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

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FORM 10-K

|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934    
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|                                                              | For the fiscal year ended December 31, 2004                                             
|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(Address of principal executive offices) |  | 94538(Zip Code)                                  

510-657-5900(Registrant's Telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share(Title of Class)

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

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

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on that date as of
June 27, 2004 was $481,017,761 based on the closing price for the registrant's common stock reported by the Nasdaq Stock Market. Shares of voting stock held by each director and executive
officer and by STEAG Electronics Systems AG have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.

Number
of shares outstanding of registrant's Common Stock as of March 16, 2005: 51,721,319.

Documents
incorporated by reference:

Portions
of the Proxy Statement for registrant's 2005 Annual Meeting of Stockholders, which will be filed on or before May 2, 2005, are incorporated herein by reference into
Part III.



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MATTSON TECHNOLOGY, INC.        FORM 10-K        FOR THE YEAR ENDED DECEMBER 31, 2004        TABLE OF CONTENTS

|         |  |                                                                                                              |  |   
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|PART I  
|Item 1.  |  | Business                                                                                                     |  | 3 
|Item 2.  |  | Properties                                                                                                   |  | 13
|Item 3.  |  | Legal Proceedings                                                                                            |  | 13
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 14
|PART II 
|Item 5.  |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 15
|Item 6.  |  | Selected Financial Data                                                                                      |  | 15
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 18
|Item 7A. |  | Qualitative and Quantitative Disclosures about Market Risk                                                   |  | 45
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 46
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 80
|Item 9A. |  | Controls and Procedures                                                                                      |  | 80
|Item 9B. |  | Other Information                                                                                            |  | 80
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 81
|Item 11. |  | Executive Compensation                                                                                       |  | 81
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                                               |  | 81
|Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 81
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 81
|PART IV 
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 81

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements made pursuant to the provisions of
Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on management's current expectations and beliefs, including estimates and projections about our
industry. Forward-looking statements may be 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. Statements concerning our financial position, business strategy and plans or objectives for future operations are forward-looking statements.
These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict and may cause actual results to differ
materially from management's current expectations. 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." 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. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission.

PART I

Item 1.Business

We are a leading supplier of semiconductor wafer processing equipment used in the fabrication of integrated circuits (ICs). According to Gartner Dataquest, an
independent research firm, in 2003, we were one of the top two suppliers for dry strip equipment(1) and were the second largest supplier of rapid thermal processing (RTP) equipment(2) for the
semiconductor industry. Our manufacturing equipment is used for transistor level, or front-end-of-line (FEOL) manufacturing, and also in specialized applications
for processing the interconnect layer, or back-end-of-line (BEOL) 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
(mm) wafers, sub-90 nanometer (nm) design rules and the use of new materials, such as copper, low capacitance (low-k) dielectrics and barrier metals.

Our
customer base is diversified geographically, and includes foundries and logic and memory device manufacturers. We have a global sales and support organization focused on developing
strong, long-term customer relationships to build customer loyalty. We have design and manufacturing centers in the United States, Canada and Germany. Our sales and support presence in
Asia, which represents the largest share of the world's capacity for semiconductor manufacturing, includes offices in China, Japan, Korea, Singapore and Taiwan.

Our
business is focused on our core technologies in dry strip and RTP. In 2004, we introduced the Aspen III ICPHT Strip system, the Helios RTP system and a
low-pressure thermal (LPT) module. In October 2004, we acquired Vortek Industries Ltd, a privately held developer of millisecond flash annealing technology based in
Vancouver, Canada. The acquisition expands and strengthens our RTP technology portfolio and supports our long-term growth strategy. As part of our decision to focus on our core
technologies, we narrowed our chemical vapor deposition (CVD) efforts to a limited number of strategic customers.

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Footnotes:

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Mattson
Technology (Mattson) was incorporated in California in 1988, reincorporated in Delaware in 1997, and is headquartered in Fremont, California. Our principal executive office is
located at 47131
Bayside Parkway, Fremont, CA 94538. Our telephone number is (510) 657-5900. Additional information about Mattson is available on our Website at http://www.mattson.com. The
information on our Website is not incorporated herein by reference.

Industry Background

The manufacture of ICs is a highly complex process with numerous individual processing steps, many of which are performed multiple times before manufacturing is
complete and the IC is fully functional. To build an IC, transistors are first created on the surface of the silicon wafer, known as FEOL fabrication, and then the transistors are microscopically
wired together by means of the interconnect metal layers, known as BEOL processing. The steps require the wafer to be subjected to a tightly controlled series of chemical, thermal and
photolithographic processes, resulting in the formation of millions of transistors per circuit and hundreds of circuits on a single wafer.

Semiconductor
manufacturers face continuing competitive pressures to manufacture increasingly complex ICs, improve their yields per wafer and reduce their manufacturing costs. Advances
in semiconductor manufacturing processes focus on methods to enable smaller and smaller transistor sizes and circuit designs. Each new generation of manufacturing process is characterized by the
distance between pattern lines in the design of the circuit, measured in nanometers (billionths of a meter). Current generation production processes are at or below the 110 nm technology node, and
leading semiconductor manufacturers have pilot process lines based on 65 nm. The trend toward increasing device complexity and shrinking geometries requires new interconnect materials, such as copper
conducting materials and low-k dielectric films. At the same time, the semiconductor industry is ramping production on 300 mm wafers. These developments increase manufacturing
complexity and create the need for manufacturing equipment with ever more precise process control capability.

The Mattson Strategy

Today's semiconductor manufacturers demand processes that deliver results with an unprecedented level of precision. We partner with our customers to deliver on
these demands. We remain committed to investing in our technologies, customer support infrastructure and operational effectiveness to meet our customers' challenging requirements and build
long-term customer loyalty.

Our
strategy for success focuses on three key areas:

Leverage innovative technologies to extend product leadership

We plan to maintain our focus on market and technology leadership in the markets we serve and on the delivery of innovative products with superior technology and
productivity to bring total cost of ownership advantages to our customers. We are continuously investing in three generations of wafer process technology  improving current
generation production tools, qualifying and refining next-generation equipment and developing tools for future-generation processes to deliver better results on the wafer surface. We will
continue to collaborate with customers, academia and industry consortia to develop product innovations with process control advantages that allow IC manufacturers to achieve higher productivity at
lower cost.

Collaborate closely with customers to strengthen customer loyalty

We strive to attain preferred vendor status and build loyalty with our customers by helping to make them more productive while reducing their cost of ownership.
Our global sales and support organization focuses on solving specific manufacturing challenges faced by customers, aligning our product

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development
plans with our customers' future technical and production requirements and expanding our presence in regional growth markets.

Improve operational flexibility and effectiveness

We continue to streamline our internal operations and adjust our manufacturing resources to create a flexible organization intended to 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 dry strip and RTP products, reduce our cost structure and achieve greater flexibility to expand and contract
manufacturing capacity as market conditions require.

Markets, Applications and Products

Dry Strip

A strip system removes photoresist or other residues from a wafer following each step of film deposition or diffusion processing in preparation for the next
processing step. Methods for stripping off these residues include wet chemistries and dry technologies. The more advanced dry stripping systems, such as our Aspen Strip, create gaseous chemistries, or
plasmas, to which the wafer is exposed to remove mask films and residues.

As
the complexity and number of thin-film layers required for each wafer has increased, the demand for advanced strip equipment has grown. This has led to a need for
semiconductor manufacturers to increase their strip capacity and to place greater emphasis on low-damage results and residue-free stripping. The fabrication of ICs with feature
sizes of sub-100 nm, and the use of copper and low-k dielectric films, create new challenges for advanced stripping equipment. The resist or residues must be removed from the
interconnect layer without degrading the low-k materials, oxidizing any exposed copper or damaging the surface of the wafer.

Our
200 and 300 mm strip products are built on our high-productivity Aspen platform and feature our patented inductively coupled plasma (ICP) technology. The Aspen
platform offers semiconductor manufacturers advantages in process uniformity, productivity and throughput by enabling multiple strip steps in a single chamber. We have over 1,000 Aspen platform-based
dry strip systems installed worldwide and are a leader in the dry strip market for both 200 mm and 300 mm systems. Our Aspen ICP Strip system is used in advanced process applications for
high-dose implant strip, photoresist, residue removal and surface cleaning, including low-k in oxygen and non-oxygen-based processes.

Our
Aspen III Highlands, an advanced 300 mm resist strip system targeted for new low-k/copper barrier layer removal applications, is currently in use in
high-volume 90 nm production applications by IC manufacturers that are transitioning to copper. The Highlands has also been qualified for production and is in development use in 65 nm
applications. We are collaborating with customers to expand the Highlands' processing capabilities.

In
2004, we introduced the Aspen III ICPHT system, which provides a wider process window and a productivity improvement for FEOL and BEOL process applications. Utilizing an enhanced
radio frequency (RF) and matching network and a higher capacity heating source, the ICPHT provides
increased throughput, process performance and reliability. The ICPHT is now in high-volume production at customer sites around the world.

Rapid Thermal Processing

In RTP, semiconductor wafers are rapidly heated under controlled atmospheric conditions to process temperatures of up to 1250 °C, held at this
temperature for a defined time and then are rapidly cooled.

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Thermal
processing can alter and lock in material properties at the wafer surface as well as in the bulk silicon. Typical processes are:



Historically,
diffusion furnaces have been used to heat-treat large batches of wafers. As device features continue to shrink, temperature uniformity and exposure control have
become more critical and require process capabilities beyond those diffusion furnaces can provide. Single-wafer RTP inherently enables more precise thermal control, uniformity across the diameter of
the wafer and repeatability of results from wafer to wafer.

Our
RTP products feature dual-sided, lamp-based heating technology that provides enhanced control, process uniformity and repeatability for both 200 and
300 mm wafer production. Our product lines include the 2800 and the 2900 for 200 mm applications, the 3000 series (which includes the 3000, the 3000 Plus and the 3000 Steam) for 200 and
300 mm fabrication and the recently released Helios RTP system for 300 mm advanced applications. Introduced in 2004, the Helios provides the advanced thermal control necessary to meet
the stringent demands of IC transistor
formation while maintaining low cost of ownership for our customers. The Helios is in production at 90 nm, and customers have qualified it for 65 nm processes. We are working with our customers to
demonstrate the Helios' capabilities on processes for advanced 45 nm technology applications.

Our
goal is to continue to build products and develop applications aligned to our customers' future technology requirements. In 2004, we broadened and strengthened our RTP product
portfolio with the acquisition and integration of Vortek Industries Ltd. In late 2004, we shipped the first beta system of our new micro-flash anneal (MFA) RTP product, which features the
patented arc lamp technology acquired through Vortek. This system is designed to reduce the thermal cycle time by a factor of over a hundred. This capability is intended to enable our customers to
meet advanced ultra-shallow junction (USJ) anneal process requirements through the 32 nm technology node.

Plasma-Enhanced Chemical Vapor Deposition

CVD processes are used to deposit insulating and conducting films on wafers. These films are the basic materials used to form the resistors, capacitors and
transistors of an integrated circuit. These materials are also used to form the wiring and insulation between these electrical components.

As
feature sizes continue to decrease, CVD processing equipment must meet increasingly stringent requirements. Particles or defect densities must be minimized and controlled to achieve
the desired yields. Film properties, such as stress, must also be improved and more tightly controlled. Compatibility with metallization steps, such as aluminum and copper deposition, is critical.
Finally, as process complexity increases with the use of low-k and dual-damascene processing solutions, the number of plasma-enhanced (PE) CVD steps increases significantly,
and system productivity becomes even more important.

We
are focused on PECVD applications at the front-end of the fabrication line, and we offer a PECVD process to deposit insulating films. Our products are based on our leading
Aspen platform and robotic technology that provide performance and productivity advantages to our customers. PECVD allows the system to process wafers at a relatively low temperature, reducing the
risk of device parameter drift during FEOL processing and of damage to metalization layers during BEOL processing. Our Aspen III CVD system has been production-certified at leading fabrication
sites for both 200 mm and 300 mm applications. In the last two years, we narrowed our CVD efforts to a limited number of strategic customers as part of our strategic decision to focus on
core businesses in strip and RTP.

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Customer Support

One of our primary goals is to build strong and productive partnerships with our customers. We recognize that their success is our success. Our customer support
organization leads our company-wide efforts to drive Mattson's customer satisfaction programs to build and strengthen these long-term relationships. Our customer support
organization is headquartered in Fremont, California, with additional offices located in China, France, Germany, Italy, Japan, Korea, Singapore, Taiwan and the United States. Our global support
infrastructure is composed of an extensive network of experienced field service teams with diverse technical backgrounds and process, mechanical and electronics training. After-sales support is an
essential part of our customer satisfaction program, and our international customer support teams provide the following services: system installation, on-site repair, telephone support,
relocation services and selected post-sales process development applications.

We
offer competitive, comprehensive warranties on all our products. We maintain spare parts depots in most regions and provide regional field and process support. As part of our global
support services, we also offer a broad selection of technical training courses from maintenance and service training to basic and advanced applications and operation.

We
are committed to continuously improving our customer support. Over the last three years, we have enhanced our customer service and support programs. We are actively engaged in joint
development programs at major customer sites to collaborate on product and process development and increase the level of customer support.

In
2003, we achieved the International Organization for Standardization (ISO) 9001:2000 global certification for our manufacturing sites and sales and service operations. In 2004, we
successfully passed several ISO surveillance and customer audits, demonstrating that our internal processes and procedures continue to meet the high quality standards, including ISO compliance, which
our customers demand.

In
2004, we realigned our support organizations and developed an integrated, cross-business-unit approach to customer service and support implementation to better serve our
growing portfolio of global customers. These changes will help strengthen our global support infrastructure to quickly meet our customers' requirements. We work closely with SEMI (a global member
association for companies participating in the microelectronics and display industries) to ensure that our programs comply with its major support directives. Our Customer Satisfaction Assurance
Program (CSAP) has shown that we have made significant improvements in increasing customer satisfaction, as evidenced by recent successful customer audits and customer satisfaction survey ratings
conducted in 2004.

Sales and Marketing

Our marketing and sales efforts are focused on building long-term relationships with our customers. We sell our systems primarily through our direct
sales force. Our sales personnel work closely with our customers to develop solutions to meet their processing needs. In addition to the direct sales force resident in our Fremont, California
headquarters, we have sales and support offices in China, France, Germany, Italy, Japan, Korea, Singapore, Taiwan and the United States. In January 2005, we opened a regional sales office in
Israel.

In
2004, we maintained our distribution relationship with PTS SARL, which supports our direct sales and support organization, Mattson International France SARL, and has expanded our
sales representation in France. Similarly, we have established distribution relationships with CSD Ltd. in the United Kingdom, MICL Ltd. in Israel and SemiQuip Inc. in the United
States.

In
addition to maintaining our wholly-owned subsidiary in Japan, we have continuing relationships with Canon Sales Company for the distribution of our RTP systems in Japan, and with NOAH
Corporation for regional sales activities of our plasma strip products in Japan.

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Our
international sales accounted for 87% of our net sales in 2004 and 2003, and 75% in 2002. We anticipate that 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. Our sales to customers located in China, Japan, Taiwan and other Asian countries accounted for 79% of our net
sales in 2004, 71% of our net sales in 2003 and 50% in 2002. Our foreign sales are also subject to certain governmental restrictions, including the Export Administration Act and the regulations
promulgated under this Act. For a discussion of the risks associated with our international sales, see "Risk Factors That May Affect Future Results and Market Price of Stock  We
are highly dependent on international sales and face significant economic and regulatory risks."

Customers

Our customer base is diversified, both geographically and by chip segments. Customers for our products include most of the world's top 20 semiconductor
manufacturers and foundries.

In
2004, two customers accounted for 16% and 12% of our net sales. In 2003, two customers accounted for 19% and 11% of net sales. In 2002, three customers accounted for 11%, 10% and 10%
of net sales. Although the composition of the group comprising our largest customers has varied from year to year, our top ten customers accounted for 67% of our net sales in 2004, 50% in 2003, and
56% in 2002. For a discussion of risks associated with changes in our customer base, see "Risk Factors That May Affect Future Results and Market Price of Stock  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."

Backlog

We schedule production of our systems based on both backlog and regular sales forecasts. We include in backlog only those systems for which we have accepted
purchase orders and assigned shipment dates within the next 12 months. Orders may be subject to cancellation or delay by the customer with limited or no penalty. Our backlog was approximately
$73.4 million as of December 31, 2004, and $40.3 million as of December 31, 2003. Because of possible future changes in delivery schedules and cancellations of orders, our
backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period, and our actual sales for the year may not meet or exceed the backlog
represented. During periods of industry downturn, we have experienced cancellations, delays and push-out of orders that were previously booked and included in backlog.

Research, Development and Engineering

The semiconductor equipment industry is characterized by rapid technological change and product innovation. We develop process and process integration solutions
with results at the wafer surface for our customers. The products that we develop and market are the means to allow our customers to implement their advanced process requirements. Only by continuously
striving to develop new intellectual property for process and hardware to support new processes can we maintain and advance our competitive position in the markets we serve. Accordingly, we devote a
significant portion of our resources to research, development and engineering (RD&E) programs and seek to maintain close relationships with our global customers to remain responsive to their product
and processing needs.

Our
key RD&E activities during 2004 involved the successful introduction of new generations of 300 mm Strip and RTP tools. Our newest atmospheric RTP tool, the Helios, features a
novel, model-based temperature control system that extends our low-temperature capability to enable advanced silicide formation and provides tighter peak-width control for
conventional USJ anneal requirements.

Through
our acquisition of Vortek Industries Ltd in 2004, we added to our RTP portfolio a flash lamp technology that is intended to address annealing for advanced USJ applications
down to the 32 nm

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technology
node. We shipped the first beta tool employing this new flash technology to a beta customer in December 2004.

In
2004, we also began shipment of a LPT process module on an OEM basis to a Japanese customer. Our latest-generation RTP tools extend Mattson's RTP capabilities below the 65 nm node and
will help to further improve our tool reliability and productivity, and reduce our customers' cost of ownership.

We
also introduced an enhanced version of our ICP strip capability, the Aspen III ICPHT, that significantly increases strip rate and lowers our customer cost of ownership.

Other
development efforts have led to improved process uniformity for strip applications. We also made significant progress in improving the performance of the processes in our process
application suite for strip products.

Our
RD&E efforts have been aided by the continuous expansion of our in-house computer modeling and simulation capabilities. The use of modeling has significantly reduced the
time and cost for tool simulation and design.

We
intend to continue to make substantial investments in strategic development and engineering programs to meet our customers' technical and production requirements. Over the next year,
we plan to focus our RD&E efforts on both improving existing system capabilities and developing new advanced Strip and RTP technologies for smaller feature sizes, low-k dielectric
materials and 300 mm applications.

We
maintain applications development and engineering laboratories in Fremont, California; Vancouver, Canada; and Dornstadt, Germany to address new tool and process development activities
and customer-specific requirements. By basing products on existing and accepted product lines in the Strip and RTP markets, we believe that we can focus our development activities on producing new
products more quickly and at relatively low cost.

The
markets in which we compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. Because of continual
changes in these markets, we believe that our future success will depend upon our ability to continue to improve our
existing systems and processes and to develop new systems and technologies that parallel and precede the technology roadmaps of our customers more effectively than our competition. In addition, we
must adapt our systems and processes to continuously evolving technological changes and to support emerging industry standards for target markets. We cannot be sure that we will complete our existing
and future development efforts within our anticipated schedule or that our new or enhanced products will have the features to make them successful. We may experience difficulties that could delay or
prevent the successful development, introduction or marketing of new or improved systems or process technologies. In addition, these new and improved systems and process technologies may not meet the
requirements of the marketplace and achieve market acceptance.

Furthermore,
despite testing by us, difficulties could be encountered with our products after shipment, resulting in loss of revenue or delay in market acceptance and sales, diversion of
development resources, injury to our reputation or increased service and warranty costs. The success of new system introductions is dependent on a number of factors, including timely completion of new
system designs and market acceptance. If we are unable to improve our existing systems and process technologies or to develop new technologies or systems, we may lose sales and customers.

Our
research, development and engineering expenses were $23.1 million for the year ended December 31, 2004, $23.0 million for 2003 and $37.4 million for 2002,
representing 9.1% of net sales in 2004, 13.2% in 2003 and 17.1% in 2002.

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Competition

The global semiconductor equipment industry is intensely competitive and is characterized by rapid technological change and demanding customer service
requirements. Our ability to compete depends upon our ability to continually improve products, processes and services, and our ability to develop new products that meet constantly evolving customer
requirements.

A
substantial capital investment is required by semiconductor manufacturers to install and integrate new processing equipment into a semiconductor production line. As a result, once a
semiconductor manufacturer has selected a particular supplier's products, the manufacturer often relies, for a significant period of time, upon that equipment for the specific production line
application and frequently will attempt to consolidate its other capital equipment requirements with the same supplier. Accordingly, it is difficult to sell to a customer for a significant period of
time in the event that the customer has selected a competitor's product, and it may be difficult to unseat an existing relationship that a potential customer has with a competitor in order to increase
sales of products to that customer.

Each
of our product lines competes in markets defined by the particular IC fabrication process it performs. In each of these markets, we have multiple competitors. At present, however,
no single competitor competes with us in all of the process areas in which we serve. Competitors in a given technology tend to have different degrees of market presence in the various regional
geographic markets. Competition is based on many factors, primarily technological innovation, productivity, total cost of ownership of the systems, including yield, price, product performance and
throughput capability, quality, contamination control, reliability and customer support. We believe that our competitive position in each of our markets is based on the ability of our products and
services to address customer requirements related to these competitive factors.

Our
principal competitors in the dry strip market include Axcelis Technologies, Canon, Hitachi Kokusai, Novellus Systems and Shibaura Mechatronics. We believe that we compete favorably
on each of the competitive elements in this market and estimate that we are one of the top two providers of dry strip products. The principal competitor for our RTP systems is Applied Materials.
Principal competitors for our PECVD systems include Applied Materials, ASM International and Novellus Systems.

Manufacturing

Our Mattson-owned manufacturing operations consist of procurement, assembly, test, quality assurance and manufacturing engineering. We also utilize an outsourcing
strategy for the manufacture of components, major subassemblies and complete systems. In 2004, we continued to increase the proportion of manufacturing work performed by outsourcing partners. This
outsourcing strategy is a key element of our "cyclically flexible enterprise" (CFE) business model. In addition, we strengthened our corporate infrastructure by successfully implementing SAP. With our
new enterprise resource planning (ERP) system in place, our manufacturing efficiency in our core products continues to improve, and we expect to see further progress in 2005. We have Mattson-owned
manufacturing capability in Fremont, California and Dornstadt, Germany. Our outsourcing partners have manufacturing facilities in China, Singapore and Taiwan.

Some
of our components are obtained from a sole supplier or a limited group of suppliers. We generally acquire these components on a purchase order basis and not under
long-term supply contracts. Our reliance on outside vendors generally, and a limited group of suppliers in particular, involves several risks, including a potential inability to obtain an
adequate supply of required components and reduced control over pricing and timely delivery of components. Because the manufacture of certain of these components and subassemblies is an extremely
complex process and can require long lead times, we could experience delays or shortages caused by suppliers. Historically, we have not experienced any significant delays in manufacturing due to an
inability to obtain components, and we are not currently aware of any specific problems regarding the availability of components that might significantly delay the manufacturing

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of
our systems in the future. However, any inability to obtain adequate deliveries, or any other circumstance that would require us to seek alternative sources of supply or to manufacture such
components internally, could delay our ability to ship our systems and could have a material adverse effect on us.

We
are subject to a variety of federal, state and local laws, rules and regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our sales
demonstrations and research and development. Public attention has increasingly been focused on the environmental impact of operations that use hazardous materials. Failure to comply with present or
future regulations could result in substantial liability to us, suspension or cessation of our operations, restrictions on our ability to expand at our present locations or requirements for the
acquisition of significant equipment or other significant expense. To date, compliance with environmental rules and regulations has not had a material effect on our operations.

Intellectual Property

We rely on a combination of patent, copyright, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection
methods to protect our proprietary technology. We hold a number of United States patents and corresponding foreign patents and have a number of patent applications pending covering various aspects of
our products and processes. We have also licensed a small number of patents and, where appropriate, we will continue this practice in the future. Where appropriate, we intend to file additional patent
applications on inventions resulting from our ongoing research, development and manufacturing activities to strengthen our intellectual property rights.

Although
we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we cannot be sure that we will be able to protect our
technology adequately, and our competitors could independently develop similar technology, duplicate our products or design around our patents. To the extent we wish to assert our patent rights, we
cannot be sure that any claims of our patents will be sufficiently broad to protect our technology or that our
pending patent applications will be approved. In addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented, that any rights granted under
these patents will provide adequate protection to us or that we will have sufficient resources to protect and enforce our rights. 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.

As
is customary in our industry, from time to time, we receive or make inquiries regarding possible infringement of patents or other intellectual property rights. Although there are no
pending claims against us regarding infringement of any existing patents or other intellectual property rights or any unresolved notices that we are infringing intellectual property rights of others,
such infringement claims could be asserted against us or our suppliers by third parties in the future. Any claims, with or without merit, could be time-consuming, result in costly
litigation, result in loss or cancellation of customer orders, cause product shipment delays, subject us to significant liabilities to third parties, require us to enter into royalty or licensing
agreements or prevent us from manufacturing and selling our products. If our products were found to infringe a third party's proprietary rights, we could be required to enter into royalty or licensing
agreements in order to continue to be able to sell our products. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our
business. Our involvement in any patent or other intellectual property dispute or action to protect trade secrets and know-how could have a material adverse effect on our business.

Employees

As of December 31, 2004, we had 661 employees. During 2004, our number of employees grew by ten percent while our net revenue in strip and RTP sales grew
by more than eighty-five percent. The success of

11

---



our
future operations will depend in large part on our ability to recruit and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the
manufacture of existing systems and the development of new systems and processes. Historically, during times of economic expansion, competition for such personnel has been intense, particularly in the
San Francisco Bay Area, where our headquarters is located. At times, we have experienced difficulty in attracting new personnel, and if needed, we may not be successful in retaining or recruiting
sufficient key personnel in the future. None of our employees outside Germany is represented by a labor union, and we have never experienced a work stoppage, slowdown or strike. In Germany, our
employees are represented by workers' councils. We consider our relationships with our employees to be good.

Environmental Matters

We are subject to federal, state, local and international environmental laws and regulations. These laws, rules and regulations govern the use, storage, discharge
and disposal of hazardous chemicals during manufacturing, research and development and sales demonstrations. Neither compliance with federal, state and local provisions regulating discharge of
materials into the environment, nor remedial agreements or other actions relating to the environment, has had, or is expected to have, a material effect on our capital expenditures, financial
condition, results of operations or competitive position. However, if we fail to comply with applicable regulations, we could be subject to substantial liability for clean up efforts, personal
injuries, fines or suspension or cessation of our operations.

Available Information

We make available free of charge, through our Website, http://www.mattson.com, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the
Securities and Exchange Commission, and its Website is http://www.sec.gov. The information on our Website is not incorporated herein by reference.

12

---



Item 2.Properties

Our principal properties as of December 31, 2004 are set forth below:

|Location             |  | Type                        |  | Principal Use                                                                  |  | Square
Footage |     | Ownership
|-------------------- |  | --------------------------- |  | ------------------------------------------------------------------------------ |  | -------------- | --- | ---------
|Fremont, CA          |  | Office, plant and warehouse |  | Headquarters, Marketing, Manufacturing, Distribution, Research and Engineering |  | 110,000        |     | Leased   
|Exton, PA            |  | Office, plant and warehouse |  | 100% Subleased                                                                 |  | 140,000        | (1) | Leased   
|Dornstadt, Germany   |  | Office, plant and warehouse |  | Manufacturing, Research and Engineering                                        |  | 105,000        |     | Leased   
|Pliezhausen, Germany |  | Office, plant and warehouse |  | 100% Subleased through September 2004                                          |  | 140,000        | (2) | Leased   

---

In addition to the above properties, we lease an aggregate of approximately 42,000 square feet of office space for sales and customer support
offices. In Canada, we lease approximately 18,500 square feet of office, plant and warehouse space for office, manufacturing and research facilities. At December 31, 2004, we had vacated from a
leased building of approximately 12,000 square feet located in Fremont, California as a result of consolidation of excess facilities into our current headquarters based in Fremont, California. We
agreed with the landlord to terminate the lease of this vacated building by the end of February 2005. In total, we lease office space for headquarters, manufacturing, operations, research and
engineering, distribution, marketing, sales and customer support offices in 19 locations throughout the world: six in the United States, six in Europe, two in China and one in each of Canada, Japan,
Korea, Singapore and Taiwan. We consider these current facilities suitable and adequate to meet our requirements.

Item 3.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

13

---



from
manufacturing and selling our products. Any of these situations could have a material adverse effect on our business.

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

None

Executive Officers of the Registrant

The following table and notes sets forth information about our three executive officers:

Name

Age

TitleDavid L. Dutton

44

Chief Executive Officer, President, and DirectorRobert B. MacKnight

55

Chief Operating OfficerLudger H. Viefhues

62

Chief Financial Officer, Executive Vice President  Finance and Secretary


David L. Dutton  Chief Executive Officer, President and Director

David Dutton has served as Mattson's Chief Executive Officer and President since October 2001 and was elected to this position in December 2001.
Prior to being elected Chief Executive Officer and President, Mr. Dutton served as the President of the Plasma Products Division. Mr. Dutton joined Mattson in 1994 as General Manager of
the Strip/Plasma Etch division. From 1998 to 2000, Mr. Dutton served as Executive Vice President and Chief Operating Officer of Mattson. From 1993 to 1994, Mr. Dutton was Engineering
Manager for Thin Films Processing at Maxim Integrated Products, Inc. From 1984 to 1993, Mr. Dutton served as an engineer and then manager in plasma etch processing and yield enhancement
at Intel Corp.

Robert B. MacKnight  Chief Operating Officer

Robert MacKnight has served as Mattson's Chief Operating Officer since December 2002. Prior to that, Mr. MacKnight served as President of the
Thermal/Films/Etch division and Executive Vice President since December 2001. Mr. MacKnight joined Mattson in September 2001 as Executive Vice President of Corporate Development
and General Manager of the RTP Product Business Unit. From 1998 to 2001, Mr. MacKnight served at Microbar, Inc., a manufacturer of chemical systems for the semiconductor industry, where
he last served as President and Chief Operating Officer. From 1996 to 1998, Mr. MacKnight was Vice President and General Manager of After Market Operations for Cymer, Inc., a supplier of
equipment used in semiconductor manufacturing.

Ludger H. Viefhues  Chief Financial Officer, Executive Vice President-Finance, and Secretary

Ludger Viefhues joined Mattson as the Chief Financial Officer in December 2000 and also serves as Executive Vice President, Finance and Secretary. From
1999 to 2000, Mr. Viefhues was Chief Financial Officer of STEAG RTP Systems. From 1996 to 1999, Mr. Viefhues was Chief Executive Officer at MEMC Electronic Materials, Inc., a
supplier of silicon wafers. Prior to being appointed Chief Executive Officer at MEMC, Mr. Viefhues served as MEMC's Chief Financial Officer. From 1993 to 1996, Mr. Viefhues held the post
of Chief Financial Officer at Huels AG in Germany.

14

---





PART II

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

Stock Listing

Our common stock has been traded on the Nasdaq National Market tier of the Nasdaq Stock Market since our initial public offering on September 28, 1994. Our
stock is quoted under the symbol "MTSN". The following table sets forth the high and low closing prices as reported by the Nasdaq National Market for the periods indicated.

High

Low2004 QuarterFirst

$
14.82

$
10.12Second


14.38


9.07Third


12.02


7.05Fourth


11.59


7.212003 QuarterFirst

$
3.01

$
1.53Second


3.95


1.77Third


9.95


2.95Fourth


16.59


8.72


On
March 1, 2005, the last reported sales price of our common stock on the Nasdaq National Market was $10.06 per share. According to records of our transfer agent, we had 243
stockholders of record of our common stock at March 1, 2005.

Dividends

We have never paid cash dividends on our common stock and have no present plans to pay cash dividends. We are also restricted by the terms of our credit facility
with our bank from paying future dividends. We intend to retain all future earnings for use in our business.

Public Offering

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 $46.4 million. See Note 8.

Item 6.Selected Financial Data

The following historical financial data should be read in conjunction with our consolidated financial statements and notes thereto. We derived the selected
consolidated statement of operations data for the years ended December 31, 2004, 2003 and 2002 and the selected consolidated balance sheet data as of December 31, 2004 and 2003 from our
audited consolidated financial statements appearing in this report. We derived the selected consolidated statement of operations data for the years ended December 31, 2001 and 2000 and the
selected consolidated balance sheet data as of December 31, 2002, 2001 and 2000 from our audited consolidated financial statements, which are not included in this report.

On
October 27, 2004, we completed the acquisition of Vortek Industries Ltd. On January 1, 2001, we completed the acquisitions of the semiconductor equipment division
of STEAG Electronic systems AG (the STEAG Semiconductor Division) and CFM Technologies, Inc. (CFM). These acquisitions have been accounted for under the purchase method of accounting, and the
results of operations of the acquired companies are included in our selected financial data. On March 17, 2003, we divested our wet surface

15

---



preparation
products business. During 2001 and 2002, we incurred charges relating to impairment of long-lived assets, inventory valuation charges and restructuring costs. These
acquisitions, divesture and charges affect the comparability of our financial data for the periods shown in the following table. These transactions are further discussed in Management's Discussion and
Analysis of Financial Conditions and Results of Operations, and in Notes 1, 3, 4, and 6 to our Consolidated Financial Statements.

|                                                                                          |                                                   | Year Ended December 31,     |        
|----------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------- | -------
|
|
|CONSOLIDATED STATEMENT OF OPERATIONS DATA:                                                |                                                   |                             |        
|Net sales(4)                                                                              |                                                   | $                           | 252,761
|Cost of sales(3)                                                                          |                                                   |                             | 141,973
|                                                                                          |                                                   |                             |        
|Gross profit                                                                              |                                                   |                             | 110,788
|                                                                                          |                                                   |                             |        
|Operating expenses:                                                                       |                                                   |                             |        
|                                                                                          | Research, development and engineering             |                             |        
|                                                                                          | Selling, general and administrative               |                             |        
|                                                                                          | Acquired in-process research and development      |                             |        
|                                                                                          | Amortization of goodwill and intangibles(2)       |                             |        
|                                                                                          | Restructuring and other charges                   |                             |        
|                                                                                          | Impairment of long-lived assets and other charges |                             |        
|                                                                                          | Loss on disposition of Wet Business               |                             |        
|                                                                                          |                                                   |                             |        
|                                                                                          |                                                   | Total operating expenses(5) |        
|                                                                                          |                                                   |                             |        
|Income (loss) from operations                                                             |                                                   |                             | 29,109 
|Interest and other income (expense), net(4)(5)                                            |                                                   |                             | 1,914  
|                                                                                          |                                                   |                             |        
|Income (loss) before income taxes and cumulative effect of change in accounting principle |                                                   |                             | 31,023 
|Provision (benefit) for income taxes                                                      |                                                   |                             | (5,502 
|                                                                                          |                                                   |                             |        
|Income (loss) before cumulative effect of change in accounting principle                  |                                                   |                             | 36,525 
|Cumulative effect of change in accounting principle, net of tax benefit(1)                |                                                   |                             |       
|                                                                                          |                                                   |                             |        
|Net income (loss)                                                                         |                                                   | $                           | 36,525 
|                                                                                          |                                                   |                             |        
|Income (loss) per share, before cumulative effect of change in accounting principle:      |                                                   |                             |        
|                                                                                          | Basic                                             |                             | $      
|                                                                                          | Diluted                                           |                             | $      
|Cumulative effect of change in accounting principle:                                      |                                                   |                             |        
|                                                                                          | Basic                                             |                             | $      
|                                                                                          | Diluted                                           |                             | $      
|Net income (loss) per share:                                                              |                                                   |                             |        
|                                                                                          | Basic                                             |                             | $      
|                                                                                          | Diluted                                           |                             | $      
|Shares used in computing net income (loss) per share:                                     |                                                   |                             |        
|                                                                                          | Basic                                             |                             |        
|                                                                                          | Diluted                                           |                             |        

16

---



|                                       |  | December 31,
|-------------------------------------- |  | ------------
|
|
|CONSOLIDATED BALANCE SHEET DATA:       |  |             
|Cash and cash equivalents(6)           |  | $           
|Working capital                        |  |             
|Total assets                           |  |             
|Long-term debt, net of current portion |  |             
|Total stockholders' equity             |  |             

---

17

---





Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected
Financial Data," our consolidated financial statements and related notes included elsewhere in this document. In addition to historical information, the discussion in this document contains certain
forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements due to various factors,
including, but not limited to, those set forth under the caption "Risk Factors that May Affect Future Results and Market Price of Stock" and elsewhere in this document.

Overview

We are a leading supplier of semiconductor wafer processing equipment used in the fabrication of integrated circuits (ICs). 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 mm wafers, sub-90 nm
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
2002 and the first quarter of 2003, we took restructuring actions to refocus our business on our core technologies in dry strip (Strip) and rapid thermal processing (RTP) and to
reduce our cost structure. As part of this restructuring effort, we divested a significant line of business, our wet surface
preparation products (Wet Business), in March of 2003. As a result of our restructurings in 2003 and 2002, our revenue sources and our cost structure have significantly changed. This affects the
comparability of our reported financial information for the annual periods discussed in this report, and it causes our historical information not to be a good indicator or predictor of results for
future periods.

As
a result of our restructurings and divestitures, we reduced our cost structure and reduced our rate of losses throughout the first three quarters of 2003. We achieved a small profit
from operations for the fourth quarter of 2003.

During
2004, we continued to focus on our core technologies in Strip and RTP products. We increased our revenues by 45.0% to $252.8 million from $174.3 million in 2003. As
a result of our continued efforts to control our operating costs in 2004, our research, development and engineering expenses and selling, general and administrative expenses in total increased by 3.9%
to $80.3 million, compared with $77.3 million in 2003. Overall, we had a year of stable growth in 2004 and reported increases in net income for each of the four quarters.

During
the first quarter of 2004, we successfully completed an underwritten public offering of approximately 4.3 million shares of common stock, with net proceeds of approximately
$46.4 million. In the fourth quarter of 2004, we acquired Vortek Industries Ltd, a privately held developer of millisecond flash annealing technology based in Vancouver, Canada for a
total consideration of $18.9 million, consisting of approximately 1.5 million shares of our common stock valued at $16.7 million and approximately $2.2 million in cash for
acquisition-related expenses. We had $89.7 million of cash and cash equivalents and no long-term debt at December 31, 2004. With the recent improvements in our operating
results and the infusion of additional cash on our balance sheet, we believe we are in a healthy position in terms of liquidity and capital resources.

18

---



In
2004, 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, 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.

After
this overview, we will provide discussion of the following topics to help understand our financial statements, the changes in certain key items in those financial statements from
year to year and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our financial statements:



Reclassifications

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

Loss on disposition of Wet Business in 2003.We had previously reported in 2003 a loss on disposition of Wet Business of
$10.3 million after income (loss) from operations. We have reclassified this loss to be included as part of income (loss) from operations for 2003. See Note 3 to Consolidated Financial
Statements.

DNS Settlement Income in 2002.We had previously reported in 2002 the receipt of $15 million related to the DNS
litigation settlement as other income (expense), net. We have reclassified this to net sales for 2002. The reclassification of this amount increases our reported net sales for 2002 to
$218.5 million. See Note 9 to Consolidated Financial Statements.

Auction Rate Securities from 2002 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

19

---



through
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, which was 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 the accompanying consolidated balance sheets. The reclassification results in reclassification to short-term investments of
$20.2 million and $15.9 million at December 31, 2003 and 2002, respectively. We sold all auction rate securities in November 2004. In addition, purchases of investments and
sales of investments, included in the accompanying consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities during the periods presented.

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. 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. See Note 1 of Notes to Consolidated Financial Statements for a summary of our
significant accounting policies.

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
accepted, 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.

20

---



In
all cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and 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 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 three quarters of 2004 which triggered an impairment
review. During the fourth quarter of 2004, we completed our (first-step) annual impairment test based on management estimates and fair value assessments, which did not indicate any
impairment, thus the second step was not necessary.

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

21

---



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 years ended December 31, 2004 and 2003, we did not record any impairment charge. During the year ended December 31, 2002, we recorded an aggregate impairment
loss of $11.6 million for property and equipment, intangible assets and other long-lived assets because the carrying amounts of such assets exceeded the estimated future cash flows
from the use of such assets.

Income Taxes.We recorded a 100% valuation allowance against our net deferred tax asset as we expect it is more likely than
not that we will not realize our net deferred tax asset as of December 31, 2004. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks
associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies. In the event we determine that we would be able to realize deferred tax assets in the
future in excess of the net recorded amount, we would record an adjustment to the deferred tax asset valuation allowance, which would increase income in the period of adjustment.

Results of Operations

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

Year Ended December 31,2004

2003

2002(2)Net sales

100.0
%
100.0
%
100.0
%Cost of sales

56.2

64.7

74.6Gross profit margin

43.8

35.3

25.4Operating expenses:Research, development and engineering

9.1

13.2

17.1Selling, general and administrative

22.6

31.1

39.5Amortization of intangibles

0.6

1.2

3.0Restructuring and other charges



0.3

7.9Loss on disposition of Wet Business(1)



5.9

Income (loss) from operations(1)

11.5

(16.4
)
(42.1
)Interest and other income (expense), net

0.8

0.3

(1.1
)Income (loss) before income taxes

12.3

(16.1
)
(43.2
)Provision (benefit) for income taxes

(2.2
)
0.2

(0.1
)Net income (loss) before cumulative effect of change

14.5
%
(16.3
)%
(43.1
)%


---

Net Sales

Year Ended December 31,2004

2003

2002(in thousands, except percentages)Net Sales

$
252,761

$
174,302

$
218,520Change from prior year

$
78,459

$
(44,218
)


22

---



The
increase in net sales in 2004 compared with 2003 was primarily due to an increase in Strip and RTP system and spare parts sales of $111.0 million, or 86%, partially offset by
the decrease in Wet product sales of $33.6 million as a result of our divesture of the Wet Business in 2003. Of the $111.0 million increase, $101.6 million resulted from higher
Strip and RTP system sales for 2004 compared with 2003. In 2004, over 70% of our business was for 300 mm products. In 2004, we received business from leading chipmakers in all regions we
serve  China, Europe, Japan, Korea, Singapore, Taiwan and the United States. Our net sales for 2004 included royalty income of $12.9 million, compared with
$12.0 million for 2003.

The
decrease in net sales in 2003 compared with 2002 was primarily due to the divestiture of the Wet Business on March 17, 2003. Net sales of Wet Business products were
$33.6 million in 2003, a decrease of $43.9 million from net sales of $77.5 million in 2002. Net sales of Strip and RTP products for 2003 were $128.7 million, an increase of
7.5% from $119.7 million in 2002. The increase in 2003 net sales of Strip and RTP products was primarily due to increased units sold. Net sales for 2003 and 2002 included $12.0 million
and $21.3 million of revenue from DNS royalties, respectively. See "Reclassifications" in Note 1 to Consolidated Financial Statements.

Our
deferred revenue at December 31, 2004 was approximately $30.3 million, a decrease of $8.4 million from $38.7 million at December 31, 2003. The
$30.3 million in deferred revenue consisted of $9.5 million of deferred revenue related to installation services awaiting completion for sales of established products, $9.6 million of
deferred revenue related to recently introduced or beta products shipped and awaiting customer acceptance and $11.2 million in advanced payments related to DNS royalties. The decline in
deferred revenue in 2004 compared with 2003 was primarily a result of $6.5 million in DNS royalty payments recognized during 2004 and a net $2.5 million decrease in deferred revenue
related to newly introduced products, as we began to receive customer acceptances related to our Helios product. Our deferred revenue at December 31, 2003 was $38.7 million, a decrease
of $70.0 million from $108.7 million at December 31, 2002, reflecting our divestiture of the Wet Business early in 2003. The $38.7 million in deferred revenue at the end of
2003 consisted of $8.9 million of deferred revenue related to installation services awaiting completion for sales of established products, $12.1 million of deferred revenue related to
tools shipped and awaiting customer acceptance and $17.7 million in advanced payments related to DNS royalties.

International
sales, predominantly to customers based in Europe, Japan and the Pacific Rim, including China, Korea, Singapore and Taiwan accounted for 87% of total net sales for both
2004 and 2003, and 75% of total net sales for 2002. We anticipate that international sales will continue to account for a significant portion of our sales.

Gross Profit and Gross Profit Margin

Year Ended December 31,2004

2003

2002(in thousands, except percentages)Gross Profit

$
110,788

$
61,519

$
55,457Change from prior year

$
49,269

$
6,062


The
increase in gross profit for 2004 compared with 2003 was primarily due to increased system sales, in particular from our higher-margin products, including our
next-generation 300 mm RTP system, the Helios. In accordance with our revenue recognition policy as it pertains to new products, we recognized no revenues related to shipments of our
Helios products made in 2003. Helios related sales were reported as deferred revenue in the consolidated balance sheet at December 31, 2003. Gross profit reported for Helios sales recognized in
2004 amounted to approximately $20.0 million. Improved direct labor and overhead absorption for 2004 compared with 2003 resulted in an increase in gross margin of $10.4 million.
Additionally, in 2004 the Company benefited from improved reliability of installed systems, and accordingly was able to carry lower reserves for retrofitting costs, thereby increasing gross profit by
$3.0 million. Our net sales for 2004 included royalty income of $12.9 million received from DNS, compared

23

---



with
$12.0 million for 2003 and $21.3 million for 2002. See "Reclassifications" in Note 1 to Consolidated Financial Statements. The royalty income carries no associated cost of
sales.

Gross
profit for 2003 improved compared with 2002, primarily due to improvements in our inventory management. We recorded inventory valuation charges of $1.6 million for 2003, an
88.8% decrease from 2002 charges of $14.3 million. Due to the reclassification of $15 million in settlement payments from DNS as net sales for 2002 (See "Reclassifications" in
Note 1 to Consolidated Financial Statements), our gross profit for 2002 improved to $55.5 million, compared with $40.5 million reported in our previous reports.

Year Ended December 31,2004

2003

2002(percentages)Gross Profit Margin

43.8
%
35.3
%
25.4
%


The
improved gross profit margin for 2004 compared with 2003 was primarily due to increased sales of higher-margin products, particularly our Helios RTP system. The improved gross profit
margin for 2003 compared with 2002 was primarily due to improved facility utilization and other efficiencies gained from the divestiture of the Wet business, and a greater proportion of Strip and RTP
product sales, as well as spare parts and service revenues, with relatively higher margins. Gross profit margin in both 2004 and 2003 was also favorably impacted by improvements in our inventory
management. We had no inventory valuation charge in 2004, compared with inventory valuation charges of $1.6 million for 2003 and $14.3 million for 2002.

In
addition, due to the reclassification of $15 million in litigation settlement payments to net sales for 2002 (See "Reclassifications" in Note 1 to Consolidated Financial
Statements), our gross profit margin for 2002 improved to 25.4% from 19.9% reported in our previous reports.

Due
to intense competition, we continue to face pricing pressure that can affect our gross profit margin. In 2004, we continued 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.

Research, Development and Engineering

Year Ended December 31,2004

2003

2002(in thousands, except percentages)Research, Development and Engineering

$
23,069

$
22,988

$
37,395Percentage of net sales


9.1
%

13.2
%

17.1
%Change from prior year

$
81

$
(14,407
)


Research,
development and engineering (RD&E) expenses consist primarily of salary and benefits for our RD&E staff as well as contractors' fees and other costs associated with the
enhancements of existing products and development of new products. The increase in RD&E expense in 2004 compared with 2003 was primarily due to higher employee-related costs as a result of increased
headcount of our RD&E function. As a percentage of net sales, our RD&E expenses decreased in 2004 compared with 2003 because of increased net sales.

24

---



The decrease in RD&E expenses in 2003 compared with 2002 was primarily due to a reduction in depreciation and amortization expense by $7.3 million resulting from the divestiture
of our Wet Business in March 2003, a $2.2 million credit for cost sharing with an alliance partner in connection with an RD&E project and a reduction in personnel and associated costs by
$1.6 million.

Selling, General and Administrative

Year Ended December 31,2004

2003

2002(in thousands, except percentages)Selling, general and administrative

$
57,181

$
54,292

$
86,218Percentage of net sales


22.6
%

31.1
%

39.5
%Change from prior year

$
2,889

$
(31,926
)


Sales
and marketing expenses consist primarily of the costs of personnel involved in the sales and marketing process, outside service costs, sales commissions, advertising and
promotional materials, sales facilities expense, trade shows and seminars. General and administrative expenses consist primarily of personnel costs for finance, administration, operations and general
management, headquarters and general office facilities costs, as well as legal and accounting expenses. The increase in selling, general and administrative (SG&A) expenses in 2004 compared with 2003
was primarily the result of additional variable expenses that come with a higher level of business activity, primarily related to an increase in outside service charges of $0.9 million as a
result of increased outsourcing. In 2004, we continued to streamline our internal operations and adjust our resources through outsourcing in an effort to create a more flexible organization that can
operate profitably through changing industry cycles. As a percentage of net sales, our SG&A expenses decreased in 2004 compared to 2003 because we achieved higher net sales while better controlling
our SG&A expenses in 2004.

The
decrease in SG&A expenses in 2003 compared with 2002 was primarily due to the divestiture of our Wet Business in March 2003, other restructuring and cost control measures
which included a reduction in personnel and related costs by $19.0 million, reduction in rent expenses for buildings by $3.4 million, reduction in outside professional services by
$6.9 million, reduction in depreciation expense by $2.9 million, reduction in sales commissions by $1.6 million, and reduction in travel expenses by $2.1 million.

Amortization of Intangibles

Year Ended December 31,2004

2003

2002(in thousands, except percentages)Amortization of intangibles

$
1,429

$
2,151

$
6,591Percentage of net sales


0.6
%

1.2
%

3.0
%Change from prior year

$
(722
)
$
(4,440
)


Upon
adoption of SFAS 142 "Goodwill and Other Intangible Assets" on January 1, 2002, we no longer amortize goodwill. Amortization expenses decreased in 2004 compared with
2003 primarily due to a reduction in intangibles resulting from the divesture of our Wet Business in 2003. In 2005, higher amortization expense is expected due to the amortization of intangible assets
resulting from our acquisition of Vortek Industries Ltd. We estimate our amortization expense to be $2.0 million for 2005.

25

---



Restructuring and Other Charges

Year Ended December 31,2004

2003

2002(in thousands, except percentages)Restructuring and other charges

$


$
489

$
17,307Percentage of net sales





0.3
%

7.9
%Change from prior year

$
(489
)
$
(16,818
)


During
2004, we made cash payments of $115,000 in connection with our 2002 severance accrual. During 2004, we made total cash payments of $161,000 in connection with our building
facilities related to our 2002 restructuring plan, and released $450,000 in unused facility-related reserve balances to the consolidated statement of operations, resulting in a remaining reserve of
$564,000 for consolidation of excess facilities. In connection with our consolidation of excess facilities into our current headquarters based in Fremont, California in 2004, we accrued for lease
termination costs of $450,000 in December 2004. As a result, we had no restructuring charges recorded for 2004 and had $1,014,000 in facilities-related restructuring accruals as of
December 31, 2004. See Note 6 to Consolidated Financial Statements.

The
decrease in restructuring and other charges for 2003 compared with 2002 was primarily due to insignificant new restructuring activities during 2003. We recorded restructuring and
other charges of $489,000 in 2003, including $381,000 for workforce reductions in Fremont and Germany and $108,000 for consolidation of excess facilities in California. In connection with the
workforce reductions, we terminated 104 employees. Our other restructuring activities during 2003 were mainly limited to the further completion of the restructuring plan initiated in 2002. In the last
two quarters of 2002, in response to the downturn in the semiconductor industry, we performed assessments of the carrying values of our long-lived assets to be held and used, including
property and equipment and other intangible assets. As a result of these assessments, we recorded a charge of $11.6 million to reduce the carrying value of property and equipment, intangible
assets and other long-term assets. The charge of $11.6 million included $6.5 million for impaired and abandoned property and equipment, $4.4 million for the
write-off of intangible assets for developed technology, and $0.7 million for impairment of other long- lived assets. Additionally, we recorded restructuring charges
related to our workforce reduction and consolidation of excess facilities in the amount of $3.4 million and $2.3 million, respectively. See Note 6 to Consolidated Financial
Statements.

We
anticipated that the restructuring actions implemented in 2002 would result in an annual savings of depreciation and amortization expenses of $3.9 million through 2005,
estimated savings on employee costs of $2.3 million and rent expense for leased facilities of $1.3 million.

Interest and Other Income (Expense), Net

Year Ended December 31,2004

2003

2002(in thousands, except percentages)Interest expense

$
81

$
122

$
1,660Percentage of net sales





0.1
%

0.8
%Change from prior year

$
(41
)
$
(1,538
)Interest income

$
1,242

$
1,207

$
2,380Percentage of net sales


0.5
%

0.7
%

1.1
%Change from prior year

$
35

$
(1,173
)Other income (expense), net

$
753

$
(432
)
$
(3,084
)Percentage of net sales


0.3
%

(0.2
%)

(1.4
%)Change from prior year

$
1,185

$
2,652


26

---



Interest
income remained flat in 2004 compared with 2003, despite higher cash and cash equivalent balances, primarily due to lower average interest rates. Interest income decreased in
2003 compared with 2002, primarily due to lower cash and cash equivalent balances and lower average interest rates. Interest expense for 2004 and 2003 remained minimal. Interest expense of
$1.7 million during 2002 was primarily related to interest on our notes payable to STEAG Electronic Systems (SES). The increase in other income (expense), net in 2004 compared with 2003 was
primarily due to gains on forward foreign exchange contracts. We had reported in 2002 an amount of $15 million related to the DNS settlement to other income (expense), net. This amount related
to damages and partial reimbursements of attorney fees. We reclassified this amount to net sales for 2002. See Note 9 to Consolidated Financial Statements. The decrease in other expense in 2003
compared with 2002 was primarily due to a decrease in foreign exchange losses, which was $2.0 million in 2002.

Provision for Income Taxes

We recorded a tax benefit of $5.5 million for the year ended December 31, 2004, compared with a tax expense of approximately $0.4 million for
the year ended December 31, 2003, and a tax benefit of $0.1 million for the year ended December 31, 2002. The tax benefit in 2004 was primarily due to a tax benefit of
$4.5 million resulting from reduced foreign income tax liabilities, and a onetime tax benefit of $1.0 million related to a refund of taxes that had been previously withheld and expensed
at the time of our DNS settlement in the third quarter of 2002, which were partially offset by tax expenses related to foreign operations. The tax expense in 2003 primarily consisted of tax expense
related to foreign operations. The tax benefit in 2002 primarily resulted from amortization of identifiable intangibles acquired in 2001 and the receipt of a federal tax refund, which were partially
offset by tax expenses related to foreign operations.

27

---



Quarterly Results of Operations

The following tables set forth our unaudited consolidated statements of operations data for each of the eight quarterly periods ended December 31, 2004.
This information should be read in conjunction with our consolidated financial statements and accompanying notes appearing elsewhere in this annual report. We have prepared this unaudited consolidated
information on a basis consistent with our audited consolidated financial statements, reflecting all normal recurring adjustments that we consider necessary for a fair presentation of our financial
position and operating results for the fiscal quarters presented.

|                                           |                                       | Quarter Ended            |       
|------------------------------------------ | ------------------------------------- | ------------------------ | ------
|
|
|CONSOLIDATED STATEMENTS OF OPERATIONS      |                                       |                          |       
|Net sales                                  |                                       | $                        | 53,125
|Cost of sales                              |                                       |                          | 30,717
|                                           |                                       |                          |       
|Gross profit                               |                                       |                          | 22,408
|                                           |                                       |                          |       
|Operating expenses:                        |                                       |                          |       
|                                           | Research, development and engineering |                          |       
|                                           | Selling, general and administrative   |                          |       
|                                           | Amortization of intangibles           |                          |       
|                                           |                                       |                          |       
|                                           |                                       | Total operating expenses |       
|                                           |                                       |                          |       
|Income from operations                     |                                       |                          | 4,237 
|Interest and other income (expense), net   |                                       |                          | (654  
|                                           |                                       |                          |       
|Income before income taxes                 |                                       |                          | 3,583 
|Provision (benefit) for income taxes       |                                       |                          | 269   
|                                           |                                       |                          |       
|Net income                                 |                                       | $                        | 3,314 
|                                           |                                       |                          |       
|Net income per share:                      |                                       |                          |       
|                                           | Basic                                 |                          | $     
|                                           | Diluted                               |                          | $     
|Shares used in computing income per share: |                                       |                          |       
|                                           | Basic                                 |                          |       
|                                           | Diluted                               |                          |       

28

---



|                                                  |                                        | Quarter Ended            |        
|------------------------------------------------- | -------------------------------------- | ------------------------ | -------
|
|
|CONSOLIDATED STATEMENTS OF OPERATIONS             |                                        |                          |        
|Net sales                                         |                                        | $                        | 67,758 
|Cost of sales                                     |                                        |                          | 49,167 
|                                                  |                                        |                          |        
|Gross profit                                      |                                        |                          | 18,591 
|                                                  |                                        |                          |        
|Operating expenses:                               |                                        |                          |        
|                                                  | Research, development and engineering  |                          |        
|                                                  | Selling, general and administrative    |                          |        
|                                                  | Amortization of intangibles            |                          |        
|                                                  | Restructuring and other charges        |                          |        
|                                                  | Loss on disposition of Wet Business(1) |                          |        
|                                                  |                                        |                          |        
|                                                  |                                        | Total operating expenses |        
|                                                  |                                        |                          |        
|Income (loss) from operations                     |                                        |                          | (17,256
|Interest and other income (expense), net          |                                        |                          | 1,203  
|                                                  |                                        |                          |        
|Income (loss) before income taxes                 |                                        |                          | (16,053
|Provision (benefit) for income taxes              |                                        |                          | (62    
|                                                  |                                        |                          |        
|Net income (loss)                                 |                                        | $                        | (15,991
|                                                  |                                        |                          |        
|Net income (loss) per share:                      |                                        |                          |        
|                                                  | Basic                                  |                          | $      
|                                                  | Diluted                                |                          | $      
|Shares used in computing income (loss) per share: |                                        |                          |        
|                                                  | Basic                                  |                          |        
|                                                  | Diluted                                |                          |        

---

Liquidity and Capital Resources

Our cash and cash equivalents (excluding restricted cash) and short-term investments were $92.1 million at December 31, 2004, an
increase of $15.0 million from $77.1 million held as of December 31, 2003. Stockholders' equity at December 31, 2004 was $191.4 million.

Credit Arrangements

We have a $20 million revolving line of credit with a bank. In 2004, the terms of this line of credit were amended, giving us the right to increase the
line of credit to $25 million at our option, and extending the line of credit through April 2005. 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 December 31, 2004, we were in compliance with the covenants and there was no borrowing under this credit line.

29

---



Our
Japanese subsidiary has a credit facility with a Japanese bank in the amount of 600 million Yen (approximately $5.8 million at December 31, 2004), 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 December 31, 2004. 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 December 31, 2004, the Japanese subsidiary had approximately $40,000 of off-balance-sheet recourse liability related to a
commercial bill discounted 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 $1.0 million at
December 31, 2004). The facility is not collateralized and is subject to variable interest rates. The facility will expire on March 30, 2005. There are no financial covenant requirements
for this credit facility. At December 31, 2004, there was no borrowing under this credit facility

Off-Balance Sheet Arrangements

As of December 31, 2004, we do 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.

Contractual Obligations

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 3, 14 and 17 to Consolidated Financial Statements.

30

---



Our
contractual commitments as of December 31, 2004 are summarized in the following table:

Vendor CommitmentsOperating
Lease Payments

Sublease
IncomeSubcontractor

Inventory

Other

Total(in thousands)2005

$
3,597

$
7,670

$
3,343

$
2,286

$
13,299

$
2,1492006


3,102








1,097


1,097


2,0182007


2,852








515


515


1,3692008


2,417








257


257


2009


2,651














Thereafter


16,127














$
30,746

$
7,670

$
3,343

$
4,155

$
15,168

$
5,536


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 $11.7 million at December 31, 2004), 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 $11.7 million at December 31, 2004) less any royalties paid by Vortek or us to the Minister.

Other Commitments and Legal Settlement

On July 2, 2002, we timely retired two obligations, of $26.9 million and 10.2 million Euros, including accrued interest thereon, and made
payments in full to STEAG Electronic Systems AG in the total amount of approximately $37.7 million.

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.

As
of December 31, 2004, 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
to us through December 31, 2004, $4.6 million was subjected to Japanese withholding tax. In December 2004, we received $3.1 million withholding tax refund from the Japanese
tax authority in respect of DNS's payments to the Company.

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

Liquidity and Capital Resources Outlook

As of December 31, 2004, we had cash and cash equivalents (excluding restricted cash) and short-term investments of $92.1 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 and 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.

31

---



Cash Flows from Operating Activities

Net cash used in operations in 2004 of $17.0 million was primarily due to an increase in accounts receivable of $25.2 million, an increase in
inventories of $14.6 million, primarily due to reduction in inventory reserves of $8.2 million as a result of improvement in inventory control and disposal of obsolete inventories and
increases of inventories of purchased parts and raw materials of $7.6 million; a decrease in accrued liabilities of $19.5 million, largely due to reduction in
tool-related/retrofit accruals; and a decrease in deferred revenue of $8.4 million due to recognition of DNS royalty income, partially offset by net income of $36.5 million,
a decrease in advanced billings of $3.9 million and depreciation and amortization charges of $7.1 million.

Net
cash used in operations in 2003 of $16.4 million was primarily due to net losses of $28.4 million, a decrease in deferred revenue of $22.1 million due to our
concerted effort during 2003 to address situations where customers had been slow to provide sign-off, some of the shipments were a year old or more, and a decrease in accrued liabilities
of $13.0 million, offset by the decreases in inventories and inventories  delivered systems of $11.5 million, primarily due to the divesture of our Wet Business, a
loss on disposition of the Wet business of $10.3 million, increases in accounts payable of $6.9 million, an increase in other assets of $6.0 million, a loss on disposal of fixed
assets of $2.7 million, and the non-cash depreciation and amortization of $8.0 million.

Net
cash used in operations in 2002 of $10.9 million was primarily due to the net loss of $94.3 million, a decrease in deferred revenue of $43.9 million, and a
decrease in accrued liabilities of $8.1 million. These
uses of cash were offset by the decreases in inventories and inventories  delivered systems of $41.2 million, decreases in accounts receivable and advance billings of
$49.1 million, a decrease in prepaid expenses and other current assets of $2.6 million, a non-cash impairment of long-lived assets and other charges of
$11.6 million, inventory valuation charges of $14.3 million and the non-cash depreciation and amortization of $17.2 million.

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

Cash Flows from Investing Activities

Net cash used in investing activities of $2.9 million in 2004 was primarily due to purchases of available-for-sale investments of
$26.2 million, capital spending for the build-out of our manufacturing operations as a result of consolidation of manufacturing facilities in Fremont, California, loans to Vortek
prior to acquisition of $2.6 million, and net cash of $2.2 million paid in connection with the Vortek acquisition, partially offset by proceeds from sales and maturities of
available-for-sale investments of $43.9 million.

Net
cash used in investing activities of $10.3 million in 2003 consisted of purchases of property and equipment of $8.0 million, purchases of
available-for-sale investments of $35.7 million, partially offset by proceeds from sales and maturities of available-for-sale investments of
$31.4 million, and proceeds from the disposition of the Wet Business of $2.0 million. The purchases of property and equipment were primarily related to implementation of a new enterprise
resource planning system.

Net
cash used in investing activities in 2002 of $10.9 million consisted of purchases of available-for-sale investments of $31.3 million, and
purchases of property and equipment of $4.6 million, partially offset by proceeds from sales and maturities of available-for-sale investments of $21.2 million and
proceeds from the sale of equipment of $3.7 million.

Cash Flows from Financing Activities

Net cash provided by financing activities of $47.8 million in 2004 consisted primarily of the net proceeds of $46.4 million from an underwritten
public offering of approximately 4.3 million newly issued shares of common stock priced at $11.50 per share issued in February 2004. We used the net proceeds

32

---



received
from the offering for general corporate purposes, including working capital requirements and potential strategic acquisitions or investments.

Net
cash provided by financing activities of $4.2 million in 2003 consisted of $3.6 million in proceeds from stock plans and a decrease in restricted cash of
$0.6 million. The decrease in restricted cash resulted from pledge deposits that were no longer required for leases in Germany.

Net
cash provided by financing activities of $20.2 million in 2002 was primarily due to a decrease in restricted cash of $26.2 million, and the net proceeds from the
issuance of common stock of $34.9 million under a private placement arrangement in April 2002, offset by the payment on notes payable of $38.8 million, and payment on a line of
credit of $5.3 million.

New 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 us to measure all employee stock-based compensation awards using a fair value method and record such
expense in our 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. SFAS 123R is effective beginning in our third quarter of fiscal 2005. We are currently assessing the effects of adopting
SFAS 123R, 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
November 2004, the FASB's Emerging Issues Task Force reached a consensus on Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report Discontinued Operations" (EITF 03-13). The guidance should be applied to a component of an enterprise that is either disposed of
or classified as held for sale in fiscal periods that began after December 15, 2004. We believe that the adoption of EITF 03-13 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.

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Acquisitions and Divestitures

Acquisition of Vortek Industries Ltd.

On October 27, 2004, we acquired certain outstanding debt and equity ownership interests in Vortek Industries Ltd. (Vortek), a privately held
corporation amalgamated under the laws of British Columbia for a total purchase price of $18.9 million. Vortek is based in Vancouver, Canada. The purchase price
consisted of approximately 1.5 million shares of Mattson common stock valued at approximately $16.7 million, and approximately $2.2 million in cash for acquisition-related
expenses. Prior to the closing date of the Vortek acquisition (October 27, 2004), Mattson provided loans to Vortek aggregating $2.6 million. These loans still existed at
December 31, 2004 and were eliminated in consolidation. As a result of the transaction, Vortek became our wholly-owned subsidiary. Vortek is a developer of millisecond flash annealing
technology for rapid thermal processing of silicon wafers used in the manufacture of semiconductors. Of the shares of common stock we issued in the Vortek transaction, 290,561 (the Escrow Shares) are
being held subject to an escrow agreement. The Escrow Shares are subject to forfeiture in the event of valid indemnification claims within a period of 12 months from October 27, 2004. In
connection with the Vortek acquisition, we entered into a Stock Registration and Restriction Agreement, dated as of October 27, 2004, pursuant to which we agreed to register the shares issued
in the Vortek acquisition, other than the Escrow Shares, under the Securities Act of 1933, for resale by the recipients subject to certain restrictions on the transfer of such shares.

This
acquisition was consummated principally to expand and strengthen our RTP technology portfolio and support our long-term growth strategy. The acquisition was accounted
for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of acquisition based on management estimates and relative fair
value assessments. The results of operations of Vortek have been included in our consolidated financial statements subsequent to the acquisition date.

Our
preliminary allocation of the purchase price is summarized as follows:

Purchase
Price
Allocation(in thousands)Goodwill

$
16,212Existing technology (estimated useful life of 17 years)


11,700Current assets


1,435Property, plant and equipment


847Liabilities assumed


(6,808
)Deferred tax liability on intangibles


(4,446
)Total purchase price

$
18,940


In
addition, we acquired CAD11.0 million (approximately $9.1 million at December 31, 2004) of deferred tax asset in connection with the acquisition of Vortek. If
realized, the amount will be first used to reduce the amount of goodwill recorded at the date of acquisition before reducing the tax provision.

Divesture of Wet Business

On March 17, 2003, we sold the portion of our business that related to developing, manufacturing, selling, and servicing wet surface preparation products
for the cleaning and preparation of semiconductor wafers (the Wet Business) to SCP Global Technologies, Inc. (SCP). We had originally acquired the Wet Business on January 1, 2001, as
part of our merger with the semiconductor division of STEAG Electronic Systems AG (STEAG) and CFM Technologies, Inc. (CFM). As part of this disposition, SCP acquired certain subsidiaries and
assets, and assumed certain contracts relating to the Wet Business, including the operating assets, customer contracts and inventory of CFM, all outstanding stock of Mattson Technology IP, Inc.
(Mattson IP), a subsidiary that owned various patents relating to the Wet Business, and all equity

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ownership
interest in Mattson Wet Products GmbH, a subsidiary in Germany that owned our principal Wet Business operations. We retained rights to all the cash from the Wet Business entities, and all
rights to payments under the settlement and license agreements with Dainippon Screen Manufacturing Co., Ltd. (DNS). See Note 9. SCP acquired the rights to any damages under pending
patent litigation relating to patents owned by Mattson IP. SCP assumed responsibility for the operations, sales, marketing and technical support services for our former wet product lines worldwide.

SCP
paid us the initial purchase price of $2.0 million in cash. That initial purchase price was subject to adjustment based on a number of criteria, including the net working
capital of the Wet Business at closing, to be determined post-closing based on a pro forma closing date balance sheet, and an earn-out, up to an aggregate maximum of
$5.0 million, payable to the Company based upon sales by SCP of certain products to identified customers through December 31, 2004. There had been no earn-out received
through the period ended December 31, 2004.

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

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

During
2003, as part of the loss on disposition of the Wet Business, we recorded accruals of approximately $11.9 million to cover the future obligations relating to this
transaction. We paid $11.5 million relating to reductions in force, working capital adjustment, investment banker's fees, legal fees, and accounting and other professional fees, which were
charged against accruals established at the closing of the sale. Pursuant to the Second Amendment on December 5, 2003, we had no further obligation to SCP relating to the sale of the Wet
Business.

In
connection with the disposition of the Wet Business, we 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. 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. 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. The landlord for this property is an affiliate of STEAG Electronic Systems AG, our largest stockholder. As a result, we were 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 3, 14 and 17 to Consolidated Financial
Statements.

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Capital Finance Transactions and DNS Settlement

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 $46.4 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 17.6 percent, of the 51.9 million shares of our
common stock outstanding as of December 31, 2004.

On
April 30, 2002, we issued 7.4 million shares of common stock in a private placement transaction. Of the 7.4 million shares issued, 1.3 million shares were
issued to SES upon conversion of $8.1 million of outstanding promissory notes at $6.15 per share. The remaining 6.1 million shares were sold to other investors at $6.15 per share for
aggregate net cash proceeds of $34.9 million.

On
June 24, 2002, we settled a patent infringement lawsuit with Dainippon Screen Manufacturing Co., Ltd. (DNS). As part of the settlement, DNS agreed to pay us, at minimum,
$75 million, relating to past damages, partial reimbursement of attorney's fees and costs and royalties, payable in varying amounts at varying dates through April 1, 2007, in return for
our granting DNS a worldwide license under the previously infringed patents. Depending on the volume of future product sales by DNS, we could receive up to an additional $30 million in royalty
payments. We determined, based on relative fair values, how much of the aggregate payments due to us are attributable to past damages and how much are attributable to future royalties on DNS sales of
wet processing products. Based on our analysis, we allocated $15.0 million to past damages, which we recorded as net sales during 2002, and we allocated $60 million to royalty income,
which is being recognized in our income statements on a straight-line basis over the license term. See Note 9 to Consolidated Financial Statements.

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

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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 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.

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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 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.

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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.

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

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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.

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

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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 87% of our net sales in 2004, 87% of our net sales in 2003, and 75% of our net sales in 2002. 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 79% of our net sales in 2004, 71% of our net
sales in 2003, and 50% of our net sales in 2002. Because of our continuing dependence upon international sales, we are subject to a number of risks associated with international business activities,
including:



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

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products
prior to purchasing components and subassemblies from our suppliers. If our suppliers increase the cost of components or subassemblies, we may not have alternative sources of supply and may
no longer be able to increase the cost of the system being evaluated by our customers to cover all or part of the increased cost of components.

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

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

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

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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.

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 51.9 million shares of our common stock outstanding as of December 31, 2004, of which approximately 9.1 million (or
17.6%) 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, 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

43

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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, for the year ended
December 31, 2004, the price range for our common stock was $7.05 to $14.82 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. 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.

44

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Item 7A.Qualitative and Quantitative 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 $45.6 million in cash equivalents and $2.5 million in marketable securities as of
December 31, 2004. 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 at the
end of 2004 had maturities of less than one year.

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. 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. With respect to forward foreign currency exchange
contracts, we recorded a net gain of $2.3 million for 2004, and net losses of $0.2 million and $0.1 million for 2003 and 2002, respectively in other income (expense), net.

At
December 31, 2004, we had three outstanding forward foreign exchange contracts 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). The fair value of these contracts as of December 31, 2004 totaled US$38.4 million, resulting in an unrealized loss of
$0.2 million which was charged to the consolidated statement of operations of 2004. In January 2005, when our outstanding forward foreign exchange contracts as of December 31,
2004 were settled upon maturities, due to the significant change in foreign exchange rates between Euro and U.S. dollar, we realized a total foreign exchange loss of $1.3 million.

45

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                     |             | Page
|---------------------------------------------------------------------------------------------------- | ----------- | ----
|Consolidated Financial Statements:                                                                   |             |     
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                         |             | 47  
|Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002           |             | 48  
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2004, 2003 and 2002 |             | 49  
|Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002           |             | 50  
|Notes to Consolidated Financial Statements                                                           |             | 51  
|Report of Independent Registered Public Accounting Firm                                              |             | 78  
|Financial Statement Schedules:                                                                       |             |     
|                                                                                                     | Schedule II |     

46

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MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

|                                        |                                                                                                                                                                                   | December 31,                |                                           
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------
|
|
|ASSETS                                  |                                                                                                                                                                                  
|Current assets:                         |                                                                                                                                                                                   |                             |                                           
|                                        | Cash and cash equivalents                                                                                                                                                         |                             | $                                         
|                                        | Short-term investments                                                                                                                                                            |                             |                                           
|                                        | Restricted cash                                                                                                                                                                   |                             |                                           
|                                        | Accounts receivable, net of allowance for doubtful accounts of $6,392 and $5,567 in 2004 and 2003, respectively                                                                   |                             |                                           
|                                        | Advance billings                                                                                                                                                                  |                             |                                           
|                                        | Inventories                                                                                                                                                                       |                             |                                           
|                                        | Inventories  delivered systems                                                                                                                                                   |                             |                                           
|                                        | Prepaid expenses and other assets                                                                                                                                                 |                             |                                           
|                                        |                                                                                                                                                                                   |                             |                                           
|                                        |                                                                                                                                                                                   | Total current assets        |                                           
|Property and equipment, net             |                                                                                                                                                                                   |                             | 27,396                                    
|Goodwill                                |                                                                                                                                                                                   |                             | 24,451                                    
|Intangibles, net                        |                                                                                                                                                                                   |                             | 12,897                                    
|Other assets                            |                                                                                                                                                                                   |                             | 950                                       
|                                        |                                                                                                                                                                                   |                             |                                           
|                                        |                                                                                                                                                                                   |                             | Total assets                              
|                                        |                                                                                                                                                                                   |                             |                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY    |                                                                                                                                                                                  
|Current liabilities:                    |                                                                                                                                                                                   |                             |                                           
|                                        | Accounts payable                                                                                                                                                                  |                             | $                                         
|                                        | Accrued liabilities                                                                                                                                                               |                             |                                           
|                                        | Deferred revenue                                                                                                                                                                  |                             |                                           
|                                        |                                                                                                                                                                                   |                             |                                           
|                                        |                                                                                                                                                                                   | Total current liabilities   |                                           
|                                        |                                                                                                                                                                                   |                             |                                           
|Long-term liabilities:                  |                                                                                                                                                                                   |                             |                                           
|                                        | Deferred income tax liabilities                                                                                                                                                   |                             |                                           
|                                        |                                                                                                                                                                                   |                             |                                           
|                                        |                                                                                                                                                                                   | Total long-term liabilities |                                           
|                                        |                                                                                                                                                                                   |                             |                                           
|                                        |                                                                                                                                                                                   | Total liabilities           |                                           
|                                        |                                                                                                                                                                                   |                             |                                           
|Commitments and contingencies (Note 17) |                                                                                                                                                                                   |                             |                                           
|Stockholders' equity:                   |                                                                                                                                                                                   |                             |                                           
|                                        | Preferred stock, 2,000 shares authorized; none issued and outstanding                                                                                                             |                             |                                           
|                                        | Common Stock, par value $0.001, 120,000 authorized shares; 51,892 shares issued and 51,517 shares outstanding in 2004; 45,826 shares issued and 45,451 shares outstanding in 2003 |                             |                                           
|                                        | Additional paid-in capital                                                                                                                                                        |                             |                                           
|                                        | Accumulated other comprehensive income                                                                                                                                            |                             |                                           
|                                        | Treasury stock, 375 shares in 2004 and 2003, at cost                                                                                                                              |                             |                                           
|                                        | Accumulated deficit                                                                                                                                                               |                             |                                           
|                                        |                                                                                                                                                                                   |                             |                                           
|                                        |                                                                                                                                                                                   | Total stockholders' equity  |                                           
|                                        |                                                                                                                                                                                   |                             |                                           
|                                        |                                                                                                                                                                                   |                             | Total liabilities and stockholders' equity
|                                        |                                                                                                                                                                                   |                             |                                           

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

47

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MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                      |                                       | Year Ended December 31,  |        
|----------------------------------------------------- | ------------------------------------- | ------------------------ | -------
|
|
|Net sales                                             |                                       | $                        | 252,761
|Cost of sales                                         |                                       |                          | 141,973
|                                                      |                                       |                          |        
|                                                      | Gross profit                          |                          |        
|                                                      |                                       |                          |        
|Operating expenses:                                   |                                       |                          |        
|                                                      | Research, development and engineering |                          |        
|                                                      | Selling, general and administrative   |                          |        
|                                                      | Amortization of intangibles           |                          |        
|                                                      | Restructuring and other charges       |                          |        
|                                                      | Loss on disposition of Wet Business   |                          |        
|                                                      |                                       |                          |        
|                                                      |                                       | Total operating expenses |        
|                                                      |                                       |                          |        
|Income (loss) from operations                         |                                       |                          | 29,109 
|Interest expense                                      |                                       |                          | (81    
|Interest income                                       |                                       |                          | 1,242  
|Other income (expense), net                           |                                       |                          | 753    
|                                                      |                                       |                          |        
|Income (loss) before income taxes                     |                                       |                          | 31,023 
|Provision (benefit) for income taxes                  |                                       |                          | (5,502 
|                                                      |                                       |                          |        
|Net income (loss)                                     |                                       | $                        | 36,525 
|                                                      |                                       |                          |        
|Net income (loss) per share:                          |                                       |                          |        
|                                                      | Basic                                 |                          | $      
|                                                      | Diluted                               |                          | $      
|Shares used in computing net income (loss) per share: |                                       |                          |        
|                                                      | Basic                                 |                          |        
|                                                      | Diluted                               |                          |        

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

48

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MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                 |                                    | Common Stock |   |   |    | Accumulated
Other
Comprehensive
Income (Loss) |   | Treasury Stock |   |   |        |        |     
|------------------------------------------------ | ---------------------------------- | ------------ | - | - | -- | --------------------------------------------- | - | -------------- | - | - | ------ | ------ | ----
|
|
|
|Balance at December 31, 2001                     |                                    | 37,406       |   | $ | 37 |                                               | $ | 497,536        |   | $ | (6,553 | )      | (375
|Components of comprehensive loss:                |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 | Net loss                           |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 | Cumulative translation adjustments |              |  |   |    |                                              |   |                |  |   |        | 13,570 |     
|                                                 | Unrealized loss on investments     |              |  |   |    |                                              |   |                |  |   |        | (103   | )   
|                                                 | Accumulated derivative gain        |              |  |   |    |                                              |   |                |  |   |        | 217    |     
|                                                 |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 | Comprehensive loss                 |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|Private placement, net of offering costs         |                                    | 6,124        |   |   | 7  |                                               |   | 34,855         |   |   |       |        |    
|Shares issued for conversion of STEAG notes      |                                    | 1,300        |   |   | 1  |                                               |   | 8,139          |   |   |       |        |    
|Exercise of stock options                        |                                    | 114          |   |   |   |                                               |   | 596            |   |   |       |        |    
|Shares issued under employee stock purchase plan |                                    | 288          |   |   |   |                                               |   | 1,224          |   |   |       |        |    
|Issuance of options to non-employees             |                                    |             |   |   |   |                                               |   | 132            |   |   |       |        |    
|                                                 |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|Balance at December 31, 2002                     |                                    | 45,232       |   |   | 45 |                                               |   | 542,482        |   |   | 7,131  |        | (375
|Components of comprehensive loss:                |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 | Net loss                           |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 | Cumulative translation adjustments |              |  |   |    |                                              |   |                |  |   |        | 2,621  |     
|                                                 | Unrealized loss on investments     |              |  |   |    |                                              |   |                |  |   |        | 86     |     
|                                                 | Accumulated derivative gain        |              |  |   |    |                                              |   |                |  |   |        | (370   | )   
|                                                 |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 | Comprehensive loss                 |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|Exercise of stock options                        |                                    | 399          |   |   |   |                                               |   | 3,329          |   |   |       |        |    
|Shares issued under employee stock purchase plan |                                    | 195          |   |   |   |                                               |   | 288            |   |   |       |        |    
|                                                 |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|Balance at December 31, 2003                     |                                    | 45,826       |   |   | 45 |                                               |   | 546,099        |   |   | 9,468  |        | (375
|Components of comprehensive loss:                |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 | Net income                         |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 | Cumulative translation adjustments |              |  |   |    |                                              |   |                |  |   |        | 6,559  |     
|                                                 |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 | Comprehensive income               |              |   |   |    |                                               |   |                |   |   |        |        |     
|                                                 |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|Public offering, net of offering costs           |                                    | 4,313        |   |   | 4  |                                               |   | 46,366         |   |   |       |        |    
|Shares issued in Vortek acquisition              |                                    | 1,453        |   |   | 2  |                                               |   | 16,757         |   |   |       |        |    
|Exercise of stock options                        |                                    | 214          |   |   | 1  |                                               |   | 815            |   |   |       |        |    
|Shares issued under employee stock purchase plan |                                    | 86           |   |   |   |                                               |   | 653            |   |   |       |        |    
|                                                 |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     
|Balance at December 31, 2004                     |                                    | 51,892       |   | $ | 52 |                                               | $ | 610,690        |   | $ | 16,027 |        | (375
|                                                 |                                    |              |   |   |    |                                               |   |                |   |   |        |        |     

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

49

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MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                             |                                                                                      | Year Ended December 31,                                           |                                          
|------------------------------------------------------------ | ------------------------------------------------------------------------------------ | ----------------------------------------------------------------- | -----------------------------------------
|
|
|Cash flows from operating activities:                        |                                                                                      |                                                                   |                                          
|                                                             | Net income (loss)                                                                    |                                                                   | $                                        
|                                                             | 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                                       |                                          
|                                                             |                                                                                      | Impairment of long-lived assets, restructuring and other charges  |                                          
|                                                             |                                                                                      | Loss on disposal of Wet Business                                  |                                          
|                                                             |                                                                                      | Loss (gain) on disposal of fixed assets                           |                                          
|                                                             |                                                                                      | (Gain) on sales of investments                                    |                                          
|                                                             |                                                                                      | Income tax benefit realized from activity in employee stock plans |                                          
|                                                             |                                                                                      | 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                        |                                                                                      |                                                                   | (17,001                                  
|                                                             |                                                                                      |                                                                   |                                          
|Cash flows from investing activities:                        |                                                                                      |                                                                   |                                          
|                                                             | Purchases of property and equipment                                                  |                                                                   |                                          
|                                                             | Proceeds from the sale of equipment                                                  |                                                                   |                                          
|                                                             | Proceeds from the disposition of Wet Business                                        |                                                                   |                                          
|                                                             | Purchases of available-for-sale investments                                          |                                                                   |                                          
|                                                             | Proceeds from sales and maturities of available-for-sale investments                 |                                                                   |                                          
|                                                             | Loans to Vortek prior to acquisition                                                 |                                                                   |                                          
|                                                             | Net cash paid for acquisition and acquisition-related expenses                       |                                                                   |                                          
|                                                             |                                                                                      |                                                                   |                                          
|Net cash provided by (used in) investing activities          |                                                                                      |                                                                   | (2,870                                   
|                                                             |                                                                                      |                                                                   |                                          
|Cash flows from financing activities:                        |                                                                                      |                                                                   |                                          
|                                                             | Restricted cash                                                                      |                                                                   |                                          
|                                                             | Payment on line of credit                                                            |                                                                   |                                          
|                                                             | Borrowings against line of credit                                                    |                                                                   |                                          
|                                                             | Payment on STEAG notes payable                                                       |                                                                   |                                          
|                                                             | Change in interest accrual on STEAG note                                             |                                                                   |                                          
|                                                             | Proceeds from the issuance of Common Stock, net of offering costs                    |                                                                   |                                          
|                                                             | Proceeds from stock plans                                                            |                                                                   |                                          
|                                                             |                                                                                      |                                                                   |                                          
|Net cash provided by financing activities                    |                                                                                      |                                                                   | 47,837                                   
|                                                             |                                                                                      |                                                                   |                                          
|Effect of exchange rate changes on cash and cash equivalents |                                                                                      |                                                                   | 4,772                                    
|                                                             |                                                                                      |                                                                   |                                          
|Net increase (decrease) in cash and cash equivalents         |                                                                                      |                                                                   | 32,738                                   
|Cash and cash equivalents, beginning of year                 |                                                                                      |                                                                   | 56,915                                   
|                                                             |                                                                                      |                                                                   |                                          
|Cash and cash equivalents, end of year                       |                                                                                      | $                                                                 | 89,653                                   
|                                                             |                                                                                      |                                                                   |                                          
|Supplemental disclosures:                                    |                                                                                      |                                                                   |                                          
|                                                             | Cash paid for interest                                                               |                                                                   | $                                        
|                                                             | Cash paid for income taxes                                                           |                                                                   | $                                        
|                                                             | Common stock issued for Vortek acquisition                                           |                                                                   | $                                        
|                                                             | Common stock issued for STEAG note conversion                                        |                                                                   | $                                        
|                                                             | Non-cash adjustment to goodwill and intangibles                                      |                                                                   | $                                        

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

50

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MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Organization and Summary of Significant Accounting Policies

Mattson Technology, Inc. (the Company or Mattson) was incorporated in California on November 18, 1988. In September 1997, the Company was
reincorporated in the State of Delaware. As part of the reincorporation, each outstanding share of the California corporation, no par value common stock, was converted automatically to one share of
the new Delaware corporation, $0.001 par value common stock.

The
Company designs, manufactures and markets semiconductor wafer processing equipment used in "front-end" fabrication of integrated circuits to the semiconductor
manufacturing industry worldwide.

The
Company refocused its business on core technologies in dry strip and rapid thermal processing, and in line with that focus the Company divested its Wet Products Division on
March 17, 2003. The transaction involved the transfer of certain subsidiaries, assets and intellectual property related to the Wet Products Division. As part of the transaction, the Company
retained the rights to all future royalty and settlement payments under agreements with Dainippon Screen Manufacturing Co., Ltd.

Basis of Presentation

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
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the reported periods. Actual results could differ from those estimates.

The
Company's year ends on December 31. The Company's fiscal quarters end on the last Sunday in the calendar quarter.

Revenue Recognition

The Company derives revenue from two primary sources  equipment sales and spare part sales. In December, 2003, the SEC issued Staff Accounting
Bulletin No. 104 (SAB 104), "Revenue Recognition," which supersedes SAB 101 "Revenue Recognition in Financial Statements." The adoption of SAB 104 did not have a material effect on the
Company's revenue recognition policy. The Company accounts 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, the Company recognizes revenue on a multiple element approach in which the Company bifurcates 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 accepted, is not recognized as revenue until final customer acceptance of the tool. From time to time, however, the Company allows customers to evaluate systems, and since customers
can return such systems at any time with limited or no penalty, the Company does not recognize revenue until these evaluation systems are accepted by the

51

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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
the Company's distributor in Japan, where the Company recognizes revenues upon title transfer to the distributor. For spare parts, the Company recognizes revenue upon shipment. The Company recognizes
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 and determinable and collectibility is reasonably
assured.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with maturity of three months or less to be cash equivalents. The Company's cash and cash
equivalents are carried at fair market value and consist primarily of high-grade money market funds.

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.
The Company had historically classified these instruments as cash equivalents if the period between interest rate resets was 90 days or less, which was based on the Company's ability to either
liquidate its holdings or roll its investment over to the next reset period.

Based
upon re-evaluation of these securities, the Company has reclassified its auction rate securities, previously classified as cash equivalents, as short-term
investments for each of the periods presented in the accompanying consolidated balance sheets. The reclassification results in reclassification to short-term investments of
$20.2 million and $15.9 million at December 31, 2003 and 2002, respectively. The Company sold all auction rate securities in November 2004. In addition, purchases of
investments and sales of investments, included in the accompanying consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities during the
periods presented.

Restricted Cash

The Company had $0.5 million of restricted cash collateral for the Company's corporate credit cards at December 31, 2004 and 2003.

Investments

The Company carries short-term investments, which primarily consist of short-term marketable securities with contractual maturities less
than one year, except for certain auction rate securities outstanding at December 31, 2003. These investments are reported in accordance with the provisions of Statements of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company classifies short-term investments as
available-for-sale and they are reported at fair value, with unrealized gains and losses, net of tax, recorded in stockholders' equity. The fair value of short-term
investments is based on quoted market prices. Realized gains and losses and declines in fair value that are other than temporary are recorded in the statement of operations. Realized gains and losses
are determined on a specific identification basis. Sales of available-for-sale securities were $43.9 million in 2004. The Company had $2.5 million and
$20.2 million of short-term investments at

52

---



December 31,
2004 and 2003, respectively. At December 31, 2004, all short term investments had a maturity of one year.

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.
The Company had historically classified these instruments as cash equivalents if the period between interest rate resets was 90 days or less, which was based on the Company's ability to either
liquidate its holdings or roll its investment over to the next reset period.

Based
upon re-evaluation of these securities, the Company has reclassified its auction rate securities, previously classified as cash equivalents, as short-term
investments for each of the periods presented in the accompanying consolidated balance sheets. The reclassification results in reclassification to short-term investments of
$20.2 million and $15.9 million at December 31, 2003 and 2002, respectively. The Company sold all auction rate securities in November 2004. In addition, purchases of
investments and sales of investments, included in the accompanying consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities during the
periods presented.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, investments,
trade accounts receivable and financial instruments used in hedging activities.

The
Company invests in a variety of financial instruments such as money market and auction rate securities. The Company limits the amount of credit exposure to any one financial
institution or commercial issuer. To date, the Company has not experienced significant losses on these investments.

The
Company's trade accounts receivable are concentrated with companies in the semiconductor industry and are derived from sales in the United States, Taiwan, Japan, other Pacific Rim
countries and Europe. The Company performs ongoing credit evaluations of its customers and records specific allowances for bad debts when a customer is unable to meet its financial obligations as in
the case of bankruptcy filings or deteriorated financial position. Estimates are used in determining allowances for all other customers based on factors such as current trends, the length of time the
receivables are past due and historical collection experience. The Company writes off an accounts receivable when all rights, remedies and recourses against the account and its principals are
exhausted. During the year ended December 31, 2004, the Company provided approximately $2.0 million additional allowance for doubtful accounts receivable. In 2004, two customers
accounted for 16% and 12% of the Company's net sales. In 2003, two customers accounted for 19% and 11% of the Company's net sales,. In 2002, three customers accounted for 11%, 10% and 10% of the
Company's net sales. At December 31, 2004, three customers accounted for 17%, 14% and 12% of the Company's accounts receivables. At December 31, 2003, two customers accounted for 19% and
14% of the Company's accounts receivables.

The
Company is exposed to credit loss in the event of nonperformance by counterparties on the forward foreign exchange contracts used in hedging activities. The Company does not
anticipate nonperformance by these counterparties.

53

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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. Under the Company's terms of sale, title generally transfers when the
Company completes 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 the Company and its subsidiaries are eliminated from the
consolidated financial statements.

The
Company's 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. The Company recorded no inventory valuation charges in 2004, and recorded inventory valuation charges of $1.6 million and $14.3 million in 2003 and 2002,
respectively. Although the Company attempts 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 the Company's inventories and reported operating results.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the
assets, which range from three to seven years. Leasehold improvements are amortized using the straight-line method over the term of the related lease. Depreciation expense was
$5.6 million, $5.9 million and $10.6 million for the years ended December 31, 2004, 2003 and 2002, respectively. When assets are retired or otherwise disposed of, the
assets and related accumulated depreciation are removed from the accounts. Gains or losses resulting from asset sales are included in other income (expense), net in the accompanying consolidated
statements of operations. Repair and maintenance costs are expensed as incurred.

Goodwill and Intangibles

The Company reviews its 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 also reviews 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 value could result in an unexpected impairment charge for impaired goodwill, which could have a material
adverse effect on the Company's business, financial condition and results of operations.

The
Company is required to test its goodwill for impairment at the reporting unit level. The Company has determined that it has only one reporting unit. The test for goodwill impairment
is a two-step process. The first step compares the fair value of its reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not 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 its reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of its reporting unit goodwill exceeds the implied fair value of that
goodwill, an impairment loss shall be recognized in an amount equal to that excess. There were no events or changes in circumstances during the first three quarters of 2004, which triggered an
impairment review. During the fourth quarter of 2004, the Company completed its first-step annual

54

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impairment
test based on management estimates and fair value assessments, which did not indicate any impairment, thus the second step was not necessary.

Impairment of Long-Lived Assets

Pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), the Company reviews its
long-lived assets, including property and equipment and other intangibles, 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 years ended December 31, 2004 and 2003, the Company did not record any impairment charge. During the year ended December 31, 2002, the Company recorded an
aggregate impairment loss of $11.6 million for property and equipment, intangible assets and other long-lived assets because the carrying amounts of such assets exceeded the
estimated future cash flows from the use of such assets.

Warranty

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 movements of the product warranty accrual for
the years ended December 31, 2004, 2003 and 2002:

Year Ended December 31,2004

2003

2002(in thousands)Balance at beginning of period

$
16,508

$
16,486

$
19,936Accrual for warranties issued during the period


12,982


10,378


5,715Changes in liability related to pre-existing warranties


1,451


(462
)

413Settlements made during the period


(14,897
)

(9,894
)

(9,578
)Balance at end of period

$
16,044

$
16,508

$
16,486


Stock-Based Compensation

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

55

---



at
the grant date for awards for the years ended 2004, 2003 and 2002, consistent with the provisions of SFAS No. 123, net income (loss) and net income (loss) per share would have been as
follows:

Year Ended December 31,2004

2003

2002(in thousasnds, except per share amounts)Net income (loss):As reported

$
36,525

$
(28,355
)
$
(94,271
)Add: Stock-based compensation expense included in reported net income (loss), net of tax








Deduct: Total stock-based compensation expense determined under fair value method, net of tax


(5,944
)

(2,095
)

(7,233
)Pro forma

$
30,581

$
(30,450
)
$
(101,504
)Diluted net income (loss) per share:As reported

$
0.72

$
(0.63
)
$
(2.23
)Pro forma

$
0.60

$
(0.68
)
$
(2.40
)


Foreign Currency

The functional currency of the Company's 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.

Forward Foreign Exchange Contracts

During 2004, the Company 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, the Company also included Euro denominated intercompany balances
in its 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 do 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. The Company does not use foreign currency forward exchange contracts for
speculative or trading purposes. With respect to forward foreign currency exchange contracts, the Company recorded a net gain of $2.3 million for 2004, and net losses of $0.2 million and
$0.1 million for 2003 and 2002, respectively in other income (expense), net.

At
December 31, 2004, the Company had three outstanding forward foreign exchange contracts for the purchase in total of 28.3 million Euros in exchange for
US$38.6 million. The fair value of these contracts as of December 31, 2004 totaled US$38.4 million, resulting in an unrealized loss of $0.2 million, which was charged to
the consolidated statement of operations of 2004.

56

---



Comprehensive Income

The components of accumulated other comprehensive income, net of related tax, at December 31, 2004 and 2003 are as follows:

December 31,2004

2003(in thousands)Cumulative translation adjustments

$
16,028

$
9,469Unrealized investment loss


(1
)

(1
)$
16,027

$
9,468


Net Income (Loss) Per Share

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings
per share gives effect to all dilutive rights to acquire common shares outstanding during the period. For purposes of computing diluted earnings per share, weighted average common share equivalents do
not include stock options with an exercise price that exceeded the average market price of the Company's common stock for the period.

Income Taxes

The Company provides for income taxes under the provisions of SFAS No. 109 "Accounting for Income Taxes." SFAS No. 109 requires an asset and
liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates. Valuation allowances are provided against deferred income tax assets which are not likely to be realized.

Reclassifications

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

Loss on disposition of Wet Business in 2003.The Company had previously reported in 2003 a loss on disposition of Wet
Business of $10.3 million after income (loss) from operations. The Company has reclassified this loss to be included as part of income (loss) from operations for 2003. See Note 3 to
Consolidated Financial Statements.

DNS Settlement Income in 2002.The Company had reported in 2002 an amount of $15 million related to the DNS litigation
settlement to other income (expense), net. The Company has reclassified this to net sales for 2002. The reclassification of this amount increases the Company's reported net sales for 2002 to
$218.5 million. See Note 9 to Consolidated Financial Statements.

Auction Rate Securities from 2002 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

57

---



and
rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity provided through 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, which was based on the Company's ability to either liquidate its
holdings or roll its investment over to the next reset period.

Based
upon re-evaluation of these securities, the Company has reclassified its auction rate securities, previously classified as cash equivalents, as short-term
investments for each of the periods presented in the accompanying consolidated balance sheets. The reclassification results in reclassification to short-term investments of
$20.2 million and $15.9 million at December 31, 2003 and 2002, respectively. The Company sold all auction rate securities in November 2004. In addition, purchases of
investments and sales of investments, included in the accompanying consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities during the
periods presented.

New 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 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. SFAS 123R is effective beginning in the Company's third quarter of fiscal 2005. The Company is
currently assessing the effects of adopting SFAS 123R, 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 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
November 2004, the FASB's Emerging Issues Task Force reached a consensus on Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report Discontinued Operations" (EITF 03-13). The guidance should be applied to a component of an enterprise that is either disposed of
or classified as held for sale in fiscal periods that began after December 15, 2004. The Company believes that the adoption of EITF 03-13 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 20040" (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. The Company believes that the adoption of SFAS 109-2 will not have a significant effect on its financial statements.

58

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2.     Balance Sheet Details

December 31,2004

2003(in thousands)CASH AND CASH EQUIVALENTS:Cash in bank

$
44,076

$
32,494Money market funds


45,577


24,421$
89,653

$
56,915SHORT-TERM INVESTMENTS:Auction rate securities

$


$
20,200Commercial paper


2,488


$
2,488

$
20,200INVENTORIES:Purchased parts and raw materials

$
34,971

$
18,884Work-in-process


4,679


5,444Finished goods


3,859


3,102$
43,509

$
27,430PROPERTY AND EQUIPMENT, NET:Machinery and equipment

$
38,451

$
30,824Furniture and fixtures


14,343


18,085Leasehold improvements


12,587


5,20765,381


54,116Less: accumulated depreciation


(37,985
)

(37,905
)$
27,396

$
16,211ACCRUED LIABILITIES:Warranty

$
16,044

$
16,508Accrued compensation and benefits


8,728


6,596Income taxes payable


4,529


6,992Other


18,404


32,512$
47,705

$
62,608


All
short-term investments as of December 31, 2004 have maturities of less than one year and they are marked to market with no significant unrealized gains (losses)
recorded under other comprehensive income (See Note 1 to Consolidated Financial Statements).

As
of December 31, 2004 and 2003, the allowance for excess and obsolete inventory was $20.8 million and $29.0 million, respectively.

3.     Disposition of Wet Business

On March 17, 2003, the Company sold the portion of its business that related to developing, manufacturing, selling, and servicing wet surface preparation
products for the cleaning and preparation of semiconductor wafers (the Wet Business) to SCP Global Technologies, Inc. (SCP). The Company had

59

---



originally
acquired the Wet Business on January 1, 2001, as part of its merger with the STEAG Semiconductor Division of STEAG Electronic Systems AG (STEAG) and CFM Technologies, Inc.
(CFM). As part of this disposition, SCP acquired certain subsidiaries and assets, and assumed certain contracts relating to the Wet Business, including the operating assets, customer contracts and
inventory of CFM, all outstanding stock of Mattson Technology IP, Inc. (Mattson IP), a subsidiary that owned various patents relating to the Wet Business, and all equity ownership interest in
Mattson Wet Products GmbH, a subsidiary in Germany that owned the Company's principal Wet Business operations. The Company retained rights to all the cash from the Wet Business entities, and all
rights to payments under the settlement and license agreements with Dainippon Screen Manufacturing Co., Ltd. (DNS). See Note 9. SCP acquired the rights to any damages under pending
patent litigation relating to patents owned by Mattson IP. SCP assumed responsibility for the operations, sales, marketing and technical support services for the Company's former wet product lines
worldwide.

SCP
paid the Company the initial purchase price of $2.0 million in cash. That initial purchase price was subject to adjustment based on a number of criteria, including the net
working capital of the Wet Business at closing, to be determined post-closing based on a pro forma closing date balance sheet, and an earn-out, up to an aggregate maximum of
$5.0 million, payable to the Company based upon sales by SCP of certain products to identified customers through December 31, 2004. There had been no earn-out received
through the period ended December 31, 2004.

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

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

During
2003, as part of the loss on disposition of the Wet Business, the Company recorded accruals of approximately $11.9 million to cover the future obligations relating to this
transaction. The Company paid $11.5 million relating to reductions in force, working capital adjustment, investment banker's fees, legal fees, and accounting and other professional fees, which
were charged against accruals established at the closing of the sale. Pursuant to the Second Amendment on December 5, 2003, the Company had no further obligation to SCP relating to the sale of
the Wet Business.

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

60

---



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. The landlord for this property is an affiliate
of STEAG Electronic Systems AG, the Company's largest stockholder. As a result, the Company was released from any further legal commitments under the lease with effect from January 1, 2005. The
Company had fully accrued for the costs related to this lease.

The
Wet Business entity in Germany had a pension plan that was established in accordance with certain German laws. Benefits were determined based upon retirement age and years of service
with the Company. The plan was not funded and there were no plan assets. The Company made payments to the plan when distributions to participants were required. Pension expense for the years 2004,
2003 and 2002 was $28,000, $0 and $46,000, respectively. Following the Second Amendment on December 5,
2003 as discussed in the foregoing paragraph, the Company had no further obligation under this pension plan.

In
summary, the Company recorded a $10.3 million loss on the disposition of the Wet Business in 2003, as detailed below:

(in thousands)Contractual purchase price payment from SCP

$
2,000Net book value of assets sold, including goodwill and intangibles


(80,824
)Net book value of liabilities assumed by SCP, including deferred revenues


76,117Other(1)


(7,550
)Loss on disposition of the Wet Business

$
(10,257
)


---

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

4.     Acquisitions

On October 27, 2004, the Company acquired certain outstanding debt and equity ownership interests in Vortek Industries Ltd. (Vortek), a privately
held corporation amalgamated under the laws of British Columbia, for a total purchase price of $18.9 million. Vortek is based in Vancouver, Canada. The purchase price consisted of approximately
1.5 million shares of Mattson common stock valued at approximately

61

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$16.7 million,
and approximately $2.2 million in cash for acquisition-related expenses. Prior to the closing date of the Vortek acquisition (October 27, 2004), Mattson provided
loans to Vortek aggregating $2.6 million. These loans still existed at December 31, 2004 and were eliminated in consolidation. As a result of the transaction, Vortek became a
wholly-owned subsidiary of the Company. Vortek is a developer of millisecond flash annealing technology for rapid thermal processing of silicon wafers used the manufacture of semiconductors. Of the
shares of common stock issued by the Company in the Vortek transaction, 290,561 (the Escrow Shares) are being held subject to an escrow agreement. The Escrow Shares are subject to forfeiture in the
event of valid indemnification claims within a period of 12 months from October 27, 2004. In connection with the Vortek acquisition, the Company entered into a Stock Registration and
Restriction Agreement, dated as of October 27, 2004, pursuant to which the Company agreed to register the shares issued in the Vortek acquisition, other than the Escrow Shares, under the
Securities Act of 1933, for resale by the recipients, subject to certain restrictions on the transfer of such shares.

This
acquisition was consummated principally to expand and strengthen the Company's RTP technology portfolio, and supports the Company's long-term growth strategy. The
acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of acquisition based on management
estimates and relative fair value assessments. The results of operations of Vortek have been included in the Company's consolidated financial statements subsequent to the acquisition date.

The
Company's preliminary allocation of the purchase price is summarized as follows:

Purchase
Price
Allocation(in thousands)Goodwill

$
16,212Existing technology (estimated useful life of 17 years)


11,700Current assets


1,435Property, plant and equipment


847Liabilities assumed


(6,808
)Deferred tax liability on intangibles


(4,446
)Total purchase price

$
18,940


In
addition, the Company acquired CAD11.0 million (approximately $9.1 million at December 31, 2004) of deferred tax asset in connection with the acquisition of
Vortek. If realized, the amount will first be used to reduce the amount of goodwill recorded at the date of acquisition before reducing the tax provision.

62

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Unaudited Pro Forma Results of Operations

The following unaudited pro forma results of operations present the impact on our results of operations for 2004 and 2003 as if our Vortek acquisition had
occurred on January 1, 2004 and 2003, respectively.

|                                  |  | Year Ended
December 31, 2004 |         | Year Ended
December 31, 2003 |  
|--------------------------------- |  | ---------------------------- | ------- | ---------------------------- | -
|
|
|Net sales                         |  | $                            | 252,761 |                              | $
|Net income (loss)                 |  | $                            | 36,525  |                              | $
|Basic earnings (loss) per share   |  | $                            | 0.74    |                              | $
|Diluted earnings (loss) per share |  | $                            | 0.72    |                              | $

---

5.     Goodwill and Other Intangible Assets

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

|                                     |  | December 31, 2004 |        | December 31, 2003
|------------------------------------ |  | ----------------- | ------ | -----------------
|
|
|Goodwill                             |  | $                 | 24,451 |                  
|Developed technology                 |  |                   | 18,265 |                  
|                                     |  |                   |        |                  
|Total goodwill and intangible assets |  | $                 | 42,716 |                  
|                                     |  |                   |        |                  

In
2004, the Company recorded goodwill of $16.2 million in connection with the acquisition of Vortek. See Note 4 to Consolidated Financial Statements.

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 three quarters of 2004, which would have
triggered an impairment review. During the fourth quarter of 2004 the Company completed the annual impairment test, which indicated that there was no impairment. 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 $1.4 million, $2.2 million and $6.6 million for the years ended December 31, 2004,
2003 and 2002, respectively. Annual amortization expense is estimated to be $2.0 million for 2005 and $0.7 million for years 2006 to 2009.

63

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6.     Restructuring and Other Charges

The following table summarizes movements of the restructuring-related accruals for the years ended December 31, 2004, 2003 and 2002:

|                             |  |   |        |   |   | Impairment of |   |   |       
|---------------------------- |  | - | ------ | - | - | ------------- | - | - | ------
|
|
|Restructuring charges        |  | $ | 3,371  |   | $ | 2,338         |   | $ | 6,531 
|Non-cash charges             |  |   |       |   |   |              |   |   | (6,531
|Cash payments                |  |   | (1,064 | ) |   | (282          | ) |   |      
|                             |  |   |        |   |   |               |   |   |       
|Balance at December 31, 2002 |  |   | 2,307  |   |   | 2,056         |   |   |      
|Restructuring charges        |  |   | 381    |   |   | 108           |   |   |      
|Cash payments                |  |   | (2,573 | ) |   | (989          | ) |   |      
|                             |  |   |        |   |   |               |   |   |       
|Balance at December 31, 2003 |  |   | 115    |   |   | 1,175         |   |   |      
|Restructuring charges        |  |   |       |   |   | 450           |   |   |      
|Cash payments                |  |   | (115   | ) |   | (161          | ) |   |      
|Release of reserve           |  |   |       |   |   | (450          | ) |   |      
|                             |  |   |        |   |   |               |   |   |       
|Balance at December 31, 2004 |  | $ |       |   | $ | 1,014         |   | $ |      
|                             |  |   |        |   |   |               |   |   |       

During
2004, the Company made cash payments of $115,000 in connection with its 2002 severance accrual. During 2004, the Company made total cash payments of $161,000 in connection with
its building facilities related to its 2002 restructuring plan, and released $450,000 in unused facility-related reserve balances to the statement of operations, resulting in a remaining reserve of
$564,000 for consolidation of excess facilities. In connection with the consolidation of excess facilities into the Company's current headquarters based in Fremont, California in 2004, the Company
accrued for lease termination costs of $450,000 in December 2004. As a result, the Company had no restructuring charges
recorded for 2004, and had $1,014,000 in facilities-related restructuring accruals as of December 31, 2004.

During
the third quarter of 2003, the company recorded restructuring and other charges of $489,000 that included $381,000 for workforce reductions in Fremont and Germany and $108,000 for
consolidation of excess facilities in California resulting from realignment to current business conditions. In connection with the workforce reductions, the Company terminated 104 employees.

During
the second half of 2002, the Company recorded restructuring and other charges of $17.3 million in connection with plans to align its cost structure with projected sales
resulting from the unfavorable economic conditions and to reduce future operating expenses. The $17.3 million of restructuring and other charges for this restructuring program included a
workforce reduction at certain locations of $3.4 million, the shut-down of the Malvern, Pennsylvania operations and the consolidation of other excess facilities of
$2.3 million, the write-down of certain fixed assets of $6.5 million, the write-down of certain intangible assets of $4.4 million, and the
write-down of certain other long-term assets of $0.7 million.

64

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The
following paragraphs describe in more detail the components of the restructuring and other charges in 2002:

Workforce reduction

In September 2002, the Company reduced the workforce at its Fremont, California location by approximately 30 employees, primarily in connection with the
reorganization of the EPI and CVD product lines and consolidation of RTP operations into the Company's Dornstadt, Germany facility. The Company also implemented a reduction in force that affected
employees at its Malvern, Pennsylvania location, where 65 individuals were notified in August 2002 that their employment would cease on various dates from October 29, 2002 through
April 1, 2003 in connection with the planned shutdown of the Company's Malvern facilities. Severance and related employee benefit costs related to the reduction in force at both locations
amounted to $1.0 million, which had been or were paid at the time of their separation. During the fourth quarter of 2002, the Company terminated employment of 52 employees at the Malvern,
Pennsylvania location. Additionally, in December 2002, the Company further reduced the workforce by 80 employees, at its locations in California, Germany, UK, France and Italy, and recorded a
charge of $2.4 million. The Company paid $2.2 million out of the $2.3 million accrued liability at December 31, 2002 during the first three quarters of 2003.

Consolidation of excess facilities

The Company incurred a $2.3 million restructuring charge in 2002 for four excess leased facilities located in Pennsylvania, as well as several other excess
leased facilities in the U.S. and overseas. The remaining lease obligations on vacated facilities that were non-cancelable, net of the income from subleasing these facilities, are
estimated to be approximately $0.6 million as of December 31, 2004. The income from subleasing these facilities is estimated based upon current comparable rates for leases in the
respective markets. If facilities rental rates continue to decrease in these markets, or if it takes longer than expected to sublease these facilities, the actual loss could exceed this estimate.

Impairment of fixed assets

During the third quarter of 2002, restructuring costs related to abandoned property and equipment amounted to $1.7 million, which represented the net book
value of fixed assets as of September 29, 2002 relating to the reorganization of the EPI and CVD product lines and consolidation of RTP development operations into the Company's Dornstadt,
Germany facility. The fixed assets included in the restructuring charges were removed from service prior to September 29, 2002. During the fourth quarter of 2002, restructuring costs related to
abandoned property and equipment amounted to $2.5 million, which represented the write-off of fixed assets related to discontinued projects in the Company's EPI and Wet surface
preparation product lines. Additionally, the Company performed an assessment of the carrying amount of property and equipment for its Wet Business, and recorded an impairment charge of
$2.3 million.

Impairment of intangible assets

During the third quarter of 2002, the Company wrote off an intangible asset, the developed technology resulting from the Company's Concept Systems acquisition in
1998 with a remaining net book value of $1.3 million. This developed technology specifically related to the Company's EPI product line, which was reorganized during September 2002.
Additionally, in the fourth quarter of 2002, the Company performed an assessment of the carrying value of intangible assets for its Wet business and as a result of this assessment, recorded a charge
of $3.1 million.

65

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Impairment of other long-lived assets

In the fourth quarter of 2002, the Company performed an assessment of the carrying value of other long-lived assets for its Wet Business and as a
result of this assessment, recorded a charge of $0.7 million.

7.     Debt

The Company has a $20 million revolving line of credit with a bank. In 2004, the terms of this line of credit were amended, giving the Company the right to
increase the line of credit to $25 million at the Company's option, and extending the line of credit through April 2005. 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 December 31, 2004, the Company was in compliance with the covenants and there
was no borrowing under this credit line.

The
Company's Japanese subsidiary had a credit facility with a Japanese bank in the amount of 900 million Yen (approximately $8.4 million at December 31, 2003),
collateralized by specific trade accounts receivable of the Japanese subsidiary. The facility was subject to an annual interest rate of TIBOR plus 75 basis points. The facility expired on
June 20, 2004. On June 10, 2004 the Company's Japanese subsidiary entered into a new credit facility with a Japanese bank in the amount of 600 million Yen (approximately
$5.8 million at December 31, 2004), 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 December 31, 2004. 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 December 31, 2004, the Japanese subsidiary had approximately $40,000 of
off-balance-sheet recourse liability related to a commercial bill discounted 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
$1.0 million at December 31, 2004). The facility is not collateralized and at variable interest rates. The facility will expire on March 30, 2005. There are no financial covenant
requirements for this credit facility. At December 31, 2004, there was no borrowing under this credit facility.

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 $46.4 million. 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 approximately 9.1 million, or 17.6%, of the approximately 51.9 million outstanding shares of the Company's common stock outstanding as of December 31, 2004.

66

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

On
April 30, 2002, the Company issued 7.4 million shares of common stock in a private placement transaction. Of the 7.4 million shares issued, 1.3 million
shares were issued to STEAG upon conversion of $8.1 million of outstanding promissory notes at $6.15 per share. The remaining 6.1 million shares were sold to other investors at $6.15 per
share for aggregate net cash proceeds of $34.9 million.

9.     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 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.

DNS
paid the Company $6.4 million and $24.0 million during 2004 and 2003, respectively. As of December 31, 2004, 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 December 31, 2004, $4.6 million was subjected to Japanese
withholding tax. In December 2004, the Company received $3.1 million withholding tax refund from the Japanese tax authority in respect of DNS's payments to the Company.

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 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. The Company recognized $12.9 million, $12.0 million and $21.3 million of royalty income for the years ended December 31, 2004, 2003 and 2002,
respectively. Of the $21.3 million royalty income reported in 2002, $15.0 million was reclassified from other income (expense), net. See "Reclassifications" in Note 1 to
Consolidated Financial Statements.

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

67

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10.   Stock Plans

Stock Option Plan

In September 1989, the Company adopted an incentive and non-statutory stock option plan (1989 Plan) under which a total of 11,975,000 shares of
common stock have been reserved for issuance through December 31, 2004. Options granted under the 1989 Plan are for periods not to exceed ten years. Incentive stock option and
non-statutory stock option grants under the
1989 Plan must be at prices at least 100% and 85%, respectively, of the fair market value of the stock on the date of grant. The options generally vest 25% one year from the date of grant, with the
remaining vesting 1/36th per month thereafter. The Company had approximately 3.3 million shares available for future grants under the 1989 Plan at December 31, 2004.

In
connection with its acquisition of CFM Technologies, Inc. (CFM) in January 2001, the Company filed with the SEC in January 2001 a registration statement on
Form S-8 for the four then existing stock option plans of CFM (CFM Plans), namely the 1992 Employee Stock Option Plan for approximately 248,000 shares, the Restated 1995 Incentive
Plan (CFM Plans) for approximately 641,000 shares, the Restated Non-employee Directors' Plan for approximately 19,000 shares and the CFM Non-plan Stock Option Plan for
approximately 21,000 shares. The options previously granted by CFM prior to the Company's acquisition had vesting terms set by CFM's then executive compensation and stock option committee of the board
of directors, and expired 10 years after the date of grant. The Company continues to administer the CFM Plans to the extent that options granted previously are exercised by the optionees or
that options previously granted become terminated under the respective terms of the CFM Plans. As of December 31, 2004, approximately 4,000 stock options in total remained outstanding and
exercisable under the CFM Plans.

The
following table summarizes the status of all of the Company's stock option plans at December 31, 2004, 2003 and 2002 and changes during the years then ended:

|                                 |  | Year Ended December 31,
|-------------------------------- |  | -----------------------
|
|
|
|Outstanding at beginning of year |  | 4,676                  
|Granted                          |  | 1,142                  
|Exercised                        |  | (215                   
|Forfeited                        |  | (245                   
|                                 |  |                        
|Outstanding at end of year       |  | 5,358                  
|                                 |  |                        
|Exercisable at end of year       |  | 2,872                  
|                                 |  |                        

The
weighted average fair value of options granted under the option plan was approximately $8.12 in 2004, $4.83 in 2003 and $5.36 in 2002.

68

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The following table summarizes information about the stock options outstanding at December 31, 2004:

Options Outstanding

Options ExercisableRange of
Exercise Prices

Number

Weighted-
Average
Contractual
Life

Weighted-
Average
Exercise
Price

Number

Weighted-
Average
Exercise
Price(in thousands)

(in years)



(in thousands)$  1.55 - $  2.85

935

8.1

$
2.24

389

$
2.26$  3.05 - $  6.97

956

6.8

$
5.58

575

$
5.83$  7.00 - $  9.00

938

6.4

$
7.76

681

$
7.73$  9.06 - $10.44

936

6.1

$
10.13

732

$
10.18$10.50 - $12.00

917

9.1

$
11.19

33

$
10.92$12.13 - $49.13

676

7.0

$
17.38

462

$
19.455,358

7.3

$
8.62

2,872

$
9.16


Compensation
cost under SFAS No. 123 for the fair value of each incentive stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:

2004

2003

2002Expected dividend yield





Expected stock price volatility

98
%
100
%
93
%Risk-free interest rate

3.5
%
3.0
%
3.6
%Expected life of options

5 years

4.8 years

2 years


Employee Stock Purchase Plan

In August 1994, the Company adopted an employee stock purchase plan (Purchase Plan) under which 3,975,000 shares of common stock had been reserved for
issuance through December 31, 2003. During 2004, the Company filed with the SEC two registration statements on Form S-8 for an additional total of 2,200,000 shares to be
reserved for issuance under the Purchase Plan. Shares sold under the Purchase Plan were approximately 86,000 in 2004, 195,000 in 2003 and 288,000 in 2002. The weighted average fair value on the grant
date of rights granted under the Purchase Plan was approximately $7.56 in 2004, $1.51 in 2003, and $2.85 in 2002. At December 31, 2004, approximately 3.8 million shares were available
for issue under the Purchase Plan.

The
Purchase Plan is administered generally over offering periods of six months, beginning February 1 and August 1 of each year. Eligible employees may designate not more
than 15% of their cash compensation to be deducted each pay period for the purchase of common stock under the Purchase Plan and participants may not purchase more than $25,000 worth of common stock in
any calendar year or 10,000 shares in any offering period. On the last business day of each purchase period, shares of common stock are purchased with the employees' payroll deductions accumulated
during the six months, at a price per share equal to 85% of the market price of the common stock on the date immediately preceding the offering date or the date immediately preceding the purchase
date, whichever is lower.

69

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Compensation
cost under SFAS No. 123 is calculated for the estimated fair value of the employees' stock purchase rights using the Black-Scholes option-pricing model with the
following average assumptions:

2004

2003

2002Expected dividend yield





Expected stock price volatility

58
%
104
%
93
%Risk-free interest rate

1.8
%
3.0
%
3.6
%Expected life of stock purchase rights

0.5 year

2 years

2 years


11.   Income Taxes

The components of income (loss) before provision for income taxes are as follows:

Year Ended December 31,2004

2003

2002(in thousands)Domestic income (loss)

$
24,020

$
(35,646
)
$
(79,767
)Foreign income (loss)


7,003


7,641


(14,651
)Income (loss) before provision for income taxes

$
31,023

$
(28,005
)
$
(94,418
)


The
provision (benefit) for income taxes consists of the following:

Year Ended December 31,2004

2003

2002(in thousands)Current:Federal

$
(607
)
$


$
(1,136
)State


60


100


201Foreign


(4,340
)

1,078


5,110Total current


(4,887
)

1,178


4,175Deferred:Federal


(615
)

(828
)

(4,322
)Total deferred


(615
)

(828
)

(4,322
)Provision (benefit) for income taxes

$
(5,502
)
$
350

$
(147
)


70

---



Deferred
tax assets (liabilities) are comprised of the following:

December 31,2004

2003(in thousands)Reserves not currently deductible

$
19,469

$
24,828Deferred revenue


3,996


2,260Depreciation


7,145


8,924Net operating loss carryforwards


109,261


105,478Tax credit carryforwards


9,855


12,302Other


10,846


18,433Total deferred tax asset

$
160,572

$
172,225Valuation allowance


(160,572
)

(172,225
)Total net deferred tax asset





Acquired intangibles

$
4,901

$
1,055Net deferred tax liability

$
4,901

$
1,055


The
provision for income taxes reconciles to the amount computed by multiplying income (loss) before income tax by the U.S. statutory rate of 35% as follows:

Year Ended December 31,2004

2003

2002(in thousands)Provision (benefit) at statutory rate

$
10,858

$
(9,802
)
$
(33,046
)State taxes, net of federal benefit


776


(700
)

(2,578
)Foreign earnings taxed at different rates


(212
)

(124
)

(3,357
)Losses not benefited





6,288


26,079Foreign tax credits








(1,968
)Settlement of controversies with foreign tax authorities


(4,858
)




Federal refund from amended return


(628
)




Deferred tax asset valuation allowance


(11,463
)

4,589


12,323Other


25


99


2,400Total provision (benefit) for income taxes

$
(5,502
)
$
350

$
(147
)


The
valuation allowance at December 31, 2004 and 2003 is attributable to federal and state deferred tax assets, as well as foreign deferred tax assets. Management believes that
sufficient uncertainty exists with regard to the realizability of 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. At December 31, 2004, the Company had federal net operating
loss carryforwards of approximately $315.1 million, which will expire at various dates through 2024. The Company also has approximately $41.5 million foreign net operating loss
carryforwards in

71

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Germany
and Canada, in addition to the federal net operating loss carryforwards, that are unlimited, a portion of which in the amount of approximately $12.9 million related to the acquisition
of Vortek will expire at various dates through 2014, and the remainder does not have any expiration date.

The
federal and state net operating losses acquired from the STEAG Semiconductor Division, CFM and Concept are also subject to change in control limitations as defined in
Section 382 of the Internal Revenue Code. Furthermore, the Company had a change in control in April 2002, which limited its net operating losses generated prior to the date the ownership
change occurred. If certain substantial changes in the Company's ownership occur, there would be an additional annual limitation on the amount of the net operating loss carryforwards that can be
utilized. The Company acquired $48.0 million of deferred tax assets as a result of its acquisitions of the Vortek Industries Ltd., STEAG Semiconductor Division, CFM and Concept Systems
Design, Inc. and, if realized, the amounts will be first used to reduce the amount of goodwill recorded at the date of acquisition before reducing the tax provision. At December 31,
2004, the Company has $1.8 million of valuation allowance related to stock option deductions, which, if realized, will be accounted for as an addition to equity rather than as a reduction of
the provision for taxes.

12.   Employee Benefit Plans

The Company has a retirement/savings plan (the Plan), which is qualified under section 401(k) of the Internal Revenue Code. All full-time
employees who are twenty-one years of age or older are eligible to participate in the Plan. The Plan allows participants to contribute up to an amount allowed by the applicable Internal
Revenue Service guidelines. The Company may make a discretionary matching contribution equal to a percentage of the participant's contributions. In 2004, 2003, and 2002 the Company made matching
contributions of approximately $573,000, $562,000, and $920,000, respectively.

13.   Net Income (Loss) Per Share

Earnings per share is calculated in accordance with SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires dual presentation of basic and diluted
net income (loss) per share on the face of the income statement. Basic earnings per share is computed by dividing income (loss) available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding plus the effect of all dilutive potential
common shares outstanding during the period.

72

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

Year Ended December 31,2004

2003

2002(in thousands except
per share amounts)Basic net income (loss) per share:Income (loss) available to common stockholders

$
36,525

$
(28,355
)
$
(94,271
)Weighted average common shares outstanding


49,539


44,997


42,239Basic income (loss) per share

$
0.74

$
(0.63
)
$
(2.23
)Diluted net income (loss) per share:Income (loss) available to common stockholders

$
36,525

$
(28,355
)
$
(94,271
)Weighted average common shares outstanding


49,539


44,997


42,239Diluted potential common shares from stock options


1,481





Escrow shares related to Vortek acquisition


53





Weighted average common shares and dilutive potential common shares


51,073


44,997


42,239Diluted net income (loss) per share

$
0.72

$
(0.63
)
$
(2.23
)


Total
stock options outstanding at December 31, 2004 of 2.7 million, at December 31, 2003 of 5.4 million and at December 31, 2002 of 5.8 million
were excluded from the computations 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.

14.   Related Party Transactions

At December 31, 2003, the Company had $576,000 of principal and accrued interest outstanding from Brad Mattson under loans issued in 2002.
Mr. Mattson resigned as an officer of the Company in October 2001 and resigned as a director in November 2002. The principal balance and all accrued interest were repaid by
Mr. Mattson during 2004. At December 31, 2004, the Company had no outstanding loan balance from Mr. Mattson.

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
December 31, 2004, STEAG continued to hold approximately 8.9 million shares directly, and approximately 0.3 million shares indirectly, or 17.6%, of the 51.9 million
outstanding shares of the Company's common stock.

At
December 31, 2004, the Company had receivables from two employees of approximately $21,000 in aggregate.

In
December 2004, the Company entered into an agreement with the landlord of facilities leased by the Company in Pliezhausen, Germany, under which the lease would be terminated
and the Company agreed to pay 1.5 million Euros (approximately $2.0 million) to the landlord in four installments from January 2005 through September 2005. The landlord for
these facilities is an affiliate of STEAG Electronic Systems AG, the Company's largest stockholder. The lease for these facilities had been assumed by the Company in connection with the disposition of
the Wet Business in 2003. The facilities were used to house

73

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the
manufacturing and administrative functions of the transferred Wet Business. The 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 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, and 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. As a result of the lease termination, the Company was released from any
further legal commitments under the lease with effect from January 1, 2005. See Note 17 to Consolidated Financial Statements.

15.   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.

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

Year Ended December 31,2004

2003

2002(in thousands)United States

$
32,345

$
22,160

$
53,914Taiwan


108,336


44,159


36,898Japan


40,831


37,632


28,652Korea


19,230


20,121


20,127China


23,507


19,801


9,544Germany


14,563


17,891


45,417Europe  others


5,531


10,058


8,917Singapore


7,049


2,480


15,051Others


1,369





$
252,761

$
174,302

$
218,520


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 2004, two customers accounted for 16%, and 12% of net sales. In 2003, two customers accounted for 19% and 11% of net sales. In 2002, three customers accounted
for 11%, 10% and 10% of net sales.

74

---



Geographical
information relating to the Company's property and equipment as of December 31, 2004 and 2003 is as follows:

December 31,2004

2003(in thousands)The United States

$
17,488

$
7,798Germany


8,290


7,782Others


1,618


631$
27,396

$
16,211


16.   Guarantees

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 $953,000, representing standby letters of credit outstanding and guarantees related to total outstanding
balances on corporate credit cards as of December 31, 2004. The Company has not recorded any liability in connection with these guarantee arrangements beyond that required to appropriately
account for the underlying transaction being guaranteed. The Company does not believe, based on historical experience and information currently available, that it is probable that any amounts will be
required to be paid under these guarantee arrangements.

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

17.   Commitments and Contingencies

The Company holds various operating leases related to its facilities and equipment and subleases in respect of its facilities located in Exton, Pennsylvania. The
following table sets forth the Company's

75

---



minimum
annual rental commitments with respect to its operating leases with various expiry dates through 2019 and subleases with various expiry dates through 2007 at December 31, 2004:

Operating
Lease Payments

Sublease
Income(in thousands)2005

$
3,597

$
2,1492006


3,102


2,0182007


2,852


1,3692008


2,417


2009


2,651


Thereafter


16,127


$
30,746

$
5,536


Rent
expense was $5.3 million in 2004, $7.7 million in 2003 and $9.2 million in 2002. The consecutive decreases in rent expense in 2004 and 2003 compared with 2003
and 2002 were primarily due to the consolidation of facilities and non-renewal of expired leases. The Company recorded sublease income of $3.6 million, $2.6 million and
$0.2 million in 2004, 2003 and 2002, respectively.

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. The sublease, aggregating to approximately $7.2 million lease payments, is expected to cover all related costs on the administrative building during the
sublease period. In July 2003, the manufacturing building at the Exton, Pennsylvania location was sublet for a period of approximately three years, until September 2006, with an option
for the subtenant to renew for a total of two successive periods, the first for five years and the second for the balance of the term of the master lease. The sublease, aggregating to approximately
$2.1 million in lease payments, 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 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

76

---



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. The landlord for this property is an affiliate of STEAG
Electronic Systems AG, the Company's largest stockholder. As a result, the Company was released from any further legal commitments under the lease with effect from January 1, 2005. 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 $11.7 million at December 31, 2004), 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 $11.7 million at December 31, 2004) 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.

77

---





Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Stockholders of Mattson Technology, Inc.:

We
have completed an integrated audit of Mattson Technology, Inc.'s 2004 consolidated financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.

Consolidated financial statements and financial statements schedule

In our opinion, the consolidated financial statements listed in the index under Item 15(a)(1) present fairly, in all material respects, the financial
position of Mattson Technology, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed
in the index under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial
statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by
the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our
audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial
reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance

78

---



of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material effect on the financial statements.

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

/s/PRICEWATERHOUSECOOPERS LLP

San
Jose, California
March 23, 2005

79

---





Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.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 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.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act
Rule 13a-15(f). Our internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.

Under
the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal
Control  Integrated Framework. Based on our evaluation under the framework inInternal Control  Integrated
Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

Our
management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which is included at page 78 of this Annual Report on Form 10-K.

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

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 fourth quarter of 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. Based on that evaluation, our management concluded that there was no such change during the fourth quarter.

Item 9B.Other Information

None.

80

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PART III

Item 10.Directors and Executive Officers of the Registrant

For information with respect to Executive Officers, see Part I of this Annual Report on Form 10-K, under "Executive Officers of the
Registrant." The other information required by this item will be set forth in the 2005 Proxy Statement under the captions "Election of Directors," and "Section 16(a) Beneficial Ownership
Compliance," and is incorporated herein by reference.

We
have adopted a Code of Ethics and Business Conduct for all officers, directors, and employees. We have posted the Code of Ethics and Business Conduct on our Website located at
www.mattson.com. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, this Code of Ethics by posting such
information on our Website.

Item 11.Executive Compensation

The information required by this item will be set forth in the 2005 Proxy Statement under the caption "Executive Compensation and Other Matters," and is
incorporated herein by reference.

Item 12.Security Ownership of Certain Beneficial Owners and Management

Information related to security ownership of certain beneficial owners and management will be set forth in the 2005 Proxy Statement under the caption "Security
Ownership of Management and Principal Stockholders," and is incorporated herein by reference. Information with respect to our securities authorized for issuance under our equity compensation plans
will be set forth in the 2005 Proxy Statement under the caption "Equity Compensation Plan Information," and is incorporated herein by reference.

Item 13.Certain Relationships and Related Transactions

The information required by this item will be included in the 2005 Proxy Statement under the caption "Certain Relationships and Related Transactions," and is
incorporated herein by reference.

Item 14.Principal Accountant Fees and Services

The information required by this item will be set forth in the 2005 Proxy Statement under the caption "Audit and Related Fees," and is incorporated herein by
reference.

PART IV

Item 15.Exhibits and Financial Statement Schedules

(a)(1)Financial Statements

The
financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements in Item 8 on page 46.

(a)(2)Financial Statement Schedules

Schedule II 
Valuation and Qualifying Accounts for the three years ended December 31, 2004, 2003 and 2002, which is included on page 86 of this
Form 10-K.

81

---



(a)(3)Exhibits

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                     |  | Management
Contract or
Compensatory
Plan or
Arrangement |  | Notes
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------- |  | -----
|2.5            |  | Stock and Asset Purchase Agreement for Wet Products Division dated as of February 12, 2003, by and among Mattson Technology, Inc., a Delaware corporation, Mattson International, Inc., a Delaware corporation,
 Mattson Wet Products, Inc., a Pennsylvania corporation, Mattson Technology Finance, Inc., a Delaware corporation, and SCP Global Technologies, Inc., an Idaho corporation.                     |  |                                                         |  | (1)  
|2.6            |  | First Amendment to Stock and Asset Purchase Agreement for Wet Products Division dated as of March 17, 2003, by and among Mattson Technology, Inc., a Delaware corporation, Mattson International, Inc., a
Delaware corporation, Mattson Wet Products, Inc., a Pennsylvania corporation, Mattson Technology Finance, Inc., a Delaware corporation, and SCP Global Technologies, Inc., an Idaho corporation.      |  |                                                         |  | (1)  
|2.7            |  | Second Amendment to Stock and Asset Purchase Agreement for Wet Products Division dated as of December 5, 2003, by and among Mattson Technology, Inc., a Delaware corporation, Mattson International, Inc., a
Delaware corporation, Mattson Wet Products, Inc., a Pennsylvania corporation, Mattson Technology Finance, Inc., a Delaware corporation, and SCP Global Technologies, Inc., a Delaware corporation. |  |                                                         |  | (2)  
|3.1            |  | Amended and Restated Certificate of Incorporation of Mattson Technology, Inc.                                                                                                                                                                                                                                                                                                                                   |  |                                                         |  | (3)  
|3.2            |  | Third Amended and Restated Bylaws of Mattson Technology, Inc.                                                                                                                                                                                                                                                                                                                                                   |  |                                                         |  | (4)  
|4.1            |  | Form of Share Purchase Agreement.                                                                                                                                                                                                                                                                                                                                                                               |  |                                                         |  | (5)  
|4.2            |  | Share Purchase Agreement between Mattson Technology, Inc. and STEAG Electronic Systems AG dated April 4, 2002.                                                                                                                                                                                                                                                                                                  |  |                                                         |  | (6)  
|4.3            |  | Form of Senior Indenture.                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                         |  | (7)  
|4.4            |  | Form of Senior Debt security (included in Exhibit 4.3).                                                                                                                                                                                                                                                                                                                                                         |  |                                                         |  |      
|4.5            |  | Form of Subordinated Indenture.                                                                                                                                                                                                                                                                                                                                                                                 |  |                                                         |  | (7)  
|4.6            |  | Form of Subordinated Debt security (Included in Exhibit 4.5).                                                                                                                                                                                                                                                                                                                                                   |  |                                                         |  |      
|10.2           |  | 1989 Stock Option plan, as amended                                                                                                                                                                                                                                                                                                                                                                              |  | C                                                       |  | (4)  
|10.3           |  | 1994 Employee Stock Purchase Plan                                                                                                                                                                                                                                                                                                                                                                               |  | C                                                       |  | (8)  
|10.4           |  | Form of Indemnity Agreement                                                                                                                                                                                                                                                                                                                                                                                     |  | C                                                       |  | (9)  
|10.5           |  | Stockholder Agreement by and among STEAG Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, Mattson Technology, Inc., a Delaware corporation, and
Brad Mattson.                                                                                                                                                                             |  |                                                         |  | (10) 
|10.6           |  | Amendment to Stockholder Agreement dated as of November 5, 2001, by and between STEAG Electronic Systems AG, an Aktiengesellschaft organized and existing under the laws of the Federal Republic of Germany, and Mattson
Technology, Inc., a Delaware corporation.                                                                                                                                              |  |                                                         |  | (11) 
|10.7           |  | Executive Change of Control agreement between Mattson Technology, Inc. and David Dutton, dated as of March 4, 2002.                                                                                                                                                                                                                                                                                             |  | C                                                       |  | (4)  
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                                         |  |      

82

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|10.8  |  | Form of Executive Change of Control agreement Between Mattson Technology, Inc. and its Executive Vice Presidents and Product Division Presidents.                                         |  | C |  | (4) 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - |  | ----
|10.12 |  | Sublease agreement dated February 27, 2003, by and between Lam Research Corporation, a Delaware Corporation, and Mattson Technology, Inc., a Delaware Corporation, for lease of building. |  |   |  | (12)
|10.13 |  | Lease agreement dated September 2, 2001, by and between RENCO EQUITIES IV, a California partnership, and Lam Research Corporation, a Delaware Corporation, for lease of building.         |  |   |  | (12)
|21.1  |  | Subsidiaries of Registrant.                                                                                                                                                               |  |   |  |     
|23.1  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                 |  |   |  |     
|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.                                                                                                              |  |   |  |     

---

83

---





SIGNATURES

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

| |  | MATTSON TECHNOLOGY, INC.(Registrant)
| |  | ------------------------------------
| |  | By:                                 
| |  | By:                                 

March 22,
2005

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitutes and appoints David Dutton and Ludger Viefhues, and each of them, his
true and lawful
attorneys-in-fact, each with full power of substitution, for him in all capacities, to sign any amendments to this form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the date indicated.

|Signature                             |  | Title                                                                                                    |  | Date          
|------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | --------------
|                                      |  |                                                                                                          |  |               
|/s/DAVID DUTTONDavid Dutton           |  | President, Chief Executive Officer and Director                                                          |  | March 22, 2005
|/s/LUDGER VIEFHUESLudger Viefhues     |  | Executive Vice President  Finance, Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 22, 2005
|/s/JOCHEN MELCHIORDr. Jochen Melchior |  | Chairman of the Board and Director                                                                       |  | March 22, 2005
|/s/HANS-GEORG BETZHans-Georg Betz     |  | Director                                                                                                 |  | March 22, 2005
|                                      |  |                                                                                                          |  |               

84

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|/s/SHIGERU NAKAYAMAShigeru Nakayama   |  | Director |  | March 22, 2005
|------------------------------------- |  | -------- |  | --------------
|/s/KENNETH SMITHKenneth Smith         |  | Director |  | March 22, 2005
|/s/KENNETH KANNAPPANKenneth Kannappan |  | Director |  | March 22, 2005
|/s/WILLIAM TURNERWilliam Turner       |  | Director |  | March 22, 2005

85

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SCHEDULE II        VALUATION AND QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts (in thousands)

|Fisal Year |  | Balance at
Beginning
of Year |        | Wet Business
Disposition
Adjustments |   | Additions
Charged to
Income |   | Deductions
and
Other |       | Balance at
End of
Year
|---------- |  | ---------------------------- | ------ | ------------------------------------ | - | ---------------------------- | - | -------------------- | ----- | ----------------------
|2004       |  | $                            | 5,567  |                                      | $ |                             |   | $                    | 1,950 |                       
|2003       |  | $                            | 10,552 |                                      | $ | (1,432                       | ) | $                    |      |                       
|2002       |  | $                            | 12,473 |                                      | $ |                             |   | $                    |      |                       

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

86

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