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

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FORM 10-Q

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|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended March 27, 2005                
|OR                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission file number: 000-24838

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

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

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

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

Number of shares of common stock outstanding as of May 2, 2005: 51,732,214.



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MATTSON TECHNOLOGY, INC.

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TABLE OF CONTENTS

|                              |  |                                                                                                              |  | Page
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|PART I. FINANCIAL INFORMATION |  |                                                                                                             
|Item 1.                       |  | Financial Statements (unaudited):                                                                            |  |     
|                              |  | Condensed Consolidated Balance Sheetsat March 27, 2005 and December 31, 2004                                |  | 3   
|                              |  | Condensed Consolidated Statements of Operationsfor the Three Months Ended March 27, 2005 and March 28, 2004 |  | 4   
|                              |  | Condensed Consolidated Statements of Cash Flowsfor the Three Months Ended March 27, 2005 and March 28, 2004 |  | 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                                                   |  | 40  
|Item 4.                       |  | Controls and Procedures                                                                                      |  | 41  
|PART II. OTHER INFORMATION    |  |                                                                                                             
|Item 1.                       |  | Legal Proceedings                                                                                            |  | 42  
|Item 6.                       |  | Exhibits                                                                                                     |  | 42  
|Signatures                    |  | 43                                                                                                          
|Exhibit Index                 |  | 44                                                                                                          

2

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PART I.    FINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS

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

|                                     |                                                                                                                                                                                   | March 27,
2005              |                                            | December 31,
2004 |        
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------ | ----------------- | -------
|ASSETS                               |                                                                                                                                                                                   |                             |                                            |                  
|Current assets:                      |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     | Cash and cash equivalents                                                                                                                                                         |                             | $                                          | 79,375            |        
|                                     | Short-term investments                                                                                                                                                            |                             |                                            | 3,915             |        
|                                     | Restricted cash                                                                                                                                                                   |                             |                                            | 512               |        
|                                     | Accounts receivable, net                                                                                                                                                          |                             |                                            | 57,395            |        
|                                     | Advance billings                                                                                                                                                                  |                             |                                            | 18,840            |        
|                                     | Inventories                                                                                                                                                                       |                             |                                            | 44,243            |        
|                                     | Inventoriesdelivered systems                                                                                                                                                     |                             |                                            | 6,074             |        
|                                     | Prepaid expenses and other assets                                                                                                                                                 |                             |                                            | 12,159            |        
|                                     |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     |                                                                                                                                                                                   | Total current assets        |                                            |                   | 222,513
|Property and equipment, net          |                                                                                                                                                                                   |                             | 25,601                                     |                   |        
|Goodwill                             |                                                                                                                                                                                   |                             | 24,451                                     |                   |        
|Intangibles, net                     |                                                                                                                                                                                   |                             | 12,397                                     |                   |        
|Other assets                         |                                                                                                                                                                                   |                             | 1,108                                      |                   |        
|                                     |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     |                                                                                                                                                                                   | Total assets                |                                            | $                 | 286,070
|                                     |                                                                                                                                                                                   |                             |                                            |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                                   |                             |                                            |                  
|Current liabilities:                 |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     | Accounts payable                                                                                                                                                                  |                             | $                                          | 21,560            |        
|                                     | Accrued liabilities                                                                                                                                                               |                             |                                            | 41,038            |        
|                                     | Deferred revenue                                                                                                                                                                  |                             |                                            | 27,961            |        
|                                     |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     |                                                                                                                                                                                   | Total current liabilities   |                                            |                   | 90,559 
|                                     |                                                                                                                                                                                   |                             |                                            |                   |        
|Long-term liabilities:               |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     | Deferred income tax liabilities                                                                                                                                                   |                             |                                            | 4,711             |        
|                                     |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     |                                                                                                                                                                                   | Total long-term liabilities |                                            |                   | 4,711  
|                                     |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     |                                                                                                                                                                                   | Total liabilities           |                                            |                   | 95,270 
|                                     |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     | Commitments and contingencies (Note 13)                                                                                                                                           |                             |                                            |                   |        
|Stockholders' equity:                |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     | Preferred stock, 2,000 shares authorized; none issued and outstanding                                                                                                             |                             |                                            |                  |        
|                                     | Common stock, par value $0.001, 120,000 authorized shares; 52,097 shares issued and 51,722 shares outstanding in 2005; 51,892 shares issued and 51,517 shares outstanding in 2004 |                             |                                            | 52                |        
|                                     | Additional paid-in capital                                                                                                                                                        |                             |                                            | 612,038           |        
|                                     | Accumulated other comprehensive income                                                                                                                                            |                             |                                            | 13,105            |        
|                                     | Treasury stock, 375 shares in 2005 and 2004, at cost                                                                                                                              |                             |                                            | (2,987            | )      
|                                     | Accumulated deficit                                                                                                                                                               |                             |                                            | (431,408          | )      
|                                     |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     |                                                                                                                                                                                   | Total stockholders' equity  |                                            |                   | 190,800
|                                     |                                                                                                                                                                                   |                             |                                            |                   |        
|                                     |                                                                                                                                                                                   |                             | Total liabilities and stockholders' equity |                   | $      
|                                     |                                                                                                                                                                                   |                             |                                            |                   |        

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

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

|                                               |                                       | Three Months Ended       |       
|---------------------------------------------- | ------------------------------------- | ------------------------ | ------
|
|Net sales                                      |                                       | $                        | 55,065
|Cost of sales                                  |                                       |                          | 32,789
|                                               |                                       |                          |       
|                                               | Gross profit                          |                          |       
|                                               |                                       |                          |       
|Operating expenses:                            |                                       |                          |       
|                                               | Research, development and engineering |                          |       
|                                               | Selling, general and administrative   |                          |       
|                                               | Amortization of intangibles           |                          |       
|                                               |                                       |                          |       
|                                               |                                       | Total operating expenses |       
|                                               |                                       |                          |       
|Income from operations                         |                                       |                          | 1,288 
|Interest expense                               |                                       |                          | (58   
|Interest income                                |                                       |                          | 444   
|Other expense, net                             |                                       |                          | (798  
|                                               |                                       |                          |       
|Income before income taxes                     |                                       |                          | 876   
|Provision (benefit) for income taxes           |                                       |                          | (112  
|                                               |                                       |                          |       
|Net income                                     |                                       | $                        | 988   
|                                               |                                       |                          |       
|Net income per share:                          |                                       |                          |       
|                                               | Basic                                 |                          | $     
|                                               | Diluted                               |                          | $     
|Shares used in computing net income per share: |                                       |                          |       
|                                               | Basic                                 |                          |       
|                                               | Diluted                               |                          |       

The
accompanying notes are an integral part of these condensed consolidated financial statements.

4

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

|                                                             |                                                                                      | Three Months Ended                                                         |                                          
|------------------------------------------------------------ | ------------------------------------------------------------------------------------ | -------------------------------------------------------------------------- | -----------------------------------------
|
|Cash flows from operating activities:                        |                                                                                      |                                                                            |                                          
|                                                             | Net income                                                                           |                                                                            | $                                        
|                                                             | Adjustments to reconcile net income (loss) to net cash used in operating activities: |                                                                            |                                          
|                                                             |                                                                                      | Depreciation                                                               |                                          
|                                                             |                                                                                      | Deferred taxes                                                             |                                          
|                                                             |                                                                                      | Allowance for doubtful accounts                                            |                                          
|                                                             |                                                                                      | Inventory valuation charge                                                 |                                          
|                                                             |                                                                                      | Amortization of intangibles                                                |                                          
|                                                             |                                                                                      | Loss on disposal of fixed assets                                           |                                          
|                                                             |                                                                                      | Stock-based compensation expense recognized for non-employee option grants |                                          
|                                                             |                                                                                      | Changes in assets and liabilities:                                         |                                          
|                                                             |                                                                                      |                                                                            | Accounts receivable                      
|                                                             |                                                                                      |                                                                            | Advance billings                         
|                                                             |                                                                                      |                                                                            | Inventories                              
|                                                             |                                                                                      |                                                                            | Inventoriesdelivered systems            
|                                                             |                                                                                      |                                                                            | Prepaid expenses and other current assets
|                                                             |                                                                                      |                                                                            | Other assets                             
|                                                             |                                                                                      |                                                                            | Accounts payable                         
|                                                             |                                                                                      |                                                                            | Accrued liabilities                      
|                                                             |                                                                                      |                                                                            | Deferred revenue                         
|                                                             |                                                                                      |                                                                            |                                          
|Net cash used in operating activities                        |                                                                                      |                                                                            | (7,713                                   
|                                                             |                                                                                      |                                                                            |                                          
|Cash flows from investing activities:                        |                                                                                      |                                                                            |                                          
|                                                             | Purchases of property and equipment                                                  |                                                                            |                                          
|                                                             | Proceeds from the sale of equipment                                                  |                                                                            |                                          
|                                                             | Purchases of available-for-sale investments                                          |                                                                            |                                          
|                                                             | Proceeds from sales and maturities of available-for-sale investments                 |                                                                            |                                          
|                                                             |                                                                                      |                                                                            |                                          
|Net cash provided by (used in) investing activities          |                                                                                      |                                                                            | (2,255                                   
|                                                             |                                                                                      |                                                                            |                                          
|Cash flows from financing activities:                        |                                                                                      |                                                                            |                                          
|                                                             | Restricted cash                                                                      |                                                                            |                                          
|                                                             | Proceeds from the issuance of Common Stock, net of offering costs                    |                                                                            |                                          
|                                                             | Proceeds from stock plans                                                            |                                                                            |                                          
|                                                             |                                                                                      |                                                                            |                                          
|Net cash provided by financing activities                    |                                                                                      |                                                                            | 1,276                                    
|                                                             |                                                                                      |                                                                            |                                          
|Effect of exchange rate changes on cash and cash equivalents |                                                                                      |                                                                            | (1,586                                   
|                                                             |                                                                                      |                                                                            |                                          
|Net increase (decrease) in cash and cash equivalents         |                                                                                      |                                                                            | (10,278                                  
|Cash and cash equivalents, beginning of period               |                                                                                      |                                                                            | 89,653                                   
|                                                             |                                                                                      |                                                                            |                                          
|Cash and cash equivalents, end of period                     |                                                                                      | $                                                                          | 79,375                                   
|                                                             |                                                                                      |                                                                            |                                          

The
accompanying notes are an integral part of these condensed consolidated financial statements.

5

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MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  March 27, 2005  (Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary
for a fair statement of financial position and operations have been included. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements of Mattson Technology, Inc. (the Company or Mattson) for the year ended December 31, 2004, which are included in the Company's Annual Report on
Form 10-K. The Company's Form 10-K, Forms 10-Q and Forms 8-K are available online at the Securities and Exchange Commission (SEC) website.
The address of that site is http://www.sec.gov. The Company also posts the Form 10-K, Forms 10-Q and Forms 8-K on the Company's corporate website at
http://www.mattson.com.

The
Company's current year will end December 31, 2005 and includes 52 weeks. The Company closes its fiscal quarters on the last Sunday of March, June, and September and on
December 31. The latest fiscal quarter ended March 27, 2005. The results of operations for the quarter ended March 27, 2005 are not necessarily indicative of results that may be
expected for future quarters or for the entire year ending December 31, 2005.

The
consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.



The Company had $0.5 million of restricted cash collateral for the Company's corporate credit cards at March 27, 2005.



Certain amounts presented in the comparative financial statements for prior fiscal periods have been reclassified to conform to the fiscal 2005 presentation.

Auction Rate Securities Through the Third Fiscal Quarter of 2004.The Company has reclassified certain auction rate
securities from cash equivalents to short-term investments. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the
securities in excess of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction, at pre-determined short-term intervals, usually
every 7, 28 or 35 days. They trade at par and are callable at par on any interest payment date at the option of the issuer. Interest paid during a given period is based upon the interest rate
determined during the prior auction. Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the
liquidity provided through the auction and the interest rate reset. The Company had historically classified these instruments as cash equivalents if the period between interest rate resets was
90 days or less, based on the Company's ability to either liquidate its holdings or roll its investment over to the next reset period.

6

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Based
upon the Company's re-evaluation of these securities, the Company has reclassified its auction rate securities, previously classified as cash equivalents, as
short-term investments in the Company's consolidated balance sheets for the appropriate periods. The Company sold all auction rate securities in November 2004. In addition,
purchases of investments and sales of investments, included in the accompanying condensed consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate
securities during the periods presented.



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), (SFAS 123R), Share-Based Payment.
SFAS 123R requires the Company to measure all employee stock-based compensation awards using a fair value method and to record such expense in the Company's consolidated financial statements.
In addition, the adoption of SFAS 123R will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based
payment arrangements. On March 29, 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 107 (SAB 107). This Bulletin summarizes the views of the SEC staff
regarding the interaction between SFAS 123R, Share-Based Payment, and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment
arrangements for public companies. On April 21, 2005, the SEC issued Release 33-8568 amending the effective date of SFAS 123R. As a result, the Company will be required to
comply with SFAS 123R and SAB 107 effective the first quarter of 2006. The Company is currently evaluating which transition method and pricing model to adopt, and assessing the effects of
adopting SFAS 123R and SAB 107, which could have a material impact on its consolidated financial position, results of operations and cash flows.

In
November 2004, the FASB issued SFAS No. 151 "Inventory CostsAn Amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4" (SFAS 151).
SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS 151
requires that allocation of fixed and production facilities overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS 151 are
effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently assessing the effects of adopting this Statement.

In
December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary AssetsAn Amendment of APB Opinion No. 29" (SFAS 153). The provisions of
this statement are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. SFAS 153 eliminates the exception to fair value for
exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substancethat is, transactions that are not expected
to result in significant changes in the cash flows of the reporting entity. The Company believes that the adoption of SFAS 153 will not have a significant effect on its financial statements.

In
December 2004, the FASB issued Staff Position No. FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004" (SFAS 109-2). The American Jobs Creation Act of 2004 introduces a special one-time dividends received deduction on the repatriation
of certain foreign earnings to a U.S. taxpayer, provided certain

7

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criteria
are met. SFAS 109-2 provides accounting and disclosure guidance for the repatriation provision and was effective immediately upon issuance. The Company believes that the
adoption of SFAS 109-2 will not have a significant effect on its financial statements.



The Company uses the intrinsic value-based method as prescribed in the Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) to account for all stock-based employee compensation plans and has adopted the disclosure-only alternative of SFAS No. 123 "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure". Stock-based compensation for non-employees is based on
the fair value of the related stock or options. If compensation had been determined based on the fair value at the grant date for awards for the quarters ended March 27, 2005 and
March 28, 2004, consistent with the provisions of SFAS No. 123, net income (loss) and net income (loss) per share would have been as follows:

|                                     |                                                                                                        | Three Months Ended |    
|------------------------------------ | ------------------------------------------------------------------------------------------------------ | ------------------ | ---
|
|
|Net income:                          |                                                                                                        | $                  | 988
|                                     | As reported                                                                                            |                    |    
|                                     | Deduct: Total employee stock-based compensation expense determined under fair value method, net of tax |                    |    
|                                     |                                                                                                        |                    |    
|Pro forma net income (loss)          |                                                                                                        | $                  | (97
|                                     |                                                                                                        |                    |    
|Diluted net income (loss) per share: |                                                                                                        |                    |    
|                                     | As reported                                                                                            |                    | $  
|                                     | Pro forma                                                                                              |                    | $  

The
fair value of the Company's stock options and stock purchase plan awards were estimated using a Black-Scholes option valuation model, which was developed for use in
estimating the fair value of traded options which have no vesting restrictions and which are fully transferable. The model requires the input of certain assumptions, including expected stock price
volatility and the estimated life of each option. The fair value of all of the Company's stock-based awards was estimated assuming no expected dividends and estimates of expected option life, stock
volatility and risk-free interest rate at the time of grant. The fair value of the Company's stock-based awards and employees' stock purchase rights granted in the quarters ended
March 27, 2005 and March 28, 2004 were estimated using the following weighted-average assumptions:

|                                |  | Options |   | ESPP    |  
|------------------------------- |  | ------- | - | ------- | -
|
|Expected dividend yield         |  |        |   |        |  
|Expected stock price volatility |  | 91      | % | 99      | %
|Risk-free interest rate         |  | 4.1     | % | 2.7     | %
|Expected life of options        |  | 4 years |   | 5 years |  

8

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Note 2. Balance Sheet Detail

|                             |                                   | March 27,
2005 |        | December 31,
2004 |  
|---------------------------- | --------------------------------- | -------------- | ------ | ----------------- | -
|
|Cash and cash equivalents:   |                                   |                |        |                   |  
|                             | Cash in bank                      |                | $      | 36,958            |  
|                             | Money market funds                |                |        | 32,602            |  
|                             | Commercial paper and notes        |                |        | 9,815             |  
|                             |                                   |                |        |                   |  
|                             |                                   | $              | 79,375 |                   | $
|                             |                                   |                |        |                   |  
|Short-term investments:      |                                   |                |        |                   |  
|                             | Commercial paper and notes        |                | $      | 3,915             |  
|                             |                                   |                |        |                   |  
|Inventories, net:            |                                   |                |        |                   |  
|                             | Purchased parts and raw materials |                | $      | 33,156            |  
|                             | Work-in-process                   |                |        | 7,913             |  
|                             | Finished goods                    |                |        | 3,174             |  
|                             |                                   |                |        |                   |  
|                             |                                   | $              | 44,243 |                   | $
|                             |                                   |                |        |                   |  
|Property and equipment, net: |                                   |                |        |                   |  
|                             | Machinery and equipment           |                | $      | 40,115            |  
|                             | Furniture and fixtures            |                |        | 13,892            |  
|                             | Leasehold improvements            |                |        | 12,675            |  
|                             |                                   |                |        |                   |  
|                             |                                   |                | 66,682 |                   |  
|                             | Less: accumulated depreciation    |                |        | (41,081           | )
|                             |                                   |                |        |                   |  
|                             |                                   | $              | 25,601 |                   | $
|                             |                                   |                |        |                   |  
|Accrued liabilities:         |                                   |                |        |                   |  
|                             | Warranty                          |                | $      | 16,091            |  
|                             | Accrued compensation and benefits |                |        | 6,435             |  
|                             | Income taxes payable              |                |        | 4,564             |  
|                             | Other                             |                |        | 13,948            |  
|                             |                                   |                |        |                   |  
|                             |                                   | $              | 41,038 |                   | $
|                             |                                   |                |        |                   |  

All
short-term investments as of March 27, 2005 have maturities of less than one year and are marked to market with no significant unrealized gains (losses) recorded
under other comprehensive income (See Note 5 to Condensed Consolidated Financial Statements).

As
of March 27, 2005 and December 31, 2004, the reserve for excess and obsolete inventories was $19.7 million and $20.8 million, respectively.

9

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Note 3. Goodwill and Intangible Assets

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

|                                     |  | March 27, 2005 |        | December 31, 2004
|------------------------------------ |  | -------------- | ------ | -----------------
|
|
|Goodwill                             |  | $              | 24,451 |                  
|Developed technology                 |  |                | 18,265 |                  
|                                     |  |                |        |                  
|Total goodwill and intangible assets |  | $              | 42,716 |                  
|                                     |  |                |        |                  

In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the Company reviews goodwill for impairment annually during the fourth quarter of each year and more
frequently if an event or circumstance indicates that an impairment loss has occurred. There were no events or changes in circumstances during the first quarter of 2005, which would have triggered an
impairment review. No assurances can be given that future evaluations of goodwill will not result in charges as a result of future impairment.

The
Company recorded amortization expense for its developed technology of $0.5 million and $0.3 million for the quarter ended March 27, 2005 and March 28,
2004, respectively. Annual amortization expense is estimated to be $2.0 million for 2005 and $0.7 million for years 2006 to 2009.

Note 4. Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income
per share is computed, using the treasury stock method, as though all potential common shares that are dilutive were outstanding during the period. The following table provides a reconciliation of the
numerators and denominators of the basic and diluted computations for net income per share.

Three Months EndedMarch 27,
2005

March 28,
2004(in thousands except per share amounts)Numerator:Net income

$
988

$
3,314Denominator:Basic average shares outstanding


51,344


47,463Effect of potential dilutive securities:Stock option plans


1,178


1,812Escrow shares related to Vortek acquisition


290


Diluted average shares outstanding


52,812


49,275Net income per shareBasic

$
0.02

$
0.07Net income per shareDiluted

$
0.02

$
0.07


For
the quarters ended March 27, 2005 and March 28, 2004, outstanding stock options for 3.4 million and 1.5 million shares of common stock, respectively, were
excluded from the computations

10

---



because
the options' exercise prices exceeded the average market price of the Company's common stock in these periods and their inclusion would be antidilutive.

Note 5. Comprehensive Income (Loss)

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

Three Months EndedMarch 27,
2005

March 28,
2004(in thousands)Net income

$
988

$
3,314Cumulative translation adjustments

$
(2,919
)
$
(169
)Unrealized investment gain (loss)


(3
)

8Comprehensive income (loss)

$
(1,934
)
$
3,153


The
balance of accumulated other comprehensive income is as follows:

March 27,
2005

December 31,
2004(in thousands)Cumulative translation adjustments

$
13,109

$
16,028Unrealized investment loss


(4
)

(1
)$
13,105

$
16,027


Note 6. Reportable Segments

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards for reporting information about operating
segments, geographic areas and major customers 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, the 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 sales of products and services for
this one segment.

11

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The
following shows net sales by geographic areas based on the installation locations of the systems and the location of services rendered:

Three Months EndedMarch 27, 2005

March 28, 2004(in thousands)

%

(in thousands)

%United States

$
8,888

16

$
4,151

8Taiwan


15,214

28


19,456

37Japan


10,273

19


10,481

20Korea


7,989

14


7,616

14China


5,618

10


4,452

8Germany


4,274

8


5,116

10Europeothers


1,579

3


871

1Singapore


1,225

2


982

2Others


5






$
55,065

100

$
53,125

100


For
purposes of determining sales to significant customers, the Company includes sales to customers through its distributor (at the sales price to the distributor) and excludes the
distributor as a significant customer. In the first quarter of 2005, two customers accounted for 17% and 13% of net sales. In the first quarter of 2004, two customers accounted for 19% and 13% of net
sales.

Geographical
information relating to the Company's property and equipment as of March 27, 2005 and December 31, 2004 is as follows:

March 27, 2005

December 31, 2004(in thousands)

%

(in thousands)

%The United States

$
16,710

66

$
17,488

64Germany


7,549

29


8,290

30Others


1,342

5


1,618

6$
25,601

100

$
27,396

100


Note 7. Debt

As of March 27, 2005, the Company had a $20 million revolving line of credit with a bank, which expired in April 2005. In April 2005,
this line of credit was renewed with an expiration date in April 2006 and a credit limit of $10 million, which may be increased to $20 million at the option of the Company. All
borrowings under this credit line bear interest at a per annum rate equal to the bank's prime rate plus 100 basis points. 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 consolidated cash balance and
a domestic minimum cash balance of unrestricted cash and cash equivalents, and a minimum balance of investment accounts, and not exceeding a maximum net loss limit. At March 27, 2005, the
Company was in compliance with the covenants, and there was no borrowing under this credit line.

On
June 10, 2004 the Company's Japanese subsidiary entered into a credit facility with a Japanese bank in the amount of 600 million Yen (approximately $5.7 million
at March 27, 2005), collateralized by specific trade accounts receivable of the Japanese subsidiary. The facility is subject to the short-term

12

---



prime
rate, which was 1.375% per annum as of March 27, 2005. The facility has an indefinite term, subject to termination at the option of either party. The Company has given a corporate
guarantee for this credit facility. There are no financial covenant requirements for this credit facility. At March 27, 2005, there was no borrowing under this credit facility.

On
March 30, 2004, the Company's Japanese subsidiary entered into an overdraft facility with a Japanese bank in the amount of 100 million Yen (approximately
$0.9 million at March 27, 2005). The facility was not collateralized and was subject to variable interest rates. The facility expired on March 30, 2005, and no renewal has been
arranged since its expiration. There are no financial covenant requirements for this credit facility. At March 27, 2005, there was no borrowing under this credit facility.

Note 8. Share Offerings

On February 17, 2004, the Company sold approximately 4.3 million newly issued shares of common stock, and STEAG Electronic Systems AG (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, of approximately $46.6 million as shown in the condensed consolidated statements of cash flows, which was reduced to $46.4 million as
related transaction expenses were finalized through the third quarter of 2004. The Company used 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 stockholder,
holding 9,132,291 shares, or 17.7%, of the approximately 51,722,319 million outstanding shares of the Company's common stock outstanding as of March 27, 2005.

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. As of March 27, 2005, STEAG continued to hold 8,861,144 shares directly, and 271,147 shares indirectly, or 17.7%, of the 51,722,319 million outstanding shares of the Company's
common stock.

At
March 27, 2005, the Company had receivables from two employees of approximately $21,000 in aggregate.

On
March 17, 2003, the Company subleased its Pliezhausen, Germany property to SCP Global Technologies (SCP), as a result of the divestiture of the Wet Products Division to SCP.
Under the sublease, SCP had 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
was responsible for the future lease costs of approximately $2.6 million through August 2006, net of recovery efforts and any sublease income. In December 2004, the Company
entered into an agreement with the landlord to terminate the lease and agreed to pay 1.5 million Euros (approximately $2.0 million) in four installments from January 2005 through
September 2005. As a result, the Company has been released from any further legal commitments under the lease with effect from January 1, 2005. During the first quarter of 2005, the
Company paid $0.4 million under the first installment. The landlord for this property is an affiliate of STEAG, the Company's largest stockholder.

On
October 27, 2004, the Company completed the acquisition of Vortek Industries Ltd. ("Vortek"), a privately held corporation amalgamated under the laws of British
Columbia. Vortek is a

13

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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, the Company issued an aggregate of 1,452,808 shares of Company common stock, which represented approximately 2.8% of the outstanding common shares of the Company. The
Company acquired debt and equity ownership interests in Vortek from: Trian Equities Ltd., BCI Ventures Inc., Lake Street Capital Fund I, L.P., Ventrum GmbH & Co., West STEAG
Partners GmbH ("WSP"), and seven individuals who are associated with WSP (collectively the "Vortek Sellers"). WSP is a venture capital firm, 50% of the equity capital of which is owned by STEAG. WSP
received 271,147 shares of Company common stock as a result of the Vortek acquisition. Two of the individual Vortek Sellers are members of the Board of Directors of the Company, and were at the time
of the transaction affiliated with STEAG or WSP. Dr. Jochen Melchior is a director and the Chairman of the Board of the Company, and was until December 2004 the Chairman of the
Supervisory Board of STEAG and the Chairman of the Supervisory Board of WSP. He received 275 shares of Company common stock as a result of the Vortek transaction. Dr. Hans Betz is a director
and a member of the Audit Committee of the Company. Dr. Betz has been Chief Executive Officer of WSP since August 2001. He received 889 shares of Company common stock as a result of the
transaction. In connection with the Vortek acquisition, the Company entered into a Stock Registration and Restriction Agreement, dated as of October 27, 2004, with the Vortek Sellers pursuant
to which the Company agreed to register 80% of the shares issued in the Vortek acquisition under the Securities Act of 1933, and the Vortek Sellers agreed to certain restrictions on the transfer of
such shares.

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 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 surface preparation products (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 the Company totaling between
$75 million (minimum) and $105 million (maximum), relating to past damages, partial reimbursement of attorney fees and costs, and royalties.

The
Company received no payment from DNS during the quarter ended March 27, 2005. As of March 27, 2005, DNS has 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 March 27, 2005, $4.6 million was
subjected to Japanese withholding tax. In December 2004, the Company received a $3.1 million withholding tax refund from the Japanese tax authority through competent authority in respect
of DNS's payments to the Company. The refund received was for Japanese withholding taxes paid through June 30, 2004. Effective July 1, 2004, no withholding tax is applicable on royalty
payments from DNS due to the ratification of a new tax treaty on November 6, 2003, between Japan and the United States of America.

The
Company determined, based on estimated relative fair values, how much of the aggregate payments due to the Company were attributable to past disputes and how much were attributable
to future royalties on DNS sales of the wet processing products. The Company allocated $15.0 million to

14

---



past
damages and recorded this amount in the statement of operations in 2002, and allocated $60.0 million as income to be recognized in the statement of operations on a
straight-line basis over the license term. All DNS payments are reported as royalty income and recognized as net sales. Net sales for the first quarters ended March 27, 2005 and
March 28, 2004 each included royalties of $3.2 million from DNS.

The
Company is scheduled to receive minimum annual royalty payments of $6.0 million in April 2005, 2006 and 2007, totaling $18.0 million.

Note 11. Guarantees

The warranty offered by the Company on its system sales generally ranges from 12 months to 36 months depending on the product. A provision for the
estimated cost of warranty, based on historical costs, is recorded as a cost of sales when the revenue is recognized. The Company's warranty obligations require it 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 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 summarizes changes in the product warranty accrual for the quarters ended March 27,
2005 and March 28, 2004:

Three Months EndedMarch 27,
2005

March 28,
2004(in thousands)Balance at beginning of period

$
16,044

$
16,508Accrual for warranties issued during the period


2,880


4,338Changes in liability related to pre-existing warranties


(7
)

Settlements made during the period


(2,826
)

(3,521
)Balance at end of period

$
16,091

$
17,325


During
the ordinary course of business, the Company's bank provides standby letters of credit or other guarantee instruments on behalf of the Company to certain parties as required. The
maximum potential amount that the Company could be required to pay is $0.8 million, representing standby letters of credit outstanding and guarantees related to total outstanding balances on
corporate credit cards as of March 27, 2005. 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

15

---



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

The following table summarizes activities relating to restructuring and other charges for the quarter ended March 27, 2005:

Consolidation
of Excess
Facilities(in thousands)Balance at December 31, 2004

$
1,014Cash payments during the period


(319
)Balance at March 27, 2005

$
695


At
December 31, 2004, the Company had a restructuring accrual balance of $1,014,000, consisting of $564,000 for consolidation of excess facilities related to its 2002
restructuring plan, and accrued lease termination costs of $450,000 in connection with the consolidation of excess facilities into the Company's current headquarters based in Fremont, California in
2004. During the quarter ended March 27, 2005, the Company paid $319,000 for lease termination costs and incurred no other restructuring charges, which resulted in a remaining balance of
$695,000 as of March 27, 2005.

Note 13. Commitments and Contingencies

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 will expire March 31, 2019 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. Total lease payments of approximately $7.2 million are 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, aggregating to
approximately $2.1 million in lease payments over the initial term, 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 period over which the building 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 $0.9 million for each additional year that the
facilities are not leased and could aggregate approximately $13.5 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

16

---



fourteen
years, less any sublet amounts. Adjustments for the facilities leases 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 retained 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 was due to expire on August 31, 2006, with an approximate rental cost of $1.6 million annually. The Company
sublet the facilities to SCP Global Technologies (SCP) on terms that covered all rent and costs payable by the Company under the primary lease. Under its sublease, the Company was to receive from SCP
sublease payments of approximately $1.6 million per annum, and SCP had 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 became responsible for the future lease costs of approximately $2.6 million
through August 2006, net of cost recovery efforts and any sublease income. In December 2004, the Company entered into an agreement with the landlord to terminate the lease early and
agreed to pay 1.5 million Euros (approximately $2.0 million) in four installments from January 2005 through September 2005. As a result, the Company was released from any
further legal commitments under the lease with effect from January 1, 2005. The landlord for this property is an affiliate of STEAG Electronic Systems AG, the Company's largest stockholder.
During the first quarter of 2005, the Company paid $0.4 million under the first installment. The Company had fully accrued for the costs related to this lease.

In
connection with the acquisition of Vortek Industries Ltd., the Company became party to an agreement between Vortek and the Canadian Minister of Industry (the Minister) relating
to an investment in Vortek by Technology Partnerships Canada. Under that agreement, as amended, the Company or Vortek agreed to various covenants, including (a) payment by the Company of a
royalty to the Minister of 1.4% of revenues from flash RTP products, up to a total of CAD14,269,290 (approximately $11.8 million at March 27, 2005), and (b) Vortek maintaining a
specified average workforce of employees in Canada through October 27, 2009. If the Company, or Vortek, does not satisfy its obligations, the Minister may demand payment of liquidated damages
in the amount of CAD14,269,290 (approximately $11.8 million at March 27, 2005) less any royalties paid by Vortek or the Company to the Minister.

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.

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 flows.

Note 14. Income Taxes

The provision for income taxes reflected a tax benefit of $112,000 for the quarter ended March 27, 2005. The tax benefit was primarily due to the
amortization of the deferred tax liability in the amount of $190,000 associated with the acquired intangibles of STEAG and Vortek. Excluding the amortization of the deferred tax liability, the Company
would have reported a tax expense of $78,000. On a quarterly

17

---



basis,
the Company evaluates its expected income tax expense or benefit based on its year to date operations, and records an adjustment in the current quarter. The net tax provision is the result of
the mix of profits earned by the Company and its subsidiaries in tax jurisdictions with a broad range of income tax rates. At March 27, 2005, management believes that sufficient uncertainty
exists with regard to the realizability of deferred tax assets such that a valuation allowance is necessary. Factors considered in providing a valuation allowance include the lack of a significant
history of consistent profits and the lack of carry-back 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 first quarter of 2004, the Company recorded income tax expense of approximately $269,000, which consisted of accrued foreign withholding taxes of $274,000, foreign taxes incurred
by its foreign sales and service operations of $85,000, and federal and state income taxes of approximately $35,000, partially offset by a deferred tax benefit on the amortization of certain
intangible assets of $125,000.

18

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

This quarterly report on Form 10-Q contains forward-looking statements, which are subject to the Safe Harbor provisions
created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs, including estimates and projections about
our industry. Our forward-looking statements may include statements that relate to our future revenue, customer demand, market share, competitiveness, gross margins, product development plans and
levels of research and development (R&D), outsourcing plans and operating expenses, tax expenses, the expected effects, cost and timing of restructurings and consolidation of operations and
facilities, economic conditions in general and in our industry, and the sufficiency of our financial resources to support future operations and capital expenditures. Forward-looking statements are
identified by use of terms such as "anticipates," "expects," "intends," "plans," "seeks," "estimates," "believes" and similar expressions, although some forward-looking statements are expressed
differently. These statements are not guarantees of future performance, and are subject to numerous risks, uncertainties and assumptions that are difficult to predict. Such risks and uncertainties
include those set forth herein under "Risk Factors That May Affect Future Results and Market Price of Stock" and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Our actual results could differ materially from those anticipated by these forward-looking statements. The forward-looking statements in this report speak only as of the time they are
made and do not necessarily reflect our outlook at any other point in time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future
events or for any other reason.

Documents To Review In Connection With Management's Analysis Of Financial Condition and Results Of Operations

This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes presented in this Form 10-Q and
the consolidated financial statements and notes in our last filed Annual Report on Form 10-K for the year ended December 31, 2004.

Overview

We are the leading supplier of dry strip equipment and the second largest supplier of rapid thermal processing equipment in the global semiconductor industry. Our
manufacturing equipment is used for transistor level, or front-end-of-line manufacturing, and also in specialized applications for processing the interconnect
layer, or back-end-of-line processing. Our manufacturing equipment utilizes innovative technology to deliver advanced processing capabilities and high productivity
for the fabrication of current and next-generation ICs. Our tools, technologies and expertise are enablers in the semiconductor industry's transition to larger 300 millimeter wafers,
sub-90 nanometer design rules and the use of new materials, such as copper, low capacitance (low-k) dielectrics and barrier metals.

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. Because the demand for semiconductor devices is highly cyclical, the demand for wafer processing equipment is also highly cyclical. Declines in demand for
semiconductors and for capital equipment occurred throughout 2001, 2002 and the first half of 2003, creating a period of great challenge and significant change for us. During that period, we incurred
significant losses.

In
2004 and the first quarter of 2005, we continued to streamline our internal operations and adjust our manufacturing resources with the goal of creating a more flexible organization
that can operate profitably through changing industry cycles. Our strategy is to outsource selected non-critical functions in manufacturing, spare parts logistics and subsystem design to
third parties specializing in these areas. This allows us to concentrate our resources on our core technologies in Strip and RTP,

19

---



reduce
our cost structure and achieve greater flexibility to expand and contract manufacturing capacity as market conditions require. Although we have implemented cost cutting and operational
flexibility measures, we are largely dependent upon increases in sales in order to improve our profitability.

The
cyclicality and uncertainties regarding overall market conditions continue to present significant challenges to us and impair 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 conditions is limited.

Going
forward, the success of our business 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 (a) develop and bring to market new products that address our customers' needs, (b) grow
customer loyalty through collaboration with and support of our customers and (c) maintain a cost structure that will enable us to operate effectively and profitably throughout changing industry
cycles.

For
the quarter ended March 27, 2005 our net sales were $55.1 million, an increase of 3.7% from $53.1 million for the same quarter last year, primarily due to
increases in system sales of $1.5 million. Gross profit margin for the quarter ended March 27, 2005 was 40.5%, a decrease of 1.7 percentage points from 42.2% for the first quarter
of 2004. The decrease was primarily due to differences in the mix of system sales revenue and installation service revenue recognized in the two periods. Operating expenses for the quarter ended
March 27, 2005 were $21.0 million, $2.8 million higher than the $18.2 million reported for the first quarter of 2004 as that quarter included a cost recovery of
$1.3 million received from an alliance partner under a cost sharing agreement in connection with a research and development (R&D) project. Operating expenses as a percentage of net sales were
38.2% for the first quarter of 2005, compared with 34.2% for the first quarter of 2004.

During
the quarter ended March 27, 2005, we used net cash of $7.7 million in operating activities. Cash, cash equivalents, short-term investments and restricted
cash totaled $83.8 million as of March 27, 2005.

Reclassifications

Certain prior period amounts have been reclassified. These reclassifications do not affect our net income or loss, cash flows or stockholders' equity.

Auction Rate Securities Through the Third Fiscal Quarter of 2004.We have reclassified certain auction rate securities from
cash equivalents to short-term investments. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in
excess of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction, at pre-determined short-term intervals, usually every 7, 28 or
35 days. They trade at par and are callable at par on any interest payment date at the option of the issuer. Interest paid during a given period is based upon the interest rate determined
during the prior auction. Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity
provided through the auction and the interest rate reset. We had historically classified these instruments as cash equivalents if the period between interest rate resets was 90 days or less,
based on our ability to either liquidate our holdings or roll our investment over to the next reset period.

Based
upon our re-evaluation of these securities, we have reclassified our auction rate securities, previously classified as cash equivalents, as short-term
investments for each of the periods presented in our consolidated balance sheets of the appropriate periods. We sold all auction rate securities in November 2004. In addition, purchases of
investments and sales of investments, included in the accompanying condensed consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities during
the periods presented.

20

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Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, 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 periods. On an on-going basis, management evaluates its estimates and judgments, including those related to reserves for excess and obsolete inventory,
warranty obligations, bad debts, intangible assets, income taxes, restructuring costs, contingencies and litigation. 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 judgment 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 SEC Staff Accounting Bulletin
No. 104, Revenue Recognition in Financial Statements (SAB 104). We account for equipment sales as follows: 1) for equipment sales of existing products with new specifications and for all
sales of new products (and, for the first quarter of 2003 and earlier periods, for all sales of wet surface preparation products), revenue is recognized upon customer acceptance; 2) for
equipment sales to existing customers who have purchased the same equipment with the same specifications and previously demonstrated acceptance provisions, or equipment sales to new customers
purchasing existing products with established reliability, we recognize revenue on a multiple element approach in which we bifurcate 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 upon shipment, generally 90% of the total invoice
price, is recognized as revenue upon shipment and title transfer of the tool; and the remaining portion of the total invoice price, generally 10% of the total invoice price, which is due once
installation services have been performed, is not recognized as
revenue until final customer acceptance 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 these evaluation systems are accepted by the customers. 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 RTP products through our distributor in Japan, where we recognize revenues upon title transfer to the distributor. For spare
parts, we recognize revenue upon shipment. We recognize service and maintenance contract revenue on a straight-line basis over the service period of the related contract. Accounts
receivable for which revenue has not been recognized are classified as "Advance Billings" in the accompanying consolidated balance sheets.

In
all cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably
assured.

Warranty.The warranty we offer on system sales generally ranges from 12 months to
36 months, depending on the product. A provision for the estimated cost of warranty, based on historical costs, is recorded as a cost of sales when the revenue is recognized for the sale of the
equipment or parts. Our warranty obligations 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
actual system performance and/or field expense profiles may differ from historical experience, and in those cases, we adjust our

21

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warranty
accruals accordingly. 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 costs that we have had in the past.

Inventories.Inventories are stated at the lower of cost or market, with cost determined on a
first-in, first-out basis, and include material, labor and manufacturing overhead costs. Finished goods are reported as inventories until the point of title transfer to the
customer. When the terms of sale do not specify, we assume title transfers when we complete physical transfer of the products to the freight carrier unless other customer practices prevail. All
intercompany profits related to the sales and purchases of inventory between our legal entities are eliminated from the consolidated financial statements.

Our
policy is to assess the valuation of all inventories, including manufacturing raw materials, work-in-process, finished goods and spare parts, in each
reporting period. Although we attempt to accurately forecast future inventory 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 inventories and reported operating results.

Goodwill and Other Intangible Assets.We review our goodwill and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and we also review goodwill annually in accordance with SFAS No. 142,
"Goodwill and Other Intangibles." Goodwill and intangible assets, such as purchased technology, are generally recorded in connection with business acquisitions. The value assigned to goodwill and
intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. A severe decline in market conditions could
result in an unexpected impairment charge for impaired goodwill, which could have a material adverse effect on our business, financial condition and results of operations.

We
are required to test our goodwill for impairment at the reporting unit level. We have determined that we have only one reporting unit. The test for goodwill impairment is a
two-step process. The first step compares the fair value of our reporting unit with its carrying amount, including goodwill. If the fair value of our reporting unit exceeds its carrying
amount, goodwill of our reporting unit is considered not to be impaired, thus the second step of the impairment test is unnecessary. The second step, used to measure the amount of impairment loss,
compares the implied fair value of our reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of our reporting unit goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess. There were no events or changes in circumstances during the first quarter of 2005 which triggered an impairment review.

Impairment of Long-Lived Assets.Pursuant to SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," we review our long-lived assets, including property and equipment, intangibles and other long-lived assets, for
impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability is measured by a comparison of the assets' carrying
amount to their expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount
of the asset exceeds its fair value.

During
the first quarters ended March 27, 2005 and 2004, we did not record any impairment charge.

Income Taxes.We recorded a 100% valuation allowance against our net deferred tax asset as we cannot
conclude that it is more likely than not that we will realize our net deferred tax asset as of March 27, 2005. In assessing the need for a valuation allowance, we consider historical levels of

22

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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, which would increase income in the period of
adjustment.

Results of Operations

The following table sets forth our condensed consolidated results of operations for the periods indicated, expressed as a percentage of net sales:

Three Months EndedMarch 27,
2005

March 28,
2004Net sales

100.0
%
100.0
%Cost of sales

59.5

57.8Gross profit

40.5

42.2Operating expenses:Research, development and engineering

11.5

9.2Selling, general and administrative

25.8

24.4Amortization of intangibles

0.9

0.6Total operating expenses

38.2

34.2Income from operations

2.3

8.0Interest and other income (expense), net

(0.7
)
(1.3
)Income before income taxes

1.6

6.7Provision (benefit) for income taxes

(0.2
)
0.5Net income

1.8
%
6.2
%




Three Months EndedMarch 27,
2005

March 28,
2004(in thousands)Net sales

$
55,065

$
53,125Change from prior year

$
1,940


Net
sales in the first quarter of 2005 increased over the same period of 2004, primarily due to an increase in system sales of $1.5 million. Net sales for the first quarter for
both 2005 and 2004 included royalty income of $3.2 million.

Our
deferred revenue at March 27, 2005 decreased to $28.0 million from $30.3 million at December 31, 2004, primarily due to recognition of $3.2 million
in DNS royalty payments in the first quarter of 2005, partially offset by an increase in deferred revenue for system shipments in the first quarter of 2005.

International
sales, predominantly to customers based in Europe, Japan and the Pacific Rim, including China, Korea, Singapore and Taiwan accounted for 84% and 92% of total net sales for
the first quarters of 2005 and 2004, respectively. We anticipate that international sales will continue to account for a significant portion of our sales.

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Three Months EndedMarch 27,
2005

March 28,
2004(in thousands)Gross Profit

$
22,276

$
22,408Change from prior year

$
(132
)


Gross
profit in the first quarter of 2005 decreased by $0.1 million compared to the first quarter of 2004. Although net sales increased by $1.9 million in the first quarter
of 2005, this was more than offset by a
higher cost of sales in the first quarter of 2005 resulting from an inventory valuation charge of $1.3 million for excess and obsolete inventories and adverse price and volume variances of
$1.0 million related to direct cost and manufacturing overheads. Net sales for the first quarter for both 2005 and 2004 included DNS royalty income of $3.2 million.

Three Months EndedMarch 27,
2005

March 28,
2004(in percentages)Gross profit margin

40.5
%
42.2
%


Gross
profit margin in the first quarter of 2005 decreased by 1.7 percentage points compared to the first quarter of 2004. This was primarily due to differences in the mix of
system sales revenue and installation service revenue recognized in the two periods.

Due
to intense competition, we continue to face pricing pressure that can affect our gross profit margin. We continue to increase the proportion of manufacturing work performed by
outsourcing partners. This outsourcing strategy is a key element of our "cyclically flexible enterprise" business model, which is designed to enable us to expand and contract our manufacturing
capacity to meet market conditions. Our gross profit margin has varied over the years and will continue to be affected by many factors, including competitive pressures, product mix, economies of scale
and overhead absorption levels.



Three Months EndedMarch 27,
2005

March 28,
2004(in thousands, except percentages)Research, development and engineering

$
6,313

$
4,896Percentage of net sales


11.5
%

9.2
%Change from prior year

$
1,417


Research,
development and engineering expenses increased in amount and as a percentage of net sales in the first quarter of 2005 compared to the same period of 2004 as that quarter
included a cost recovery of $1.3 million received from an alliance partner under a cost sharing agreement in connection with an R&D project.

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Three Months EndedMarch 27,
2005

March 28,
2004(in thousands, except percentages)Selling, general and administrative

$
14,175

$
12,947Percentage of net sales


25.8
%

24.4
%Change from prior year

$
1,228


Selling,
general and administrative (SG&A) expenses for the first quarter of 2005 increased compared to the same period of 2004, primarily due to increases in compensation expenses of
$0.9 million, outside service costs of $0.8 million and depreciation expenses of $0.8 million, partially offset by a decrease of $1.3 million in bad debt expense. Higher
compensation expenses were primarily due to increased headcount in selling and marketing functions as a result of our Vortek acquisition and our newly opened regional support center in Israel in
January 2005. Higher outside service costs were due to increased use of outsourcing services, mainly related to Sarbanes-Oxley compliance. Higher depreciation expenses were due to the
completion of the leasehold improvements related to the
consolidation of our manufacturing facilities into our headquarters located in Fremont, California and our new enterprise resource planning system. The decrease in bad debt expense was due to the
release of $0.8 million of allowance for doubtful accounts resulting from the collection of previously reserved accounts receivable during the first quarter of 2005, compared to a charge of
$0.5 million for allowance for doubtful accounts in the first quarter of 2004. Thus, SG&A expenses as a percentage of net sales for the first quarter of 2005 compared to the same period in 2004
increased by 1.4%.



Three Months EndedMarch 27,
2005

March 28,
2004(in thousands, except percentages)Amortization of intangibles

$
500

$
328Percentage of net sales


0.9
%

0.6
%Change from prior year

$
172


Amortization
of intangibles for the first quarter of 2005 increased compared to the same period in 2004 due to the amortization of intangible assets resulting from our acquisition of
Vortek Industries Ltd.



At December 31, 2004, we had a restructuring accrual balance of $1,014,000, consisting of $564,000 for consolidation of excess facilities related to our
2002 restructuring plan, and accrued lease termination costs of $450,000 in connection with the consolidation of excess facilities into our current headquarters based in Fremont, California in 2004.
During the quarter ended March 27, 2005, we paid $319,000 for lease termination costs and incurred no other restructuring charges, which resulted in a remaining balance of $695,000 as of
March 27, 2005.

25

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Three Months EndedMarch 27,
2005

March 28,
2004(in thousands, except percentages)Interest expense

$
58

$
9Percentage of net sales


0.1
%

Change from prior year

$
49Interest income

$
444

$
219Percentage of net sales


0.8
%

0.4
%Change from prior year

$
225Other expense, net

$
798

$
864Percentage of net sales


1.4
%

1.7
%Change from prior year

$
(66
)


Interest
income increased in the first quarter of 2005 compared with the same period of 2004, primarily due to higher average interest rates. Interest expense in the first quarter of
2005 increased compared to the same period of 2004, primarily due to interest expenses paid on bank overdrafts by our subsidiary in Israel. Other expense, net for the first quarter of 2005 included a
realized foreign exchange loss of $1.3 million on forward foreign exchange contracts settled during the first quarter of 2005, partially offset by other realized and unrealized foreign currency
exchange gains of $0.2 million and miscellaneous income of $0.2 million.



The provision for income taxes reflected a tax benefit of $112,000 for the quarter ended March 27, 2005. The tax benefit was primarily due to the
amortization of the deferred tax liability in the amount of $190,000 associated with the acquired intangibles of the STEAG Semiconductor division and Vortek. Excluding the amortization of the deferred
tax liability, we would have reported a tax expense of $78,000. On a quarterly basis, we evaluate our expected income tax expense or benefit based on our year to date operations and record an
adjustment in the current quarter. The net tax provision is the result of the mix of profits earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates. At
March 27, 2005, management believes that sufficient uncertainty exists with regard to the realizability of deferred tax assets such that a full valuation allowance is necessary. Factors
considered in providing a valuation allowance include the lack of a significant history of consistent profits and the lack of carry-back 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 we will generate sufficient taxable income to realize all our net deferred tax assets.

In
the first quarter of 2004, we recorded income tax expense of approximately $269,000, which consisted of accrued foreign withholding taxes of $274,000, foreign taxes incurred by our
foreign sales and service operations of $85,000, and federal and state income taxes of approximately $35,000, partially offset by a deferred tax benefit on the amortization of certain intangible
assets of $125,000.

Liquidity and Capital Resources

Our cash, cash equivalents (excluding restricted cash) and short-term investments were $83.3 million at March 27, 2005, a decrease of
$8.8 million from $92.1 million as of December 31, 2004. Stockholders' equity at March 27, 2005 was $190.8 million.

26

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As of March 27, 2005, we had a $20 million revolving line of credit with a bank, which expired in April 2005. In April 2005, this line
of credit was renewed with an expiration date in April 2006 and a credit limit of $10 million, which may be increased to $20 million at our option. All borrowings under this
credit line bear interest at a per annum rate equal to the bank's prime rate plus 100 basis points. 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 consolidated cash balance and a domestic minimum cash balance of
unrestricted cash and cash equivalents and a minimum balance of investment accounts, and not exceeding a maximum net loss limit. At March 27, 2005, we were in compliance with the covenants, and
there was no borrowing under this credit line.

Our
Japanese subsidiary has a credit facility with a Japanese bank in the amount of 600 million Yen (approximately $5.7 million at March 27, 2005), collateralized by
specific trade accounts receivable of the Japanese subsidiary. The facility is subject to the short-term prime rate, which was 1.375% per annum as of March 27, 2005. The facility
will continue indefinitely unless either party notifies the other party to terminate the facility. We have given a corporate guarantee for this credit facility. There are no financial covenant
requirements for this credit facility. At March 27, 2005, the Japanese subsidiary had no borrowing under this credit facility.

On
March 30, 2004, our Japanese subsidiary entered into an overdraft facility with a Japanese bank in the amount of 100 million Yen (approximately $0.9 million at
March 27, 2005). The facility was not
collateralized and was subject to variable interest rates. The facility expired on March 30, 2005, and no renewal has been arranged since its expiration. There are no financial covenant
requirements for this credit facility. At March 27, 2005, there was no borrowing under this credit facility



As of March 27, 2005, we did not have any "off-balance-sheet" arrangements, as defined in Item 303 (a)(4)(ii) of
Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources that are material to investors.



Under U.S. Generally Accepted Accounting Principles, certain obligations and commitments are not required to be included in our consolidated balance sheets. These
obligations and commitments, while entered into in the normal course of business, may have a material impact on our liquidity.

In
connection with the disposition of the Wet Business, we 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 was due to expire on August 31, 2006, with an approximate rental cost of $1.6 million annually. We sublet the facilities
to SCP Global Technologies (SCP) on terms that covered all rent and costs payable by us under the primary lease. Under the sublease, we were to receive from SCP sublease payments of approximately
$1.6 million per annum, and SCP had the right upon 90 days notice to partially or completely terminate the sublease. In the second quarter of 2004, SCP terminated the sublease
completely, and we became responsible for the future lease costs of approximately $2.6 million through August 2006, net of cost recovery efforts and any sublease income. In
December 2004, we entered into an agreement with the landlord to terminate the lease early and agreed to pay 1.5 million Euros (approximately $2.0 million) in four installments
from January 2005 through September 2005. As a result, we are released from any further legal commitments under the lease with effect from January 1, 2005. We had fully accrued
for the costs related to this lease. See Notes 9 and 13 to Condensed Consolidated Financial Statements.

27

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In
connection with the acquisition of Vortek Industries Ltd., we became party to an agreement between Vortek and the Canadian Minister of Industry (the Minister) relating to an
investment in Vortek by Technology Partnerships Canada. Under that agreement, as amended, we or Vortek agreed to various covenants, including (a) payment by us of a royalty to the Minister of
1.4% of revenues from flash RTP products, up to a total of CAD14,269,290 (approximately $11.8 million at March 27, 2005), and (b) Vortek maintaining a specified average workforce
of employees in Canada through October 27, 2009. If we, or Vortek, do not satisfy our obligations, the Minister may demand payment of liquidated damages in the amount of CAD14,269,290
(approximately $11.8 million at March 25, 2005) less any royalties paid by Vortek or us to the Minister.



On June 24, 2002, we entered into a settlement agreement and a license agreement with DNS under which DNS agreed to make payments to us totaling between
$75 million (minimum) and $105 million (maximum), relating to past damages, partial reimbursement of attorney fees and costs, and license fees.

We
received no payment from DNS during the quarter ended March 27, 2005. As of March 27, 2005, DNS has 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 March 27, 2005, $4.6 million was subjected to Japanese withholding tax. In December 2004, we
received a $3.1 million withholding tax refund from the Japanese tax authority in respect of DNS's payments to us.

We
are scheduled to receive minimum annual royalty payments of $6.0 million in April 2005, 2006 and 2007, totaling $18.0 million.



As of March 27, 2005, we had cash, cash equivalents (excluding restricted cash) and short-term investments of $83.3 million. We believe
that these balances, including interest to be earned thereon, and anticipated cash flows from operating activities will be sufficient to fund our working and other capital requirements over the course
of the next twelve months and for the foreseeable future. In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with
or investing in these businesses. We may use available cash, cash equivalents and marketable security investments to fund such activities in the future. In the event additional needs for cash arise,
we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at
all. If adequate funds were not available or were not
available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.



Net cash used in operations during the first quarter of 2005 was $7.7 million, primarily due to a net decrease in accrued liabilities and accounts payable
of $4.9 million, a decrease in deferred revenue of $2.4 million and increases in inventories of $2.6 million and advanced billings of $2.0 million, partially offset by a
depreciation charge of $2.3 million and an inventory valuation charge of $1.3 million. The net decrease of $4.9 million in accrued liabilities and accounts payable was mainly due
to payment of an accrued 2004 performance bonus of $2.0 million and other fringe benefits of $1.1 million, payment of termination fees of $0.4 million related to our surrendered
building leases in Germany, payments of accrued lease termination costs of $0.3 million, payments of miscellaneous accrued expenses of $0.9 million. Deferred revenue decreased by
$2.4 million, primarily due to recognition of $3.2 million in DNS royalty payments as net sales during the first quarter of 2005. Inventories increased by $2.6 million due to the
build-up of work-in-progress to meet anticipated higher

28

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system
shipments in April 2005. Advanced billings increased by $2.0 million as a result of deferred revenue of $11.8 million associated with systems shipped in the first quarter
of 2005, partially offset by deferred revenue of $9.8 million for shipments in prior periods recognized during the first quarter of 2005. An inventory valuation charge of $1.3 million
was incurred for excess and obsolescence provision for spare parts and demonstration and evaluation tools.

Net
cash used in operations during the first quarter of 2004 was $18.0 million, primarily attributable to an increase of $17.0 million in accounts receivable, due to
increased shipments during the last month of the quarter; and an increase of $8.8 million in inventories due to ramping up of manufacturing of products in response to a higher number of systems
orders. The cash used in operating activities was partially offset by an increase of $4.7 million in accounts payable due to timing of payments and build up of inventories.

We
expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors including fluctuations in our net sales and operating results,
amount of revenue deferred, collection of accounts receivable and timing of payments.



Net cash used in investing activities during the first quarter of 2005 was $2.3 million, primarily due to purchases of $3.3 million of
available-for-sale investments and capital spending of $0.8 million for computer equipment and software, partially offset by proceeds of $1.9 million from sales
and maturities of available-for-sale investments.

Net
cash used in investing activities during the first quarter of 2004 was $12.1 million, due to purchases of $16.3 million of available-for-sale
investments and capital expenditure of $2.5 million on property and equipment, partially offset by proceeds of $6.7 million from sales and maturities of
available-for-sale investments.



Net cash provided by financing activities during the first quarter of 2005 was $1.3 million, attributable to net proceeds of $1.3 million from stock
options exercised and stock purchases under our employee stock purchase plan.

Net
cash provided by financing activities during the first quarter of 2004 was $46.7 million, primarily attributable to the net proceeds of $46.6 million received from our
underwritten public offering of approximately 4.3 million shares of newly issued common stock at $11.50 per share, which was reduced to $46.4 million as related transaction expenses were
finalized through the third quarter of 2004.

Capital Finance Transactions

On February 17, 2004, we sold approximately 4.3 million newly issued shares of common stock in an underwritten public offering priced at $11.50 per
share. This resulted in net proceeds to us of approximately $46.6 million. In the same offering, STEAG Electronic Systems AG (SES) sold approximately 4.3 million outstanding shares.
Following this public offering, SES remains our largest stockholder, holding approximately 9.1 million shares, or approximately 17.7 percent, of the 51.7 million shares of our
common stock outstanding as of March 27, 2005.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), (SFAS 123R), Share-Based Payment.
SFAS 123R requires the Company to measure all employee stock-based compensation awards using a fair value method and record such expense in the Company's

29

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consolidated
financial statements. In addition, the adoption of SFAS 123R will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow
effects resulting from share-based payment arrangements. On March 29, 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 107 (SAB 107). This Bulletin summarizes
the views of the SEC staff regarding the interaction between SFAS 123R, Share-Based Payment, and certain SEC rules and regulations and provides the staff's views regarding the valuation of
share-based payment arrangements for public companies. On April 21, 2005, the SEC issued Release 33-8568 amending the effective date of SFAS 123R. As a result, we will be
required to comply with SFAS 123R and SAB 107 effective the first quarter of 2006. We are currently evaluating which transition method and pricing model to adopt, and assessing the effects of
adopting SFAS 123R and SAB 107, which could have a material impact on our consolidated financial position, results of operations and cash flows.

In
November 2004, the FASB issued SFAS No. 151 "Inventory CostsAn Amendment of ARB No. 43, Chapter 4" (SFAS 151). SFAS 151 clarifies that
abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS 151 requires that allocation of fixed
and production facilities overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS 151 are effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. We are currently assessing the effects of adopting this Statement.

In
December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary AssetsAn Amendment of APB Opinion No. 29" (SFAS 153). The provisions of
this statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. SFAS 153 eliminates the exception to fair value for exchanges of
similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substancethat is, transactions that are not expected to result in
significant changes in the cash flows of the reporting entity. We believe that the adoption of SFAS 153 will not have a significant effect on our financial statements.

In
December 2004, the FASB issued Staff Position No. FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004" (SFAS 109-2). The American Jobs Creation Act of 2004 introduces a special one-time dividends received deduction on the repatriation
of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. SFAS 109-2
provides accounting and disclosure guidance for the repatriation provision and was effective immediately upon issuance. We believe that the adoption of SFAS 109-2 will not have a
significant effect on our financial statements.

30

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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

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 as 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 and 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 our gross margin and net income.

We
are currently experiencing a downturn in orders and cannot predict what the magnitude or duration of the downturn will be. During the downturn in 2002 and 2003, we were unable to
reduce our expenses quickly enough to avoid incurring losses. During those periods, our net losses were $94.3 million and $28.4 million, respectively. In the current and future
downturns, if we are unable to effectively align our cost structure with prevailing market conditions, we could again experience losses, may be required to undertake additional
cost-cutting measures, and may 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 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 $0.5 million to over $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 our results to fall below our
expectations and the expectations of market analysts or investors. Delays in collection of accounts receivable could require us to increase our accounts receivable reserve, which would increase our
operating expenses.

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 with expected shipment dates within the next 12 months, customers may request cancellations or delivery
delays. As a result, our backlog may not be

31

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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.

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 achieving volume production of new systems or enhancements. Our inability to overcome such
difficulties, 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, and
such 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 levels 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 vendors.
Accordingly, we may face narrow windows of opportunity to be selected as the "vendor of choice" by significant 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 maintain and 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. 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 technology trends and 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.

Our
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

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customer
requirements for new processes, to assess and select the potential technologies for research and development, and to 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.

As we continue our work to implement and improve our new enterprise resource planning and financial statement consolidation systems, unexpected problems could occur and could
cause disruption to the management of our business and delays or errors in the preparation of our financial statements.

In the fourth quarter of 2004, as part of a multi-phase process, we completed the implementation of a new enterprise resource planning, or ERP, system for our
worldwide operations. The new ERP system has 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. In recent periods, we have implemented other phases of the ERP system and implemented new financial systems to aid in the consolidation of our
financial reporting. Our work to implement and improve our new computerized consolidation and ERP systems continues as an active project. These systems are new to us and we have not had extensive
experience with them.

The
new ERP and consolidation systems could eventually become more costly, difficult and time consuming to purchase and implement than we currently anticipate. Implementation of the new
ERP system has required us to change internal business practices, transfer records to a new computer system and train our employees in the correct use and input of data into the system. We may
discover that errors have been made in converting to or using the new systems, or encounter unexpected difficulties or costs or other challenges, any of which may disrupt our business or cause errors
or delays in the reporting of our financial results. Our systems, procedures or controls may not be adequate to support our operations and require us to change our internal business practices.
Corrections and improvements may be required as we continue the implementation of our new systems, procedures and controls, and could cause us to incur additional costs and require additional
management attention, placing burdens on our internal resources. If we fail to manage these changes effectively, it could adversely affect our ability to manage our business and our operating results.

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

We need to manage our inventory of component parts, work-in-process 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 the customer demand we anticipate does not materialize in a timely manner, we will incur increased carrying costs and some
inventory could become un-saleable or obsolete, resulting in write-offs which would adversely affect the results of our operations.

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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 experience product failures at an unexpectedly high level, our reputation in the marketplace could be damaged, and
our business would suffer.

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 we 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 that 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:



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

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



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 may experience delays finalizing system sales while the customer
obtains approval for the purchase, 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.

International sales accounted for 84% of net sales in the first quarter of 2005, 87% of our net sales in 2004, and 87% of our net sales in 2003. 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 in Asia. Our sales to customers located in Taiwan, Japan, China, Korea and other Asian countries accounted for 73% of net sales in the
first quarter of 2005, 79% of our net sales in 2004 and 71% of our net sales in 2003. Because of our continuing dependence upon international sales, we are subject to a number of risks associated with
international business activities, including:



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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 may become less price-competitive when 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.

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,

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including,
but not limited to natural disasters, work stoppages, operational facility constraints and terrorism. Such disruption 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 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 have 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.

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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 51.7 million shares of our common stock outstanding as of March 27, 2005, of which approximately 9.1 million (or
17.7%) are held beneficially by STEAG Electronic Systems AG and its affiliates (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 during 2001 to 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 were profitable for each of the four quarters in 2004 and the first quarter of 2005, we
expect to continue to incur significant research and development and selling, general and administrative expenses. We may not achieve profitability in future years. We will need to continue to
generate significant net sales to achieve and maintain profitability, 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, in the twelve months prior
to March 27, 2005, the closing price range for our common stock was $7.05 to $14.38 per share.

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.

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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:



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.

Continued 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.

As a result of compliance with the Sarbanes-Oxley Act of 2002, as well as changes to listing standards adopted by the Nasdaq Stock Market, and the attestation and
accounting changes required by the Securities and Exchange Commission, we are required to implement additional internal controls, to improve our existing internal controls, and to comprehensively
document and test our internal controls. As a result, we are required to hire additional personnel and to obtain additional outside legal, accounting and advisory services, all of which will cause our
general and administrative costs 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, which may adversely affect our operating results.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. Historically, much of our revenues and capital
spending has been transacted in U.S. dollars.

Our
exposure to market risk for changes in interest rates relates to our investment portfolio. We do not currently use derivative financial instruments in our investment portfolio, nor
hedge for these interest rate exposures. 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 only
marketable securities with active secondary or resale markets to ensure portfolio liquidity.

Our
interest rate risk relates primarily to our investment portfolio, which consisted of $42.4 million in cash equivalents and $3.9 million in short-term
marketable securities as of March 27, 2005. An immediate sharp increase in interest rates could have a material adverse affect on the fair value of our investment portfolio. Conversely,
immediate sharp declines in interest rates could seriously harm interest earnings of our investment portfolio. By policy, we limit our exposure to longer-term investments, and our entire
investment portfolio as of March 27, 2005 had maturities of less than one year. As a result of the relatively short duration of our portfolio, an immediate hypothetical parallel shift to the
yield curve of plus 25 basis points (BPS), 50 BPS and 100 BPS would result in a reduction in the range between 0.01% to 0.02% in the market value of our investment portfolio as of March 27,
2005.

Foreign Currency Risk

The functional currency of our foreign subsidiaries is their local currencies. 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. Because much of our revenues and capital spending are transacted in U.S. dollars, we believe that foreign currency exchange rates should not
materially adversely affect our overall financial position, results of operations or cash flows.

During
2004, we employed a foreign currency hedging program, utilizing foreign currency forward exchange contracts, to hedge foreign currency fluctuations associated with Euro and
Japanese Yen denominated accounts receivable balances. Beginning in the fourth quarter of 2004, we also included Euro denominated intercompany balances in our foreign currency hedging program. The
goal of the hedging program is to hedge against foreign currency fluctuations associated with the revaluation gains (losses) of foreign denominated accounts receivable and intercompany account
balances. All forward foreign exchange contracts employed by the Company did not exceed one year. Under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," these forward contracts are not designated hedges. All outstanding forward foreign currency contracts are marked to market with the resulting unrealized gains
(losses) recorded in other income (expense), net. We do not use foreign currency forward exchange contracts for speculative or trading purposes.

During
January 2005, we settled three forward foreign exchange contracts outstanding as of December 31, 2004 for the purchase in total of 28.3 million Euros in
exchange for US$38.6 million (weighted average contract rate of 1 Euro to US$1.36) upon maturities and realized a total foreign exchange loss of $1.3 million, which was recorded under
other expense, net. No new forward foreign

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exchange
contracts were contracted during the first quarter of 2005. There was no forward foreign exchange contract outstanding as of March 27, 2005.

ITEM 4. CONTROLS AND PROCEDURES

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 quarterly 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.

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.

Quarterly Evaluation of Changes in Internal Control Over Financial Reporting

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 first quarter of 2005 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 that quarter.

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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 not meritorious, could result in the expenditure of significant financial
and managerial resources.

Our
involvement in any patent dispute, 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

Exhibit
Number

Description3.1
(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.


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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: May 6, 2005 | By: | /s/DAVID DUTTONDavid DuttonPresident and Chief Executive Officer
(Principal Executive Officer)                                            
|Dated: May 6, 2005 | By: | /s/LUDGER VIEFHUESLudger ViefhuesExecutive Vice PresidentFinance and
Chief Financial Officer
(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

|Exhibit
Number |     | Description                                                                            
|-------------- | --- | ---------------------------------------------------------------------------------------
|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.           

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