --------        --------
Cash flows from investing activities:
      Proceeds from the disposition of Wet Business ................................................             --           2,000
      Purchases of property and equipment ..........................................................        (10,923)         (3,880)
                                                                                                           --------        --------
                 Net cash used in investing activities .............................................        (10,923)         (1,880)
                                                                                                           --------        --------
Cash flows from financing activities:
      Restricted cash ..............................................................................             --             597
      Payments on line of credit and long-term debt ................................................             --            (335)
      Borrowings against line of credit ............................................................             --           1,397
      Proceeds from issuance of common stock, net of costs .........................................         46,370              91
      Proceeds from issuance of common stock under stock plans .....................................          1,119             305
                                                                                                           --------        --------
                 Net cash provided by financing activities .........................................         47,489           2,055
                                                                                                           --------        --------
Effect of exchange rate changes on cash and cash equivalents .......................................           (170)          4,272
                                                                                                           --------        --------
Net increase (decrease) in cash and cash equivalents ...............................................          3,374          (4,883)
Cash and cash equivalents, beginning of period .....................................................         77,115          87,879
                                                                                                           --------        --------
Cash and cash equivalents, end of period ...........................................................       $ 80,489        $ 82,996
                                                                                                           ========        ========
</TABLE>

           See accompanying notes to condensed consolidated financial
                            statements (unaudited).


                                       5
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 26, 2004
                                   (unaudited)

Note 1 -- Basis of Presentation

      Overview

      The  accompanying  interim  unaudited  condensed   consolidated  financial
statements  as of September 26, 2004 and December 31, 2003 and for the three and
nine months ended  September  26, 2004 and September 28, 2003 have been prepared
by Mattson Technology, Inc. and its subsidiaries (the "Company" or "Mattson") in
accordance with generally accepted accounting principles in the United States of
America ("United States" or "U.S.") for interim  financial  information and with
the  instructions  to Form 10-Q and  Regulation  S-X.  Accordingly,  they do not
include all of the  information  and  footnotes  required by generally  accepted
accounting  principles  for  complete  financial  statements.  In the opinion of
management,   all  adjustments  (consisting  of  normal  recurring  adjustments)
considered   necessary  for  a  fair  presentation   have  been  included.   All
intercompany  accounts and transactions  have been eliminated in  consolidation.
The  condensed  consolidated  balance  sheet as of  December  31,  2003 has been
derived  from the audited  financial  statements  as of that date,  but does not
include all disclosures  required by generally accepted  accounting  principles.
The  accompanying  financial  statements  should be read in conjunction with the
audited  financial  statements  included in the Company's  Annual Report on Form
10-K for the year ended December 31, 2003.

      The  preparation  of financial  statements in conformity  with  accounting
principles  generally accepted in the United States requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting periods.  Estimates are used for, but
are not limited to, the  accounting  for the  allowance  for doubtful  accounts,
inventory  reserves,  depreciation  and amortization  periods,  asset impairment
analyses, sales returns,  accrued liabilities,  warranty costs and income taxes.
Actual results could differ from these estimates.

      The results of  operations  for the three and nine months ended  September
26, 2004 are not  necessarily  indicative  of results  that may be expected  for
future quarters or for the entire year ending December 31, 2004.

      Restricted Cash

      Restricted cash represents cash that has been set aside in accordance with
an agreement with the Company's commercial bank that is responsible for issuance
of travel and corporate credit cards. As of September 26, 2004,  restricted cash
of  approximately   $0.5  million  was  maintained  with  the  commercial  bank.
Restricted  cash is classified in current  assets on the condensed  consolidated
balance sheet.

      Recent Accounting Pronouncements

      The Financial Accounting Standards Board ("FASB") issued an exposure draft
entitled  Share-Based  Payment, an Amendment of FASB Statements Nos. 123 and 95.
This exposure draft would require  stock-based  compensation  to employees to be
recognized as a cost in the financial  statements  and require that such cost be
measured according to the fair value of the stock  compensation.  In the absence
of an observable market price for the stock awards,  the fair value of the stock
rights or stock options would be based upon a valuation  methodology  that takes
into consideration various factors, including the exercise price of the right or
option,  the expected term of the option,  the current  price of the  underlying
shares,  the expected  volatility of the  underlying  share price,  the expected
dividends on the underlying shares and the risk-free interest rate. The proposed
requirements  in the exposure draft would be effective for the first fiscal year
beginning after June 15, 2005. The FASB has announced that it intends to issue a
final Statement in late 2004. The Company continues to monitor communications on
this subject from the FASB in order to determine the impact on its  consolidated
financial statements.

      Stock-Based Compensation

      The Company accounts for its stock-based employee compensation plans under
the  recognition  and  measurement  principles  of Accounting  Principles  Board
("APB") Opinion No. 25,  "Accounting for Stock Issued to Employees," and related
Interpretations.  No stock-based employee  compensation cost is reflected in net
income  (loss),  as all options  granted to  employees  under those plans had an
exercise price equal to the market value of the  underlying  common stock on the
date of grant. In December 2002, FASB issued  Statement of Financial  Accounting


                                       6
<PAGE>


                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

Standards ("SFAS") No. 148, "Accounting for Stock-Based  Compensation Transition
and Disclosure" ("SFAS No. 148"). The statement amends SFAS No. 123, "Accounting
For Stock-Based  Compensation," to provide alternative methods of transition for
a voluntary  change to the fair value based method of accounting for stock-based
employee compensation. The Company adopted the disclosure provisions of SFAS No.
148 on January 1, 2003.

      The  following  table  sets  forth the  effect on net  income  (loss)  and
earnings (loss) per share if the Company had applied the fair value  recognition
provisions of SFAS No. 123 to stock-based  employee  compensation (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                         Three Months Ended                 Nine Months Ended
                                                                  ------------------------------    -------------------------------
                                                                  September 26,    September 28,    September 26,     September 28,
                                                                        2004            2003            2004               2003
                                                                  -------------    -------------    -------------     -------------
<S>                                                                <C>               <C>              <C>               <C>
Net income (loss):
    As reported .............................................      $   10,197        $   (3,903)      $   20,872        $  (29,440)
    Add: Total stock-based employee compensation
    expense included in net income (loss) ...................              --                --               --                --
    Deduct: total stock-based employee
    compensation expense determined under fair
    value based method for all awards .......................          (1,852)             (685)          (5,331)           (1,843)
                                                                   ----------        ----------       ----------        ----------
    As adjusted .............................................      $    8,345        $   (4,588)      $   15,541        $  (31,283)
                                                                   ==========        ==========       ==========        ==========
Net income (loss) per share - Basic:
    As reported .............................................      $     0.20        $    (0.09)      $     0.43        $    (0.66)
                                                                   ==========        ==========       ==========        ==========
    As adjusted .............................................      $     0.17        $    (0.10)      $     0.32        $    (0.70)
                                                                   ==========        ==========       ==========        ==========
Net income (loss) per share -- Diluted:
    As reported .............................................      $     0.20        $    (0.09)      $     0.41        $    (0.66)
                                                                   ==========        ==========       ==========        ==========
    As adjusted .............................................      $     0.16        $    (0.10)      $     0.31        $    (0.70)
                                                                   ==========        ==========       ==========        ==========
</TABLE>


Note 2 -- Balance Sheet Detail (in thousands):

<TABLE>
<CAPTION>
                                                                                               September 26,          December 31,
                                                                                                    2004                  2003
                                                                                               -------------          ------------
<S>                                                                                                <C>                   <C>
Inventories:
      Purchased parts and raw materials ........................................                   $32,349               $18,884
      Work-in-process ..........................................................                    14,001                 5,444
      Finished goods ...........................................................                     5,338                 3,102
                                                                                                   -------               -------
                                                                                                   $51,688               $27,430
                                                                                                   =======               =======
Accrued liabilities:
      Warranty .................................................................                   $16,157               $16,508
      Accrued compensation and benefits ........................................                     9,309                 6,596
      Income taxes .............................................................                     6,900                 6,992
      Other ....................................................................                    23,141                32,512
                                                                                                   -------               -------
                                                                                                   $55,507               $62,608
                                                                                                   =======               =======
</TABLE>

Note 3 -- Disposition of Wet Business

      On March 17, 2003,  the Company sold the portion of its business  that was
engaged  in  developing,  manufacturing,  selling,  and  servicing  wet  surface
preparation  products for the cleaning and preparation of  semiconductor  wafers
(the "Wet Business") to SCP Global  Technologies,  Inc. ("SCP"). The Company had
originally  acquired the Wet Business on January 1, 2001,  as part of its merger
with the STEAG  Semiconductor  Division of STEAG Electronic Systems AG ("STEAG")
and CFM Technologies,  Inc. ("CFM").  As part of this


                                       7
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

disposition,  SCP acquired certain  subsidiaries and assets, and assumed certain
contracts relating to the Wet Business, including the operating assets, customer
contracts and inventory of CFM, all outstanding stock of Mattson  Technology IP,
Inc.  ("Mattson IP"), a subsidiary that owns various patents relating to the Wet
Business,  and all equity  ownership  interest in Mattson Wet  Products  GmbH, a
subsidiary  in  Germany  that  owned  the   Company's   principal  Wet  Business
operations.  The Company  retained  rights to all the cash from the Wet Business
entities,  and the Company  retained all rights to payments under the settlement
and license  agreements with Dainippon Screen  Manufacturing  Co., Ltd. ("DNS").
SCP acquired the rights to any damages under pending patent litigation  relating
to patents owned by Mattson IP. SCP assumed  responsibility  for the operations,
sales,  marketing and technical  support  services for the Company's  former wet
product lines worldwide.

      The initial  purchase  price paid to the Company by SCP to acquire the Wet
Business  was $2 million in cash.  That  initial  purchase  price was subject to
adjustment  based on a number of criteria,  including the net working capital of
the Wet Business at closing, to be determined  post-closing based on a pro forma
closing date balance sheet,  and an earn-out,  up to an aggregate  maximum of $5
million,  payable to the Company based upon sales by SCP of certain  products to
identified  customers  through  December  31,  2004.  There has been no earn-out
received to date through the period ended September 26, 2004.

      Under the terms of the disposition, the Company remained responsible after
the closing for negotiating  with the workers' council and funding a significant
reduction in force for the Wet Business operations in Germany; agreed to provide
transitional support of information services,  spare parts logistics and certain
other functions in support of the Wet Business for an extended  period;  assumed
certain real  property  leases  relating to  transferred  facilities in Germany,
subject to a sublease to SCP;  agreed to reimburse  specified  legal fees to the
extent  incurred  by SCP in pursuit of existing  Wet  Business  litigation;  and
remained  responsible for resolving or funding  resolution of specified customer
responsibilities.  The  Company  received  the  right to earn out  payments,  as
described above, and retained the right to payments under the DNS settlement. As
a result of the significant  continuing involvement by the Company subsequent to
the  disposition,  the  transaction  was  accounted  for as a sale of assets and
liabilities.

      On December 5, 2003,  the Company  signed a Second  Amendment to Stock and
Asset Purchase Agreement for Wet Products Division (the "Second Amendment") with
SCP. Under the terms of the Second  Amendment,  the Company paid $4.4 million to
SCP in satisfaction of all further  liabilities  relating to (i) working capital
adjustments, (ii) pension obligations, (iii) reductions in force in Germany (iv)
reimbursement of legal fees, and (v) reimbursement of amounts necessary to cover
specified customer responsibilities.

      In the first quarter of 2003, the Company recorded a $10.3 million loss on
the disposition of the Wet Business, as detailed below (in thousands):

Contractual purchase price payment from SCP ................        $  2,000
Net book value of assets sold,
  including goodwill and intangibles .......................         (80,824)
Net book value of liabilities assumed by SCP,
  including deferred revenues ..............................          76,117
Other ......................................................          (7,550)(1)
                                                                    --------
     Loss on disposition of the Wet Business ...............        $(10,257)
                                                                    ========

----------
(1)   Included in the Other category were  cumulative  translation  adjustments,
      estimated future costs associated with reduction in force, working capital
      adjustment,  indemnification  for future legal fees,  investment  banker's
      fees,  and  legal,   accounting  and  other   professional  fees  directly
      associated with the disposition of the Wet Business.

      During the first  quarter of 2003, as part of the loss on  disposition  of
the Wet Business,  the Company recorded accruals of approximately  $11.9 million
to cover the future  obligations  relating to this transaction.  The Company has
not recorded any additional accruals relating to the transaction.

      During 2003,  the Company paid $11.5  million  relating to  reductions  in
force,  working capital  adjustment,  investment  banker's fees, legal fees, and
accounting  and other  professional  fees which were  charged  against  accruals


                                       8
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

established  at the closing of the sale.  With the  effectiveness  of the Second
Amendment  on December 5, 2003,  the  Company has no further  obligation  to SCP
relating to the sale of the Wet Business.

      The  Company's  Wet  Business  represented  a  significant  portion of the
Company's net sales and costs in 2001,  2002 and the first quarter of 2003. As a
result,  the divestiture of the Wet Business  affects the  comparability  of the
Company's Consolidated  Statements of Operations and Balance Sheet for the first
nine  months of 2004 to its  reported  results  from those  prior  periods.  For
periods prior to the  divestiture  of the Wet Business,  the Company's net sales
were  comprised  primarily  of sales of Wet  Business  products,  sales of rapid
thermal processing  ("RTP") products and strip products,  and royalties received
from DNS. Following the divestiture of the Wet Business, the Company's net sales
are  comprised  primarily  of sales of RTP and  strip  products,  and  royalties
received  from DNS. In the fourth  quarter of 2003,  $1.3 million of revenue was
recognized  that related to a deferred Wet system that  remained the property of
the Company after the divestiture.

Note 4 -- Goodwill and Intangible Assets

      The  following  table   summarizes  the  components  of  goodwill,   other
intangible asset and related accumulated amortization balances (in thousands):

<TABLE>
<CAPTION>
                                                                 September 26, 2004                     December 31, 2003
                                                        ---------------------------------      -----------------------------------
                                                         Gross                      Net         Gross                         Net
                                                        Carrying   Accumulated    Carrying     Carrying    Accumulated     Carrying
                                                         Amount   Amortization     Amount       Amount     Amortization     Amount
                                                         ------   ------------     ------       ------     ------------     ------
<S>                                                     <C>          <C>           <C>          <C>          <C>           <C>
Goodwill ...........................................    $ 8,239      $    --       $ 8,239      $ 8,239      $    --       $ 8,239
Developed technology ...............................      6,565       (4,924)        1,641        6,565       (3,939)        2,626
                                                        -------      -------       -------      -------      -------       -------
Total goodwill and intangible assets ...............    $14,804      $(4,924)      $ 9,880      $14,804      $(3,939)      $10,865
                                                        =======      =======       =======      =======      =======       =======
</TABLE>

      Amortization  expense  related to  intangible  assets  was as follows  (in
thousands):

<TABLE>
<CAPTION>
                                                            Three Months Ended             Nine Months Ended
                                                       -----------------------------   ----------------------------
                                                       September 26,   September 28,   September 26,  September 28,
                                                            2004           2003            2004            2003
                                                       -------------   -------------   -------------  -------------
<S>                                                        <C>            <C>            <C>            <C>
 Developed technology amortization.................        $    328       $    328       $    985       $  1,823
                                                           --------       --------       --------       --------
      Total amortization...........................        $    328            328       $    985       $  1,823
                                                           ========       ========       ========       ========
</TABLE>

      In accordance with SFAS No. 142,  "Goodwill and Other Intangible  Assets,"
the Company performed an annual goodwill impairment test as of December 31, 2003
and determined that goodwill was not impaired. The Company evaluates goodwill at
least on an annual  basis and  whenever  events  and  changes  in  circumstances
suggest  that the  carrying  amount may not be  recoverable  from its  estimated
future cash flow. No assurances can be given that future evaluations of goodwill
will not result in charges as a result of future impairment.

      An  intangible  asset for  workforce  was  reclassified  to goodwill  upon
adoption  of SFAS No.  141,  "Business  Combinations,"  on January 1, 2002.  The
Company  continues  to  amortize   developed   technology   intangible   assets.
Amortization  expense for developed  technology and other intangible  assets was
$0.3 million and $0.3 million for the three months ended  September 26, 2004 and
September 28, 2003, respectively.  Amortization expense for developed technology
and other  intangible  assets was $1.0  million  and $1.8  million  for the nine
months  ended  September  26, 2004 and  September  28, 2003,  respectively.  The
amortization  expense is estimated to be $1.3 million for each of years 2004 and
2005. In the first quarter of 2003,  goodwill and intangible  assets relating to
developed   technology   were  reduced  by  $4.4  million  and  $10.5   million,
respectively, in connection with the Wet Business divestiture.


                                       9
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

Note 5 -- Net Income (Loss) Per Share

      Earnings  per  share is  calculated  in  accordance  with  SFAS  No.  128,
"Earnings  Per Share."  SFAS No. 128  requires  dual  presentation  of basic and
diluted net income (loss) per share on the face of the income  statement.  Basic
earnings per share ("EPS") is computed by dividing  income  (loss)  available to
common  stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS gives effect to all dilutive potential common shares
outstanding  during the period.  For purposes of computing  diluted earnings per
share,  weighted  average common share  equivalents do not include stock options
with an exercise  price that exceeded the average  market price of the Company's
common stock for the period. All amounts in the following table are in thousands
except per share data:

<TABLE>
<CAPTION>
                                                                            Three Months Ended              Nine Months Ended
                                                                       ----------------------------    ----------------------------
                                                                       September 26,  September 28,    September 26,  September 28,
                                                                           2004           2003             2004           2003
                                                                       -------------  -------------    -------------  -------------
<S>                                                                       <C>            <C>             <C>            <C>
Net income (loss) ....................................................    $ 10,197       $ (3,903)       $ 20,872       $(29,440)
                                                                          ========       ========        ========       ========
Basic income (loss) per share:
      Income (loss) available to common stockholders .................    $ 10,197       $ (3,903)       $ 20,872       $(29,440)
      Weighted average common shares outstanding .....................      49,922         44,975          49,085         44,911
                                                                          --------       --------        --------       --------
        Basic earnings (loss) per share ..............................    $   0.20       $  (0.09)       $   0.43       $  (0.66)
                                                                          ========       ========        ========       ========
Diluted income:
      Income (loss) available to common stockholders .................    $ 10,197       $ (3,903)       $ 20,872       $(29,440)
                                                                          --------       --------        --------       --------
      Weighted average common shares outstanding .....................      49,922         44,975          49,085         44,911
      Diluted potential common shares from stock options .............       1,129             --           1,503             --
                                                                          --------       --------        --------       --------
      Weighted average common shares and diluted
        potential common shares ......................................      51,051         44,975          50,588         44,911
                                                                          --------       --------        --------       --------
        Diluted income (loss) per share ..............................    $   0.20       $  (0.09)       $   0.41       $  (0.66)
                                                                          ========       ========        ========       ========
</TABLE>


      For the three and nine months  ended  September  26, 2004,  3,238,665  and
2,607,082 shares of common stock,  respectively,  subject to outstanding options
were not  included in the  calculation  of diluted net income per share  because
they were considered  antidilutive  (i.e., the per share exercise price for such
options  exceeded the trading price of the Company's common stock as reported on
The Nasdaq Stock Market).  Total stock options outstanding at September 28, 2003
of  4,638,889  were  excluded  from the  computation  of diluted EPS because the
effect of including them would have been antidilutive.

Note 6 -- Comprehensive Income (Loss)

      SFAS No. 130, "Reporting  Comprehensive Income," establishes standards for
disclosure   and  financial   statement   presentation   for   reporting   total
comprehensive  income and its individual  components.  Comprehensive  income, as
defined, includes all changes in equity during a period from non-owner sources.

      The  following  are the  components  of  comprehensive  income  (loss) (in
thousands):

<TABLE>
<CAPTION>
                                                                      Three Months Ended                  Nine Months Ended
                                                                 ----------------------------        ----------------------------
                                                                 September 26,  September 28,        September 26,  September 28,
                                                                     2004           2003                 2004           2003
                                                                 -------------  -------------        -------------  -------------
<S>                                                               <C>               <C>               <C>               <C>
Net income (loss) ..........................................      $ 10,197          $ (3,903)         $ 20,872          $(29,440)

Cumulative translation adjustments .........................         1,173            (1,150)             (276)             (850)
Unrealized investment gain (loss) ..........................            (9)               --                --                87
Gain (loss) on cash flow hedging instruments ...............            --                 7                --              (202)
                                                                  --------          --------          --------          --------
      Comprehensive gain (loss) ............................      $ 11,361          $ (5,046)         $ 20,596          $(30,405)
                                                                  ========          ========          ========          ========
</TABLE>


                                       10
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

      The components of accumulated other  comprehensive  income, net of related
tax, are as follows (in thousands):

                                                   September 26,    December 31,
                                                        2004           2003
                                                   -------------    ------------
Cumulative translation adjustments ..............     $ 9,192        $ 9,469
Unrealized investment loss ......................          --             (1)
                                                      -------        -------
                                                      $ 9,192        $ 9,468
                                                      =======        =======

Note 7 -- Reportable Segments

      SFAS No. 131,  "Disclosures  about  Segments of an Enterprise  and Related
Information,"  establishes  standards for reporting  information about operating
segments in financial  statements.  Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated  regularly by the chief  operating  decision  maker, or chief decision
making  group,   in  deciding  how  to  allocate   resources  and  in  assessing
performance.  The chief executive  officer of the Company is the Company's chief
decision maker. As the Company's  business is completely focused on one industry
segment - design,  manufacturing and marketing of advanced fabrication equipment
to the  semiconductor  manufacturing  industry -  management  believes  that the
Company has one  reportable  segment.  The  Company's  revenues  and profits are
generated  through the sale and service of products for this one  segment.  As a
result, no additional operating segment information is required to be disclosed.

      The following is net sales  information by geographic area for the periods
presented (dollars in thousands):

<TABLE>
<CAPTION>
                                          Three Months Ended                         Nine Months Ended
                            ------------------------------------------   ----------------------------------------
                             September 26, 2004    September 28, 2003     September 26, 2004   September 28, 2003
                            --------------------  --------------------   -------------------   ------------------
                                 ($)        (%)        ($)        (%)        ($)        (%)       ($)       (%)
                            ----------     -----    --------     -----    ---------    -----   ---------   -----
<S>                           <C>            <C>    <C>            <C>    <C>            <C>   <C>           <C>
Taiwan.....................   $ 29,799       44     $  5,699       17     $  73,021      40    $  30,081     23
Japan......................     11,604       17       10,675       33        32,754      18       24,120     18
United States..............      8,618       13        3,832       12        20,866      11       20,358     16
China......................      6,611       10        3,666       11        19,321      11       13,598     11
Korea......................      2,231        3        4,571       14        13,595       8       17,428     13
Germany ...................      5,070        7        1,641        5        13,023       7       17,401     13
Europe - others............      3,218        5        1,899        6         5,263       3        2,435      2
Singapore..................        887        1          650        2         3,471       2        5,505      4
                              --------              --------              ---------            ---------
                              $ 68,038              $ 32,633              $ 181,314            $ 130,926
                              ========              ========              =========            =========
</TABLE>

      The net sales above have been allocated to the geographic areas based upon
the installation location of the systems.

      In the third  quarter of 2004,  two  customers  accounted for 12% and 11%,
respectively  of net  sales.  In the  third  quarter  of 2003,  three  customers
accounted  for 10%,  13% and 15% of net sales.  During the first nine  months of
2004, two customers  each accounted for 12% of net sales.  During the first nine
months of 2003, two customers accounted for 21% and 13% of net sales.

      At September 26, 2004, two customers each accounted for 10% or more of the
Company's accounts receivables,  net, accounting for 15% and 12%,  respectively.
At December 31, 2003,  two  customers  each  accounted  for more than 10% of the
Company's  accounts  receivables,  accounting  for  approximately  14% and  19%,
respectively.


                                       11
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

Note 8 -- Debt

      The Company's  Japanese  subsidiary has a credit  facility with a Japanese
bank in the amount of 900 million Yen  (approximately  $8.3 million at September
26, 2004),  collateralized by specific trade accounts receivable of the Japanese
subsidiary.  At September 26, 2004,  ther were no borrowings  outstanding  under
this credit  facility.  The facility bears interest at a per annum rate of TIBOR
plus 75 basis points (0.80% at September 26, 2004). The facility expires on June
20, 2005. The Company has given a corporate  guarantee for this credit facility.
There are no financial covenant requirements for this credit facility.

      The Company has a revolving  line of credit with a U.S. bank in the amount
of $20.0 million,  which expires on April 26, 2005.  All  borrowings  under this
credit  line bear  interest  at a per annum rate equal to the bank's  prime rate
plus 125  basis  points  (6% at  September  26,  2004).  The line of  credit  is
collateralized  by a  blanket  lien  on  all of the  Company's  domestic  assets
including  intellectual  property.  The line of credit  requires  the Company to
satisfy certain quarterly financial covenants,  including  maintaining a minimum
balance  of  unrestricted  cash and cash  equivalents  and a minimum  balance of
investment  accounts,  and not exceeding a maximum net loss limit.  At September
26, 2004,  the Company was in  compliance  with the  covenants and there were no
borrowings under this credit line.

Note 9 -- Employee Stock Option and Stock Purchase Plans

      Employee Stock Option Grants

      Options to purchase 42,668 and 942,608 shares of common stock were granted
to employees  during the three and nine months ended  September  26, 2004. As of
September 26, 2004,  options to purchase  6,038,317  shares of common stock were
outstanding.

      Employee Stock Purchase Plan

      As of  September  26,  2004,  2,376,662  shares had been issued  under the
Employee Stock Purchase Plan (the "Purchase Plan") since its inception in August
1994.

      Fair Value Disclosures

      Information regarding net income and net income per share, as adjusted, is
required by SFAS No. 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options granted under the
fair value  method.  The fair value for these  options was  estimated  using the
Black-Scholes  option  pricing  model  employing the multiple  option  valuation
methodology.  The per share weighted  average  estimated fair value for employee
options  granted was $9.10 and $4.52 during the three months ended September 26,
2004 and  September  28,  2003,  respectively.  The per share  weighted  average
estimated  fair value for employee  options  granted was $11.01 and $2.73 during
the nine months ended  September 26, 2004 and September 28, 2003,  respectively.
The  Black-Scholes  model was developed for use in estimating  the fair value of
traded  options  that  have no  restrictions  and  are  fully  transferable  and
negotiable  in a freely  traded  market.  Black-Scholes  does not  consider  the
employment,  transfer or vesting restrictions that are inherent in the Company's
employee  options.  The usage of an option  valuation model, as required by SFAS
No. 123, includes highly subjective  assumptions based on long-term predictions,
including the expected  stock price  volatility  and average life of each option
grant. Because the Company's employee options have characteristics significantly
different  from  those of freely  traded  options,  and  because  changes in the
subjective input assumptions can materially affect the Company's estimate of the
fair value of those  options,  it is the  Company's  opinion  that the  existing
valuation models, including Black-Scholes,  are not reliable single measures and
may misstate the fair value of the Company's employee options.


                                       12
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

      The following  weighted average  assumptions are included in the estimated
fair value  calculations  for stock  option  grants in the three and nine months
ended September 26, 2004 and September 28, 2003:

<TABLE>
<CAPTION>
                                                                              Employee Stock Option Plans
                                                        --------------------------------------------------------------------
                                                                  Three Months Ended                Nine Months Ended
                                                        --------------------------------    --------------------------------
                                                        September 26,      September 28,    September 26,      September 28,
                                                             2004               2003             2004                2003
                                                        -------------      -------------    -------------      -------------

<S>                                                           <C>               <C>               <C>               <C>
Risk-free interest rate ................................     2.32%             3.00%             1.96%             3.00%
Expected term of options (in years) ....................      1.5               1.5               1.5               1.5
Expected volatility ....................................     99.5%             98.6%             99.5%             98.6%
Expected dividend yield ................................        0                 0                 0                 0
</TABLE>

      Using  Black-Scholes,  the per share weighted average estimated fair value
of rights issued  pursuant to the  Company's  Purchase Plan during the three and
nine months ended September 26, 2004 and September 28, 2003 was $7.56 and $3.06,
respectively.

      The following  weighted average  assumptions are included in the estimated
grant  date fair  value  calculations  for rights to  purchase  stock  under the
Purchase Plan:

<TABLE>
<CAPTION>
                                                                              Employee Stock Purchase Plan
                                                        --------------------------------------------------------------------
                                                                  Three Months Ended                Nine Months Ended
                                                        --------------------------------    --------------------------------
                                                        September 26,      September 28,    September 26,      September 28,
                                                             2004               2003             2004                2003
                                                        -------------      -------------    -------------      -------------
<S>                                                           <C>               <C>               <C>               <C>
Risk-free interest rate ................................      2.0%              1.2%              1.7%              1.2%
Expected term of options (in years) ....................      0.5               0.5               0.5               0.5
Expected volatility ....................................     52.3%             67.6%             58.1%             91.8%
Expected dividend yield ................................        0                 0                 0                 0
</TABLE>


Note 9 -- Related Party Transactions

      On February 17, 2004, STEAG sold  approximately  4.3 million shares of the
Company's  common stock in an underwritten  public offering at $11.50 per share.
Following that sale, STEAG continued to hold  approximately  8.9 million shares,
or 17.7%, of the 50.0 million outstanding shares of the Company's common stock.

Note 10 -- DNS Patent Infringement Suit Settlement

      On March 5,  2002,  a jury in San Jose,  California  rendered a verdict in
favor of the Company's then subsidiary, Mattson Wet Products, Inc. (formally CFM
Technologies,  Inc.), in a patent  infringement  suit against  Dainippon  Screen
Manufacturing Co., Ltd. ("DNS"), a large Japanese  manufacturer of semiconductor
wafer processing equipment. The jury found that six different DNS wet processing
systems  infringed  on two of CFM's  drying  technology  patents  and that  both
patents were valid. On June 24, 2002, the Company and DNS jointly announced that
they had amicably  resolved  their legal disputes with a  comprehensive,  global
settlement agreement,  which included termination of all outstanding  litigation
between the companies.  On March 17, 2003, as part of the disposition of the Wet
Business,  the Company sold to SCP the subsidiary that owns the patents licensed
to DNS.  However,  the  Company  retained  all  rights  to  payments  under  the
settlement  and  license  agreements.   The  settlement  agreement  and  license
agreement  require DNS to make payments to Mattson totaling between a minimum of
$75 million and a maximum of $105  million,  relating to past  damages,  partial
reimbursement of attorney's fee and costs, and royalties.


                                       13
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

      As of September 26, 2004, DNS had made payments  aggregating $57.0 million
under the settlement and license agreements. Of the $57.0 million paid by DNS as
of  September  26, 2004,  $4.6 million was withheld to pay Japanese  withholding
tax,  and the net amount the Company  received was $52.4  million.  In the third
quarter  of  2004,  the  Company  received  confirmation  that its  request  for
"competent  authority"  with the IRS has been  granted  in  connection  with its
attempt to obtain a partial refund of Japanese taxes withheld in connection with
its DNS effort.  The Company expects that it will receive an approximately  $2.9
million  refund of  withheld  taxes in the  fourth  quarter  of 2004.  In future
periods, the Company is scheduled to receive minimum royalty payments as follows
(in millions):

                                                       Future
                                                    DNS Minimum
                                                      Payments
                Fiscal Period                      to be Received
                -------------                      --------------
                 April 2005                           $   6.0
                 April 2006                               6.0
                 April 2007                               6.0
                                                      -------
                                                      $  18.0
                                                      =======

      During July 2004, DNS made an additional  royalty payment of approximately
$370,000, beyond the minimum royalty payment of $6.0 million made in April 2004,
based on their actual sales.  This payment  brought the total amount paid by DNS
to $57.4 million.

      The Company  determined,  based on relative  fair values,  how much of the
aggregate  payments due to the Company are attributable to past disputes and how
much are  attributable  to future  royalties on DNS sales of the wet  processing
products.  The  Company  allocated  $15.0  million  to past  damages,  which was
recorded as "other  income"  during 2002,  and  allocated $60 million to royalty
income,  which is being  recognized  in net sales in the income  statement  on a
straight-line  basis over the  license  term.  During the three and nine  months
ended September 26, 2004, the Company  recognized royalty income of $3.2 million
and $9.6 million, respectively.

Note 11 -- Guarantees

      The Company adopted Financial  Accounting  Standards Board  Interpretation
No. 45  "Guarantor's  Accounting and  Disclosure  Requirements  for  Guarantees,
including Indirect  Indebtedness of Others" ("FIN 45") during the fourth quarter
of 2002. FIN 45 requires  disclosures  concerning the Company's obligation under
certain guarantees, including its warranty obligations.

      Under its  warranty  obligations,  the  Company is  required  to repair or
replace defective products or parts,  generally at a customer's site, during the
warranty  period  at no  cost  to the  customer.  The  warranty  offered  on the
Company's systems ranges from 12 months to 36 months depending on the product. A
provision  for the  estimated  cost of  warranty is recorded as a cost of sales,
based on the historical  costs, at the time of revenue  recognition.  The actual
system  performance  and/or field  expense  profiles may differ from  historical
experience,  and in those  cases  the  Company  adjusts  its  warranty  accruals
accordingly.  The following table is the detail of the product  warranty accrual
for the three and nine months periods ended September 26, 2004 and September 28,
2003 (in thousands):

<TABLE>
<CAPTION>
                                                                     Three Months Ended                   Nine Months Ended
                                                                -----------------------------      --------------------------------
                                                                September 26,   September 28,      September 26,      September 28,
                                                                     2004            2003               2004               2003
                                                                -------------   -------------      -------------      -------------
<S>                                                               <C>               <C>               <C>               <C>
Balance at beginning of period .............................      $ 16,773          $ 17,437          $ 16,508          $ 16,486
Accrual for warranties during the period ...................         3,309             1,567            10,882             5,721
Changes in liability related to pre-existing
     warranties ............................................            --            (1,079)               --            (1,079)
Settlements made during the period .........................        (3,925)             (918)          (11,233)           (4,121)
                                                                  --------          --------          --------          --------
     Balance at end of period ..............................      $ 16,157          $ 17,007          $ 16,157          $ 17,007
                                                                  ========          ========          ========          ========
</TABLE>


                                       14
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

      During the  ordinary  course of  business,  the Company  provides  standby
letters  of  credit  or  other  guarantee  instruments  to  certain  parties  as
necessary.  As of September  26, 2004,  the maximum  potential  amount of future
payments that the Company could be required to make under these standby  letters
of credit is approximately $1.1 million,  representing  collateral for corporate
credit cards,  certain equipment leases and security  deposits.  The Company has
not  recorded any  liability in  connection  with these  guarantee  arrangements
beyond that required to  appropriately  account for the  underlying  transaction
being guaranteed.  The Company does not believe,  based on historical experience
and information  currently available,  that it is probable that any amounts will
be required to be paid under these guarantee arrangements.

      The Company is a party to a variety of agreements pursuant to which it may
be  obligated  to  indemnify  the other party with  respect to certain  matters.
Typically,  these  obligations arise in the context of contracts entered into by
the Company,  under which the Company may agree to hold the other party harmless
against  losses  arising  from a breach of  representations  or under  which the
Company may have an indemnity  obligation  to the  counterparty  with respect to
certain   intellectual   property   matters  or  certain  tax  related  matters.
Customarily,  payment by the Company with respect to such matters is conditioned
on the other party making a claim  pursuant to the  procedures  specified in the
particular  contract,  which procedures typically allow the Company to challenge
the other  party's  claims.  Further,  the  Company's  obligations  under  these
agreements may be limited in terms of time and/or amount,  and in some instances
the Company may have recourse against third parties for certain payments made by
the  Company.  It is not  possible to predict the  maximum  potential  amount of
future payments under these or similar  agreements due to the conditional nature
of the Company's obligations and the unique facts and circumstances  involved in
each  particular  agreement.  Historically,  payments  made by the Company under
these  agreements  have not had a  material  effect on the  Company's  financial
position or results of  operations.  The Company  believes if it were to incur a
loss in any of these matters, such loss should not have a material effect on the
Company's financial position or results of operations.

Note 12 -- Restructuring and Other Charges

      During the third quarter of 2003, the Company recorded  restructuring  and
other  charges of $489,000 that  included  $381,000 for workforce  reduction and
$108,000 for consolidation of excess  facilities.  The following is a summary of
activities in the  restructuring-related  accruals  during the nine month period
ended September 26, 2004 (in thousands):

<TABLE>
<CAPTION>
                                                                        Liability as of      Cash Payments        Liability as of
                                                                         December 31,      Nine Months Ended        September 26,
                                                                              2003         September 26, 2004            2004
                                                                         ------------      -----------------        -------------
<S>                                                                         <C>                  <C>                   <C>
Workforce reduction ................................................        $  115               $  (35)               $   80
Consolidation of excess facilities .................................         1,175                 (141)                1,034
                                                                            ------               ------                ------
      Total ........................................................        $1,290               $ (176)               $1,114
                                                                            ======               ======                ======
</TABLE>

Note 13 -- Public Offering

      On December 23, 2003, the Company filed a shelf registration  statement on
Form S-3 that would  allow the  Company to sell,  from time to time,  up to $100
million  of its  common  stock  or  other  securities.  The  shelf  registration
statement  also  covered  sales of up to 5.9 million of the already  outstanding
shares of Company common stock owned by STEAG.  The  registration  statement was
declared effective by the Securities and Exchange  Commission ("SEC") on January
9, 2004.

      On February 17, 2004,  the Company sold  approximately  4.3 million  newly
issued shares of common stock, and STEAG sold  approximately 4.3 million already
outstanding  shares of Company common stock, in an underwritten  public offering
priced at $11.50 per share.  This  resulted in proceeds to the  Company,  net of
underwriting  discounts and transaction  expenses,  through the third quarter of
2004, of approximately $46.4 million. Out of the gross proceeds from the sale of
common stock by the Company of approximately  $49.6 million,  approximately $2.5
million represented underwriting discounts and commissions, and there were other
costs  and  expenses  of  approximately  $0.6  million,   primarily  for  legal,
accounting and printing services, through the third


                                       15
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

quarter of 2004. The Company estimates its net proceeds were approximately $46.3
million, net payment of transaction costs.

      The Company intends to use the net proceeds received from the offering for
general corporate purposes, including working capital requirements and potential
strategic acquisitions or investments.  The Company did not receive any proceeds
from the sale of shares by STEAG.  STEAG  remained the Company's  single largest
shareholder,  holding  approximately 8.9 million, or 17.7%, of the approximately
50.0 million  outstanding  shares of Company common stock immediately  following
the offering.

Note 14 -- Commitments and Contingencies

      The Company is party to certain claims  arising in the ordinary  course of
business.  While the  outcome of these  matters is not  presently  determinable,
management  believes  that they will not have a material  adverse  effect on the
financial position or results of operations of the Company.

      The  Company   leases  two   buildings   previously   used  to  house  its
manufacturing and  administrative  functions related to wet surface  preparation
products in Exton, Pennsylvania.  The lease for both buildings has approximately
15 years  remaining with a combined  rental cost of  approximately  $1.5 million
annually.  The lease  agreement for both  buildings  allows for  subleasing  the
premises without the approval of the landlord.  In June 2002, the administrative
building was sublet for a period of  approximately  five years,  until  December
2007,  with an option for the subtenant to extend for an additional  five years.
The  sublease,  under which  lease  payments  aggregate  to  approximately  $7.2
million,  is expected to cover all related costs on the administrative  building
during the sublease  period.  In July 2003,  the  manufacturing  building at the
Exton,  Pennsylvania  location  was sublet for a period of  approximately  three
years,  until  September  2006,  with an option for the subtenant to renew for a
total of two successive periods, the first for five years and the second for the
balance  of the term of the  master  lease.  The  sublease,  under  which  lease
payments aggregate  approximately $2.1 million, is expected to cover all related
costs on the  manufacturing  building during the sublease period. In determining
the facilities lease loss, net of cost recovery  efforts from expected  sublease
income,  various assumptions were made,  including,  the time periods over which
the buildings will be vacant;  expected  sublease terms;  and expected  sublease
rates. The Company has estimated that under certain circumstances the facilities
lease losses could be  approximately  $0.8 million for each additional year that
the  facilities  are not  leased  and could  aggregate  to  approximately  $12.6
million,  net of expected  sublease  income,  under certain  circumstances.  The
Company  expects to make payments  related to the above noted  facilities  lease
losses over the next fifteen years,  less any amounts  received under subleases.
Adjustments  for the  facilities  leases  and  subleases  will be made in future
periods,   if  necessary,   based  upon  the  then  current  actual  events  and
circumstances.

      In  connection  with the  disposition  of the Wet  Business,  the  Company
assumed the lease  obligations  with respect to the facilities used to house the
manufacturing  and  administrative  functions of the transferred Wet Business in
Pliezhausen,  Germany. That lease has approximately two years remaining,  ending
in August 2006, with an approximate  rental cost of $1.2 million  annually.  The
Company  had sublet the  facilities  to SCP on terms that  covered  all rent and
costs payable by the Company under the primary  lease.  During the third quarter
of 2004 and the  first  nine  months  of 2004,  the  Company  received  sublease
payments of approximately $0.3 million and $0.9 million, respectively, from SCP.
Under its  sublease,  SCP has the right  upon 90 days  notice  to  partially  or
completely terminate the sublease. In the second quarter of 2004, SCP terminated
the sublease  completely.  The Company is responsible for the future lease costs
of approximately  $2.5 million through August 2006, net of cost recovery efforts
and any sublease income.  The Company has fully accrued for the costs related to
this lease, as part of restructuring.

      In the ordinary  course of business,  the Company is subject to claims and
litigation,  including claims that it infringes third party patents,  trademarks
and other intellectual property rights. Although the Company believes that it is
unlikely that any current claims or actions will have a material  adverse impact
on its operating  results or its financial  position,  given the  uncertainty of
litigation,  the  Company  cannot be certain of this.  Moreover,  the defense of
claims or actions against the Company, even if not meritorious,  could result in
the expenditure of significant financial and managerial resources.


                                       16
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

      The Company is currently  party to legal  proceedings  and claims,  either
asserted or unasserted,  which arise in the ordinary  course of business.  While
the  outcome  of these  matters  is not  presently  determinable  and  cannot be
predicted with certainty, management does not believe that the outcome of any of
these  matters or any of the above  mentioned  legal claims will have a material
adverse  effect on the Company's  financial  position,  results of operations or
cash flow.

Note 15 -- Income Taxes

      In the third quarter of 2004, the Company  recorded  income tax expense of
approximately  $1,000,  which consisted of foreign taxes incurred by its foreign
sales and service operations of approximately $24,000, foreign withholding taxes
on  royalty   income  of  $72,000,   and  federal  and  state  income  taxes  of
approximately  $30,000,  partially  offset  by a  deferred  tax  benefit  on the
amortization of certain intangible assets of $0.1 million.  The effective income
tax rate was zero  percent  for the third  quarter  of 2004.  In the first  nine
months of 2004, the Company  recorded income tax expense of  approximately  $0.3
million,  which consisted of foreign taxes of  approximately  $0.6 million,  and
federal and state income taxes of approximately  $0.1 million,  partially offset
by a deferred tax benefit on the  amortization of certain  intangible  assets of
$0.4 million.  The effective  income tax rate was 1.5% for the nine months ended
September  26,  2004.  At September  26,  2004,  the Company has provided a full
valuation  allowance  against its net deferred tax asset as management  believes
that  sufficient  uncertainty  exists  with regard to the  realizability  of tax
assets.  Factors considered in providing a valuation  allowance include the lack
of a  significant  history  of  consistent  profits  and the  lack of  carryback
capacity to realize  these assets.  Based on the absence of objective  evidence,
management  is unable to assert that it is more likely than not that the Company
will  generate  sufficient  taxable  income to  realize  all the  Company's  net
deferred tax assets.

      In the third quarter of 2003,  the Company  recorded an income tax benefit
of  approximately  $21,000,  and an income tax provision of  approximately  $0.1
million  for  the  first  nine  months  of  2003,  which  consisted  of  foreign
withholding  taxes of $0.6 million,  foreign taxes incurred by our foreign sales
and service operations of $0.1 million,  and state income taxes of approximately
$0.1 million,  partially offset by a deferred tax benefit on the amortization of
certain  intangible  assets of $0.7 million.  There was no US or German  current
income tax benefit or expense. The effective income tax rate was a negative 0.6%
for the nine months ended September 28, 2003. At September 28, 2003, the Company
provided  a full  valuation  allowance  against  its net  deferred  tax asset as
management  believes  that  sufficient  uncertainty  exists  with  regard to the
realizability of tax assets.

Note 16 -- Subsequent Event

      On October 27, 2004, the Company  acquired  certain  outstanding  debt and
equity  ownership   interests  in  Vortek  Industries  Ltd.,  a  privately  held
corporation  amalgamated  under the laws of British  Columbia  ("Vortek")  for a
purchase price of approximately  $17.0 million.  As a result of the transaction,
Vortek became a wholly-owned subsidiary of the Company. Vortek is a developer of
millisecond flash annealing  technology for rapid thermal  processing of silicon
wafers,  for use in the  manufacture  of  semiconductors.  Vortek  is  based  in
Vancouver, Canada.

      As  consideration  for  the  acquisition  of  Vortek,  Mattson  issued  an
aggregate  of  1,452,808   shares  of  its  common   stock,   which   represents
approximately 2.8% of the outstanding common shares of the Company. Between June
28, 2004 and October 27, 2004, the Company provided  approximately  $2.5 million
in working capital loans to Vortek.  Of the shares of common stock issued by the
Company in the Vortek transaction,  290,561 (the "Escrow Shares") are being held
subject to an escrow  agreement.  The Escrow Shares are subject to forfeiture in
the event of valid  indemnification  claims by the Company within a period of 12
months from October 27, 2004.

      In  connection  with the Vortek  acquisition,  the Company  entered into a
Stock  Registration  and  Restriction  Agreement,  dated as of October 27, 2004,
pursuant to which the Company agreed to register the shares issued in the


                                       17
<PAGE>

                    MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                               September 26, 2004
                                   (unaudited)

Vortek  acquisition,  other than the Escrow Shares,  under the Securities Act of
1933,  for  resale by the  recipients,  and the  recipients  agreed  to  certain
restrictions on the transfer of such shares.



                                       18
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The following  discussion and analysis of our financial condition and results of
operations   should  be  read  in  conjunction  with  our  unaudited   condensed
consolidated  financial  statements and related notes included elsewhere in this
report, and in conjunction with our audited  consolidated  financial  statements
and related notes and other financial  information included in our Annual Report
on Form 10-K. In addition to historical  information,  this discussion  contains
certain  forward-looking  statements that involve risks and  uncertainties.  Our
actual  results  could  differ   materially  from  those  anticipated  by  these
forward-looking  statements due to factors including,  but not limited to, those
set forth or  incorporated  by reference  under  "Factors That May Affect Future
Results and Market Price of Stock" and elsewhere in this document.

Overview

      We are a leading supplier of semiconductor wafer processing equipment used
in the fabrication of integrated circuits. Our products include dry strip, rapid
thermal  processing,  or RTP, and plasma enhanced chemical vapor deposition,  or
PECVD, equipment.  Our manufacturing equipment utilizes innovative technology to
deliver advanced  processing  capability and high  productivity to semiconductor
manufacturers for both 200 mm and 300 mm wafer production at technology nodes at
and below 130 nanometers, or nm.

      The last three years,  2001 to 2003,  were a period of great challenge and
significant  change  for us.  The  external  market  environment  was  extremely
difficult,  with the semiconductor industry experiencing a significant downturn,
resulting in severe capital spending cutbacks by our customers. At the beginning
of 2001, we had just completed the simultaneous acquisition of the semiconductor
equipment   division  of  STEAG  Electronic   Systems  AG,  or  STEAG,  and  CFM
Technologies,  Inc.  This more than  doubled the size of our company and changed
the nature and breadth of our product  lines.  On top of the many  challenges in
integrating  multiple  merged  companies,  we were  faced  with  the  impact  of
dramatically  lower  sales as a result  of the  downturn  in the  industry  that
resulted in excess production capacity. We determined to refocus our business on
our core technologies in dry strip and rapid thermal processing, and in 2002 and
the first  quarter of 2003 we took  restructuring  actions to align our business
with this focus and to reduce our cost structure.  As part of this restructuring
effort, we divested a significant line of business,  our wet surface preparation
products, or the Wet Business, in March of 2003.

      Our  organization and structure was very different at the end of 2003 than
it was at the  beginning  of  2003 or  during  2001  and  2002.  Because  of our
significant restructurings and divestitures during this period, both our revenue
sources and our cost  structure  have  significantly  changed.  This affects the
comparability of our more recently reported  financial  information,  and causes
our  historical  information  not to be a good indicator or predictor of results
for future periods.  Our size, structure and product focus have been more stable
during the last three quarters of 2003 and the first three quarters of 2004.

      We recorded  losses from  operations  in each of the years 2001,  2002 and
2003.  However,  as a result of our restructurings and divestitures,  we reduced
our cost structure and reduced our rate of losses throughout that period.

      As we finished 2003, we achieved a profit of $1.1 million from  operations
for the fourth  quarter.  For the first,  second and third  quarters of 2004, we
recorded  net  income  of  $3.3  million,   $7.4  million  and  $10.2   million,
respectively.

      Our net income was $10.2 million in the third quarter of 2004, compared to
a loss of $3.9 million in the third quarter of 2003, on a $35.4 million increase
in net sales.  This reflected the  improvement in the efficiency and flexibility
of our manufacturing cost structure, which utilizes both internal and outsourced
manufacturing and allows us to increase  production without increasing  internal
headcount.  We ended the third quarter of 2004 with approximately  $80.5 million
in cash  and cash  equivalents.  We have no  long-term  debt.  With  the  recent
improvements  in our  operating  results and the infusion of cash on our balance
sheet from a stock  offering  early in the year,  we believe we are in a healthy
position in terms of liquidity and capital resources.

      Our  business  depends  upon  capital  expenditures  by  manufacturers  of
semiconductor  devices. The level of capital expenditures by these manufacturers
depends upon the current and anticipated market demand for such devices.  Market
conditions  improved  significantly  in the first part of 2004, but recently are
demonstrating  signs  of  weakening  in  the  current  quarter.   However,   the
cyclicality and uncertainties  regarding  overall market conditions  continue to
present significant challenges to us and limit our ability to forecast near term
revenue.  Given that many of our costs are fixed in the short-term,  our ability
to quickly modify our operations in response to changes in market


                                       19
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

conditions  is  limited.   Although  we  have  implemented  cost  reduction  and
operational  flexibility  measures,  we are largely  dependent upon increases in
sales in order to improve our profitability.

      The success of our  business in the future will be  dependent  on numerous
factors,  including but not limited to the market demand for  semiconductors and
semiconductor  wafer  processing  equipment,  and our ability to (1) develop and
bring to market  new  products  that  address  our  customers'  needs,  (2) grow
customer loyalty through  collaboration  with and support of our customers,  and
(3) manage a cost  structure  which will  enable us to operate  effectively  and
profitably throughout changing industry cycles.

Critical Accounting Policies and Estimates

      Management's Discussion and Analysis of Financial Condition and Results of
Operations  discusses our  consolidated  financial  statements,  which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States of America,  or United  States or U.S. The  preparation  of these
financial  statements requires management to make estimates and assumptions that
affect the reported  amounts of assets and  liabilities  and the  disclosure  of
contingent assets and liabilities at the date of the financial  statements,  and
the reported amounts of revenues and expenses during the reporting  period.  Our
management evaluates its estimates and judgments on an on-going basis, including
those  related  to  reserves  for  excess  and  obsolete   inventory,   warranty
obligations,  bad debts,  intangible assets, income taxes,  restructuring costs,
contingencies  and litigation.  Our management bases its estimates and judgments
on  historical  experience  and on various other factors that are believed to be
reasonable  under the  circumstances.  These form the basis for making judgments
about the  carrying  values  of  assets  and  liabilities  that are not  readily
apparent  from other  sources.  Actual  results may differ from these  estimates
under different assumptions or conditions.

      We consider certain  accounting  policies related to revenue  recognition,
warranty  obligations,   inventories,  goodwill  and  other  intangible  assets,
impairment  of long-lived  assets,  and income taxes as critical to our business
operations and an understanding of our results of operations.

      Revenue   recognition.   We  recognize  revenue  in  accordance  with  the
Securities and Exchange  Commission,  or SEC, Staff Accounting Bulletin No. 104,
"Revenue Recognition," or SAB 104.

      We derive  revenue from two primary  sources -- equipment  sales and spare
part sales. We account for equipment sales as follows:  (1) for all sales of new
products and sales of (and,  for the first quarter of 2003 and earlier  periods,
for all sales of our wet surface  preparation  products),  revenue is recognized
upon customer acceptance;  (2) for all sales of existing products,  we recognize
revenue on a multiple  element  approach  in which we divide a sale  transaction
into two separate  elements based on objective  evidence of fair value.  The two
elements are the tool and  installation  of the tool.  Under this approach,  the
portion of the invoice price that is due after  installation  services have been
performed  and upon final  customer  acceptance  of the tool has been  obtained,
generally  10% of the total  invoice  price,  is deferred  until final  customer
acceptance  of the  tool.  The  remaining  portion  of the total  invoice  price
relating to the tool,  generally 90% of the total invoice  price,  is recognized
upon shipment and title  transfer of the tool.  From time to time,  however,  we
allow customers to evaluate systems, and since customers can return such systems
at any time with limited or no penalty,  we do not  recognize  revenue until the
customer accepts these  evaluation  systems.  Revenues  associated with sales to
customers in Japan are recognized  upon title transfer,  which generally  occurs
upon  customer  acceptance,  with the  exception  of  sales of our RTP  products
through our  distributor  in Japan,  where  revenues are  recognized  upon title
transfer to the  distributor,  FOB shipping point.  For spare parts,  revenue is
recognized upon shipment. Service and maintenance contract revenue is recognized
on a straight-line basis over the service period of the related contract.

      Revenues are difficult to predict, due in part to our reliance on customer
acceptance  related to a portion of our  revenues.  Any  shortfall in revenue or
delay  in  recognizing  revenue  could  cause  our  operating  results  to  vary
significantly  from  quarter to  quarter  and could  result in future  operating
losses.

      Warranty.  Our  warranties  require  us to  repair  or  replace  defective
products or parts, generally at a customer's site, during the warranty period at
no cost to the  customer.  The  warranty  offered on our systems  ranges from 12
months to 36 months,  depending on the product.  At the time we first  recognize
revenue for a system  sale,  we record


                                       20
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

a provision for the  estimated  cost of warranty as a cost of sales based on our
historical  costs.  While our warranty costs have  historically  been within our
expectations and the provisions we have  established,  we cannot be certain that
we will  continue to experience  the same warranty  repair costs that we have in
the past. An increase in the costs to repair our products  could have a material
adverse impact on our operating  results for the period or periods in which such
additional costs materialize.

      Inventories.  We state  inventories  at the lower of cost or market,  with
cost  determined  on  a  first-in,  first-out  basis.  Due  to  changing  market
conditions,  estimated future  requirements,  age of the inventories on hand and
our introduction of new products,  we regularly monitor inventory  quantities on
hand and  identify  obsolete  inventories  that are no  longer  used in  current
production.  Accordingly,  we  write  down  our  inventories  to  estimated  net
realizable  value.  Actual  demand may differ  from  forecasted  demand and such
difference  may  result  in  write-downs  that  have a  material  effect  on our
financial position and results of operations. In the future, if our inventory is
determined  to be  overvalued,  we would be required to recognize the decline in
value in our cost of goods sold at the time of such  determination.  Although we
attempt to accurately  forecast  future product  demand,  given the  competitive
pressures and cyclicality of the semiconductor industry there may be significant
unanticipated changes in demand or technological  developments that could have a
significant  impact on the value of our  inventory  and our  reported  operating
results.

      Goodwill  and Other  Intangible  Assets.  We assess the  realizability  of
goodwill and other intangible assets at a minimum annually or whenever events or
changes  in   circumstances   indicate  that  the  carrying  value  may  not  be
recoverable,  in accordance  with the provisions of SFAS No. 142,  "Goodwill and
Other Intangible Assets." SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their  estimated  residual  values and reviewed for  impairment in accordance
with SFAS No. 144,  "Accounting  for the  Impairment  or Disposal of  Long-Lived
Assets." Our judgments  regarding the  existence of  impairment  indicators  are
based on changes in strategy,  market conditions and operational  performance of
our business. Future events, including significant negative industry or economic
trends,  could cause us to conclude that  impairment  indicators  exist and that
goodwill or other intangible assets are impaired.  Any resulting impairment loss
could have a material adverse impact on our results of operations.  In assessing
the  recoverability  of  goodwill  and  other  intangible  assets,  we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the  respective  assets.  If these  estimates or their related
assumptions  change in the  future,  we may be  required  to  record  impairment
charges for these assets.

      Impairment of Long-Lived  Assets.  We assess the  impairment of identified
intangibles,  long-lived  assets and related goodwill whenever events or changes
in  circumstances  indicate that the carrying value may not be  recoverable,  in
accordance with the provisions of SFAS No. 144 "Accounting for the Impairment or
Disposal of  Long-Lived  Assets."  Our  judgments  regarding  the  existence  of
impairment  indicators are based on changes in strategy,  market  conditions and
operational  performance of our business.  Future events,  including significant
negative industry or economic trends, could cause us to conclude that impairment
indicators  exist  and  that  long-lived  assets  are  impaired.  Any  resulting
impairment  loss  could  have  a  material  adverse  impact  on our  results  of
operations.  In assessing the  recoverability of long-lived assets, we must make
assumptions  regarding estimated future cash flows and other factors,  including
discount  rates and  probability of cash flow  scenarios,  to determine the fair
value of the respective assets. If these estimates or their related  assumptions
change in the future, we may be required to record impairment  charges for these
assets.

      Income taxes.  We record a valuation  allowance to reduce our net deferred
tax asset to the amount we estimate is more likely than not to be  realized.  In
assessing the need for a valuation  allowance,  we consider historical levels of
income,  expectations  and risks  associated  with  estimates of future  taxable
income and ongoing prudent and feasible tax planning strategies. In the event we
determine that we would be able to realize  deferred tax assets in the future in
excess of the net recorded amount, we would record an adjustment to the deferred
tax asset  valuation  allowance.  This  adjustment  would increase income in the
period such determination was made.


                                       21
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

Results of Operations

      The following  table sets forth our statement of operations data expressed
as a percentage of net sales for the periods indicated:

<TABLE>
<CAPTION>
                                                                              Three Months Ended             Nine Months Ended
                                                                        ----------------------------  -----------------------------
                                                                        September 26,  September 28,  September 26,   September 28,
                                                                            2004           2003            2004            2003
                                                                        -------------  -------------  -------------   -------------
<S>                                                                         <C>            <C>             <C>             <C>
Net sales ...........................................................       100.0%         100.0%          100.0%          100.0%
Cost of sales .......................................................        54.8           60.9            56.3            66.8
                                                                            -----          -----           -----           -----
      Gross profit ..................................................        45.2           39.1            43.7            33.2
                                                                            -----          -----           -----           -----

Operating expenses:
      Research, development and engineering .........................         8.3           13.7             8.8            14.3
      Selling, general and administrative ...........................        22.0           38.7            22.8            32.3
      Amortization of intangibles ...................................         0.4            1.0             0.5             1.4
      Restructuring and other charges ...............................          --            1.6              --             0.4
                                                                            -----          -----           -----           -----
        Total operating expenses ....................................        30.7           55.0            32.1            48.4
                                                                            -----          -----           -----           -----

Income (loss) from operations .......................................        14.5          (15.9)           11.6           (15.2)
Loss on disposition of Wet Business .................................          --             --              --            (7.8)
Interest and other income:
                                                                            -----          -----           -----           -----
      Interest income ...............................................         0.5            1.0             0.5             0.7
                                                                            -----          -----           -----           -----
      Interest expense ..............................................          --             --              --            (0.1)
      Other income (expense), net ...................................          --            2.9            (0.4)             --
                                                                            -----          -----           -----           -----
        Interest and other income, net ..............................         0.5            3.9             0.1             0.6
                                                                            -----          -----           -----           -----
Income (loss) before provision for (benefit from)
      income taxes ..................................................        15.0          (12.0)           11.7           (22.4)
Provision for (benefit from) income taxes ...........................          --             --             0.2             0.1
                                                                            -----          -----           -----           -----
Net income (loss) ...................................................        15.0%         (12.0)%          11.5%          (22.5)%
                                                                            =====          =====           =====           =====
</TABLE>

      The  divestiture  of our Wet Business on March 17, 2003 has  significantly
affected  the  comparability  of our net sales  and our costs in the  nine-month
period ended September 26, 2004 to our reported  results a year ago for the same
period and to periods  prior to that.  Our  reported  results for the first nine
months of 2003 include sales of Wet Business  products and related costs,  while
our  results  for the first  nine  months of 2004 do not.  The  following  table
summarizes  the amount of our net sales in each quarter of 2003 and in the first
three quarters of 2004 attributable to products of the Wet Business,  to RTP and
strip  products,   and  to  royalties  from  DNS.  We  believe  this  additional
information  regarding our prior period sales will facilitate  comparison of our
current  and future  results of  operations  to our results  from prior  periods
(dollars in millions):

<TABLE>
<CAPTION>
                                                               Net Sales                             Percent of Total Net Sales
                                          --------------------------------------------------     ----------------------------------
                                             Wet         RTP and        DNS        Reported        Wet         RTP and       DNS
           Three Months                   Business        Strip       Royalty        Total       Business       Strip      Royalty
               Ended                      Products      Products      Revenue      Net Sales     Products      Products    Revenue
---------------------------------------   --------      --------      --------     ---------     --------      --------    --------
<S>                                       <C>           <C>           <C>           <C>              <C>         <C>         <C>
March 30, 2003 ........................   $   32.3      $   32.5      $    3.0      $   67.8         47.7%       47.9%       4.4%
June 29, 2003 .........................         --          27.5           3.0          30.5           --        90.2        9.8
September 28, 2003 ....................         --          29.6           3.0          32.6           --        90.8        9.2
December 31, 2003 .....................        1.3          39.1           3.0          43.4          3.0        90.1        6.9
                                          --------      --------      --------      --------         ----        ----        ---
                                          $   33.6      $  128.7      $   12.0      $  174.3         19.3%       73.8%       6.9%
                                          ========      ========      ========      ========         ====        ====        ===
March 28, 2004 ........................   $     --      $   49.9      $    3.2      $   53.1           --%       94.0%       6.0%
June 27, 2004 .........................         --          57.0           3.2          60.2           --        94.7        5.3
September 26, 2004 ....................         --          64.8           3.2          68.0           --        95.3        4.7
                                          --------      --------      --------      --------         ----        ----        ---
                                          $     --      $  171.7      $    9.6      $  181.3           --%       94.7%       5.3%
                                          ========      ========      ========      ========         ====        ====        ===
</TABLE>


                                       22
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

      Net Sales

      Net  sales  for  the  third  quarter  of 2004  were  $68.0  million.  This
represents  an increase of 108%  compared to $32.6  million of net sales for the
third quarter of 2003. The increase in net sales in the third quarter of 2004 as
compared  to the third  quarter of 2003 is  primarily  due to higher  unit sales
resulting from  improvement in customer  demand for our products.  We anticipate
our net sales for the fourth  quarter of 2004 to range between $68.0 million and
$71.0 million.

      Net sales of RTP and strip  systems,  spares  and  services  for the third
quarter of 2004 were approximately $64.8 million. This represents an increase of
119%  compared  to $29.6  million  of net sales for such  products  in the third
quarter of 2003.  The  increase  in net sales of RTP and strip  products  in the
third  quarter of 2004 as compared to the third quarter of 2003 is primarily due
to higher  unit  sales.  Units of RTP and strip  products  shipped  in the third
quarter of 2004 increased 139.1% as compared to the third quarter of 2003.

      Net  sales  for the  first  nine  months  of  2004  were  $181.3  million,
representing  an increase of 38% compared to net sales of $130.9 million for the
first nine months of 2003.  This increase was primarily due to higher  shipments
in the first  nine  months of 2004  than in the same  period in the prior  year,
resulting from improvement in demand for both RTP and strip products.  Net sales
for the first nine  months of 2004  include no sales of Wet  Business  products,
whereas net sales for the first nine months of 2003  included  $32.3  million in
net sales from the divested Wet  Business.  Net sales of RTP and strip  products
for the first nine months of 2004 were $171.7 million,  representing an increase
of 92% as compared to net sales of such  products of $89.6 million for the first
nine months of 2003.  Units of RTP and strip products  shipped in the first nine
months of 2004  increased  93% as  compared  to the same  period  in 2003.  This
increase was primarily due to increased  customer demand closely correlated with
improvement in industry-wide demand in our broader market.

      In the third quarter of 2004, two of our customers accounted for 12.4% and
11.0%, respectively of our net sales. In the third quarter of 2003, three of our
customers accounted for 10%, 13% and 15% of our net sales. During the first nine
months of 2004,  two of our  customers  accounted for 12.1% and 11.7% of our net
sales,  respectively.  During  the  first  nine  months of 2003,  two  customers
accounted for 13% and 21% of net sales.

      International sales, which are predominantly to customers based in Europe,
Japan and the Pacific Rim (which includes Taiwan,  China,  Korea and Singapore),
accounted  for 87.3% and 88.3% of net sales for the third  quarters  of 2004 and
2003,  respectively.  International  sales  accounted for 88.5% and 84.5% of net
sales for the first nine months of 2004 and 2003,  respectively.  We  anticipate
that international  sales will continue to account for a significant  portion of
net sales through the first half of 2005.

      Gross Margin

      Our gross margin for the third quarter of 2004 was 45.2%, an increase from
39.1% for the third  quarter of 2003.  The increase in gross margin in the third
quarter of 2004 was primarily due to a seven  percentage  point  improvement  in
increased absorption of fixed overhead costs resulting from increased production
volume.  Gross  margin in the fourth  quarter is  expected to be in the range of
approximately 43.0% to 46.0%.

      Our gross margin for the first nine months of 2004 was 43.7%,  an increase
from 33.9% for the first nine months of 2003.  The  increase in gross  margin in
the first  nine  months of 2004 was  primarily  due to a nine  percentage  point
improvement  in increased  absorption of fixed  overhead  costs  resulting  from
increased production volume, as well as the divestiture of the Wet Business.

      Our RTP and strip products have  relatively  higher gross margins than did
the Wet Business  products we offered until its  divestiture  in March 2003. The
divestiture of our Wet Business affects the comparability of our gross margin in
the current  nine-month  period and will affect the  comparability  of our gross
margins in future periods to our historical margins.

      Due to intense  competition,  we continue to face  pricing  pressure  from
competitors  that can affect our gross margin.  In response,  we are  continuing
with our cost controls and efforts to differentiate our product  portfolio.  Our
gross  margin has varied over the years and will  continue to vary based on many
factors,  including competitive


                                       23
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

pressures,  product mix, the relative amounts of customer acceptances in a given
quarter,  economies of scale,  overhead  absorption  levels and costs associated
with the introduction of new products.

      Research, Development and Engineering

      Research,  development and  engineering  expenses for the third quarter of
2004 were $5.6 million,  or 8.3% of net sales,  as compared to $4.5 million,  or
13.7% of net sales for the third quarter of 2003.  The $1.1 million  increase in
research,  development and engineering expenses for the third quarter of 2004 as
compared to the same quarter of 2003 was primarily due to reimbursable  expenses
from a joint development  project. The net change from the third quarter of 2003
as compared to the third  quarter of 2004 was $1.5 million and resulted from the
fulfillment of our joint  development  program.  This was partially  offset by a
$0.1 million  increase in  payroll-related  expenses.  The decrease in research,
development and engineering  expenses as a percentage of net sales for the third
quarter  of 2004 as  compared  to the same  quarter  of 2003  resulted  from the
proportionately greater increase in net sales.

      Research,  development and engineering  expenses for the first nine months
of 2004 were $16.0 million,  or 8.8% of net sales, as compared to $18.7 million,
or 14.3% of net  sales,  for the first  nine  months of 2003.  The $2.7  million
decrease in research,  development  and  engineering  expenses in the first nine
months of 2004 as compared to the first nine months of 2003 was primarily due to
a $2.7  million  reduction in project  materials  and  project-related  expenses
resulting from cost reimbursement on a joint development project, a $1.2 million
reduction in depreciation and amortization  resulting from the  consolidation of
our facilities and the  disposition of our Wet business,  partially  offset by a
$0.5 million increase in salary and payroll-related  expenses and a $0.4 million
increase in outside professional services. The decrease in research, development
and engineering  expenses as a percentage of net sales for the first nine months
of 2004 as compared to the same period in 2003 resulted from the proportionately
greater  increase  in net sales and the  reduction  in  expenses  on an absolute
dollar basis.

      Selling, General and Administrative

      Selling, general and administrative expenses for the third quarter of 2004
were $15.0  million,  or 22.0% of net sales,  as compared to $12.6  million,  or
38.7% of net sales,  for the third quarter of 2003. The $2.3 million increase in
selling,  general and  administrative  expenses in the third  quarter of 2004 as
compared  to the  third  quarter  of 2003  is  primarily  due to a $2.1  million
increase  in  salary  and  payroll-related  expenses  resulting  from  increased
headcount and variable compensation expenses.  The decrease in selling,  general
and  administrative  expenses as a percentage of net sales for the third quarter
of  2004,   as  compared  to  the  same  period  in  2003,   resulted  from  the
proportionately greater increase in net sales.

      Selling,  general and administrative expenses for the first nine months of
2004 were $41.3 million,  or 22.8% of net sales as compared to $42.3 million, or
32.3% of net sales for the first nine months of 2003. The $1.0 million  decrease
in selling, general and administrative expenses in the first nine months of 2004
as compared to the first nine months of 2003 is primarily  due to a $0.7 million
decrease in salaries and payroll-related expenses reflecting our continuing cost
containment efforts and a $0.7 million decrease in sales and service costs.

      Amortization of Intangibles

      Upon  adoption of SFAS No. 142 on January 1, 2002,  we no longer  amortize
goodwill.  We  continue  to  amortize  the  identified   intangibles,   and  our
amortization  expense  during the third quarter of 2004 and first nine months of
2004 were $0.3 million and $1.0 million,  respectively. Our amortization expense
during the third  quarter  of 2003 and the first  nine  months of 2003 were $.03
million  and $1.8  million,  respectively.  We  estimate  that our  amortization
expense will be approximately $1.3 million for each of the years 2004 and 2005.

      Restructuring and other charges

      During the third  quarter of 2003,  we  recorded  restructuring  and other
charges of $489,000 that included $381,000 for workforce  reduction and $108,000
for consolidation of excess  facilities.  We estimate that expected cost savings
as a result of the  restructuring  and workforce  reduction will range from $0.4
million  to $0.5  million  per  quarter.  For the  three and nine  months  ended
September 26, 2004, no restructuring expenses were recorded.


                                       24
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

      Interest and Other Income (Expense), Net

      Interest  and  other  income,  net,  for the  third  quarter  of 2004  was
approximately  $0.3 million,  or 0.5% of net sales,  as compared to interest and
other expense, net, of $1.3 million, or 3.9% of net sales, for the third quarter
of 2003.  During  the third  quarter of 2004,  interest  and other  income,  net
consisted  primarily  of  interest  income of $0.4  million  resulting  from the
investment of our cash balances in interest-bearing  accounts.  During the third
quarter of 2003, interest and other income, net, consisted primarily of interest
income of $0.3 million  resulting  from the  investment  of our cash balances in
interest-bearing  accounts,  a foreign  exchange gain of $0.9  million,  and net
other income of $0.5 million, partially offset by a loss on sale of fixed assets
of $0.4 million.

      Interest  and other  expense,  net,  for the first nine months of 2004 was
approximately  $0.2 million,  or 0.1% of net sales, as compared to $0.9 million,
or 0.7% of net sales,  for the first nine months of 2003.  During the first nine
months of 2004, interest and other expense, net, consisted primarily of interest
income of $0.9 million  resulting  from the  investment  of our cash balances in
interest-bearing accounts, partially offset by other expense of $0.6 million. In
the same period of 2003,  other  income  consisted  of  interest  income of $0.9
million  resulting from the investment of our cash balances,  a foreign exchange
gain of $0.1 million and net other income of $0.9 million,  partially  offset by
interest  expense  of $0.1  million  and a loss on sale of fixed  assets of $1.0
million.

      Provision for Income Taxes

      In  the  third  quarter  of  2004,  we  recorded  income  tax  expense  of
approximately  $1,000,  which consisted of foreign taxes incurred by its foreign
sales and service operations of approximately $24,000, foreign withholding taxes
on  royalty   income  of  $72,000,   and  federal  and  state  income  taxes  of
approximately  $30,000,  partially  offset  by a  deferred  tax  benefit  on the
amortization of certain intangible assets of $125,000.  The effective income tax
rate was 0.5% for the third  quarter of 2004.  In the first nine months of 2004,
we recorded  income tax expense of  approximately  $309,000,  which consisted of
foreign taxes of approximately  $563,000,  and federal and state income taxes of
approximately  $120,000,  partially  offset by a  deferred  tax  benefit  on the
amortization of certain intangible assets of $374,000.  The effective income tax
rate was 2.8% for the six months  ended  September  26, 2004.  At September  26,
2004, we have provided a full valuation  allowance  against our net deferred tax
asset as management  believes that sufficient  uncertainty exists with regard to
the  realizability  of tax assets.  Factors  considered in providing a valuation
allowance  include the lack of a significant  history of consistent  profits and
the lack of carryback capacity to realize these assets.  Based on the absence of
objective  evidence,  our  management is unable to assert that it is more likely
than not that we will generate  sufficient taxable income to realize all our net
deferred tax assets.

      In the third  quarter  of 2003,  we  recorded  an income  tax  benefit  of
approximately $21,000, and an income tax provision of approximately $0.1 million
for the first nine months of 2003, which consisted of foreign  withholding taxes
of $0.6  million,  foreign  taxes  incurred  by our  foreign  sales and  service
operations  of $0.1  million,  and  state  income  taxes of  approximately  $0.1
million,  partially  offset by a deferred  tax  benefit on the  amortization  of
certain  intangible  assets of $0.7  million.  We had no U.S. or German  current
income tax benefit or expense. Our effective income tax rate was a negative 0.6%
for the nine months ended September 28, 2003.

Liquidity and Capital Resources

      Our cash and cash  equivalents,  excluding  restricted  cash,  were  $80.5
million at September 26, 2004, an increase of $3.4 million from $77.1 million at
December  31,  2003.  Stockholders'  equity at  September  26,  2004 was  $151.8
million,  as compared to $83.7 million at December 31, 2003.  Working capital at
September 26, 2004 was $118.1 million,  as compared to $56.9 million at December
31, 2003. At September 26, 2004, we had no long-term debt.

      On December 23, 2003, we filed a shelf registration  statement on Form S-3
that would allow us to sell, from time-to-time, up to $100 million of our common
stock or other securities.  The shelf registration  statement also covered sales
of up to 5.9 million of the already outstanding shares of our common stock owned
by STEAG.  The  registration  statement  was  declared  effective  by the SEC on
January 9, 2004.

      On February  17,  2004,  we sold  approximately  4.3 million  newly issued
shares of common  stock,  and  STEAG  sold  approximately  4.3  million  already
outstanding  shares of our common  stock,  in an  underwritten  public  offering
priced at $11.50 per share. This resulted in proceeds to us, net of underwriting
discounts  and  transaction  expenses,


                                       25
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

through the third quarter of 2004, of  approximately  $46.4 million.  Out of the
gross  proceeds  from the sale of  common  stock  by us of  approximately  $49.6
million,  approximately  $2.5 million  represented  underwriting  discounts  and
commissions,  and there were other  costs and  expenses  of  approximately  $0.6
million,  primarily for legal,  accounting  and printing  services,  through the
third  quarter of 2004. We estimate our net proceeds to be  approximately  $46.3
million after payment in future periods of the balance of the transaction costs.

      We intend to use the net proceeds  received  from the offering for general
corporate  purposes,   including  working  capital  requirements  and  potential
strategic acquisitions or investments.  We did not receive any proceeds from the
sale of shares by STEAG. STEAG remained our largest single shareholder,  holding
approximately 8.9 million, or 17.7%, of the 50.0 million then outstanding shares
of our common stock.

      Our Japanese  subsidiary has a credit facility with a Japanese bank in the
amount of 900 million Yen  (approximately  $8.2 million at September  26, 2004),
collateralized by specific trade accounts receivable of the Japanese subsidiary.
At  September  26,  2004,  there were no borrows  outstanding  under this credit
facility. The facility bears interest at a per annum rate of TIBOR plus 75 basis
points (0.80% at September 26, 2004).  The facility expires on June 20, 2005. We
have  given a  corporate  guarantee  for  this  credit  facility.  There  are no
financial covenant requirements for this credit facility.

      We have a revolving line of credit with a U.S. bank in the amount of $20.0
million,  which expires on April 26, 2005. All borrowings under this credit line
bear  interest at a per annum rate equal to the bank's prime rate plus 125 basis
points (6% at September 26,  2004).  The line of credit is  collateralized  by a
blanket lien on all of our domestic assets including  intellectual property. The
line of credit requires us to satisfy  certain  quarterly  financial  covenants,
including   maintaining  a  minimum  balance  of  unrestricted   cash  and  cash
equivalents  and a minimum balance of investment  accounts,  and not exceeding a
maximum net loss limit.  At September 26, 2004,  we were in compliance  with the
covenants and there were no borrowings under this credit line.

      We had losses from operations in each of fiscal years 2001, 2002 and 2003.
However, as a result of our restructurings and divestitures, we reduced our cost
structure  and our rate of losses  decreased  over the  course  of that  period.
During the fourth  quarter of 2003 and during the first three  quarters of 2004,
we have been  operationally  profitable.  With the  recent  improvements  in our
operating  results and the additional cash provided by the stock offering in the
first  quarter of 2004,  we  believe  we have  adequate  liquidity  and  capital
resources for our operations for the next twelve months.

      On June 24,  2002,  we entered  into a  settlement  agreement  and a cross
license  agreement  with DNS under  which  DNS  agreed  to make  payments  to us
totaling  between a  minimum  of $75  million  and a  maximum  of $105  million,
relating to past damages, partial reimbursement of attorney's fee and costs, and
license fees. The license fee obligations of DNS would cease if all four patents
that had been the subject of the lawsuit were to be held invalid by a court.

      As of September 26, 2004, DNS had made payments  aggregating $57.4 million
under the terms of the settlement and license  agreements.  Of the $57.4 million
paid by DNS as of September 26, 2004,  $4.6 million was withheld to pay Japanese
withholding  tax,  and the net amount we received was $52.8  million.  In future
periods,  we are scheduled to receive  minimum  royalty  payments as follows (in
millions):

                                                         Future
                                                       DNS Minimum
                                                        Payments
                  Fiscal Period                      to be Received
                  -------------                      --------------
                    April 2005                           $   6.0
                    April 2006                               6.0
                    April 2007                               6.0
                                                         -------
                                                         $  18.0
                                                         =======


                                       26
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

Cash Flows

      The net cash used in  operating  activities  during the nine months  ended
September 26, 2004 totaled $33.0 million,  and was primarily  attributable to an
increase  in  accounts  receivable,  net,  of  $28.5  million,  an  increase  in
inventories of $24.7 million, a decrease in accrued  liabilities of $7.1 million
and a decrease in deferred  revenue of $6.5 million.  The cash used in operating
activities  was offset by net income of $20.9  million,  a decrease  in advanced
billings of $6.3 million,  an increase in accounts  payable of $3.1  million,  a
decrease  in  inventories  -  delivered  systems of $1.6  million  and  non-cash
depreciation  and  amortization  of  $4.9  million.  The  increase  in  accounts
receivable,  net, was due to the high volume of shipments  toward the end of the
quarter,  while days sales  outstanding  declined  slightly  as compared to days
sales outstanding at December 31, 2003. The inventory increased  proportionately
to build plan  requirements,  while inventory turns declined slightly during the
nine-month period ended September 26, 2004.

      The net cash used in  operating  activities  during the nine months  ended
September 28, 2003 totaled $9.3 million, and was primarily attributable to a net
loss of $29.4  million,  a decrease  in  deferred  revenue of $32.1  million,  a
decrease  in accrued  liabilities  of $6.0  million,  and a decrease in accounts
payable of $6.0 million.  The cash used in operating  activities was offset by a
decrease in inventories and inventories - delivered systems of $21.9 million,  a
decrease in accounts receivable and advanced billings of $23.7 million, the loss
on disposition of Wet Business of $10.3 million,  the non-cash  depreciation and
amortization  of intangibles of $6.6 million and a decrease in prepaid  expenses
and other current assets of $1.5 million.

      Net cash used in investing  activities  was $10.9 million  during the nine
months ended  September  26, 2004, as compared to $1.9 million used in investing
activities  during the same  period  last year.  The net cash used in  investing
activities  during the nine months ended September 26, 2004 was  attributable to
purchases of property and equipment.  The net cash used in investing  activities
during the nine months ended September 28, 2003 was attributable to the purchase
of  property  and  equipment  of $3.9  million,  offset  by  proceeds  from  the
disposition of the Wet Business of $2.0 million.

      Net cash provided by financing  activities  was $47.5  million  during the
nine months ended  September  26, 2004,  as compared to $2.1 million  during the
same period last year. The net cash provided by financing  activities during the
nine months ended  September 26, 2004 was primarily  attributable to the sale of
approximately  4.3 million shares of the company's  newly issued common stock in
an  underwritten  public  offering  at $11.50  per share with  proceeds,  net of
expenses  through  the third  quarter of 2004,  of $46.4  million.  The net cash
provided by financing activities during the nine months ended September 28, 2003
was primarily  attributable to net borrowing against our Japanese line of credit
in the amount of net $1.1 million, restricted cash of $0.6 million, and proceeds
from the issuance of common stock of $0.4 million.

      Based  on  current  projections,  we  believe  that our  current  cash and
investment   positions  together  with  cash  provided  by  operations  will  be
sufficient to meet our  anticipated  cash needs for working  capital and capital
expenditures for at least the next twelve months.

      Our  operating  plans are based on and require us to improve our operating
profits, control expenses,  manage inventories,  and collect accounts receivable
balances.  As a result of the cyclical nature of the semiconductor  industry, we
are exposed to a number of challenges and risks, including delays in payments of
accounts receivable by customers,  and postponements or cancellations of orders.
Postponed  or  cancelled  orders can cause excess  inventory  and  underutilized
manufacturing  capacity.  If we are not able to sustain  profitability  over the
upcoming quarters,  the operating losses could adversely affect cash and working
capital balances, and we may be required to seek additional sources of financing
through public or private financing,  or other sources,  to fund operations.  We
may not be able to obtain adequate or favorable  financing when needed.  Failure
to raise capital when needed could harm our business.  When additional funds are
raised through the issuance of equity  securities,  the percentage  ownership of
our  stockholders  is reduced,  and these  equity  securities  may have  rights,
preferences  or privileges  senior to our common stock.  Any  additional  equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve  restrictive   covenants  on  the  Company's  operations  and  financial
condition.


                                       27
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

Factors That May Affect Future Results And Market Price Of Stock

In this report and from time to time,  we may make  forward  looking  statements
regarding,  among other  matters,  our  anticipated  sales and gross  margins in
future periods,  our future strategy,  product  development plans,  productivity
gains of our products,  financial  performance and growth.  The  forward-looking
statements  are made  pursuant  to the safe  harbor  provisions  of the  Private
Securities  Litigation Reform Act of 1995.  Forward looking  statements  address
matters  which are  subject to a number of risks and  uncertainties  which could
cause  actual  results to differ  materially,  including  those set forth in our
Annual Report on Form 10-K, all of which are incorporated here by reference,  in
addition to the following:

      The semiconductor equipment industry is highly cyclical,  periodically has
      severe  and  prolonged  downturns,  and causes  our  operating  results to
      fluctuate  significantly.  We are  exposed  to the risks  associated  with
      industry overcapacity,  including reduced capital expenditures,  decreased
      demand for our products,  increased  price  competition  and delays by our
      customers in paying for our products.

      The  semiconductor  industry  is  highly  cyclical  and  has  historically
experienced  periodic downturns,  whether the result of general economic changes
or capacity  growth  temporarily  exceeding  growth in demand for  semiconductor
devices.  Our business depends in significant part upon capital  expenditures by
manufacturers of semiconductor devices, including manufacturers that open new or
expand existing  facilities.  Periods of overcapacity  and reductions in capital
expenditures  by our customers  cause  decreases in demand for our products.  If
existing  fabrication  facilities  are not  expanded or new  facilities  are not
built, demand for our systems may not develop or increase,  and we may be unable
to generate  significant new orders for our systems. If we are unable to develop
new orders for our systems,  we will not achieve  anticipated  net sales levels.
During periods of declining demand for  semiconductor  manufacturing  equipment,
our customers  typically  reduce  purchases,  delay delivery of ordered products
and/or  cancel  orders,  resulting in reduced  revenues  and backlog,  delays in
revenue  recognition,  and excess  inventory.  Increased  price  competition may
result, causing pressure on gross margin and net income.

      The onset of another market downturn is difficult to predict and may occur
suddenly.  During the latest  downturn,  we were  unable to reduce our  expenses
quickly enough to avoid incurring losses.  For the years ended December 31, 2001
and 2002 and 2003,  our net loss was $336.7  million,  $94.3  million  and $28.4
million, respectively, compared to net income of $1.5 million for the year ended
December  31,  2000.  In the  event of a future  downturn,  if we are  unable to
effectively align our cost structure with prevailing market conditions, we could
again  experience   losses,   and  may  be  required  to  undertake   additional
cost-cutting  measures,  and be unable  to  continue  to  invest  in  marketing,
research and  development and engineering at the levels we believe are necessary
to maintain our  competitive  position in our  remaining  core  businesses.  Our
failure to make these  investments  could seriously harm our long-term  business
prospects.

      We depend on large purchases from a few customers,  and any  cancellation,
      reduction  or delay of  purchases  by, or failure  to collect  receivables
      from, these customers could harm our business.

      Currently,  we derive most of our  revenues  from the sale of a relatively
small number of systems to a relatively  small number of customers,  which makes
our relationship with each customer critical to our business. The list prices on
our systems range from $500,000 to over $2.2  million.  Consequently,  any order
cancellations,  delays in scheduled shipments, delays in customer acceptances or
delays in collection of accounts  receivable could  materially  adversely affect
our operating  results and cause such results to fall below our expectations and
the expectations of market analysts or investors.

      Our list of major customers changes  substantially  from year to year, and
we cannot  predict  whether a major  customer in one year will make  significant
purchases from us in future years.  Additionally,  our customers' capital budget
considerations  and our lengthy  sales cycle make the timing of customer  orders
uneven  and  difficult  to  predict.  Accordingly,  it is  difficult  for  us to
accurately  forecast our revenues and operating results from year to year. If we
are unable to collect a receivable from a large customer,  our financial results
will be negatively impacted.

      Our backlog orders are subject to cancellation or delay.

      Although we maintain a backlog of customer orders expected to be filled
within 12 months,  customers may request  cancellations or delivery delays. As a
result, our backlog may not be a reliable indication of our future revenues.  If
shipments of orders in backlog are cancelled or delayed, our revenues could fall
below our expectations and the expectations of market analysts and investors.


                                       28
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

      Delays  or  technical  and  manufacturing  difficulties  incurred  in  the
      introduction  of new  products  could be costly and  adversely  affect our
      customer relationships.

      Our  success  depends  in part on the  continual  introduction  of new and
improved systems and processes.  Our products are complex, and we may experience
delays and technical or manufacturing difficulties in the prototype introduction
of new  systems  and  enhancements,  or in volume  production  of new systems or
enhancements.  Our  inability  to  overcome  such  difficulties,  or to meet the
technical  specifications of any new systems or enhancements,  or to manufacture
and ship these systems or enhancements  in volume and in a timely manner,  would
materially  adversely affect our business and results of operations,  as well as
our customer  relationships.  We may from time to time incur unanticipated costs
to ensure the  functionality and reliability of our products early in their life
cycles, which costs can be substantial.  If we encounter  reliability or quality
problems  with our new  products  or  enhancements,  we could  face a number  of
difficulties,  including reduced orders,  higher  manufacturing costs, delays in
collection of accounts receivable, and additional service and warranty expenses,
all of which  could  materially  adversely  affect our  business  and results of
operations.

      We may not achieve  anticipated  revenue  growth if we are not selected as
      "vendor of choice" for new or expanded  fabrication  facilities  or if our
      systems and products do not achieve broader market acceptance.

      Because semiconductor  manufacturers must make a substantial investment to
install  and  integrate  capital  equipment  into  a  semiconductor  fabrication
facility,  these  manufacturers  will  tend to  choose  semiconductor  equipment
manufacturers based on established  relationships,  product  compatibility,  and
proven financial performance.

      Once a semiconductor  manufacturer  selects a particular  vendor's capital
equipment,  the manufacturer  generally relies for a significant  period of time
upon  equipment  from this "vendor of choice" for the specific  production  line
application. In addition, the semiconductor manufacturer frequently will attempt
to consolidate its other capital  equipment  requirements  with the same vendor.
Accordingly,  we may face narrow  windows of  opportunity  to be selected as the
"vendor of choice" by substantial  new customers.  It may be difficult for us to
sell to a  particular  customer  for a  significant  period  of time  once  that
customer  selects  a  competitor's  product,  and we may  not be  successful  in
obtaining broader acceptance of our systems and technology.  If we are unable to
achieve  broader  market  acceptance  of our systems and  technology,  we may be
unable to grow our business and our operating  results and  financial  condition
will be adversely affected.

      We must continually  anticipate  technology  trends,  improve our existing
      products  and develop new  products  in order to be  competitive,  and the
      development  of new or enhanced  products  involves  significant  risk and
      cost.

      The markets in which we and our  customers  compete are  characterized  by
rapidly  changing  technology,   evolving  industry  standards,  and  continuous
improvements  in products and services.  Consequently,  our success depends upon
our ability to  anticipate  future  customer  needs,  to develop new systems and
processes  that meet  customer  requirements  and  industry  standards  and that
compete  effectively on the basis of price and  performance,  and to continually
improve our existing systems and processes.

      The development and manufacture of new products involves significant risk,
since  the  products  are very  complex  and the  development  cycle is long and
expensive.  The success of any new systems we develop and introduce is dependent
on a number of factors,  including  our ability to  correctly  predict  customer
requirements for new processes,  assess and select alternative  technologies for
research  and  development,  and timely  complete  new system  designs  that are
acceptable  to  the  market.   We  may  make  substantial   investments  in  new
technologies  before we can know whether they are  technically  or  commercially
feasible or  advantageous,  and without any  assurance  that revenue from future
products or product  enhancements  will be sufficient to recover the  associated
development costs. Not all development  activities result in commercially viable
products.  We may be adversely affected by manufacturing  inefficiencies and the
challenge  of  producing  innovative  systems  in  volume  which  meet  customer
requirements.  We may not be able to improve our existing systems or develop new
technologies  or systems in a timely manner.  We may exceed the budgeted cost of
reaching our  research,  development  and  engineering  objectives,  and planned
product  development  schedules may require extension.  Any delays or additional
development  costs  could have a material  adverse  effect on our  business  and
results of operations.


                                       29
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

      We are engaged in the implementation of a new enterprise resource planning
      system, which may be more difficult or costly than anticipated,  and could
      cause  disruption to the management of our business and the preparation of
      our financial statements.

      We  are  currently  engaged  in  the  implementation  of a new  enterprise
resource planning,  or ERP, system,  which is expected to become integral to our
ability to accurately and efficiently maintain our books and records, record our
transactions,  provide critical  information to our management,  and prepare our
financial  statements.  However,  the  new ERP  system  could  be  more  costly,
difficult  and time  consuming  to  purchase  and  implement  than we  currently
anticipate.  In addition,  implementation  of the new ERP system  requires us to
change our  internal  business  practices,  transfer  records to a new  computer
system and train our  employees in the correct use of and input of data into the
system,  which could result in  disruption  of our  procedures  and controls and
difficulties  achieving accuracy in the conversion of data. If we fail to manage
these changes effectively, our operations could be disrupted, which could result
in the diversion of management's attention and resources, cause us to improperly
state or delay  reporting of our  financial  results,  materially  and adversely
affect our operating results, and impact our ability to manage our business.  In
addition,  to  manage  our  business  effectively,  we  may  need  to  implement
additional and improved  management  information  systems,  further  develop our
operating,  administrative,  financial and accounting systems and controls,  add
experienced  senior level managers,  and maintain closer  coordination among our
executive,   engineering,    accounting,   marketing,   sales   and   operations
organizations.  We may  incur  additional  unexpected  costs  and  our  systems,
procedures or controls may not be adequate to support our operations.

      Because of our recent  implementation  of a new ERP system and the limited
      time remaining in 2004 to complete the procedures  required to comply with
      new  requirements   under  Section  404  of  the  Sarbanes-Oxley  Act  for
      evaluation and attestation of internal  control over financial  reporting,
      we may not be able to comply  with  those  requirements  in the  permitted
      time.

      Rules  adopted by the  Securities  and  Exchange  Commission  to implement
Section 404 of the  Sarbanes-Oxley  Act of 2002 (the "Rules") will require us to
assess the design and  operating  effectiveness  of our  internal  control  over
financial  reporting  and to include  in our Annual  Report on Form 10-K for the
year ending December 31, 2004 (i) a report from our management, (ii) a statement
that our registered  independent  auditors have issued an attestation  report on
our management assessment of internal control over financial reporting and (iii)
a copy of the registered  independent  auditors' attestation report. In order to
achieve  compliance  with the new Rules within the required  timeframe,  we have
been conducting a process to document and evaluate our internal  control systems
and procedures since early in 2004. In parallel with that process, we planned to
implement a new enterprise  resource  planning,  or ERP,  system.  In the latest
phase of  implementation,  we switched our Fremont  headquarters over to the new
ERP system in October of 2004. Following that  implementation,  all the affected
internal control  processes and activities need to be  re-documented,  evaluated
and tested, together with any remediation steps that need to be taken if control
deficiencies  are  noted.  Because  of the  limited  time  remaining  in 2004 to
complete the required  procedures,  there is a significant  possibility that our
management  or our  independent  auditors  may  not be able  to  complete  their
assessment in the permitted time. If our management is either unable to complete
its  assessment  in a timely  manner  or to assess  our  internal  control  over
financial  reporting  as  effective,  or if our  independent  registered  public
accountants  issue an adverse opinion,  or disclaim an opinion,  relating to the
attestation  requirements  of Section  404,  we may be unable to comply with the
Rules, and investor  confidence in the reliability of our internal controls over
financial reporting may be negatively effected.

      Our results of operations may suffer if we do not  effectively  manage our
      inventory.

      We need to manage our  inventory  of component  parts and  finished  goods
effectively to meet customer  delivery  demands at an acceptable  risk and cost.
Customers are increasingly  requiring very short lead times for delivery,  which
may  require  us to  purchase  and  carry  additional  inventory.  For  both the
inventories  that  support  manufacture  of our  products  and our  spare  parts
inventories,  if anticipated  customer  demand does not  materialize in a timely
manner,  we will incur increased  carrying costs and some inventory could become
unsaleable or obsolete, resulting in write-offs which would adversely affect the
results of our operations.

      Warranty  claims in excess of our  projections  could  seriously  harm our
      business.

      We offer a warranty on our products. The cost associated with our warranty
is significant,  and in the event our projections and estimates of this cost are
inaccurate our financial  performance could be seriously harmed. In addition, if
we experienced product failures at an unexpectedly high level, our reputation in
the  marketplace  could be  damaged,  customers  may  decline  to  place  new or
additional orders with us, and our business would suffer.


                                       30
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

      We are increasingly outsourcing  manufacturing and logistics activities to
      third party  service  providers,  which  decreases  our  control  over the
      performance of these functions.

      We have already outsourced certain manufacturing and spare parts logistics
functions to third party  service  providers,  and may  outsource  more of those
functions in the future. While we expect to achieve operational  flexibility and
cost savings as a result of this outsourcing,  outsourcing has a number of risks
and  reduces our  control  over the  performance  of the  outsourced  functions.
Significant  performance  problems by these third party service  providers could
result in cost overruns, delayed deliveries,  shortages, quality issues or other
problems which could result in significant  customer  dissatisfaction  and could
materially and adversely affect our business, financial condition and results of
operations.

      If for any  reason  one or more of these  third  party  service  providers
becomes  unable or  unwilling  to  continue to provide  services  of  acceptable
quality,  at acceptable costs and in a timely manner, our ability to deliver our
products or spare parts to our customers  could be severely  impaired.  We would
quickly need to identify and qualify  substitute  service  providers or increase
our internal  capacity,  which could be expensive,  time consuming and difficult
and could result in unforeseen operations problems. Substitute service providers
might not be available or, if  available,  might be unwilling or unable to offer
services on acceptable terms.

      If customer demand for our products increases,  we may be unable to secure
sufficient   additional   capacity  from  our  current   service   providers  on
commercially reasonable terms, if at all.

      Our  requirements  are expected to represent a small  portion of the total
capacities of our third party  service  providers,  and they may  preferentially
allocate capacity to other customers, even during periods of high demand for our
products. In addition, such manufacturers could suffer financial difficulties or
disruptions in their operations due to causes beyond our control.

      We may not be able to  continue  to  successfully  compete  in the  highly
      competitive semiconductor equipment industry.

      The  semiconductor  equipment  industry  is both  highly  competitive  and
subject to rapid technological change.  Significant  competitive factors include
the following:

      o     system performance;

      o     cost of ownership;

      o     size of installed base;

      o     breadth of product line;

      o     delivery availability; and

      o     customer support.

      Competitive  pressure has been increasing in several areas. In particular,
there is increased  price  competition,  and  customers  are  delaying  purchase
commitments,  which are then placed with  demands for rapid  delivery  dates and
increased product support.

      Our  major  competitors  are  larger  than we are,  have  greater  capital
resources, and may have a competitive advantage over us by virtue of having:

      o     broader product lines;

      o     longer operating history;

      o     greater experience with high volume manufacturing;

      o     substantially larger customer bases;

      o     the ability to reduce price through product bundling;

      o     substantially greater customer support resources; and

      o     substantially greater financial, technical, and marketing resources.


                                       31
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

      In addition,  to expand our sales we must often replace the systems of our
competitors or sell new systems to customers of our competitors. Our competitors
may  develop  new or  enhanced  competitive  products  that will offer  price or
performance  features that are superior to our systems. Our competitors may also
be able to respond more quickly to new or emerging  technologies  and changes in
customer  requirements,  or to  devote  greater  resources  to the  development,
promotion,  sale and on-site customer support of their product lines. We may not
be able to  maintain  or expand our sales if  competition  increases  and we are
unable to respond effectively.

      Our lengthy sales cycle increases our costs and reduces the predictability
      of our revenue.

      Sales of our systems depend upon the decision of a prospective customer to
increase or replace  manufacturing  capacity,  typically involving a significant
capital commitment.  Accordingly,  the decision to purchase our systems requires
time consuming  internal  procedures  associated with the  evaluation,  testing,
implementation,  and  introduction  of  new  technologies  into  our  customers'
manufacturing  facilities.  Even after the customer  determines that our systems
meet their qualification  criteria, we experience delays finalizing system sales
while  the  customer  obtains  approval  for the  purchase  and  constructs  new
facilities or expands its existing  facilities.  Consequently,  the time between
our first contact with a customer  regarding a specific  potential  purchase and
the  customer's  placing its first order may last from nine to twelve  months or
longer.  We may incur  significant  sales and  marketing  expenses  during  this
evaluation period. In addition,  the length of this period makes it difficult to
accurately  forecast future sales. If sales forecasted from a specific  customer
are not realized,  we may experience an unplanned  shortfall in revenues and our
quarterly and annual revenue and operating  results may fluctuate  significantly
from period to period.

      We are highly  dependent  on  international  sales,  and face  significant
      economic and regulatory risks because a majority of our net sales are from
      outside the United States.

      Our international sales accounted for 87% of our net sales in 2003, 74% in
2002 and 78% in 2001 and we  anticipate  international  sales will  continue  to
account  for a  significant  portion of our  future  net sales.  Asia has been a
particularly  important region for our business,  and we anticipate that it will
continue to be important as we expand our sales and marketing efforts by opening
an office in China. Our sales to customers located in Taiwan, Japan, other Asian
countries and recently China  accounted for 71% of our net sales in 2003, 47% in
2002 and 47% in 2001.  Because of our continuing  dependence upon  international
sales,  we are  subject  to a number  of  risks  associated  with  international
business activities, including:

      o     unexpected   changes  in  law  or  regulations   resulting  in  more
            burdensome governmental controls, tariffs, restrictions,  embargoes,
            or export license requirements;

      o     exchange rate volatility;

      o     the need to comply with a wide  variety of foreign  and U.S.  export
            laws;

      o     political and economic instability, particularly in Asia;

      o     differing labor regulations;

      o     reduced protection for intellectual property;

      o     difficulties in accounts receivable collections;

      o     difficulties in managing distributors or representatives;

      o     difficulties in staffing and managing foreign subsidiary operations;
            and

      o     changes in tariffs or taxes.

      In the U.S.  and Asia  (excluding  Japan),  our  sales to date  have  been
denominated  primarily  in U.S.  dollars,  while our sales in Japan are  usually
denominated  in Japanese Yen. Our sales to date in Europe have been  denominated
in various currencies,  currently primarily U.S. dollars and the Euro. Our sales
in foreign  currencies  are subject to risks of currency  fluctuation.  For U.S.
dollar sales in foreign  countries,  our products become less  price-competitive
where the local  currency is  declining  in value  compared to the dollar.  This
could cause us to lose sales or force us to lower our prices, which would reduce
our gross margins.

      In  addition,  the  expenses  of our German  manufacturing  operation  are
primarily  incurred in euros.  If the euro were to appreciate in relation to the
U.S. dollar, our operating expenses would increase.


                                       32
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

      We depend  upon a limited  number of  suppliers  for some  components  and
      subassemblies,  and supply  shortages or the loss of these suppliers could
      result  in  increased  cost  or  delays  in  manufacture  and  sale of our
      products.

      We rely to a substantial  extent on outside vendors to provide many of the
components and subassemblies of our systems.  We obtain some of these components
and subassemblies from a sole source or a limited group of suppliers. Because of
our  anticipated  reliance  on  outside  vendors  generally,  and on a sole or a
limited group of suppliers in particular, we may be unable to obtain an adequate
supply of required  components.  Although we currently experience minimal delays
in receiving goods from our suppliers,  when demand for semiconductor  equipment
is strong,  our suppliers may have difficulty  providing  components on a timely
basis.

      In  addition,  during  periods of  shortages  of  components,  we may have
reduced control over pricing and timely  delivery of components.  We often quote
prices to our customers  and accept  customer  orders for our products  prior to
purchasing  components and  subassemblies  from our suppliers.  If our suppliers
increase the cost of components or  subassemblies,  we may not have  alternative
sources of supply and may no longer be able to  increase  the cost of the system
being  evaluated by our customers to cover all or part of the increased  cost of
components.

      The  manufacture  of some of  these  components  and  subassemblies  is an
extremely  complex  process and  requires  long lead times.  If we are unable to
obtain   adequate  and  timely   deliveries   of  our  required   components  or
subassemblies,  we may have to seek alternative sources of supply or manufacture
such  components  internally.  This could  delay our ability to  manufacture  or
timely ship our systems, causing us to lose sales, incur additional costs, delay
new product introductions, and harm our reputation.

      We  manufacture  many  of  our  products  at  two  primary   manufacturing
      facilities and are thus subject to risk of disruption.

      Although we  outsource  the  manufacturing  for certain of our products to
third parties,  we continue to produce our latest generation products at our two
principal manufacturing plants in Fremont, California and Dornstadt, Germany. We
have limited ability to interchangeably produce our products at either facility,
and in the  event of a  disruption  of  operations  at one  facility,  our other
facility  would not be able to make up the capacity  loss.  Our  operations  are
subject to disruption  for a variety of reasons,  including,  but not limited to
natural  disasters,   work  stoppages,   operational  facility  constraints  and
terrorism.  Such  disruption thus could cause delays in shipments of products to
our  customers,  result  in  cancellation  of orders  or loss of  customers  and
seriously harm our business.

      Because of  competition  for  qualified  personnel,  we may not be able to
      recruit or retain necessary  personnel,  which could impede development or
      sales of our products.

      Our growth will  depend on our  ability to attract  and retain  qualified,
experienced  employees.   There  is  substantial   competition  for  experienced
engineering,  technical,  financial,  sales,  and  marketing  personnel  in  our
industry.  In  particular,  we must attract and retain highly skilled design and
process engineers. Historically, competition for such personnel has been intense
in all of our locations,  but  particularly  in the San Francisco Bay Area where
our headquarters is located.  If we are unable to retain existing key personnel,
or attract and retain additional qualified  personnel,  we may from time to time
experience  inadequate levels of staffing to develop and market our products and
perform services for our customers. As a result, our growth could be limited due
to our lack of capacity to develop and market our products to our customers,  or
we could fail to meet our delivery  commitments or experience  deterioration  in
service levels or decreased customer satisfaction.

      If we are  unable to  protect  our  intellectual  property,  we may lose a
      valuable asset and experience reduced market share. Efforts to protect our
      intellectual property may require additional costly litigation.

      We rely on a  combination  of  patents,  copyrights,  trademark  and trade
secret  laws,  non-disclosure   agreements,   and  other  intellectual  property
protection methods to protect our proprietary technology. Despite our efforts to
protect our intellectual  property,  our competitors may be able to legitimately
ascertain the non-patented  proprietary  technology  embedded in our systems. If
this occurs, we may not be able to prevent the use of such technology. Our means
of protecting our proprietary rights may not be adequate and our patents may not
be sufficiently  broad to protect our technology.  Any patents owned by us could
be challenged,  invalidated,  or  circumvented  and any rights granted under any
patent may not provide adequate protection to us.  Furthermore,  we may not have
sufficient  resources to protect our rights.  Our competitors may  independently
develop similar  technology,  or design around patents that may be issued to us.
In addition,  the laws of some foreign countries may not protect our proprietary
rights to as great an extent as do the laws of the  United  States and it may be
more difficult to monitor the use of our


                                       33
<PAGE>

products  in such  foreign  countries.  As a  result  of  these  threats  to our
proprietary  technology,  we may have to resort to costly  litigation to enforce
our intellectual property rights.

      We  might  face  patent   infringement  or  other  intellectual   property
      infringement  claims  that may be  costly  to  resolve  and  could  divert
      management attention.

      We may from time to time be  subject  to claims of  infringement  of other
parties'  patents or other  proprietary  rights.  In  addition,  we on  occasion
receive notification from customers who believe that we owe them indemnification
or other obligations  related to infringement  claims made against the customers
by third parties.  Our  involvement in any patent dispute or other  intellectual
property  dispute or action to  protect  trade  secrets,  even if the claims are
without merit,  could be very expensive to defend and could divert the attention
of our management.  Adverse determinations in any litigation could subject us to
significant  liabilities  to third parties,  require us to seek costly  licenses
from third parties,  and prevent us from manufacturing and selling our products.
Royalty  or license  agreements,  if  required,  may not be  available  on terms
acceptable  to us or at all.  Any of  these  situations  could  have a  material
adverse effect on our business and operating results in one or more countries.

      Our  failure to comply  with  environmental  regulations  could  result in
      substantial liability.

      We are subject to a variety of federal,  state,  local,  and foreign laws,
rules, and regulations relating to environmental protection.  These laws, rules,
and regulations  govern the use, storage,  discharge,  and disposal of hazardous
chemicals   during   manufacturing,   research   and   development   and   sales
demonstrations.  If we  fail to  comply  with  present  or  future  regulations,
especially  in our Fremont,  California  and  Dornstadt,  Germany  manufacturing
facilities,  we could be subject to substantial  liability for clean up efforts,
personal injury, and fines or suspension or cessation of our operations.  We may
be  subject  to  liability  if our  acquired  companies  have  past  violations.
Restrictions  on our  ability  to expand or  continue  to  operate  our  present
locations  could be imposed  upon us or we could be required  to acquire  costly
remediation equipment or incur other significant expenses.

      Future sales of shares by STEAG could adversely affect the market price of
      our common stock.

      There  are   approximately   51.4  million  shares  of  our  common  stock
outstanding  as of October  27,  2004,  of which  approximately  9.1 million (or
17.8%) are beneficially  owned by STEAG Electronic  Systems AG, or STEAG.  STEAG
has  indicated  that it plans to reduce its  ownership  in our common stock over
time.  If STEAG were to sell a large  number of shares,  the market price of our
common stock may decline.  Moreover,  the  perception in the public markets that
such sales by STEAG might occur could also adversely  affect the market price of
our common stock.

      We incurred net  operating  losses for the years 2001 through 2003. We may
      not achieve or maintain profitability on an annual basis.

      We incurred net losses of approximately  $336.7 million for the year ended
December 31, 2001,  $94.3 million for the year ended December 31, 2002 and $28.4
million for the year ended December 31, 2003.  Although we have been  profitable
for the first nine months of 2004,  we expect to  continue to incur  significant
research and development and selling,  general and administrative  expenses.  We
may not achieve  profitability in 2004 or future years. We will need to continue
to generate  significant net sales to achieve and maintain  profitability  on an
annual basis, and we may not be able to do so.

      Our quarterly operating results fluctuate  significantly and are difficult
      to predict,  and may fall short of anticipated  levels,  which could cause
      our stock price to decline.

      Our quarterly revenue and operating  results have varied  significantly in
the past and are likely to vary  significantly  in the  future,  which  makes it
difficult  for  us to  predict  our  future  operating  results.  A  substantial
percentage of our  operating  expenses are fixed in the short term and we may be
unable to adjust spending to compensate for an unexpected shortfall in revenues.
As a result,  any delay in generating or  recognizing  revenues  could cause our
operating  results to be below the expectations of market analysts or investors,
which could cause the price of our common stock to decline.

      The price of our common stock has  fluctuated in the past and may continue
      to  fluctuate  significantly  in the  future,  which may lead to losses by
      investors or to securities litigation.

      The market price of our common stock has been highly volatile in the past,
and our stock price may decline in the future.  For  example,  as of November 3,
2004,  the  52-week  price  range for our  common  stock was $6.96 to $16.59 per
share.


                                       34
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS -- (Continued)

      In addition,  in recent years the stock market in general,  and the market
for shares of high technology  stocks in particular,  have  experienced  extreme
price  fluctuations.  These  fluctuations  have frequently been unrelated to the
operating  performance  of  the  affected  companies.  Such  fluctuations  could
adversely  affect the market price of our common stock. In the past,  securities
class action  litigation has often been instituted  against a company  following
periods of  volatility  in its stock price.  This type of  litigation,  if filed
against  us,  could  result in  substantial  costs and divert  our  management's
attention and resources.

      Any  future  business  acquisitions  may  disrupt  our  business,   dilute
      stockholder value, or distract management attention.

      As part of our ongoing business strategy, we may consider acquisitions of,
or significant  investments in,  businesses that offer products,  services,  and
technologies  complementary  to our  own.  Such  acquisitions  could  materially
adversely  affect our  operating  results  and/or the price of our common stock.
Acquisitions also entail numerous risks, including:

      o     difficulty of assimilating the operations,  products,  and personnel
            of the acquired businesses;

      o     potential disruption of our ongoing business;

      o     unanticipated costs associated with the acquisition;

      o     inability  of  management  to manage  the  financial  and  strategic
            position  of  acquired  or   developed   products,   services,   and
            technologies;

      o     inability to maintain uniform  standards,  controls,  policies,  and
            procedures; and

      o     impairment of  relationships  with  employees and customers that may
            occur as a result of integration of the acquired business.

      To the extent that shares of our stock or other  rights to purchase  stock
are issued in connection with any future acquisitions,  dilution to our existing
stockholders  will  result and our  earnings  per share may  suffer.  Any future
acquisitions may not generate  additional  revenue or provide any benefit to our
business,  and we may not achieve a satisfactory return on our investment in any
acquired businesses.

      Compliance  with  new  regulatory  and  accounting  requirements  will  be
      challenging and is likely to cause our general and administrative expenses
      to  increase  and impact  our future  financial  position  and  results of
      operations.

      In order to comply with the Sarbanes-Oxley Act of 2002, changes to listing
standards  recently  adopted by NASDAQ,  and attestation and accounting  changes
required by the Securities and Exchange Commission,  we must document,  test and
improve our internal  controls.  This has  necessitated  that we utilize outside
accounting   and   advisory   services,   which  will  cause  our   general  and
administrative  expenses to increase.  Proposed changes in the accounting rules,
including  legislative and other proposals to account for employee stock options
as a compensation  expense among others,  could materially increase the expenses
that we report under  generally  accepted  accounting  principles  and adversely
affect our operating results.


                                       35
<PAGE>

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

      Our exposure to market risk for changes in interest  rates  relates to our
investment  portfolio.  We do not use  derivative  financial  instruments in our
investment portfolio.  We place our investments with high credit quality issuers
and,  by policy,  limit the amount of credit  exposure  to any one  issuer.  The
portfolio  includes money market funds and other  securities  classified as cash
equivalents,  which  trade  in  the  secondary  market.  All  securities  in our
portfolio are highly  liquid.  We have no cash flow exposure due to rate changes
for cash equivalents, as all of these investments are at market interest rates.

      The table below  presents the fair value of principal  amounts and related
weighted average interest rates for our investment portfolio as of September 26,
2004 (in thousands):

                                                                  Fair Value at
                                                                  September 26,
                                                                      2004
                                                                  -------------
Assets:
     Cash and cash equivalents ..........................           $ 80,489
        Average interest rate ...........................               1.46%
     Restricted cash ....................................           $    510
        Average interest rate ...........................               0.49%

Foreign Currency Risk

      We are a United States, or U.S.,  dollar  functional  currency entity with
non-U.S.  subsidiaries.  We have an active foreign  currency  hedging program to
mitigate  the  currency  exchange  risks  associated  from  various  third party
transactions.  This hedging program is managed and administered at our corporate
headquarters  by our treasury  staff and outside  consulting is hired as needed.
Hedging of the European EURO and the Japanese Yen transactions have been made by
placing forward  exchange  contracts in the month of the initial  exposure.  The
hedge positions are  marked-to-market  at the end of each month until the actual
settlement of the underlying transaction is consummated and the forward contract
is  closed.  Unrealized  gains and  losses  are  recorded  as an offset to other
comprehensive  income.  Realized  gains and losses  are booked to the  condensed
consolidated statement of operations.  We do not engage in any forward contracts
for speculative trading purposes.  We enter into spot foreign exchange trades to
meet third party payment requirements and for operating funding requirements for
non-U.S. subsidiaries.

      The following table provides information as of September 26, 2004 about us
and our subsidiaries'  derivative financial instruments,  which are comprised of
foreign currency forward exchange contracts. The information is provided in U.S.
dollar and EURO  equivalent  amounts,  as listed below.  The table  presents the
notional  amounts  (at  the  contract  exchange  rates),  the  weighted  average
contractual  foreign  currency  exchange rates,  and the estimated fair value of
those contracts (in thousands, except for average contract rate):

<TABLE>
<CAPTION>
                                                                                         Average      Estimated
                                                                          Notional       Contract        Fair
                                                                           Amount          Rate         Value
                                                                          --------       --------     ---------
<S>                                                                       <C>            <C>           <C>
 Foreign currency forward sell exchange contracts:
      Mattson Technology, Inc. (U.S. dollar equivalent amount)
         Japanese Yen.............................................        $    558        110.7        $    556
         European Euro............................................        $  2,071         1.22        $  1,105

 Foreign currency forward buy exchange contracts:
      Mattson Technology, Inc. (U.S. dollar equivalent amount)
         European Euro............................................        $  3,990         1.22        $  4,039
</TABLE>

      The local currency is the functional  currency for all foreign operations.
Accordingly,  all  assets  and  liabilities  of  these  foreign  operations  are
translated using exchange rates in effect at the end of the period, and revenues
and costs are translated using average  exchange rates for the period.  Gains or
losses from translation of foreign operations where the local currencies are the
functional   currency  are  included  as  a  component  of   accumulated   other
comprehensive  income (loss).  Foreign currency transaction gains and losses are
recognized in the consolidated statements of operations as they are incurred. To
help neutralize our U.S.  operation's  exposure to exchange rate


                                       36
<PAGE>

volatility,  we keep EUROS in a foreign  currency bank  account.  The balance of
this bank account was approximately 0.6 million EUROS at September 26, 2004.

ITEM 4.   CONTROLS AND PROCEDURES

      Evaluation of Disclosure Controls and Procedures

      Our management,  with the participation of our chief executive officer and
chief financial  officer,  conducted an evaluation of the  effectiveness  of our
"disclosure controls and procedures" (as defined in Exchange Act Rule 13a-15(e))
as of the end of the period  covered by this report.  Based on that  evaluation,
our 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.

      Our  work to  implement  and  improve  our  consolidation  and  enterprise
resource  planning  systems  continues as an active project.  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.

      Changes in Internal Control Over Financial Reporting During the Quarter

      Our management,  with the participation of our chief executive officer and
chief financial  officer,  also conducted an evaluation of our internal  control
over financial  reporting to determine  whether any change  occurred  during the
third  quarter  that  has  materially  affected,  or  is  reasonably  likely  to
materially affect, our internal control over financial reporting.  Based on that
evaluation,  our  management  concluded that there was no such change during the
third quarter of 2004.

      Sarbanes-Oxley  404 Compliance - Changes in Internal Control in the Fourth
Quarter

      Rules  adopted by the  Securities  and  Exchange  Commission  to implement
Section 404 of the Sarbanes-Oxley Act of 2002 (the "Rules") require us to assess
the design and operating  effectiveness of our internal  controls over financial
reporting  and to include in our Annual  Report on Form 10-K for the year ending
December  31,  2004  (i) a report  from  our  management  as to the  design  and
operating  effectiveness of those controls, (ii) a statement that our registered
independent  auditors  have  issued an  attestation  report on our  management's
assessment of internal control over financial  reporting and (iii) a copy of the
registered independent auditors' attestation report.

      In order to achieve  compliance  with the new Rules  within  the  required
timeframe,  we have been  conducting  a process to  document  and  evaluate  our
internal  control systems and procedures since early in 2004. In support of this
effort,  we  adopted a detailed  work plan,  dedicated  internal  resources  and
engaged outside consultants to: (i) assess and document the adequacy of internal
control over financial  reporting;  (ii) take steps to improve control processes
where required;  (iii) validate through testing that controls are functioning as
documented;  and (iv) implement a continuous  reporting and improvement  process
for internal control over financial reporting.

      Early in 2004,  in parallel  with our plans to document  and  evaluate our
internal  control  systems as required by the Rules,  we also determined that we
should implement a new enterprise  resource planning,  or ERP, system as part of
ongoing efforts to improve our management  information  and financial  reporting
systems, procedures and controls. The implementation has been done in phases. In
the latest  phase,  we  switched  our Fremont  headquarters  over to the new ERP
system in October of 2004.  The new ERP system  affects a significant  number of
our internal controls and procedures. Following the latest implementation phase,
all of our affected  processes and control  activities need to be re-documented,
evaluated and tested by  management.  Then our registered  independent  auditors
need to review the new documentation,  and perform  evaluations and tests of the
affected  activities.  If  control  deficiencies  are  noted,  we  will  need to
implement appropriate remediation activities. Any remediated controls would need
to be put into  operation for a period of time,  and then  re-tested in order to
determine whether they operated effectively at year end.

      Because  of  the  limited  time   remaining  in  2004  to  complete  these
activities,  there  is  a  significant  possibility  that  our  management,  and
therefore our independent auditors, may not be able to complete their assessment
in the permitted time. If that happens,  our management may not be able to issue
the required report on the effectiveness of our internal controls over financial
reporting, or our auditors may issue an adverse opinion, or disclaim an opinion,
relating  to  the  attestation  requirements  of  Section  404.  Our  registered
independent  auditors  have  delivered  a letter  to the  Chairman  of our Audit
Committee emphasizing to us their concern over this situation.


                                       37
<PAGE>

      The  requirements  of the Rules are new,  and we  cannot be  certain  what
consequences there may be if, despite our efforts, we or our auditors are unable
to timely  complete the  assessment of our internal  controls or comply with the
Rules.


                                       38
<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
      In  the  ordinary  course  of  business,  we are  subject  to  claims  and
litigation,  including  claims that we infringe third party patents,  trademarks
and other intellectual property rights.  Although we believe that it is unlikely
that any current  claims or actions will have a material  adverse  impact on our
operating  results  or  our  financial   position,   given  the  uncertainty  of
litigation,  we cannot be certain of this.  Moreover,  the  defense of claims or
actions  against us, even if such claims or actions are not  meritorious,  could
result in the expenditure of significant financial and managerial resources.

      There have been no  developments  in the  pending  cases  during the third
quarter of 2004 that are material to Mattson.

      Our  involvement in any patent  dispute,  or other  intellectual  property
dispute or action to protect  trade  secrets  and  know-how,  could  result in a
material  adverse  effect on our  business.  Adverse  determinations  in current
litigation or any other litigation in which we may become involved could subject
us to significant liabilities to third parties,  require us to grant licenses to
or seek  licenses  from third  parties,  and prevent us from  manufacturing  and
selling our  products.  Any of these  situations  could have a material  adverse
effect on our business.

ITEM 6. EXHIBITS

<TABLE>
<CAPTION>
             Exhibit
              Number                                            Description
             --------     ---------------------------------------------------------------------------------------
              <S>          <C>
               3.1(1)     Amended and Restated Certificate of Incorporation of the Company.
               3.2(2)     Third Amended and Restated Bylaws of the Company.
              31.1        Certification of Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section 302(a).
              31.2        Certification of Chief Financial Officer Pursuant to Sarbanes-Oxley Act Section 302(a).
              32.1        Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
              32.2        Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
</TABLE>

----------
(1)   Incorporated by reference from Mattson Technology,  Inc. Current Report on
      Form 8-K/A filed on January 30, 2001.

(2)   Incorporated by reference from Mattson  Technology,  Inc. Quarterly Report
      on Form 10-Q filed on August 14, 2002.


                                       39
<PAGE>

                                   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.

                                              MATTSON TECHNOLOGY, INC.
                                              ------------------------
                                                   (Registrant)

Dated: November 5, 2004


                                   By:           /s/ DAVID DUTTON
                                         -------------------------------------
                                                    David Dutton
                                         President and Chief Executive Officer
                                             (Principal Executive Officer)

Dated: November 5, 2004


                                   By:         /s/ LUDGER VIEFHUES
                                         --------------------------------------
                                                   Ludger Viefhues
                                         Executive Vice President - Finance and
                                                Chief Financial Officer
                                               (Principal Financial and
                                                  Accounting Officer)


                                       40